I

107TH CONGRESS

1ST SESSION H. R. 86

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 3, 2001

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.

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; AMENDMENT OF 1986 CODE;

4 TABLE OF CONTENTS.

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

6 ‘‘Simplified USA Tax Act of 2001’’.

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act a reference

9 is made to the Code or to a section or provision of the
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1 Code, the reference shall be considered to be made to the

2 Internal Revenue Code of 1986 or to a section or provision

3 thereof.

4 (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.

5 TITLE I—FINDINGS; NEED TO

6 REPLACE THE INCOME TAX

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

8 STATES.

9 (a) FINDINGS.—The Congress finds that—
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1 (1) the current Tax Code is irreparably flawed

2 and must be replaced;

3 (2) to enhance the liberty and protect the pri4 vacy of individuals, the Tax Code must be made sim5 pler and nonintrusive, and it must be applied

6 evenhandedly to all;

7 (3) to be fair and to provide for the prosperity

8 of current and future generation, the Tax Code must

9 give all individuals at all income levels an oppor10 tunity to save, invest and raise their standard of liv11 ing and that of their children; and

12 (4) future economic growth requires a tax sys13 tem that facilitates successful competition in the

14 global marketplace.

15 (b) MAIN FEATURES OF SIMPLIFIED USA TAX SYS16 TEM.—

17 (1) REPLACEMENT OF OLD TAX SYSTEM.—

18 Chapter 1 of subtitle A (related to income taxes) of

19 the Code is repealed and replaced for years begin20 ning after 2001.

21 (2) ESTATE AND GIFT TAX REPEALED.

22 (3) NEW TAX SYSTEM.—The Simplified USA

23 Tax consists of—

24 (A) a simplified tax collected from individ25 uals, that for years after 2001 replaces the in-
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1 come tax imposed on individuals by section 1 of

2 the Code, and

3 (B) a simplified tax collected from corpora4 tions and other businesses, that for years after

5 2001 replaces the income tax imposed on cor6 porations by section 11 of the Code.

7 (3) SIMPLIFIED USA TAX ON GROSS PROFITS.—

8 Corporations and other businesses pay tax on their

9 annual gross profits from business conducted in the

10 United States, except that—

11 (A) export revenues are excluded, and

12 (B) imports are taxed.

13 (4) SIMPLIFIED USA TAX ON INCOME.—Individ14 uals pay tax on their annual income from wages,

15 dividends, interest, and other financial income (in16 cluding sales of property), except that—

17 (A) investment earnings on previously

18 taxed income that is placed in a Roth IRA is

19 exempt from further taxation,

20 (B) a portion of each family’s income is ex21 empt from tax, and

22 (C) deductions are allowed for—

23 (i) education costs,

24 (ii) religious, charitable, and other

25 philanthropic donations,
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1 (iii) home mortgage interest pay2 ments, and

3 (iv) contributions to qualified IRAs.

4 (5) CREDIT FOR FICA PAYROLL TAXES PAID.—

5 The amount of tax due is reduced by the payroll tax

6 that is—

7 (A) in the case of an employee, withheld

8 from wages, or

9 (B) in the case of a corporation or other

10 business, paid by the employer.

11 (c) CONCEPTS AND STRUCTURE OF NEW TAX SYS12 TEM.—

13 (1) GUIDING PRINCIPLES OF THE SIMPLIFIED

14 USA TAX SYSTEM.—The Simplified USA Tax is

15 based on the following principles:

16 (A) National wealth and well-being depend

17 on the work, skill, and savings and investment

18 of people.

19 (B) Businesses are people and their capital

20 working together.

21 (C) Capital makes people more productive.

22 (D) Everyone benefits from a growing

23 stock of national savings which in turn allows

24 for a growing stock of physical and human cap25 ital.
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1 (E) Under the Simplified USA Tax, the

2 deferral of taxation on investments in human

3 capital represents an investment by the Federal

4 government in the nation’s capital stock and

5 the Federal government shares in the return on

6 its investment in the form of higher economic

7 output and revenues in the future.

8 (2) SINGLE TAX IN 2 PARTS.—The Simplified

9 USA Tax is composed of a business tax and an indi10 vidual tax which are 2 parts of a single tax system

11 that subjects all income produced and received to

12 taxation once and only once. The 2 parts are as fol13 lows:

14 (A) BUSINESS TAX AT THE SOURCE OF IN15 COME.—Tax is paid by corporations and other

16 businesses which produce and sell goods and

17 services that are—

18 (i) the source of nearly all the gross

19 domestic product of the United States, and

20 (ii) the ultimate source of income re21 ceived by individuals.

22 (B) INDIVIDUAL TAX ON INCOME RE23 CEIVED.—Tax is paid by individuals when they

24 receive wages and salaries as compensation for

25 gross domestic product created by their work.
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1 (3) SAVING AND INVESTMENT.—The Simplified

2 USA Tax allows people to save and businesses to in3 vest as follows:

4 (A) FAIR OPPORTUNITY FOR PEOPLE TO

5 SAVE.—

6 (i) OPTIONAL ELIMINATION OF DOU7 BLE TAXATION.—When an individual earns

8 income and is taxed on that income, the

9 individual can save that income in a Roth

10 IRA and not pay income taxes on the in11 vestment earnings.

12 (ii) DEDUCTIBLE AND EXCLUDABLE

13 SAVINGS.—The Simplified USA Tax con14 tinues provisions of present law that

15 allow—

16 (I) lower income individuals and

17 certain others to make deductible con18 tributions to individual retirement ac19 counts, and

20 (II) encourage employer spon21 sored savings and retirement plans

22 that defer taxation of income through

23 use of 401(k) plans and other quali24 fied retirement plans.
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1 (B) FAIR OPPORTUNITY FOR BUSINESSES

2 TO INVEST.—

3 (i) NO PREPAYMENT OF TAX.—When

4 a business invests in plant and

5 equipment—

6 (I) a deduction is allowed for the

7 cost, and

8 (II) tax is deferred.

9 (ii) TAX ON EARNINGS AND RECOVERY

10 OF COST.—When recovered out of business

11 revenues, both the cost of the investment

12 and the earnings on the investment are in13 cluded in gross profit subject to tax.

14 (iii) EXPENSING.—The deduction for

15 investment is the equivalent of allowing the

16 cost of plant and equipment to be expensed

17 instead of depreciated.

18 (4) FAIR OPPORTUNITY TO COMPETE IN THE

19 GLOBAL MARKETPLACE.—The Simplified USA Tax

20 serves the strategic interests of the United States in

21 international markets as follows:

22 (A) BORDER ADJUSTABLE TAX.—

23 (i) AMERICAN-MADE EXPORTS.—

24 Goods and services produced in the United
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1 States can be sold into world markets free

2 of tax.

3 (ii) FOREIGN-MADE IMPORTS.—Goods

4 and services imported into the United

5 States bear a fair and proportionate share

6 of the tax burden in the United States.

7 (iii) LEVELING THE INTERNATIONAL

8 PLAYING FIELD.—Border adjustments for

9 exports and imports are consistent with

10 international standards and practice.

11 (5) A SIMPLE AND UNDERSTANDABLE TAX.—

12 The Simplified USA Tax for individuals—

13 (A) is written in a simple, understandable

14 form,

15 (B) contains only a few exemptions, deduc16 tions, and credits, and can be reported on a tax

17 return only a small fraction the size of Form

18 1040.

19 (6) A NONINTRUSIVE, EVENHANDED TAX.—

20 (A) TAXPAYERS ARE IN CONTROL.—When

21 the rules are few and clear, taxpayers can cal22 culate their own tax correctly and file their own

23 returns without fear of mistake or of getting

24 caught up in an argument with the IRS.
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1 (B) LIMITED ROLE FOR IRS.—When the

2 rules are few and clear, the IRS does not have

3 the broad interpretive power that puts tax4 payers at risk of being treated unfairly and un5 evenly.

6 (C) RESTORING VOLUNTARY COMPLI7 ANCE.—When the rules are few and clear, the

8 IRS can concentrate on helping taxpayers vol9 untarily pay their correct share of tax revenues

10 for public use and benefit under a tax system

11 that is understood and respected.

12 (7) MAINTAINING TAX PROGRESSIVITY FOR IN13 DIVIDUALS.—

14 (A) GRADUATED TAX.—Like the tax im15 posed by section 1 of the current Code, the

16 Simplified USA Tax for individuals is a grad17 uated tax.

18 (B) FAMILY LIVING ALLOWANCE.—The

19 Simplified USA Tax recognizes that every fam20 ily’s budget includes necessities. The Simplified

21 USA Tax provides a family living allowance

22 that exempts from taxation the first dollars

23 earned and spent to maintain a basic standard

24 of living.
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1 (8) BUSINESSES AND INDIVIDUAL SHARE THE

2 TAX BURDEN.—

3 (A) BUSINESS PORTION OF TAX BUR4 DEN.—Corporations and other businesses pay

5 about the same portion of the total tax as

6 under the current Code.

7 (B) INDIVIDUAL PORTION OF TAX BUR8 DEN.—Individuals pay about the same portion

9 of the total tax as under the current Code.

10 (9) EMPHASIZING PERSONAL INDEPENDENCE

11 AND RESPONSIBILITY.—

12 (A) REINFORCING A CULTURE OF WORK

13 AND THRIFT.—Instead of being solely a calcula14 tion of how much they must pay to the govern15 ment, the Simplified USA Tax converts the in16 come tax into an annual calculation of how

17 much people produce and contribute to the

18 economy.

19 (B) GREATER CONTROL AND RESPONSI20 BILITY.—Because people are not double taxed

21 on their saving, they have—

22 (i) more control over their own income

23 and taxes,

24 (ii) a greater ability to plan and pro25 vide for their own future, and
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1 (iii) a fair opportunity to do so.

2 (10) MORE OPPORTUNITY FOR WAGE EARNERS

3 AT LOWER INCOME LEVELS.—

4 (A) REFUNDABLE CREDIT FOR EMPLOYEE

5 PAYROLL TAX.—The amount of the payroll tax

6 paid or withheld under the Code from an em7 ployee’s wages (and paid into the Social Secu8 rity and Hospital Insurance Trust Funds) is—

9 (i) credited against the employee’s in10 come tax, and

11 (ii) refunded to the employee to the

12 extent in excess of the employee’s income

13 tax.

14 (B) NO EFFECT ON TRUST FUND OR BEN15 EFITS.—The income tax credit allowed for pay16 roll taxes deposited in the Social Security Trust

17 Fund does not—

18 (i) reduce the amount in such fund, or

19 (ii) reduce the payment of any per20 son’s benefits from the fund.

21 TITLE II—SIMPLIFIED USA TAX

22 FOR INDIVIDUALS

23 SEC. 201. SIMPLIFIED USA TAX FOR INDIVIDUALS.

24 (a) IN GENERAL.—Chapter 1 of the Code is amended

25 to read as follows:
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1 ‘‘CHAPTER 1—SIMPLIFIED USA TAX FOR

2 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.

3 ‘‘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.

4 ‘‘SEC. 1. SIMPLIFIED USA TAX FOR INDIVIDUALS.

5 ‘‘(a) IMPOSITION OF TAX.—An income tax is imposed

6 on each individual described in section 2. The income tax

7 shall equal the amount determined by applying the tax

8 schedules in section 15 to the taxable income of the tax9 payer for the taxable year and reducing the tax so deter10 mined by the USA tax credits for the taxable year.
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1 ‘‘(b) TAXABLE INCOME.—‘Taxable income’ means

2 adjusted gross income, reduced by—

3 ‘‘(1) the personal and dependency deduction,

4 ‘‘(2) the Family Living Allowance, and

5 ‘‘(3) the USA deductions, including—

6 ‘‘(A) the homeowner deduction,

7 ‘‘(B) the education deduction, and

8 ‘‘(C) the philanthropic transfer deduction.

9 ‘‘(c) ADJUSTED GROSS INCOME.—‘Adjusted gross in10 come’ means gross income, reduced by—

11 ‘‘(1) the alimony and child support deductions,

12 and

13 ‘‘(2) the qualified IRA deduction.

14 ‘‘(d) NAME.—The tax imposed by this chapter shall

15 be known as the ‘Simplified USA Tax for Individuals’.

16 ‘‘SEC. 2. PERSONS LIABLE FOR THE SIMPLIFIED USA TAX

17 FOR INDIVIDUALS.

18 ‘‘(a) INDIVIDUALS ONLY.—The Simplified USA Tax

19 for Individuals shall apply only to individuals.

20 ‘‘(b) CITIZENS AND RESIDENT ALIENS.—The Sim21 plified USA Tax for Individuals shall apply to all citizens

22 of the United States and to all resident aliens of the

23 United States. Except as specifically provided in this chap24 ter, the Simplified USA Tax for Individuals shall not

25 apply to nonresident aliens.
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1 ‘‘(c) NONRESIDENT ALIENS.—For rules applicable to

2 the compensation income of nonresident aliens, see sub3 chapter H (sections 131 and 132). For rules on the with4 holding of tax on nonresident aliens, see chapter 5 (sec5 tions 1441–1464).

6 ‘‘(d) TAXPAYER.—For purposes of this chapter, ‘tax7 payer’ means an individual, or, in the case of a joint re8 turn, the husband and the wife.

9 ‘‘SEC. 3. GROSS INCOME.

10 ‘‘(a) GENERAL DEFINITION.—Except as otherwise

11 provided in this chapter, ‘gross income for the taxable

12 year’ means all income from whatever source derived by

13 a taxpayer during the taxable year, including (but not lim14 ited to) the following items:

15 ‘‘(1) Compensation for services, including (but

16 not limited to)—

17 ‘‘(A) salaries,

18 ‘‘(B) wages,

19 ‘‘(C) commissions,

20 ‘‘(D) tips, and

21 ‘‘(E) distributions from business entities

22 (as defined in section 171).

23 ‘‘(2) Fringe benefits (except as specifically ex24 cluded by section 4(a)), including (but not limited

25 to)—
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1 ‘‘(A) the cost of health, disability, life or

2 other similar insurance paid by an employer if

3 the taxpayer is indirectly or directly the bene4 ficiary of the policy or has the right to name

5 the beneficiary of the policy,

6 ‘‘(B) employer-paid parking (unless the

7 employee uses the automobile parked in the

8 space regularly on employer business),

9 ‘‘(C) employer-paid educational benefits,

10 ‘‘(D) employer-paid housing (other than

11 housing provided for the convenience of the em12 ployer),

13 ‘‘(E) employer-paid meals (other than

14 meals provided for the convenience of the em15 ployer or reimbursement for the reasonable cost

16 of meals incurred on overnight travel),

17 ‘‘(F) amounts contributed by an employer

18 on behalf of an employee to a group legal serv19 ices plan, and

20 ‘‘(G) dependent care assistance received

21 from an employer.

22 ‘‘(3) Distributions from business entities (as de23 fined in section 171) constituting—

24 ‘‘(A) compensation for use of capital, in25 cluding interest, or
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1 ‘‘(B) shares of profits (including divi2 dends).

3 ‘‘(4) Interest not described in paragraph (3)(A).

4 ‘‘(5) Rents.

5 ‘‘(6) Royalties.

6 ‘‘(7) Alimony, child support, and separate

7 maintenance payments.

8 ‘‘(8) Includible social security benefits.

9 ‘‘(9) Income from the discharge of indebted10 ness.

11 ‘‘(10) Gains on the sale or disposition of assets.

12 ‘‘(11) Amounts stolen or embezzled.

13 ‘‘(12) Distributions from retirement plans and

14 annuities (other than USA Roth IRAs) to the extent

15 not previously included as income, as determined in

16 accordance with section 33.

17 ‘‘(13) Amounts received through health, acci18 dent or disability insurance to the extent that—

19 ‘‘(A) the cost of such insurance was paid

20 by an employer and not included in the employ21 ee’s taxable income and

22 ‘‘(B) such amounts exceed the actual med23 ical expenses incurred and not paid or treated

24 as paid with amounts otherwise excluded from

25 income.
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1 ‘‘(b) DEFINITIONS.—For purposes of subsection (a)

2 and section 4—

3 ‘‘(1) EMPLOYER.—‘Employer’ includes—

4 ‘‘(A) in the case of a partner who provides

5 services for a partnership, the partnership,

6 ‘‘(B) in the case of a proprietor, the pro7 prietorship, and

8 ‘‘(C) in the case of an independent con9 tractor, any business or individual that hires

10 the independent contractor.

11 ‘‘(2) SOCIAL SECURITY BENEFITS.—

12 ‘‘(A) IN GENERAL.—‘Social Security bene13 fits’ means any amount received by the tax14 payer by reason of entitlement to—

15 ‘‘(i) a monthly benefit under title II of

16 the Social Security Act, or

17 ‘‘(ii) a tier 1 railroad retirement ben18 efit. The amount received by a taxpayer

19 shall be determined as if the Social Secu20 rity Act did not contain section 203(i)

21 thereof.

22 ‘‘(B) TIER 1 RAILROAD RETIREMENT BEN23 EFIT.—‘Tier 1 railroad retirement benefit’

24 means—
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1 ‘‘(i) the amount of the annuity under

2 the Railroad Retirement Act of 1974 equal

3 to the amount of the benefit to which the

4 taxpayer would have been entitled under

5 the Social Security Act if all of the service

6 after December 31, 1936, of the employee

7 (on whose record the annuity is being

8 paid) has been included in the term ‘em9 ployment’ as defined in the Social Security

10 Act, and

11 ‘‘(ii) a monthly annuity amount under

12 section 3(f)(3) of the Railroad Retirement

13 Act of 1974.

14 ‘‘(C) WORKERS’ COMPENSATION SUB15 STITUTES.—If by reason of section 224 of the

16 Social Security Act or section 3(a)(1) of the

17 Railroad Retirement Act of 1974, any social se18 curity benefit is reduced because of the receipt

19 of a benefit under a workers’ compensation act,

20 the term ‘social security benefit’ includes that

21 portion of such benefit which equals such reduc22 tion.

23 ‘‘(D) EFFECT OF EARLY PAYMENT.—If so24 cial security benefits checks are delivered before

25 the end of the calendar month for which they
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1 are issued and are not deposited until the

2 month for which they are issued, they will be

3 treated as received in the month for which they

4 are issued.

5 ‘‘(3) INCLUDIBLE SOCIAL SECURITY BENE6 FITS.—‘Includible social security benefits’ means the

7 portion of social security benefits that would be in8 cluded in gross income under section 86(a) of the

9 Internal Revenue Code of 1986, except that for pur10 poses of applying such section, the term ‘modified

11 adjusted gross income’ means adjusted gross income

12 (as defined in section 1(c)), determined without re13 gard to the inclusion of any social security benefits.

14 ‘‘(c) PROPERTY RECEIVED FOR SERVICES.—

15 ‘‘(1) IN GENERAL.—If, in connection with the

16 performance of services, property is transferred to

17 any person other than the person for whom such

18 services are performed, the excess of—

19 ‘‘(A) the fair market value of such prop20 erty (determined without regard to any restric21 tion other than a restriction which by its terms

22 will never lapse) at the first time the rights of

23 the person having the beneficial interest in such

24 property are transferable or are not subject to
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1 a substantial risk of forfeiture, whichever oc2 curs earlier, over

3 ‘‘(B) the amount (if any) paid for such

4 property, shall be included in the gross income

5 of the person who performed such services in

6 the first taxable year in which the rights of the

7 person having the beneficial interest in such

8 property are transferable or are not subject to

9 a substantial risk of forfeiture, whichever is ap10 plicable. The preceding sentence shall not apply

11 if such person sells or otherwise disposes of

12 such property in an arm’s length transaction

13 before his rights in such property become trans14 ferable or not subject to a substantial risk of

15 forfeiture.

16 ‘‘(2) RULES AND REGULATIONS.—The Sec17 retary shall prescribe rules and regulations similar

18 to those applicable under section 83 of the Internal

19 Revenue Code of 1986 for purposes of implementing

20 this subsection.

21 ‘‘SEC. 4. EXCLUSIONS FROM GROSS INCOME.

22 ‘‘(a) GENERAL RULE.—Gross income does not in23 clude:

24 ‘‘(1) RETURNS OR BENEFITS FROM PRE25 VIOUSLY TAXED INCOME.—
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1 ‘‘(A) Social security benefits (as defined in

2 section 3(b)(2)), other than includible social se3 curity benefits (as defined in section 3(b)(3)).

4 ‘‘(B) Amounts received under accident or

5 health benefit plans (except as provided in sec6 tion 3(a)(13)).

7 ‘‘(C) Value of services provided pursuant

8 to a group legal service plan (but only if the

9 cost of such services was paid by the employee

10 or paid by the employer and included in the

11 gross income of the employee).

12 ‘‘(D) Amounts received under an insurance

13 contract for certain living expenses in the case

14 of an individual whose principal residence is

15 damaged or destroyed or who is denied access

16 because of the threat of such occurrence.

17 ‘‘(E) Amounts treated as recovery of basis

18 under any other provision of chapter 1.

19 ‘‘(2) COMPENSATION FOR SPECIAL KINDS OF

20 SERVICE.—

21 ‘‘(A) In the case of a minister of the

22 gospel—

23 ‘‘(i) the rental value of a home fur24 nished to him, or
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1 ‘‘(ii) the rental allowance paid to him

2 as part of his compensation, to the extent

3 used by him to rent or provide a home.

4 ‘‘(B) Certain combat pay of members of

5 the Armed Forces of the United States (as pro6 vided in section 92).

7 ‘‘(C) Certain reduced uniform services re8 tirement pay (as defined in section 122 of the

9 Internal Revenue Code of 1986).

10 ‘‘(D) Qualified military benefits (as defined

11 in section 93).

12 ‘‘(E) Moving allowances for active military

13 personnel (as defined in section 217(g) of the

14 Internal Revenue Code of 1986).

15 ‘‘(F) Certain foster care payments (as de16 fined in section 94).

17 ‘‘(3) GRATUITOUS, CHARITABLE, AND GOVERN18 MENTAL TRANSFERS.—

19 ‘‘(A) Gifts.

20 ‘‘(B) Inheritances.

21 ‘‘(C) Supplemental security income, aid to

22 families with dependent children, food stamps,

23 section 8 low-income rental assistance, benefits

24 under the low-income home energy assistance

25 program, and benefits under other similar Fed-
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1 eral and State assistance programs for low-in2 come individuals and families.

3 ‘‘(D) Benefits or assistance received from

4 a charitable organization as the result of a dis5 aster or by reason of financial need.

6 ‘‘(4) TAX-EXEMPT BOND INTEREST.—Interest

7 on State and local bonds (as provided in section 91);

8 ‘‘(5) COMPENSATION FOR INJURY AND SICK9 NESS.—

10 ‘‘(A) Amounts received as compensation

11 for personal injury or sickness (as provided in

12 section 95).

13 ‘‘(B) Reimbursement and direct payments

14 under Medicare and Medicaid.

15 ‘‘(6) BENEFITS PRIMARILY FOR THE CONVEN16 IENCE OF THE EMPLOYER AND CERTAIN FRINGE

17 BENEFITS.—

18 ‘‘(A) Meals or lodging furnished for the

19 convenience of the employer (as provided in sec20 tion 96).

21 ‘‘(B) Value of a parking space if employee

22 uses the car parked in the space regularly on

23 company business.

24 ‘‘(C) A fringe benefit that is a no-addi25 tional-cost service (as defined in section 97(b)),
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1 subject to rules prohibiting discrimination in

2 favor of the highly compensated.

3 ‘‘(D) A qualified employee discount (as de4 fined in section 97(c)), subject to rules prohib5 iting discrimination in favor of the highly com6 pensated.

7 ‘‘(E) Any property or services provided to

8 an employee to the extent that if the employee

9 were treated as a business and the business

10 paid for those services, the employee could de11 duct the cost of such property or services under

12 the business tax.

13 ‘‘(F) A de minimis fringe benefit (as de14 fined in section 97(d)).

15 ‘‘(G) Transportation in a commuter high16 way vehicle if such transportation is in connec17 tion with travel between the employee’s resi18 dence and place of employment.

19 ‘‘(H) Any amount received directly or indi20 rectly by an individual from an employer for

21 moving expenses if—

22 ‘‘(i) the move is associated with a

23 change in job locations for the same em24 ployer, and
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1 ‘‘(ii) the expenses of such move would

2 have been deductible under the rules under

3 section 217 of the Internal Revenue Code

4 of 1986 if paid directly by the employee.

5 ‘‘(I) Employer provided coverage under an

6 accident or health plan.

7 ‘‘(7) REPAYABLE RECEIPTS.—The proceeds of

8 borrowing or any other amounts legally received that

9 the taxpayer is legally obligated to return (except

10 that the imputed interest rules of section 7872 may

11 apply if there is inadequate stated interest).

12 ‘‘(8) CERTAIN INCOME EARNED ABROAD.—Cer13 tain income and housing costs of citizens and resi14 dents of the United States living outside the United

15 States in accordance with the rules under section

16 911 of the Internal Revenue Code of 1986.

17 ‘‘(9) DISCHARGE OF INDEBTEDNESS.—The

18 amount of indebtedness discharged unless the dis19 charge is for services, property, or other valuable

20 right.

21 ‘‘(10) NONRECOGNITION TRANSACTIONS.—

22 Amounts to which the nonrecognition transaction

23 rules of section 77 apply.

24 ‘‘(11) PROCEEDS FROM SALE OF PRINCIPAL

25 RESIDENCE.—Amounts excludable under section 76
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1 (relating to certain proceeds from the sale of the

2 taxpayer’s principal residence).

3 ‘‘(12) TAXABLE RECEIPTS OF A BUSINESS EN4 TITY.—Amounts that are treated as taxable receipts

5 of a business entity under the Simplified USA Tax

6 for businesses and are not distributed to the indi7 vidual taxpayer.

8 ‘‘(13) QUALIFIED RETIREMENT CONTRIBU9 TIONS.—Employer contributions to retirement plans

10 that are exempt from taxation under chapter 3, in11 cluding contributions pursuant to a cash or deferred

12 payment plan described in section 401(k).

13 ‘‘(b) CROSS REFERENCES.—

14 ‘‘(1) ROTH IRAS.—For rules excluding from in15 come earnings on, and distributions from, Roth

16 IRAs, see sections 30 and 408A.

17 ‘‘(2) OTHER RETIREMENT PLANS.—For rules

18 excluding or deferring from income earnings on

19 other retirement plans, see chapter 3.

20 ‘‘SEC. 5. ALIMONY AND CHILD SUPPORT DEDUCTIONS.

21 ‘‘(a) GENERAL RULE.—A taxpayer shall be allowed

22 an alimony and child support deductions for an amount

23 equal to the alimony, child support, or separate mainte24 nance payments paid during the taxpayer’s taxable year.
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1 ‘‘(b) DEFINITION OF ALIMONY, CHILD SUPPORT,

2 AND SEPARATE MAINTENANCE PAYMENTS.—‘Alimony,

3 child support, and separate maintenance payments’ means

4 any alimony, child support, or separate maintenance pay5 ment which is includible in gross income of the recipient

6 under section 3.

7 ‘‘SEC. 6. PERSONAL AND DEPENDENCY DEDUCTION.

8 ‘‘(a) AMOUNT OF EXEMPTION.—The personal and

9 dependency deduction for an individual shall equal the

10 number of exemptions multiplied by $2,700.

11 ‘‘(b) NUMBER OF EXEMPTIONS.—

12 ‘‘(1) TAXPAYER.—One exemption shall be al13 lowed for the taxpayer unless the taxpayer files a

14 joint return with a spouse, in which case 1 exemp15 tion shall be allowed for the husband and 1 for the

16 wife.

17 ‘‘(2) ELIGIBLE DEPENDENT.—An exemption

18 shall be allowed for each eligible dependent.

19 ‘‘(c) DEPENDENT.—

20 ‘‘(1) DEFINITION.—‘Dependent’ means any of

21 the following individuals over half of whose support,

22 for the calendar year was received from the taxpayer

23 or is treated as received from the taxpayer:

24 ‘‘(A) A son or daughter of the taxpayer, or

25 a descendant of either.
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1 ‘‘(B) A stepson, stepdaughter, stepfather,

2 or stepmother of the taxpayer.

3 ‘‘(C) A brother, sister, stepbrother, or

4 stepsister of the taxpayer.

5 ‘‘(D) The father or mother of the taxpayer,

6 or an ancestor of either.

7 ‘‘(E) A son or daughter of a brother or sis8 ter of the taxpayer.

9 ‘‘(F) A brother or sister of the mother or

10 father of the taxpayer.

11 ‘‘(G) A son-in-law, daughter-in-law, father12 in-law, mother-in-law, brother-in-law, or sister13 in-law of the taxpayer.

14 ‘‘(H) An individual (other than an indi15 vidual who at any time during the taxable year

16 was the spouse, determined without regard to

17 section 7703, of a taxpayer) who, for the tax18 able year of the taxpayer, has as his principal

19 place of abode the home of the taxpayer and

20 is a member of the taxpayer’s household.

21 ‘‘(2) RULES RELATING TO THE GENERAL DEFI22 NITION.—The Secretary shall prescribe rules similar

23 to the rules under section 152 of the Internal Rev24 enue Code of 1986 that shall apply to the general

25 definition of ‘dependent’, including definitional rules,
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1 rules relating to multiple support agreements, and

2 support tests in cases of children of divorced par3 ents.

4 ‘‘(d) ELIGIBLE DEPENDENT.—

5 ‘‘(1) IN GENERAL.—‘Eligible dependent’ means

6 a dependent—

7 ‘‘(A) whose gross income for the calendar

8 year in which the taxable year of the taxpayer

9 begins is less than the exemption amount, or

10 ‘‘(B) who is a child of the taxpayer and

11 who—

12 ‘‘(i) has not attained the age of 19 at

13 the close of the calendar year in which the

14 taxable year of the taxpayer begins, or

15 ‘‘(ii) is a student who has not attained

16 the age of 24 at the close of such calendar

17 year.

18 ‘‘(2) EXCLUSIONS.—A dependent who files a

19 joint return with a spouse for the calendar year is

20 not an eligible dependent.

21 ‘‘(3) RULES RELATING TO DEFINITIONS.—The

22 Secretary shall prescribe rules similar to those in23 cluded in or applicable under the Internal Revenue

24 Code of 1986 relating to this subsection, including
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1 rules defining ‘child’ and ‘student’ and rules relating

2 to the income of handicapped dependents.

3 ‘‘(e) INFLATION ADJUSTMENT.—The dollar amount

4 contained in subsection (a) shall be adjusted for inflation

5 beginning with calendar year 2002 in accordance with the

6 procedures of section 23.

7 ‘‘SEC. 7. FAMILY LIVING ALLOWANCE.

8 ‘‘(a) AMOUNT OF ALLOWANCE.—The Family Living

9 Allowance for a taxpayer shall be determined in accord10 ance 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.

11 ‘‘(b) LIMITATION IN THE CASE OF CERTAIN DE12 PENDENTS.—In the case of an individual for whom an13 other taxpayer can claim an exemption under section 6,

14 the Family Living Allowance for such individual shall not

15 exceed the greater of $700 or such individual’s earned in16 come (as defined in section 171(a)(6)).

17 ‘‘(c) ADJUSTMENTS FOR INFLATION.—The dollar

18 amounts contained in subsections (a) and (b) shall be ad19 justed for inflation beginning with calendar year 2002 in

20 accordance with the procedures of section 23.
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1 ‘‘SEC. 8. USA DEDUCTIONS.

2 ‘‘In computing taxable income, an individual shall be

3 entitled to the following deductions:

4 ‘‘(1) The homeowner deduction described in

5 section 9.

6 ‘‘(2) The education deduction described in sec7 tion 10.

8 ‘‘(3) The philanthropic transfer deduction de9 scribed in section 11.

10 ‘‘SEC. 9. HOMEOWNER DEDUCTION.

11 ‘‘(a) IN GENERAL.—The homeowner deduction shall

12 equal the amount of interest paid by the taxpayer during

13 the taxable year on acquisition indebtedness with respect

14 to any qualified residence of the taxpayer.

15 ‘‘(b) DEFINITIONS.—

16 ‘‘(1) ACQUISITION INDEBTEDNESS.—‘Acquisi17 tion indebtedness’ means any indebtedness that is

18 secured by a qualified residence and that—

19 ‘‘(A) was incurred in acquiring, con20 structing, or substantially improving the quali21 fied residence, or

22 ‘‘(B) was incurred to refinance any indebt23 edness that is described in subparagraph (A) or

24 this subparagraph (B) but only to the extent

25 that the refinancing does not exceed the

26 amount refinanced.
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1 The aggregate amount treated as acquisition indebt2 edness shall not exceed $1,000,000 ($500,000 in the

3 case of a married individual filing separately).

4 ‘‘(2) QUALIFIED RESIDENCE.—‘Qualified resi5 dence’ means the principal residence of the taxpayer

6 and 1 other residence of the taxpayer that is des7 ignated by the taxpayer and which—

8 ‘‘(A) is used by the taxpayer as a residence

9 for more than 14 days during such year for

10 which such unit is rented, and

11 ‘‘(B) is not rented for more than 14 days

12 during such year.

13 ‘‘(c) COOPERATIVE HOUSING CORPORATION TEN14 ANT.—Any indebtedness secured by stock held by a tax15 payer as a tenant-stockholder in a cooperative housing cor16 poration shall be treated as secured by the house or apart17 ment which the taxpayer is entitled to occupy as a tenant18 stockholder. If such stock cannot be used to secure indebt19 edness, the indebtedness will be treated as so secured if

20 the taxpayer establishes that such indebtedness was in21 curred to acquire stock.

22 ‘‘SEC. 10. EDUCATION DEDUCTION.

23 ‘‘(a) IN GENERAL.—The education deduction shall

24 equal the sum of the qualified educational expenses for

25 each eligible student.
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1 ‘‘(b) QUALIFIED EDUCATION EXPENSES.—

2 ‘‘(1) IN GENERAL.—‘Qualified education ex3 penses’ means with respect to an eligible student the

4 lesser of—

5 ‘‘(A) $4,000, or

6 ‘‘(B) the qualified higher education ex7 penses of the eligible student paid by the tax8 payer during the taxable year.

9 ‘‘(2) QUALIFIED HIGHER EDUCATION EX10 PENSES.—

11 ‘‘(A) IN GENERAL.—‘Qualified higher edu12 cation expenses’ means tuition and fees re13 quired for the enrollment of an eligible student

14 at an eligible education institution. Such term

15 shall not include expenses with respect to any

16 course or other education involving sports,

17 games, or hobbies other than as part of a de18 gree program.

19 ‘‘(B) ELIGIBLE EDUCATIONAL INSTITU20 TION.—‘Eligible educational institution’

21 means—

22 ‘‘(i) an institution which is described

23 in section 481 of the Higher Education

24 Act of 1965 (as in effect on May 15,

25 1998), and which is eligible to participate
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1 in a program under title IV of such Act,

2 and

3 ‘‘(ii) in the case of a student who has

4 attained the age of 18 before the beginning

5 of the taxable year, and not graduated

6 from high school before the beginning of

7 the taxable year, an accredited school pro8 viding remedial education.

9 ‘‘(3) ELIGIBLE STUDENT.—‘Eligible student’

10 means—

11 ‘‘(A) the taxpayer, but only if no other tax12 payer treats the taxpayer as a dependent for

13 which an exemption is allowed in computing the

14 dependency deduction under section 6,

15 ‘‘(B) the taxpayer’s spouse if a joint return

16 is filed, and

17 ‘‘(C) any dependent of the taxpayer for

18 whom the taxpayer is allowed an exemption in

19 computing the dependency deduction under sec20 tion 6.

21 ‘‘(c) LIMITATION.—The maximum education deduc22 tion in a taxable year is $12,000 ($6,000 in the case of

23 married individuals filing separate returns).

24 ‘‘(d) INFLATION ADJUSTMENTS.—The dollar

25 amounts contained in subsections (b)(1)(A) and (c) shall
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1 be adjusted for inflation beginning with calendar year

2 2002 in accordance with section 23.

3 ‘‘SEC. 11. PHILANTHROPIC TRANSFER DEDUCTION.

4 ‘‘(a) IN GENERAL.—The philanthropic transfer de5 duction shall equal the amount of charitable contributions

6 made by the taxpayer in the taxable year, subject to the

7 limitations in subsection (b). A deduction shall be allow8 able as a deduction only if verified under regulations pre9 scribed by the Secretary.

10 ‘‘(b) LIMITATION ON AMOUNT.—

11 ‘‘(1) GENERAL RULE.—A deduction for con12 tributions to regular charities in any taxable year

13 shall be allowed only to the extent that such con14 tributions do not exceed 50 percent of the taxpayer’s

15 adjusted gross income. Other charitable contribu16 tions shall be allowed only to the extent that such

17 contributions do not exceed the lesser of—

18 ‘‘(A) 30 percent of the taxpayer’s adjusted

19 gross income, or

20 ‘‘(B) the excess, if any, of 50 percent of

21 the taxpayer’s adjusted gross income over the

22 amount of charitable contributions to regular

23 charities.

24 ‘‘(2) CARRYOVER.—If the amount of charitable

25 contributions made in a taxable year exceeds the
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1 amount which can be deducted in such year, the ex2 cess shall be carried over for a period of up to 5

3 years in accordance with rules to be prescribed by

4 the Secretary.

5 ‘‘(3) REGULAR CHARITY.—For purposes of this

6 subsection, ‘regular charity’ means an organization

7 described in section 101, that is not a private foun8 dation (other than a private operating foundation)

9 (as such terms are defined in section 102).

10 ‘‘(c) CHARITABLE CONTRIBUTION.—‘Charitable con11 tribution’ means a contribution or gift to or for the use

12 of a governmental or charitable recipient (as defined in

13 section 101).

14 ‘‘(d) CONTRIBUTIONS OF PROPERTY.—

15 ‘‘(1) GENERAL RULE.—In the case of a chari16 table contribution of property, the amount of the

17 contribution shall equal the lesser of the fair market

18 value of the property or the taxpayer’s basis in the

19 property.

20 ‘‘(2) FAIR MARKET VALUE DEDUCTIONS IN

21 CERTAIN CASES.—Notwithstanding paragraph (1),

22 in the case of a charitable contribution (other than

23 a contribution to a private foundation that is not a

24 private operating foundation) of—

25 ‘‘(A) real property,
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1 ‘‘(B) tangible property if the use by the

2 donee is related to its purpose or function con3 stituting the basis for its exemption from the

4 business tax or in the case of a governmental

5 unit, to any governmental unit, and

6 ‘‘(C) stocks, bonds, or other securities held

7 for more than one year,

8 the amount of the charitable contribution shall equal

9 the fair market value of the property.

10 ‘‘(3) CONTRIBUTIONS OF STOCK FOR WHICH

11 MARKET QUOTATIONS ARE READILY AVAILABLE.—

12 ‘‘(A) IN GENERAL.—In the case of con13 tributions of qualified appreciated stock, para14 graph (2) shall apply without regard to whether

15 the stock is contributed to a private foundation.

16 ‘‘(B) QUALIFIED APPRECIATED STOCK.—

17 ‘Qualified appreciated stock’ means any stock

18 of a corporation for which (as of the date of the

19 contribution) market quotations are readily

20 available on an established securities market,

21 except that in the case of a donor to a private

22 foundation, the term does not include stock to

23 the extent that the amount so contributed,

24 when increased by prior contributions by the

25 donor of stock in the same corporation, exceeds
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1 10 percent in value of the outstanding stock of

2 such corporation.

3 ‘‘(e) OTHER RULES.—The Secretary shall prescribe

4 rules limiting the availability of the philanthropic transfer

5 deduction in certain cases, including rules for—

6 ‘‘(1) contributions of property placed in trust,

7 ‘‘(2) contributions of partial interests in prop8 erty,

9 ‘‘(3) contributions subject to liabilities that are

10 assumed,

11 ‘‘(4) out-of-pocket expenditures on behalf of a

12 charity to influence legislation,

13 ‘‘(5) substantiation of contributions in excess of

14 $250,

15 ‘‘(6) contributions designated for lobbying activ16 ity,

17 ‘‘(7) amounts paid to maintain certain students

18 as members of taxpayer’s household,

19 ‘‘(8) qualified conservation contributions, and

20 ‘‘(9) deductions for travel expenses on behalf of

21 a charity where there is a significant element of per22 sonal pleasure.

23 ‘‘SEC. 13. LIMITATION ON DEDUCTIONS.

24 ‘‘(a) IN GENERAL.—A taxpayer’s deductions shall

25 not reduce the taxpayer’s taxable income below zero. Ex-
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1 cept as provided in section 11(b) (relating to the limitation

2 on the philanthropic transfer deduction), a taxpayer shall

3 not be entitled to carry over any unused deductions.

4 ‘‘(b) DEDUCTIONS.—For purposes of this section,

5 ‘deductions’ means—

6 ‘‘(1) the alimony and child support deductions,

7 ‘‘(2) the personal and dependency deduction,

8 ‘‘(3) the Family Living Allowance,

9 ‘‘(4) the USA deductions, and

10 ‘‘(5) the qualified IRA deduction.

11 ‘‘SEC. 15. TAX RATES.

12 ‘‘(a) MARRIED INDIVIDUALS FILING JOINT RETURNS

13 AND SURVIVING SPOUSES.—The tax schedule for every

14 married individual who files a joint return with a spouse

15 and for every surviving spouse (as defined in section

16 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.

17 ‘‘(b) HEADS OF HOUSEHOLDS.—The tax schedule for

18 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.
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1 ‘‘(c) UNMARRIED INDIVIDUALS.—The tax schedule

2 for an unmarried individual who is not a head of a house3 hold 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.

4 ‘‘(d) MARRIED INDIVIDUALS FILING SEPARATE RE5 TURNS.—The tax schedule for a married individual filing

6 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.

7 ‘‘(e) ADJUSTMENTS FOR INFLATION.—Beginning

8 with calendar year 2002, the tax schedules in subsections

9 (a) through (d) shall be adjusted so that inflation will not

10 result in tax increases in accordance with the procedures

11 under section 23.

12 ‘‘(f) DEFINITIONS.—See section 17 for rules on filing

13 status.

14 ‘‘SEC. 16. KIDDIE TAX.

15 ‘‘(a) GENERAL RULE.—If a child has a living parent

16 and net unearned income and the child has not attained

17 the age of 14 before the close of the taxable year—

18 ‘‘(1) the net unearned income of the child shall

19 be included in the taxable income of the eligible par-
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1 ent for purposes of determining the parent’s tax li2 ability, or

3 ‘‘(2) the tax calculated under the tax rate

4 schedules for the child as a separate taxpayer shall

5 not be less than the sum of—

6 ‘‘(A) the tax which would have been deter7 mined under the rate schedule if the taxable in8 come of the child were reduced by the net un9 earned income of the child, plus

10 ‘‘(B) such child’s share of the allocable pa11 rental tax.

12 ‘‘(b) CHILD’S SHARE OF ALLOCABLE PARENTAL

13 TAX.—

14 ‘‘(1) ALLOCABLE PARENTAL TAX.—‘Allocable

15 parental tax’ means the excess of—

16 ‘‘(A) the tax that would have been deter17 mined under the rate schedules on the eligible

18 parent’s taxable income if such income included

19 the net unearned income of all of the eligible

20 parent’s children to which this section applies,

21 over

22 ‘‘(B) the tax actually determined under the

23 rate schedules without regard to this section.

24 ‘‘(2) CHILD’S SHARE.—A child’s share of the

25 allocable parental tax is equal to the amount that
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1 bears the same ratio to the total allocable parental

2 tax as the child’s net unearned income bears to the

3 aggregate net unearned income of all children to

4 whom this section applies for whom the eligible par5 ent is the eligible parent.

6 ‘‘(c) ELIGIBLE PARENT.—‘Eligible parent’ means—

7 ‘‘(1) both parents of the child if the parents file

8 a joint return,

9 ‘‘(2) the surviving parent of a child if the child

10 has only 1 surviving parent,

11 ‘‘(3) the custodial parent if the child’s parents

12 are not married, or

13 ‘‘(4) the parent with the greater taxable income

14 if the parents are married and filing separate re15 turns.

16 ‘‘(d) NET UNEARNED INCOME.—‘Net unearned in17 come’ means the excess, if any, of—

18 ‘‘(1) the adjusted gross income of the child,

19 over

20 ‘‘(2) the sum of—

21 ‘‘(A) the earned income (as defined in sec22 tion 171(a)(6)) of the child, and

23 ‘‘(B) an amount equal to the Family Liv24 ing Allowance for a dependent child.
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1 ‘‘SEC. 17. RULES FOR FILING STATUS AND RATE TABLES.

2 ‘‘(a) DEFINITION OF SURVIVING SPOUSE.—

3 ‘‘(1) IN GENERAL.—‘Surviving spouse’ means

4 an individual—

5 ‘‘(A) whose spouse died during either of

6 his 2 calendar years immediately preceding the

7 calendar year, and

8 ‘‘(B) who maintains as his home a house9 hold which constitutes for the taxable year the

10 principal place of abode (as a member of such

11 household) of a dependent—

12 ‘‘(i) who (within the meaning of sec13 tion 6) is a son, stepson, daughter, or step14 daughter of the taxpayer, and

15 ‘‘(ii) who the taxpayer is entitled to

16 treat as an exemption for purposes of com17 puting the personal dependency deduction

18 for the taxable year under section 6.

19 For purposes of this paragraph, an individual shall

20 be considered as maintaining a household only if

21 over half of the cost of maintaining the household

22 during the taxable year is furnished by such indi23 vidual.

24 ‘‘(2) LIMITATIONS.—Notwithstanding para25 graph (1), for purposes of section 15, an individual

26 shall not be considered to be a surviving spouse—
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1 ‘‘(A) if the individual has remarried at any

2 time before the close of the taxable year, or

3 ‘‘(B) unless, for the individual’s taxable

4 year during which his spouse died, a joint re5 turn could have been made under the provisions

6 of section 6013 (without regard to subsection

7 (a)(3) thereof).

8 ‘‘(3) SPECIAL RULE WHERE DECEASED SPOUSE

9 WAS IN MISSING STATUS.—If an individual was in a

10 missing status (within the meaning of section

11 6013(f)(3)) as a result of service in a combat zone

12 and if such individual remains in such status until

13 the date referred to in subparagraph (A) or (B),

14 then, for purposes of paragraph (1)(A), the date on

15 which such individual died shall be treated as the

16 earlier of the date determined under subparagraph

17 (A) or the date determined under subparagraph (B):

18 ‘‘(A) the date on which the determination

19 is made under section 556 of title 37 of the

20 United States Code or under section 5566 of

21 title 5 of such Code (whichever is applicable)

22 that such individual died while in such missing

23 status, or

24 ‘‘(B) the date which is 2 years after the

25 date designated under section 92 (relating to
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1 exemption for combat zones) as the date of ter2 mination of combatant activities in that zone.

3 ‘‘(b) DEFINITION OF HEAD OF HOUSEHOLD.—

4 ‘‘(1) IN GENERAL.—An individual shall be con5 sidered a head of a household if, and only if, such

6 individual is not married at the close of his taxable

7 year, is not a surviving spouse (as defined in sub8 section (a)), and either—

9 ‘‘(A) maintains as his home a household

10 which constitutes for more than one-half of

11 such taxable year the principal place of abode,

12 as a member of such household, of—

13 ‘‘(i) a son, stepson, daughter, or step14 daughter of the taxpayer, or a descendant

15 of a son or daughter of the taxpayer, but

16 if such son, stepson, daughter, step17 daughter, or descendant is married at the

18 close of the taxpayer’s taxable year, only if

19 the taxpayer is entitled to claim such per20 son as an exemption for the taxable year

21 for purposes of computing the dependency

22 deduction under section 6 (or would be so

23 entitled but for the release of a claim to

24 such exemption by the custodial parent),
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1 ‘‘(ii) any other person who is a de2 pendent of the taxpayer, if the taxpayer is

3 entitled to claim such person as an exemp4 tion in determining the personal depend5 ency deduction for the taxable year, or

6 ‘‘(B) maintains a household which con7 stitutes for such taxable year the principal place

8 of abode of the father or mother of the tax9 payer, if the taxpayer is entitled to a personal

10 dependency deduction for the taxable year for

11 such father or mother.

12 For purposes of this paragraph, an individual shall

13 be considered as maintaining a household only if

14 over half of the cost of maintaining the household

15 during the taxable year is furnished by such indi16 vidual.

17 ‘‘(2) DETERMINATION OF STATUS.—For pur18 poses of this subsection—

19 ‘‘(A) a legally adopted child of a person

20 shall be considered a child of such person by

21 blood;

22 ‘‘(B) an individual who is legally separated

23 from his spouse under a decree of divorce or of

24 separate maintenance shall not be considered as

25 married;
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1 ‘‘(C) a taxpayer shall be considered as not

2 married at the close of his taxable year if at

3 any time during the taxable year his spouse is

4 a nonresident alien; and

5 ‘‘(D) a taxpayer shall be considered as

6 married at the close of his taxable year if his

7 spouse (other than a spouse described in sub8 paragraph (C)) died during the taxable year.

9 ‘‘(3) LIMITATIONS.—Notwithstanding para10 graph (1), for purposes of this chapter, a taxpayer

11 shall not be considered to be a head of a

12 household—

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

14 he is a nonresident alien; or

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

16 not be a dependent for the taxable year but

17 for—

18 ‘‘(i) subparagraph (H) of section

19 6(c)(1), or

20 ‘‘(ii) multiple support rules prescribed

21 by the Secretary.

22 ‘‘(c) CERTAIN MARRIED INDIVIDUALS LIVING

23 APART.—For purposes of this part, an individual shall be

24 treated as not married at the close of the taxable year
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1 if such individual is so treated under the provisions of sec2 tion 7703(b).

3 ‘‘(d) NONRESIDENT ALIENS.—In the case of a non4 resident alien individual, the taxes imposed by section 1

5 shall not apply.

6 ‘‘SEC. 20. USA TAX CREDITS.

7 ‘‘(a) IN GENERAL.—The USA tax credits are and

8 shall be applied in the following order:

9 ‘‘(1) The foreign tax credit as prescribed by the

10 Secretary under rules similar to the rules of subpart

11 A of part III of subchapter N of chapter 1 of the

12 Internal Revenue Code of 1986, but only with re13 spect to foreign taxes on amounts that are included

14 in the gross income of the taxpayer.

15 ‘‘(2) The payroll tax credit under section 21.

16 ‘‘(3) The taxes-paid tax credit under section 22.

17 ‘‘(b) REFUNDABLE CREDITS.—If a taxpayer’s USA

18 tax credits (other than the foreign tax credit) for a taxable

19 year exceed the taxpayer’s tax liability for the taxable year

20 (after application of the foreign tax credit but before appli21 cation of the other USA tax credits), the taxpayer shall

22 be entitled to a refund for such excess. The taxpayer may

23 elect in lieu of a refund to apply such excess as a tax paid

24 for the following taxable year.
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1 ‘‘SEC. 21. PAYROLL TAX CREDIT.

2 ‘‘(a) IN GENERAL.—A taxpayer shall be allowed a

3 payroll tax credit in an amount equal to the sum of—

4 ‘‘(1) the employee’s share of the basic FICA

5 tax,

6 ‘‘(2) the employee’s share of the basic Tier 1

7 railroad retirement tax, and

8 ‘‘(3) one-half of the basic SECA tax payable

9 with respect to the taxpayer’s compensation or earn10 ings during the taxable year.

11 ‘‘(b) DEFINITIONS.—

12 ‘‘(1) EMPLOYEE’S SHARE OF THE BASIC FICA

13 TAX.—‘Employee’s share of the basic FICA tax’

14 means the old-age, survivors and disability insurance

15 tax imposed by section 3101(a) and the portion of

16 the hospital insurance tax imposed by section

17 3101(b) that is attributable to the wage base on

18 which the section 3101(a) tax is imposed.

19 ‘‘(2) EMPLOYEE’S SHARE OF THE BASIC TIER 1

20 RAILROAD RETIREMENT TAX.—Employee’s share of

21 the basic Tier 1 railroad retirement tax’ means—

22 ‘‘(A) the portion of the tax imposed by sec23 tion 3201 with respect to compensation below

24 the applicable base (as defined in section

25 3231(e)(2)); and
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1 ‘‘(B) the portion of the tax imposed by sec2 tion 3211(a)(1) on railroad employee represent3 atives attributable to the tax imposed by section

4 3101(a) and the portion of the hospital insur5 ance tax imposed by section 3101(b) that is at6 tributable to the wage base on which the section

7 3101(a) tax is imposed.

8 ‘‘(3) BASIC SECA TAX.—‘Basic SECA tax’

9 means the old-age, survivors and disability insurance

10 tax imposed by section 1401(a) on self-employment

11 income and the portion of the hospital insurance tax

12 imposed by section 1401(b) on self-employment in13 come that is attributable to the amount of self-em14 ployment income (as determined under section

15 1402(b)) on which the section 1401(a) tax is im16 posed.

17 ‘‘(c) NO CREDIT FOR REFUNDABLE TAX.—No credit

18 shall be allowed with respect to any FICA tax or railroad

19 retirement tax for which a taxpayer is entitled to a refund

20 because of overpayment of tax on the applicable wage

21 base.

22 ‘‘SEC. 22. TAXES-PAID TAX CREDIT.

23 ‘‘The taxes-paid tax credit shall equal the sum of:

24 ‘‘(1) WAGE WITHHOLDING.—The amount with25 held as tax under chapter 24.
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1 ‘‘(2) SPECIAL REFUNDS OF SOCIAL SECURITY

2 TAX WHEN WAGES EARNED FROM MORE THAN 1 EM3 PLOYER.—The amount allowable under section

4 6413(c) as a special refund of taxes imposed on

5 wages.

6 ‘‘(3) OVERPAYMENTS OF PRIOR-YEAR TAX.—

7 Any overpayment of a prior tax obligation that the

8 taxpayer or the Secretary applies to the tax for the

9 taxable year.

10 ‘‘(4) ESTIMATED TAXES.—Any estimated taxes

11 paid by the taxpayer with respect to the taxpayer’s

12 tax liability for the taxable year which are treated as

13 payment on account of income tax for purposes of

14 section 6315 (relating to estimated taxes).

15 ‘‘SEC. 23. INDEXING FOR INFLATION.

16 ‘‘(a) PUBLICATION OF TABLES AND NUMBERS.—Not

17 later than December 15 of 2001, and each subsequent cal18 endar year, the Secretary shall prescribe tables and dollar

19 amounts which shall apply in the immediately following

20 calendar year in lieu of the tables and dollar amounts that

21 are required to be adjusted for inflation in accordance with

22 this section.

23 ‘‘(b) METHOD OF ADJUSTMENT.—

24 ‘‘(1) IN GENERAL.—The dollar amounts which

25 are required to be adjusted pursuant to this section
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1 for a calendar year shall be the dollar amounts as

2 stated in this chapter multiplied by the cost of living

3 adjustment for such calendar year, rounded as pro4 vided in subsection (d).

5 ‘‘(2) TAX RATE TABLES.—In the case of a tax

6 rate table, the dollar amounts to be adjusted in ac7 cordance with paragraph (1) are the minimum and

8 maximum dollar amounts for each rate bracket for

9 which a tax is imposed. The amounts setting forth

10 the bottom tax for each bracket shall be adjusted to

11 the extent necessary to reflect the adjustments in

12 the rate brackets.

13 ‘‘(c) COST-OF-LIVING ADJUSTMENT.—

14 ‘‘(1) IN GENERAL.—The cost-of-living adjust15 ment for any calendar year is the percentage (if any)

16 by which—

17 ‘‘(A) the CPI for the preceding calendar

18 year, exceeds

19 ‘‘(B) the CPI for the calendar year 2000.

20 ‘‘(2) CPI FOR ANY CALENDAR YEAR.—For pur21 poses of paragraph (1), the CPI for any calendar

22 year is the average of the Consumer Price Index as

23 of the close of the 12-month period ending on Au24 gust 31 of such calendar year.
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1 ‘‘(3) CONSUMER PRICE INDEX.—For purposes

2 of paragraph (2), ‘Consumer Price Index’ means the

3 last Consumer Price Index for all-urban consumers

4 published by the Department of Labor. For pur5 poses of the preceding sentence, the revision of the

6 Consumer Price Index which is most consistent with

7 the Consumer Price Index for calendar year 2001

8 shall be used.

9 ‘‘(d) ROUNDING.—

10 ‘‘(1) IN GENERAL.—If any increase determined

11 under subsection (b) is not a multiple of $50, such

12 increase shall be rounded to the next lowest multiple

13 of $50.

14 ‘‘(2) MULTIPLES OF $25.—Paragraph (1) shall

15 be applied by substituting ‘$25’ for ‘$50’ in the case

16 of—

17 ‘‘(A) amounts for married individuals filing

18 separately, and

19 ‘‘(B) any other dollar amount that is to be

20 adjusted for inflation if that dollar amount is

21 less than $1,000.

22 ‘‘Subchapter B—Roth IRA and Other Savings

23 Provisions

‘‘Sec. 30. Roth IRAs.

‘‘Sec. 31. Deductible IRAs.

‘‘Sec. 32. Effect of repeal of special savings provisions.
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1 ‘‘SEC. 30. ROTH IRAS.

2 ‘‘(a) GENERAL RULE.—Except as provided in this

3 section, a Roth IRA shall be treated for purposes of this

4 title in the same manner as an individual retirement plan.

5 ‘‘(b) ROTH IRA.—‘Roth IRA’ means an individual

6 retirement plan (as defined in section 7701(a)(37)) which

7 is designated (in such manner as the Secretary may pre8 scribe) at the time of establishment of the plan as a Roth

9 IRA. Such designation shall be made in such manner as

10 the Secretary may prescribe.

11 ‘‘(c) TREATMENT OF CONTRIBUTIONS.—

12 ‘‘(1) NO DEDUCTION ALLOWED.—No deduction

13 shall be allowed for a contribution to a Roth IRA.

14 ‘‘(2) CONTRIBUTION LIMIT.—The aggregate

15 amount of contributions for any taxable year to all

16 Roth IRAs maintained for the benefit of an indi17 vidual (or, in the case of individuals filing a joint re18 turn, either spouse) shall not exceed the taxpayer’s

19 adjusted gross income for the taxable year.

20 ‘‘(3) ROLLOVER FROM IRA.—

21 ‘‘(A) ROLLOVER CONTRIBUTIONS.—No

22 rollover contribution may be made to a Roth

23 IRA unless it is a qualified rollover contribu24 tion.

25 ‘‘(B) LIMITS.—A taxpayer shall not be al26 lowed to make a qualified rollover contribution
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•HR 86 IH

1 to a Roth IRA from an individual retirement

2 plan other than a Roth IRA during any taxable

3 year if—

4 ‘‘(i) the taxpayer’s adjusted gross in5 come for such taxable year exceeds

6 $100,000, or

7 ‘‘(ii) the taxpayer is a married indi8 vidual filing a separate return.

9 ‘‘(C) MARITAL STATUS.—Section 31(g)(4)

10 shall apply for purposes of this paragraph.

11 ‘‘(4) CONTRIBUTIONS PERMITTED AFTER AGE

701 12 ⁄2.—CONTRIBUTIONS TO A ROTH IRA MAY BE

13 MADE EVEN AFTER THE INDIVIDUAL FOR WHOM

14 THE ACCOUNT IS MAINTAINED HAS ATTAINED AGE

701 15 ⁄2.

16 ‘‘(5) MANDATORY DISTRIBUTION RULES NOT

17 TO APPLY BEFORE DEATH.—Notwithstanding sub18 sections (a)(6) and (b)(3) of section 408 (relating to

19 required distributions), the following provisions shall

20 not apply to any Roth IRA:

21 ‘‘(A) Section 401(a)(9)(A).

22 ‘‘(B) The incidental death benefit require23 ments of section 401(a).

24 ‘‘(6) TIME WHEN CONTRIBUTIONS MADE.—A

25 taxpayer shall be deemed to have made a contribu-
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1 tion to a Roth IRA during a year if the contribution

2 is made on account of such year and is made not

3 later than April 15 of the following year.

4 ‘‘(d) EXCLUSION FROM INCOME.—For purposes of

5 this chapter—

6 ‘‘(1) GENERAL RULES.—A distribution from a

7 Roth IRA shall not be includible in gross income.

8 ‘‘(2) NONQUALIFIED DISTRIBUTION.—The

9 automatic exclusion from gross income under para10 graph (1) shall not apply to any distribution, other

11 than a qualified special purpose distribution if—

12 ‘‘(A) it is made within the 5-taxable year

13 period beginning with the 1st taxable year for

14 which the individual made a contribution to a

15 Roth IRA (or such individual’s spouse made a

16 contribution to a Roth IRA) established for

17 such individual, or

18 ‘‘(B) in the case of a payment or distribu19 tion properly allocable (as determined in the

20 manner prescribed by the Secretary) to a quali21 fied rollover contribution from an individual re22 tirement plan other than a Roth IRA (or in23 come allocable thereto), it is made within the 5-

24 taxable year period beginning with the taxable
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1 year in which the rollover contribution was

2 made.

3 ‘‘(3) NONQUALIFIED DISTRIBUTIONS.—In ap4 plying section 33 to any distribution from a Roth

5 IRA described in paragraph (2), such distribution

6 shall be treated as made from contributions to the

7 Roth IRA to the extent that such distribution, when

8 added to all previous distributions from the Roth

9 IRA, does not exceed the aggregate amount of con10 tributions to the Roth IRA. Only distributions at11 tributable to earnings on accounts (as opposed to

12 distributions of contributions) shall be included in

13 gross income.

14 ‘‘(4) ROLLOVERS FROM AN IRA OTHER THAN A

15 ROTH IRA.—

16 ‘‘(A) IN GENERAL.—Notwithstanding sec17 tion 408(d)(3), in the case of any distribution

18 to which this paragraph applies there shall be

19 included in gross income any amount which

20 would be includible were it not part of a quali21 fied rollover contribution.

22 ‘‘(B) DISTRIBUTIONS TO WHICH PARA23 GRAPH APPLIES.—This paragraph shall apply

24 to a distribution from an individual retirement

25 plan (other than a Roth IRA) maintained for
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1 the benefit of an individual which is contributed

2 to a Roth IRA maintained for the benefit of

3 such individual in a qualified rollover contribu4 tion.

5 ‘‘(C) CONVERSIONS.—The conversion of an

6 individual retirement plan (other than a Roth

7 IRA) to a Roth IRA shall be treated for pur8 poses of this paragraph as a distribution to

9 which this paragraph applies.

10 ‘‘(D) CONVERSION OF EXCESS CONTRIBU11 TIONS.—If, no later than the due date for filing

12 the return of tax for any taxable year (without

13 regard to extensions), an individual transfers,

14 from an individual retirement plan (other than

15 a Roth IRA), contributions for such taxable

16 year (and any earnings allocable thereto) to a

17 Roth IRA, no such amount shall be includible

18 in gross income to the extent no deduction was

19 allowed with respect to such amount.

20 ‘‘(E) ADDITIONAL REPORTING REQUIRE21 MENTS.—Trustees of Roth IRAs, trustees of in22 dividual retirement plans, or both, whichever is

23 appropriate, shall include such additional infor24 mation in reports required under section 408(i)

25 as the Secretary may require to ensure that
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1 amounts required to be included in gross in2 come under subparagraph (A) are so included.

3 ‘‘(4) COORDINATION WITH INDIVIDUAL RETIRE4 MENT ACCOUNTS.—Section 408(d)(2) shall be ap5 plied separately with respect to Roth IRAs and other

6 individual retirement plans.

7 ‘‘(5) QUALIFIED SPECIAL PURPOSE DISTRIBU8 TION.—‘Qualified special purpose distribution’

9 means—

10 ‘‘(i) DISTRIBUTIONS UPON DEATH.—

11 Distributions made to a beneficiary (or to

12 the estate of the individual) on or after the

13 death of the individual.

14 ‘‘(ii) DISTRIBUTIONS UPON DIS15 ABILITY.—Distributions attributable to the

16 individual’s being disabled.

17 ‘‘(iii) DISTRIBUTIONS TO PAY MED18 ICAL EXPENSES.—Distributions made to

19 the individual for amounts paid during the

20 year for medical care, but only to the ex21 tent that the amounts paid for medical

22 care exceed 7.5% of the adjusted gross in23 come of the taxpayer. (determined without

24 regard to whether the employee itemizes

25 deductions for such taxable year).
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1 ‘‘(iv) QDROS.—Any distribution to

2 an alternate payee pursuant to a qualified

3 domestic relations order (within the mean4 ing of section 414(p)(1)).

5 ‘‘(v) DISTRIBUTIONS TO UNEMPLOYED

6 INDIVIDUALS FOR HEALTH INSURANCE

7 PREMIUMS.—Distributions to an

8 individual—

9 ‘‘(I) if such individual has re10 ceived unemployment compensation

11 for 12 consecutive weeks under any

12 Federal or State unemployment com13 pensation law by reason of such sepa14 ration (or in the case of a self-em15 ployed individual, to the extent pro16 vided in regulations, if the individual

17 would have received unemployment

18 compensation but for the fact the in19 dividual was self-employed),

20 ‘‘(II) if such distributions are

21 made during any taxable year during

22 which such unemployment compensa23 tion is paid or the succeeding taxable

24 year,
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1 ‘‘(III) to the extent such distribu2 tions do not exceed the amount paid

3 during the taxable year for insurance

4 for the diagnosis, cure, mitigation,

5 treatment, or prevention of disease, or

6 for the purpose of affecting any struc7 ture or function of the body (or for

8 transportation primarily for and es9 sential to such medical care) (includ10 ing amounts paid as premiums under

11 part B of title XVIII of the Social Se12 curity Act, relating to supplementary

13 medical insurance for the aged) or for

14 any qualified long-term care insurance

15 contract (as defined in section

16 7702B(b)) with respect to the indi17 vidual and the individual’s spouse and

18 dependents, and

19 ‘‘(IV) such distributions are not

20 made after the individual has been

21 employed for at least 60 days after

22 the separation from employment to

23 which clause (I) applies.

24 ‘‘(v) DISTRIBUTIONS TO PAY HIGHER

25 EDUCATION EXPENSES.—Distributions to
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1 the extent such distributions do not exceed

2 the qualified higher education expenses (as

3 defined in section 10(a)(2)) of—

4 ‘‘(I) the taxpayer,

5 ‘‘(II) the taxpayer’s spouse, or

6 ‘‘(III) any child or grandchild of

7 the taxpayer or the taxpayer’s spouse.

8 ‘‘(vi) DISTRIBUTIONS FOR FIRST

9 HOME PURCHASES.—Distributions which

10 are qualified first-time homebuyer distribu11 tions (as defined in paragraph (6)).

12 ‘‘(6) QUALIFIED FIRST-TIME HOMEBUYER DIS13 TRIBUTIONS.—

14 ‘‘(A) IN GENERAL.—‘Qualified first-time

15 homebuyer distribution’ means any payment or

16 distribution received by an individual to the ex17 tent such payment or distribution is used by the

18 individual before the close of the 120th day

19 after the day on which such payment or dis20 tribution is received to pay qualified acquisition

21 costs with respect to a principal residence of a

22 first-time homebuyer who is such individual, the

23 spouse of such individual, or any child, grand24 child, or ancestor of such individual or the indi25 vidual’s spouse.
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1 ‘‘(B) LIFETIME DOLLAR LIMITATION.—

2 The aggregate amount of payments or distribu3 tions received by an individual which may be

4 treated as qualified first-time homebuyer dis5 tributions for any taxable year shall not exceed

6 the excess (if any) of—

7 ‘‘(i) $10,000, over

8 ‘‘(ii) the aggregate amounts treated as

9 qualified first-time homebuyer distributions

10 with respect to such individual for all prior

11 taxable years.

12 ‘‘(C) QUALIFIED ACQUISITION COSTS.—

13 ‘Qualified acquisition costs’ means the costs of

14 acquiring, constructing, or reconstructing a res15 idence. Such term includes any usual or reason16 able settlement, financing, or other closing

17 costs.

18 ‘‘(D) FIRST-TIME HOMEBUYER; OTHER

19 DEFINITIONS.—For purposes of this

20 paragraph—

21 ‘‘(i) FIRST-TIME HOMEBUYER.—

22 ‘First-time homebuyer’ means any indi23 vidual if such individual (and if married,

24 such individual’s spouse) had no present

25 ownership interest in a principal residence
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1 during the 2-year period ending on the

2 date of acquisition of the principal resi3 dence to which this paragraph applies, and

4 ‘‘(ii) DATE OF ACQUISITION.—‘Date

5 of acquisition’ means the date—

6 ‘‘(I) on which a binding contract

7 to acquire the principal residence to

8 which subparagraph (A) applies is en9 tered into, or

10 ‘‘(II) on which construction or re11 construction of such a principal resi12 dence is commenced.

13 ‘‘(E) SPECIAL RULE WHERE DELAY IN AC14 QUISITION.—The Secretary shall prescribe rules

15 under which a distribution will not be penalized

16 if made in anticipation of being a qualified

17 first-time homeowner distribution but construc18 tion delays or other unanticipated factors delay

19 the closing.

20 ‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For

21 purposes of this section, the term qualified rollover con22 tribution means a rollover contribution to a Roth IRA

23 from another such account, or from an individual retire24 ment plan, but only if such rollover contribution meets the

25 requirements of section 408(d)(3). For purposes of section
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1 408(d)(3)(B), there shall be disregarded any qualified roll2 over contribution from an individual retirement plan

3 (other than a Roth IRA) to a Roth IRA.

4 ‘‘(f) PERMITTED INVESTMENTS.—

5 ‘‘(1) INVESTMENT PERMITTED.—A Roth IRA

6 shall not cease to be an individual retirement ac7 count pursuant to section 408(e)(2) solely because

8 funds from such account are used to make a debt

9 or equity investment in a controlled business entity.

10 ‘‘(2) LOANS TO A CONTROLLED BUSINESS ENTI11 TY.—

12 ‘‘(A) EXCESS RETURN.—If funds in a

13 Roth IRA are loaned to a controlled business

14 entity, any return on such loans in excess of a

15 fair return shall be treated as gross income of

16 the beneficiary that is then deposited in the

17 Roth IRA.

18 ‘‘(B) LOAN.—For purposes of this section,

19 an amount shall be treated as loaned to a con20 trolled business entity only if—

21 ‘‘(i) the amount is treated in the

22 books and records of the business entity as

23 a loan,
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1 ‘‘(ii) the transaction is reflected in a

2 written note or other evidence of indebted3 ness, and

4 ‘‘(iii) the business entity is required to

5 pay interest at least once per year and at

6 the time such loan is made it is reasonable

7 to expect that such interest will be paid on

8 a timely basis.

9 ‘‘(C) FAIR RETURN.—For purposes of this

10 subsection, a ‘fair return’ with respect to a loan

11 is interest at a rate not in excess of 3 percent12 age points plus the minimum rate of interest

13 that would have to be charged with respect to

14 such loan to prevent it from being a below-mar15 ket loan for purposes of section 7872 (deter16 mined as if section 7872 applied to such loan).

17 ‘‘(3) EQUITY INVESTMENT IN A CONTROLLED

18 BUSINESS ENTITY.—If funds in a Roth IRA are con19 tributed to the capital of, applied to acquire stock or

20 other equity interest in, or otherwise transferred to,

21 a controlled business entity in a transaction that is

22 not considered a loan for purposes of this sub23 section, any return on such equity shall be treated

24 as gross income of the beneficiary that is then de-
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1 posited in the Roth IRA. The preceding sentence

2 shall not apply to—

3 ‘‘(A) the proceeds of the sale of such eq4 uity interest to a third party, or

5 ‘‘(B) the proceeds received by the Roth

6 IRA as the result of a complete redemption of

7 the beneficiary’s interest in the business entity

8 (including any interests held through a Roth

9 IRA).

10 ‘‘(4) CONTROLLED BUSINESS ENTITY.—‘Con11 trolled business entity’ means any business entity in

12 which the beneficiary of the Roth IRA holds at least

13 a 5 percent interest in the profits and losses (after

14 taking into account the investment through the Roth

15 IRA) and in which an investment would cause the

16 Roth IRA to cease to be an individual retirement

17 account by reason of section 408(e)(2) but for this

18 subsection.

19 ‘‘(5) APPLICATION OF SECTION 4975.—Section

20 4975 shall not apply to a loan or equity investment

21 by a Roth IRA in a controlled business entity.

22 ‘‘(6) TAX AND PENALTY AVOIDANCE.—The Sec23 retary shall prescribe regulations that prohibit the

24 provisions of this subsection to be used to cir25 cumvent the application of subsection (d)(2) (relat-
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1 ing to taxable distributions). The regulations shall

2 not prohibit bona fide investments in controlled busi3 ness entities. The regulations shall address loans to

4 and investments in a controlled business entity that

5 are used to fund distributions or dividends from the

6 business entity to the account beneficiary or a mem7 ber of the beneficiary’s family.

8 ‘‘SEC. 31. DEDUCTIBLE IRAS.

9 ‘‘(a) ALLOWANCE OF DEDUCTION.—The ‘qualified

10 IRA deduction’ shall be an amount equal to the qualified

11 retirement contributions of the individual for the taxable

12 year, except as limited by subsection (b).

13 ‘‘(b) MAXIMUM AMOUNT OF DEDUCTION.—

14 ‘‘(1) IN GENERAL.—The amount allowable as a

15 deduction under subsection (a) to any individual for

16 any taxable year shall not exceed the lesser of—

17 ‘‘(A) $2,000, or

18 ‘‘(B) an amount equal to the compensation

19 includible in the individual’s gross income for

20 such taxable year.

21 ‘‘(2) SPECIAL RULE FOR EMPLOYER CONTRIBU22 TIONS UNDER SIMPLIFIED EMPLOYEE PENSIONS.—

23 This section shall not apply with respect to an em24 ployer contribution to a simplified employee pension.
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1 ‘‘(3) GRANDFATHERED PLANS.—Notwith2 standing paragraph (1), the amount allowable as a

3 deduction under subsection (a) with respect to any

4 contributions on behalf of an employee to a plan de5 scribed in section 501(c)(18) of the Internal Rev6 enue Code of 1986 shall not exceed the lesser of—

7 ‘‘(A) $7,000, or

8 ‘‘(B) an amount equal to 25 percent of the

9 compensation (as defined in section 415(c)(3))

10 includible in the individual’s gross income for

11 such taxable year.

12 ‘‘(4) SPECIAL RULE FOR SIMPLE RETIREMENT

13 ACCOUNTS.—This section shall not apply with re14 spect to any amount contributed to a simple retire15 ment account established under section 408(p).

16 ‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDI17 VIDUALS.—

18 ‘‘(1) IN GENERAL.—In the case of an individual

19 to whom this paragraph applies for the taxable year,

20 the limitation of paragraph (1) of subsection (b)

21 shall be equal to the lesser of—

22 ‘‘(A) the dollar amount in effect under

23 subsection (b)(1)(A) for the taxable year, or

24 ‘‘(B) the sum of—
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1 ‘‘(i) the compensation includible in

2 such individual’s gross income for the tax3 able year, plus

4 ‘‘(ii) the compensation includible in

5 the gross income of such individual’s

6 spouse for the taxable year reduced by—

7 ‘‘(I) the amount allowed as a de8 duction under subsection (a) to such

9 spouse for such taxable year, and

10 ‘‘(II) the amount of any contribu11 tion on behalf of such spouse to a

12 Roth IRA under section 30 for such

13 taxable year.

14 ‘‘(2) INDIVIDUALS TO WHOM PARAGRAPH (1)

15 APPLIES.—Paragraph (1) shall apply to any indi16 vidual if—

17 ‘‘(A) such individual files a joint return for

18 the taxable year, and

19 ‘‘(B) the amount of compensation (if any)

20 includible in such individual’s gross income for

21 the taxable year is less than the compensation

22 includible in the gross income of such individ23 ual’s spouse for the taxable year.

24 ‘‘(d) OTHER LIMITATIONS AND RESTRICTIONS.—
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1 ‘‘(1) BENEFICIARY MUST BE UNDER AGE

701 2 ⁄2.—No deduction shall be allowed under this sec3 tion with respect to any qualified retirement con4 tribution for the benefit of an individual if such individual has attained age 701 5 ⁄2 before the close of such

6 individual’s taxable year for which the contribution

7 was made.

8 ‘‘(2) RECONTRIBUTED AMOUNTS.—No deduc9 tion shall be allowed under this section with respect

10 to a rollover contribution described in section 402(c),

11 403(a)(4), 403(b)(8), or 408(d)(3).

12 ‘‘(3) AMOUNTS CONTRIBUTED UNDER ENDOW13 MENT CONTRACT.—In the case of an endowment

14 contract described in section 408(b), no deduction

15 shall be allowed under this section for that portion

16 of the amounts paid under the contract for the tax17 able year which is properly allocable, under regula18 tions prescribed by the Secretary, to the cost of life

19 insurance.

20 ‘‘(4) DENIAL OF DEDUCTION FOR AMOUNT

21 CONTRIBUTED TO INHERITED ANNUITIES OR AC22 COUNTS.—No deduction shall be allowed under this

23 section with respect to any amount paid to an inher24 ited individual retirement account or individual re-
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1 tirement annuity (within the meaning of section

2 408(d)(3)(C)(ii)).

3 ‘‘(e) QUALIFIED RETIREMENT CONTRIBUTION.—For

4 purposes of this section, the term ‘qualified retirement

5 contribution’ means—

6 ‘‘(1) any amount paid in cash for the taxable

7 year by or on behalf of an individual to an individual

8 retirement plan for such individual’s benefit, and

9 ‘‘(2) any amount contributed on behalf of any

10 individual to a plan described in section 501(c)(18)

11 of the Internal Revenue Code of 1986.

12 ‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.—

13 ‘‘(1) COMPENSATION.—For purposes of this

14 section, the term ‘compensation’ includes earned in15 come (as defined in section 401(c)(2)). The term

16 ‘compensation’ does not include any amount received

17 as a pension or annuity and does not include any

18 amount received as deferred compensation. The term

19 ‘compensation’ shall include any alimony, child sup20 port and separate maintenance payments includible

21 in the individual’s gross income with respect to a di22 vorce or separation instrument. For purposes of this

23 paragraph, section 401(c)(2) shall be applied as if

24 the term trade or business for purposes of section

25 1402 included service described in subsection (c)(6).
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1 ‘‘(2) MARRIED INDIVIDUALS.—The maximum

2 deduction under subsection (b) shall be computed

3 separately for each individual, and this section shall

4 be applied without regard to any community prop5 erty laws.

6 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

7 MADE.—For purposes of this section, a taxpayer

8 shall be deemed to have made a contribution to an

9 individual retirement plan during a year if the con10 tribution is made on account of such year and is

11 made not later than April 15 of the following year.

12 ‘‘(4) REPORTS.—The Secretary shall prescribe

13 regulations which prescribe the time and the manner

14 in which reports to the Secretary and plan partici15 pants shall be made by the plan administrator of a

16 qualified employer or government plan receiving

17 qualified voluntary employee contributions.

18 ‘‘(5) EMPLOYER PAYMENTS.—For purposes of

19 this title, any amount paid by an employer to an in20 dividual retirement plan shall be treated as payment

21 of compensation to the employee (other than a self22 employed individual who is an employee within the

23 meaning of section 401(c)(1)) includible in his gross

24 income in the taxable year for which the amount was

25 contributed, whether or not a deduction for such
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1 payment is allowable under this section to the em2 ployee.

3 ‘‘(6) EXCESS CONTRIBUTIONS TREATED AS

4 CONTRIBUTION MADE DURING SUBSEQUENT YEAR

5 FOR WHICH THERE IS AN UNUSED LIMITATION.—

6 ‘‘(A) IN GENERAL.—If for the taxable year

7 the maximum amount allowable as a deduction

8 under this section for contributions to an indi9 vidual retirement plan exceeds the amount con10 tributed, then the taxpayer shall be treated as

11 having made an additional contribution for the

12 taxable year in an amount equal to the lesser

13 of—

14 ‘‘(i) the amount of such excess, or

15 ‘‘(ii) the amount of the excess con16 tributions for such taxable year (deter17 mined under section 4973(b)(2) without

18 regard to subparagraph (C) thereof).

19 ‘‘(B) AMOUNT CONTRIBUTED.—For pur20 poses of this paragraph, the amount

21 contributed—

22 ‘‘(i) shall be determined without re23 gard to this paragraph, and

24 ‘‘(ii) shall not include any rollover

25 contribution.
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1 ‘‘(C) SPECIAL RULE WHERE EXCESS DE2 DUCTION WAS ALLOWED FOR CLOSED YEAR.—

3 Proper reduction shall be made in the amount

4 allowable as a deduction by reason of this para5 graph for any amount allowed as a deduction

6 under this section for a prior taxable year for

7 which the period for assessing deficiency has ex8 pired if the amount so allowed exceeds the

9 amount which should have been allowed for

10 such prior taxable year.

11 ‘‘(7) ELECTION NOT TO DEDUCT CONTRIBU12 TIONS.—For election not to deduct contributions to

13 individual retirement plans, see section

14 408(o)(2)(B)(ii).

15 ‘‘(g) LIMITATION ON DEDUCTION FOR ACTIVE PAR16 TICIPANTS IN CERTAIN PENSION PLANS.—

17 ‘‘(1) IN GENERAL.—If (for any part of any plan

18 year ending with or within a taxable year) an indi19 vidual is an active participant, each of the dollar

20 limitations contained in subsections (b)(1)(A) and

21 (c)(1)(A) for such taxable year shall be reduced (but

22 not below zero) by the amount determined under

23 paragraph (2).

24 ‘‘(2) AMOUNT OF REDUCTION.—
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1 ‘‘(A) IN GENERAL.—The amount deter2 mined under this paragraph with respect to any

3 dollar limitation shall be the amount which

4 bears the same ratio to such limitation as—

5 ‘‘(i) the excess of—

6 ‘‘(I) the taxpayer’s adjusted

7 gross income for such taxable year,

8 over

9 ‘‘(II) the applicable dollar

10 amount, bears to

11 ‘‘(ii) $10,000 ($20,000 in the case of

12 a joint return for a taxable year beginning

13 after December 31, 2009).

14 ‘‘(B) NO REDUCTION BELOW $200 UNTIL

15 COMPLETE PHASE-OUT.—No dollar limitation

16 shall be reduced below $200 under paragraph

17 (1) unless (without regard to this subpara18 graph) such limitation is reduced to zero.

19 ‘‘(C) ROUNDING.—Any amount determined

20 under this paragraph which is not a multiple of

21 $10 shall be rounded to the next lowest $10.

22 ‘‘(3) ADJUSTED GROSS INCOME; APPLICABLE

23 DOLLAR AMOUNT.—For purposes of this

24 subsection—
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1 ‘‘(A) ADJUSTED GROSS INCOME.—Ad2 justed gross income of any taxpayer shall be de3 termined without regard to the qualified IRA

4 deduction.

5 ‘‘(B) APPLICABLE DOLLAR AMOUNT.—The

6 term ‘applicable dollar amount’ means the fol7 lowing:

8 ‘‘(i) In the case of a taxpayer filing a

9 joint return:

‘‘For taxable years beginning

in:

‘‘The applicable dollar amount

is:

2002 ............................................... $51,000

2003 ............................................... $52,000

2004 ............................................... $53,000

2005 ............................................... $54,000

2006 ............................................... $60,000

2007 ............................................... $65,000

2008 ............................................... $70,000

2009 ............................................... $75,000

2010 and thereafter ....................... $80,000.

10 ‘‘(ii) In the case of any other taxpayer

11 (other than a married individual filing a

12 separate return):

For taxable years beginning

in:

The applicable dollar amount

is:

2002 ............................................... $31,000

2003 ............................................... $32,000

2004 ............................................... $33,000

2005 ............................................... $34,000

2006 ............................................... $40,000

2007 ............................................... $45,000

2008 and thereafter ....................... $50,000.

13 ‘‘(iii) In the case of a married indi14 vidual filing a separate return, zero.
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1 ‘‘(4) SPECIAL RULE FOR MARRIED INDIVIDUALS

2 FILING SEPARATELY AND LIVING APART.—A hus3 band and wife who—

4 ‘‘(A) file separate returns for any taxable

5 year, and

6 ‘‘(B) live apart at all times during such

7 taxable year, shall not be treated as married in8 dividuals for purposes of this subsection.

9 ‘‘(5) ACTIVE PARTICIPANT.—For purposes of

10 this subsection, the term ‘active participant’ means,

11 with respect to any plan year, an individual—

12 ‘‘(A) who is an active participant in—

13 ‘‘(i) a plan described in section 401(a)

14 which includes a trust exempt from tax,

15 ‘‘(ii) an annuity plan described in sec16 tion 403(a),

17 ‘‘(iii) a plan established for its em18 ployees by the United States, by a State or

19 political subdivision thereof, or by an agen20 cy or instrumentality of any of the fore21 going,

22 ‘‘(iv) an annuity contract described in

23 section 403(b),

24 ‘‘(v) a simplified employee pension

25 (within the meaning of section 408(k)), or
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1 ‘‘(vi) any simple retirement account

2 (within the meaning of section 408(p), or

3 ‘‘(B) who makes deductible contributions

4 to a trust described in section 501(c)(18).

5 The determination of whether an individual is an ac6 tive participant shall be made without regard to

7 whether or not such individual’s rights under a plan,

8 trust, or contract are nonforfeitable. An eligible de9 ferred compensation plan (within the meaning of

10 section 457(b) of the Internal Revenue Code of

11 1986) shall not be treated as a plan described in

12 subparagraph (A)(iii).

13 ‘‘(6) CERTAIN INDIVIDUALS NOT TREATED AS

14 ACTIVE PARTICIPANTS.—For purposes of this sub15 section, any individual described in any of the fol16 lowing subparagraphs shall not be treated as an ac17 tive participant for any taxable year solely because

18 of any participation so described:

19 ‘‘(A) MEMBERS OF RESERVE COMPO20 NENTS.—Participation in a plan described in

21 subparagraph (A)(iii) of paragraph (5) by rea22 son of service as a member of a reserve compo23 nent of the Armed Forces (as defined in section

24 10101 of title 10, unless such individual has

25 served in excess of 90 days on active duty
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1 (other than active duty for training) during the

2 year.

3 ‘‘(B) VOLUNTEER FIREFIGHTERS.—A vol4 unteer firefighter—

5 ‘‘(i) who is a participant in a plan de6 scribed in subparagraph (A)(iii) of para7 graph (5) based on his activity as a volun8 teer firefighter, and

9 ‘‘(ii) whose accrued benefit as of the

10 beginning of the taxable year is not more

11 than an annual benefit of $1,800 (when

12 expressed as a single life annuity com13 mencing at age 65).

14 ‘‘(7) SPECIAL RULE FOR CERTAIN SPOUSES.—

15 In the case of an individual who is an active partici16 pant at no time during any plan year ending with

17 or within the taxable year but whose spouse is an

18 active participant for any part of any such plan

19 year—

20 ‘‘(A) the applicable dollar amount under

21 paragraph (3)(B)(i) with respect to the tax22 payer shall be $150,000, and

23 ‘‘(B) the amount applicable under para24 graph (2)(A)(ii) shall be $10,000.
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1 ‘‘(h) CROSS REFERENCE.—For failure to provide re2 quired reports, see section 6652(g).

3 ‘‘SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVI4 SIONS.

5 ‘‘(a) EDUCATION IRA’S.—

6 ‘‘(1) IN GENERAL.—An account that qualifies

7 as an education IRA under the Internal Revenue

8 Code of 1986 as in effect immediately before adop9 tion of the Simplified USA Tax Act shall be treated

10 as a Roth IRA for purposes of this chapter (includ11 ing rules allowing for tax-free rollover).

12 ‘‘(2) NO NEW CONTRIBUTIONS.—Neither para13 graph (1) nor section 530 of the Internal Revenue

14 Code of 1986 shall apply to an education IRA to

15 which contributions are made after December 31,

16 2001.

17 ‘‘(3) SPECIAL RULE.—For purposes of applying

18 section 30 to an account that was an educational

19 IRA, the designated beneficiary of such account

20 shall be treated as described in a subclause of clause

21 (vi) of section 30(d)(5).

22 ‘‘(b) MEDICAL SAVINGS ACCOUNTS.—

23 ‘‘(1) EQUIVALENT OF DEDUCTIBLE IRA.—A

24 medical savings account shall be treated as an indi-
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1 vidual retirement plan other than a Roth IRA for

2 purposes of this chapter and chapter 3.

3 ‘‘(2) SPECIAL ROLLOVER RULES.—

4 ‘‘(A) NO INCOME LIMIT.—The income lim5 its of section 30(c)(3)(B) shall not apply to the

6 rollover of a medical savings account into a

7 Roth IRA.

8 ‘‘(B) MEDICAL DISTRIBUTIONS.—For pur9 poses of applying section 30 to the amount of

10 any medical savings account rolled over to a

11 Roth IRA, subclause (iii) of section 30(d)(5)

12 shall apply without regard to the limitation

13 based on adjusted gross income.

14 ‘‘(3) MEDICAL SAVINGS ACCOUNT.—‘Medical

15 savings account’ means an account established under

16 section 220 of the Internal Revenue Code of 1986.

17 ‘‘(c) QUALIFIED STATE TUITION PROGRAMS.—

18 ‘‘(1) EDUCATION SAVINGS ACCOUNT PRO19 GRAMS.—No account shall fail to qualify as a Roth

20 IRA merely because in addition to the beneficiary of

21 the account, there is a ‘designated beneficiary’ whose

22 education expenses the beneficiary expects to pay or

23 have paid with the proceeds of the account. The pay24 ment of such expenses with the proceeds of an ac-
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1 count shall be treated as a distribution from the ac2 count.

3 ‘‘(2) PREPAID TUITION CERTIFICATES.—

4 ‘‘(A) CONTRIBUTION TO ACCOUNTS.—An

5 individual may contribute prepaid tuition cer6 tificates to a Roth IRA before January 1, 2005,

7 without recognizing gross income on the con8 tribution of such certificates. For purposes of

9 section 30, the amount contributed shall equal

10 the cost of the certificates.

11 ‘‘(B) PURCHASE OF PREPAID TUITION

12 CERTIFICATES.—A Roth IRA account may pur13 chase prepaid tuition certificates without vio14 lating section 408.

15 ‘‘(C) PREPAID TUITION CERTIFICATES.—

16 ‘Prepaid tuition certificates’ means credits or

17 certificates that entitle a designated beneficiary

18 of such certificates to the waiver or payment of

19 qualified higher education expenses of the des20 ignated beneficiary.

21 ‘‘(3) ROLLOVER OF ACCOUNTS.—An account to

22 which section 529 of the Internal Revenue Code of

23 1986 (before adoption of the Simplified USA Tax

24 Act) shall be treated as a Roth IRA for purposes of

25 rules relating to qualified rollovers (except that in
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1 the case of any such rollover, any contributions

2 made to the section 529 account after July 1, 2001,

3 shall be treated as contributions to the Roth IRA in

4 the year of the rollover for purposes of section

5 30(c)(2)).

6 ‘‘(4) TRANSITION.—

7 ‘‘(A) TRANSITION PERIOD.—Subsections

8 (a) and (c) of section 529 of the Internal Rev9 enue Code of 1986 shall apply until January 1,

10 2005.

11 ‘‘(B) TRANSITION.—The Secretary shall

12 prescribe rules to facilitate use of the Roth IRA

13 rules to exempt earnings on accounts and cer14 tificates previously exempted under section 529

15 of the Internal Revenue Code of 1986.

16 ‘‘(5) QUALIFIED HIGHER EDUCATION EX17 PENSES.—For purposes of this subsection, the defi18 nition ‘qualified higher education expenses’ in sec19 tion 529(e)(3) of the Internal Revenue Code of 1986

20 shall apply.

21 ‘‘SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT

22 AND LIFE INSURANCE CONTRACTS.

23 ‘‘(a) GENERAL RULE FOR ANNUITIES.—Except as

24 otherwise provided in this chapter, gross income includes

25 any amount received as an annuity (whether for a period
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1 certain or during one or more lives) under an annuity, en2 dowment, or life insurance contract.

3 ‘‘(b) EXCLUSION RATIO.—

4 ‘‘(1) IN GENERAL.—Gross income does not in5 clude that part of any amount received as an annu6 ity under an annuity, endowment, or life insurance

7 contract which bears the same ratio to such amount

8 as the investment in the contract (as of the annuity

9 starting date) bears to the expected return under the

10 contract (as of such date).

11 ‘‘(2) EXCLUSION LIMITED TO INVESTMENT.—

12 The portion of any amount received as an annuity

13 which is excluded from gross income under para14 graph (1) shall not exceed the unrecovered invest15 ment in the contract immediately before the receipt

16 of such amount.

17 ‘‘(3) DEDUCTION WHERE ANNUITY PAYMENTS

18 CEASE BEFORE ENTIRE INVESTMENT RECOVERED.—

19 ‘‘(A) IN GENERAL.—If—

20 ‘‘(i) after the annuity starting date,

21 payments as an annuity under the contract

22 cease by reason of the death of an annu23 itant, and
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1 ‘‘(ii) as of the date of such cessation,

2 there is unrecovered investment in the con3 tract,

4 the amount of such unrecovered investment (in

5 excess of any amount specified in subsection

6 (e)(5) which was not included in gross income)

7 shall be allowed as a deduction from adjusted

8 gross income in determining taxable income of

9 the annuitant for his last taxable year.

10 ‘‘(B) PAYMENTS TO OTHER PERSONS.—In

11 the case of any contract which provides for pay12 ments meeting the requirements of subpara13 graphs (B) and (C) of subsection (c)(2), the de14 duction under subparagraph (A) shall be al15 lowed to the person entitled to such payments

16 for the taxable year in which such payments are

17 received.

18 ‘‘(c) DEFINITIONS.—

19 ‘‘(1) INVESTMENT IN THE CONTRACT.—For

20 purposes of subsection (b), the investment in the

21 contract as of the annuity starting date is—

22 ‘‘(A) the aggregate amount of premiums or

23 other consideration paid for the contract (in24 cluding any amounts earned on the contract
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1 which were included in gross income and rein2 vested in the contract), minus

3 ‘‘(B) the aggregate amount received under

4 the contract before such date, to the extent that

5 such amount was excludable from gross income

6 under this subtitle or prior income tax laws.

7 ‘‘(2) OTHER TERMS USED IN SUBSECTION

8 (b).—Calculations under subsections (a) and (b)

9 shall be made in accordance with regulations pre10 scribed by the Secretary, which regulations shall

11 generally be consistent with the section 72 of the In12 ternal Revenue Code of 1986.

13 ‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER

14 RETIREMENT PLANS.—

15 ‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY

16 PAYMENTS.—

17 ‘‘(A) IN GENERAL.—In the case of any

18 amount received as an annuity under a quali19 fied employer retirement plan—

20 ‘‘(i) subsection (b) shall not apply,

21 and

22 ‘‘(ii) the investment in the contract

23 shall be recovered as provided in this para24 graph.
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1 ‘‘(B) METHOD OF RECOVERING INVEST2 MENT IN CONTRACT.—

3 ‘‘(i) IN GENERAL.—Gross income

4 shall not include so much of any monthly

5 annuity payment under a qualified em6 ployer retirement plan as does not exceed

7 the amount obtained by dividing—

8 ‘‘(I) the investment in the con9 tract (as of the annuity starting date),

10 by

11 ‘‘(II) the number of anticipated

12 payments determined under the table

13 contained in clause (iii) (or, in the

14 case of a contract to which subsection

15 (c)(3)(B) applies, the number of

16 monthly annuity payments under such

17 contract).

18 ‘‘(ii) CERTAIN RULES MADE APPLICA19 BLE.—Rules similar to the rules of para20 graphs (2) and (3) of subsection (b) shall

21 apply for purposes of this paragraph.

22 ‘‘(iii) NUMBER OF ANTICIPATED PAY23 MENTS.—If the annuity is payable over the

24 life of a single individual, the number of
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1 anticipated payments shall be determined

2 as follows:

If the age of the annuitant on

the annuity starting date

is:

The number:

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

3 ‘‘(iv) NUMBER OF ANTICIPATED PAY4 MENTS WHERE MORE THAN ONE LIFE.—If

5 the annuity is payable over the lives of

6 more than 1 individual, the number of an7 ticipated payments shall be determined as

8 follows:

If the combined ages of the

annuitants are:

The number:

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

9 ‘‘(C) SPECIAL RULE WHERE LUMP SUM

10 PAID IN CONNECTION WITH COMMENCEMENT

11 OF ANNUITY PAYMENTS.—If, in connection with

12 the commencement of annuity payments under

13 any qualified employer retirement plan, the tax14 payer receives a lump sum payment—
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1 ‘‘(i) such payment shall be taxable

2 under subsection (e) as if received before

3 the annuity starting date, and

4 ‘‘(ii) the investment in the contract

5 for purposes of this paragraph shall be de6 termined as if such payment had been so

7 received.

8 ‘‘(D) EXCEPTION.—This paragraph shall

9 not apply in any case where the primary annu10 itant has attained age 75 on the annuity start11 ing date unless there are fewer than 5 years of

12 guaranteed payments under the annuity.

13 ‘‘(E) ADJUSTMENT WHERE ANNUITY PAY14 MENTS NOT ON A MONTHLY BASIS.—In any

15 case where the annuity payments are not made

16 on a monthly basis, appropriate adjustments in

17 the application of this paragraph shall be made

18 to take into account the period on the basis of

19 which such payments are made.

20 ‘‘(F) QUALIFIED EMPLOYER RETIREMENT

21 PLAN.—For purposes of this paragraph, the

22 term ‘qualified employer retirement plan’ means

23 any plan or contract described in paragraph

24 (1), (2), or (3) of section 4974(c).
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1 ‘‘(2) TREATMENT OF EMPLOYEE CONTRIBU2 TIONS UNDER DEFINED CONTRIBUTION PLANS.—

3 For purposes of this section, employee contributions

4 (and any income allocable thereto) under a defined

5 contribution plan may be treated as a separate con6 tract.

7 ‘‘(e) AMOUNTS NOT RECEIVED AS ANNUITIES.—

8 ‘‘(1) APPLICATION OF SUBSECTION.—

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

10 apply to any amount which—

11 ‘‘(i) is received under an annuity, en12 dowment, or life insurance contract, and

13 ‘‘(ii) is not received as an annuity,

14 if no provision of this subtitle (other than this

15 subsection) applies with respect to such

16 amount.

17 ‘‘(B) DIVIDENDS.—For purposes of this

18 section, any amount received which is in the na19 ture of a dividend or similar distribution shall

20 be treated as an amount not received as an an21 nuity.

22 ‘‘(2) GENERAL RULE.—Any amount to which

23 this subsection applies—
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1 ‘‘(A) if received on or after the annuity

2 starting date, shall be included in gross income,

3 or

4 ‘‘(B) if received before the annuity starting

5 date—

6 ‘‘(i) shall be included in gross income

7 to the extent allocable to income on the

8 contract, and

9 ‘‘(ii) shall not be included in gross in10 come to the extent allocable to the invest11 ment in the contract.

12 ‘‘(3) ALLOCATION OF AMOUNTS TO INCOME

13 AND INVESTMENT.—For purposes of paragraph

14 (2)(B):

15 ‘‘(A) Any amount to which this subsection

16 applies shall be treated as allocable to income

17 on the contract to the extent that such amount

18 does not exceed the excess (if any) of—

19 ‘‘(i) the cash value of the contract

20 (determined without regard to any sur21 render charge) immediately before the

22 amount is received, over

23 ‘‘(ii) the investment in the contract at

24 such time.
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1 ‘‘(B) Any amount to which this subsection

2 applies shall be treated as allocable to invest3 ment in the contract to the extent that such

4 amount is not allocated to income under sub5 paragraph (A).

6 ‘‘(4) SPECIAL RULES FOR APPLICATION OF

7 PARAGRAPH (2)(B).—For purposes of paragraph

8 (2)(B):

9 ‘‘(A) LOANS TREATED AS DISTRIBU10 TIONS.—If, during any taxable year, an

11 individual—

12 ‘‘(i) receives (directly or indirectly)

13 any amount as a loan under any contract

14 to which this subsection applies, or

15 ‘‘(ii) assigns or pledges (or agrees to

16 assign or pledge) any portion of the value

17 of any such contract,

18 such amount or portion shall be treated as re19 ceived under the contract as an amount not re20 ceived as an annuity. The preceding sentence

21 shall not apply for purposes of determining in22 vestment in the contract, except that the invest23 ment in the contract shall be increased by any

24 amount included in gross income by reason of
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1 the amount treated as received under the pre2 ceding sentence.

3 ‘‘(B) TREATMENT OF TRANSFERS WITH4 OUT ADEQUATE CONSIDERATION.—

5 ‘‘(i) IN GENERAL.—If an individual

6 who holds an annuity contract transfers it

7 without full and adequate consideration,

8 such individual shall be treated as receiv9 ing an amount equal to the excess of—

10 ‘‘(I) the cash surrender value of

11 such contract at the time of transfer,

12 over

13 ‘‘(II) the investment in such con14 tract at such time,

15 under the contract as an amount not re16 ceived as an annuity.

17 ‘‘(ii) EXCEPTION FOR CERTAIN

18 TRANSFERS BETWEEN SPOUSES OR

19 FORMER SPOUSES.—Clause (i) shall not

20 apply to any transfer to which section

21 77(c) (relating to transfers of property be22 tween spouses or incident to divorce) ap23 plies.

24 ‘‘(iii) ADJUSTMENT TO INVESTMENT

25 IN CONTRACT OF TRANSFEREE.—If under
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1 clause (i) an amount is included in the

2 gross income of the transferor of an annu3 ity contract, the investment in the contract

4 of the transferee in such contract shall be

5 increased by the amount so included.

6 ‘‘(5) RETENTION OF EXISTING RULES IN CER7 TAIN CASES.—Paragraph (5) of section 72(e) of the

8 Internal Revenue Code of 1986 shall apply to con9 tracts described in subparagraph (B) of such para10 graph to the extent provided therein.

11 ‘‘(6) INVESTMENT IN THE CONTRACT.—For

12 purposes of this subsection, the investment in the

13 contract as of any date is—

14 ‘‘(A) the aggregate amount of premiums or

15 other consideration paid for the contract before

16 such date, minus

17 ‘‘(B) the aggregate amount received under

18 the contract before such date, to the extent that

19 such amount was excludable from gross income

20 under this subtitle or prior income tax laws.

21 ‘‘(7) APPLICATION OF PARAGRAPH (2)(B) TO

22 QUALIFIED PLANS.—

23 ‘‘(A) IN GENERAL.—Notwithstanding any

24 other provision of this subsection, in the case of

25 any amount received before the annuity starting
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1 date from a trust or contract described in para2 graph (5)(D), paragraph (2)(B) shall apply to

3 such amounts.

4 ‘‘(B) ALLOCATION OF AMOUNT RE5 CEIVED.—For purposes of paragraph (2)(B),

6 the amount allocated to the investment in the

7 contract shall be the portion of the amount de8 scribed in subparagraph (A) which bears the

9 same ratio to such amount as the investment in

10 the contract bears to the account balance. The

11 determination under the preceding sentence

12 shall be made as of the time of the distribution

13 or at such other time as the Secretary may pre14 scribe.

15 ‘‘(C) TREATMENT OF FORFEITABLE

16 RIGHTS.—If an employee does not have a non17 forfeitable right to any amount under any trust

18 or contract to which subparagraph (A) applies,

19 such amount shall not be treated as part of the

20 account balance.

21 ‘‘(D) INVESTMENT IN THE CONTRACT BE22 FORE 1987.—In the case of a plan which on

23 May 5, 1986, permitted withdrawal of any em24 ployee contributions before separation from

25 service, subparagraph (A) shall apply only to
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1 the extent that amounts received before the an2 nuity starting date (when increased by amounts

3 previously received under the contract after De4 cember 31, 1986) exceed the investment in the

5 contract as of December 31, 1986.

6 ‘‘(8) TREATMENT OF MODIFIED ENDOWMENT

7 CONTRACTS.—

8 ‘‘(A) IN GENERAL.—Notwithstanding para9 graph (5)(C), in the case of any modified en10 dowment contract (as defined in section

11 7702A)—

12 ‘‘(i) paragraphs (2)(B) and (4)(A)

13 shall apply, and

14 ‘‘(ii) in applying paragraph (4)(A),

15 ‘any person’ shall be substituted for ‘an in16 dividual’.

17 ‘‘(B) TREATMENT OF CERTAIN BURIAL

18 CONTRACTS.—Notwithstanding subparagraph

19 (A), paragraph (4)(A) shall not apply to any as20 signment (or pledge) of a modified endowment

21 contract if such assignment (or pledge) is solely

22 to cover the payment of expenses referred to in

23 section 7702(e)(2)(C)(iii) and if the maximum

24 death benefit under such contract does not ex25 ceed $25,000.
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1 ‘‘(9) ANTI-ABUSE RULES.—

2 ‘‘(A) IN GENERAL.—For purposes of deter3 mining the amount includible in gross income

4 under this subsection—

5 ‘‘(i) all modified endowment contracts

6 issued by the same company to the same

7 policyholder during any calendar year shall

8 be treated as 1 modified endowment con9 tract, and

10 ‘‘(ii) all annuity contracts issued by

11 the same company to the same policyholder

12 during any calendar year shall be treated

13 as 1 annuity contract.

14 The preceding sentence shall not apply to any

15 contract described in paragraph (5)(D).

16 ‘‘(B) REGULATORY AUTHORITY.—The Sec17 retary may by regulations prescribe such addi18 tional rules as may be necessary or appropriate

19 to prevent avoidance of the purposes of this

20 subsection through serial purchases of contracts

21 or otherwise.

22 ‘‘(f) SPECIAL RULES FOR COMPUTING EMPLOYEES’

23 CONTRIBUTIONS.—In computing, for purposes of sub24 section (c)(1)(A), the aggregate amount of premiums or

25 other consideration paid for the contract, and for purposes
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1 of subsection (e)(6), the aggregate premiums or other con2 sideration paid, amounts contributed by the employer shall

3 be included, but only to the extent that—

4 ‘‘(1) such amounts were includible in the gross

5 income of the employee under this subtitle or prior

6 income tax laws; or

7 ‘‘(2) if such amounts had been paid directly to

8 the employee at the time they were contributed, they

9 would not have been includible in the gross income

10 of the employee under the law applicable at the time

11 of such contribution.

12 ‘‘(g) RULES FOR TRANSFEREE WHERE TRANSFER

13 WAS FOR VALUE.—Where any contract (or any interest

14 therein) is transferred (by assignment or otherwise) for

15 a valuable consideration, to the extent that the contract

16 (or interest therein) does not, in the hands of the trans17 feree, have a basis which is determined by reference to

18 the basis in the hands of the transferor, then—

19 ‘‘(1) for purposes of this section, only the ac20 tual value of such consideration, plus the amount of

21 the premiums and other consideration paid by the

22 transferee after the transfer, shall be taken into ac23 count in computing the aggregate amount of the

24 premiums or other consideration paid for the con25 tract;
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1 ‘‘(2) for purposes of subsection (c)(1)(B), there

2 shall be taken into account only the aggregate

3 amount received under the contract by the trans4 feree before the annuity starting date, to the extent

5 that such amount was excludable from gross income

6 under this subtitle or prior income tax laws; and

7 ‘‘(3) the annuity starting date is January 1,

8 1954, or the first day of the first period for which

9 the transferee received an amount under the con10 tract as an annuity, whichever is the later.

11 ‘‘(h) OPTION TO RECEIVE ANNUITY IN LIEU OF

12 LUMP SUM.—If—

13 ‘‘(1) a contract provides for payment of a lump

14 sum in full discharge of an obligation under the con15 tract, subject to an option to receive an annuity in

16 lieu of such lump sum;

17 ‘‘(2) the option is exercised within 60 days after

18 the day on which such lump sum first became pay19 able; and

20 ‘‘(3) part or all of such lump sum would (but

21 for this subsection) be includible in gross income by

22 reason of subsection (e)(1),

23 then, for purposes of this subtitle, no part of such lump

24 sum shall be considered as includible in gross income at

25 the time such lump sum first became payable.
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1 ‘‘(i) INTEREST.—Notwithstanding any other provi2 sion of this section, if any amount is held under an agree3 ment to pay interest thereon, the interest payments shall

4 be included in gross income.

5 ‘‘(j) FACE-AMOUNT CERTIFICATES.—For purposes of

6 this section, the term ‘endowment contract’ includes a

7 face-amount certificate, as defined in section 2(a)(15) of

8 the Investment Company Act of 1940 (15 U.S.C., sec.

9 80a–2), issued after December 31, 1954.

10 ‘‘(k) SPECIAL RULES APPLICABLE TO EMPLOYEE

11 ANNUITIES AND DISTRIBUTIONS UNDER EMPLOYEE

12 PLANS.—

13 ‘‘(1) COMPUTATION OF CONSIDERATION PAID

14 BY THE EMPLOYEE.—In computing—

15 ‘‘(A) the aggregate amount of premiums or

16 other consideration paid for the contract for

17 purposes of subsection (c)(1)(A) (relating to the

18 investment in the contract), and

19 ‘‘(B) the aggregate premiums or other con20 sideration paid for purposes of subsection (e)(6)

21 (relating to certain amounts not received as an

22 annuity),

23 any amount allowed as a deduction with respect to

24 the contract under section 404 which was paid while

25 the employee was an employee within the meaning of
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1 section 401(c)(1) shall be treated as consideration

2 contributed by the employer, and there shall not be

3 taken into account any portion of the premiums or

4 other consideration for the contract paid while the

5 employee was an owner-employee which is properly

6 allocable (as determined under regulations pre7 scribed by the Secretary) to the cost of life, accident,

8 health, or other insurance.

9 ‘‘(2) LIFE INSURANCE CONTRACTS.—

10 ‘‘(A) This paragraph shall apply to any life

11 insurance contract—

12 ‘‘(i) purchased as a part of a plan de13 scribed in section 403(a), or

14 ‘‘(ii) purchased by a trust described in

15 section 401(a) which is exempt from tax if

16 the proceeds of such contract are payable

17 directly or indirectly to a participant in

18 such trust or to a beneficiary of such par19 ticipant.

20 ‘‘(B) Any contribution to a plan described

21 in subparagraph (A)(i) or a trust described in

22 subparagraph (A)(ii) which is allowed as a de23 duction under section 404, and any income of

24 a trust described in subparagraph (A)(ii), which

25 is determined in accordance with regulations
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1 prescribed by the Secretary to have been ap2 plied to purchase the life insurance protection

3 under a contract described in subparagraph

4 (A), is includible in the gross income of the par5 ticipant for the taxable year when so applied.

6 ‘‘(C) In the case of the death of an indi7 vidual insured under a contract described in

8 subparagraph (A), an amount equal to the cash

9 surrender value of the contract immediately be10 fore the death of the insured shall be treated as

11 a payment under such plan or a distribution by

12 such trust, and the excess of the amount pay13 able by reason of the death of the insured over

14 such cash surrender value shall not be includ15 ible in gross income under this section and shall

16 be treated as provided in section 101.

17 ‘‘(3) PENALTIES APPLICABLE TO CERTAIN

18 AMOUNTS RECEIVED BY 5-PERCENT OWNERS.—

19 ‘‘(A) This paragraph applies to amounts

20 which are received from a qualified trust de21 scribed in section 401(a) or under a plan de22 scribed in section 403(a) at any time by an in23 dividual who is, or has been, a 5-percent owner,

24 or by a successor of such an individual, but only

25 to the extent such amounts are determined,
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1 under regulations prescribed by the Secretary,

2 to exceed the benefits provided for such indi3 vidual under the plan formula.

4 ‘‘(B) If a person receives an amount to

5 which this paragraph applies, his tax under this

6 chapter for the taxable year in which such

7 amount is received shall be increased by an

8 amount equal to 10 percent of the portion of

9 the amount so received which is includible in

10 his gross income for such taxable year.

11 ‘‘(C) For purposes of this paragraph, the

12 term ‘5-percent owner’ means any individual

13 who, at any time during the 5 plan years pre14 ceding the plan year ending in the taxable year

15 in which the amount is received, is a 5-percent

16 owner (as defined in section 416(i)(1)(B).

17 ‘‘(4) OWNER-EMPLOYEE DEFINED.—For pur18 poses of this subsection, the term ‘owner-employee’

19 has the meaning assigned to it by section 401(c)(3)

20 and includes an individual for whose benefit an indi21 vidual retirement account or annuity described in

22 section 408(a) or (b) is maintained. For purposes of

23 the preceding sentence, the term ‘owner-employee’

24 shall include an employee within the meaning of sec25 tion 401(c)(1).
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1 ‘‘(5) MEANING OF DISABLED.—For purposes of

2 this section, an individual shall be considered to be

3 disabled if he is unable to engage in any substantial

4 gainful activity by reason of any medically deter5 minable physical or mental impairment which can be

6 expected to result in death or to be of long-continued

7 and indefinite duration. An individual shall not be

8 considered to be disabled unless he furnishes proof

9 of the existence thereof in such form and manner

10 as the Secretary may require.

11 ‘‘(6) DETERMINATION OF INVESTMENT IN THE

12 CONTRACT IN THE CASE OF QUALIFIED DOMESTIC

13 RELATIONS ORDERS.—Under regulations prescribed

14 by the Secretary, in the case of a distribution or

15 payment made to an alternate payee who is the

16 spouse or former spouse of the participant pursuant

17 to a qualified domestic relations order (as defined in

18 section 414(p)), the investment in the contract as of

19 the date prescribed in such regulations shall be allo20 cated on a pro rata basis between the present value

21 of such distribution or payment and the present

22 value of all other benefits payable with respect to the

23 participant to which such order relates.

24 ‘‘(l) ANNUITIES UNDER RETIRED SERVICEMAN’S

25 FAMILY PROTECTION PLAN OR SURVIVOR BENEFIT
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1 PLAN.—Subsection (b) shall not apply in the case of

2 amounts received after December 31, 1965, as an annuity

3 under chapter 73 of title 10 of the United States Code,

4 but all such amounts shall be excluded from gross income

5 until there has been so excluded (under section 122(b)(1)

6 of the Internal Revenue Code of 1986, section 93, or this

7 section, including amounts excluded before January 1,

8 1966) an amount equal to the consideration for the con9 tract (as defined by section 122(b)(2) of the Internal Rev10 enue Code of 1986). Thereafter all amounts so received

11 shall be included in gross income.

12 ‘‘(m) SPECIAL RULES FOR DISTRIBUTIONS FROM

13 QUALIFIED PLANS TO WHICH EMPLOYEE MADE DE14 DUCTIBLE CONTRIBUTIONS.—

15 ‘‘(1) TREATMENT OF CONTRIBUTIONS.—For

16 purposes of this section and sections 402 and 403,

17 notwithstanding section 414(h), any deductible em18 ployee contribution made to a qualified employer

19 plan or government plan shall be treated as an

20 amount contributed by the employer which is not in21 cludible in the gross income of the employee.

22 ‘‘(2) AMOUNTS CONSTRUCTIVELY RECEIVED.—

23 ‘‘(A) IN GENERAL.—For purposes of this

24 subsection, rules similar to the rules provided
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1 by subsection (n) (other than the exception con2 tained in paragraph (2) thereof) shall apply.

3 ‘‘(B) PURCHASE OF LIFE INSURANCE.—To

4 the extent any amount of accumulated deduct5 ible employee contributions of an employee are

6 applied to the purchase of life insurance con7 tracts, such amount shall be treated as distrib8 uted to the employee in the year so applied.

9 ‘‘(3) SPECIAL RULE FOR TREATMENT OF ROLL10 OVER AMOUNTS.—For purposes of sections 402(c),

11 403(a)(4), and 408(d)(3), the Secretary shall pre12 scribe regulations providing for such allocations of

13 amounts attributable to accumulated deductible em14 ployee contributions, and for such other rules, as

15 may be necessary to insure that such accumulated

16 deductible employee contributions do not become eli17 gible for additional tax benefits (or freed from limi18 tations) through the use of rollovers.

19 ‘‘(4) ORDERING RULES.—Unless the plan speci20 fies otherwise, any distribution from such plan shall

21 not be treated as being made from the accumulated

22 deductible employee contributions, until all other

23 amounts to the credit of the employee have been dis24 tributed.
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1 ‘‘(n) LOANS TREATED AS DISTRIBUTIONS.—For pur2 poses of this section—

3 ‘‘(1) TREATMENT AS DISTRIBUTIONS.—

4 ‘‘(A) LOANS.—If during any taxable year a

5 participant or beneficiary receives (directly or

6 indirectly) any amount as a loan from a quali7 fied employer plan, such amount shall be treat8 ed as having been received by such individual as

9 a distribution under such plan.

10 ‘‘(B) ASSIGNMENTS OR PLEDGES.—If dur11 ing any taxable year a participant or beneficiary

12 assigns (or agrees to assign) or pledges (or

13 agrees to pledge) any portion of his interest in

14 a qualified employer plan, such portion shall be

15 treated as having been received by such indi16 vidual as a loan from such plan.

17 ‘‘(2) EXCEPTION FOR CERTAIN LOANS.—

18 ‘‘(A) GENERAL RULE.—Paragraph (1)

19 shall not apply to any loan to the extent that

20 such loan (when added to the outstanding bal21 ance of all other loans from such plan whether

22 made on, before, or after August 13, 1982),

23 does not exceed the lesser of—

24 ‘‘(i) $50,000, reduced by the excess (if

25 any) of—
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1 ‘‘(I) the highest outstanding bal2 ance of loans from the plan during the

3 1-year period ending on the day be4 fore the date on which such loan was

5 made, over

6 ‘‘(II) the outstanding balance of

7 loans from the plan on the date on

8 which such loan was made, or

9 ‘‘(ii) the greater of (I) one-half of the

10 present value of the nonforfeitable accrued

11 benefit of the employee under the plan, or

12 (II) $10,000.

13 for purposes of clause (ii), the present value of

14 the nonforfeitable accrued benefit shall be de15 termined without regard to any accumulated

16 deductible employee contributions (as defined in

17 subsection (m)(5)(B)).

18 ‘‘(B) REQUIREMENT THAT LOAN BE RE19 PAYABLE WITHIN 5 YEARS.—

20 ‘‘(i) IN GENERAL.—Subparagraph (A)

21 shall not apply to any loan unless such

22 loan, by its terms, is required to be repaid

23 within 5 years.

24 ‘‘(ii) EXCEPTION FOR HOME LOANS.—

25 Clause (i) shall not apply to any loan used
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1 to acquire any dwelling unit which within

2 a reasonable time is to be used (deter3 mined at the time the loan is made) as the

4 principal residence of the participant.

5 ‘‘(C) REQUIREMENT OF LEVEL AMORTIZA6 TION.—Except as provided in regulations, this

7 paragraph shall not apply to any loan unless

8 substantially level amortization of such loan

9 (with payments not less frequently than quar10 terly) is required over the term of the loan.

11 ‘‘(D) RELATED EMPLOYERS AND RELATED

12 PLANS.—For purposes of this paragraph—

13 ‘‘(i) the rules of subsections (b), (c),

14 and (m) of section 414 shall apply, and

15 ‘‘(ii) all plans of an employer (deter16 mined after the application of such sub17 sections) shall be treated as 1 plan.

18 ‘‘(o) 10-PERCENT PENALTY FOR PREMATURE DIS19 TRIBUTIONS FROM ANNUITY CONTRACTS.—

20 ‘‘(1) IMPOSITION OF PENALTY.—If any tax21 payer receives any amount under an annuity con22 tract, the taxpayer’s tax under this chapter for the

23 taxable year in which such amount is received shall

24 be increased by an amount equal to 10 percent of
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1 the portion of such amount which is includible in

2 gross income.

3 ‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN

4 DISTRIBUTIONS.—Paragraph (1) shall not apply to

5 any distribution—

6 ‘‘(A) made on or after the date on which

the taxpayer attains age 591 7 ⁄2,

8 ‘‘(B) made on or after the death of the

9 holder (or, where the holder is not an indi10 vidual, the death of the primary annuitant),

11 ‘‘(C) attributable to the taxpayer’s becom12 ing disabled within the meaning of subsection

13 (k)(5),

14 ‘‘(D) which is a part of a series of substan15 tially equal periodic payments (not less fre16 quently than annually) made for the life (or life

17 expectancy) of the taxpayer or the joint lives

18 (or joint life expectancies) of such taxpayer and

19 his designated beneficiary,

20 ‘‘(E) from a plan, contract, account, trust,

21 or annuity described in section 72(e)(5)(D) of

22 the Internal Revenue Code of 1986,

23 ‘‘(F) allocable to investment in the con24 tract before August 14, 1982,

25 ‘‘(G) under a qualified funding asset,
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1 ‘‘(H) to which subsection (r) applies (with2 out regard to paragraph (2) thereof),

3 ‘‘(I) under an immediate annuity contract,

4 or

5 ‘‘(J) which is purchased by an employer

6 upon the termination of a plan described in sec7 tion 401(a) or 403(a) and which is held by the

8 employer until such time as the employee sepa9 rates from service.

10 ‘‘(3) CHANGE IN SUBSTANTIALLY EQUAL PAY11 MENTS.—If—

12 ‘‘(A) paragraph (1) does not apply to a

13 distribution by reason of paragraph (2)(D), and

14 ‘‘(B) the series of payments under such

15 paragraph are subsequently modified (other

16 than by reason of death or disability)—

17 ‘‘(i) before the close of the 5-year pe18 riod beginning on the date of the first pay19 ment and after the taxpayer attains age

591 20 ⁄2, or

21 ‘‘(ii) before the taxpayer attains age

591 22 ⁄2,

23 the taxpayer’s tax for the 1st taxable year in which

24 such modification occurs shall be increased by an

25 amount, determined under regulations, equal to the
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1 tax which (but for paragraph (2)(D)) would have

2 been imposed, plus interest for the deferral period

3 (within the meaning of subsection (r)(4)(B)).

4 ‘‘(p) CERTAIN RAILROAD RETIREMENT BENEFITS

5 TREATED AS RECEIVED UNDER EMPLOYER PLANS.—

6 ‘‘(1) IN GENERAL.—Notwithstanding any other

7 provision of law, any benefit provided under the

8 Railroad Retirement Act of 1974 (other than a tier

9 1 railroad retirement benefit) shall be treated for

10 purposes of this title as a benefit provided under an

11 employer plan which meets the requirements of sec12 tion 401(a).

13 ‘‘(2) TIER 2 TAXES TREATED AS CONTRIBU14 TIONS.—For purposes of paragraph (1)—

15 ‘‘(i) the tier 2 portion of the tax im16 posed by section 3201 (relating to tax on

17 employees) shall be treated as an employee

18 contribution,

19 ‘‘(ii) the tier 2 portion of the tax im20 posed by section 3211 (relating to tax on

21 employee representatives) shall be treated

22 as an employee contribution, and

23 ‘‘(iii) the tier 2 portion of the tax im24 posed by section 3221 (relating to tax on
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1 employers) shall be treated as an employer

2 contribution.

3 ‘‘(B) TIER 2 PORTION.—For purposes of

4 subparagraph (A)—

5 ‘‘(1) AFTER 1984.—With respect to compensa6 tion paid after 1984, the tier 2 portion shall be the

7 taxes imposed by sections 3201(b), 3211(a)(2), and

8 3221(b).

9 ‘‘(2) BEFORE 1985.—With respect to compensa10 tion paid before 1985, see section 72(r) of Internal

11 Revenue Code of 1986 for the definition of tier 2

12 portion.

13 ‘‘(C) CONTRIBUTIONS NOT ALLOCABLE TO

14 SUPPLEMENTAL ANNUITY OR WINDFALL BENE15 FITS.—For purposes of paragraph (1), no

16 amount treated as an employee contribution

17 under this paragraph shall be allocated to—

18 ‘‘(i) any supplemental annuity paid

19 under section 2(b) of the Railroad Retire20 ment Act of 1974, or

21 ‘‘(ii) any benefit paid under section

22 3(h), 4(e), or 4(h) of such Act.

23 ‘‘(3) TIER 1 RAILROAD RETIREMENT BEN24 EFIT.—For purposes of paragraph (1), the term
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1 ‘tier 1 railroad retirement benefit’ has the meaning

2 given such term by section 3(b)(2)(B).

3 ‘‘(q) REQUIRED DISTRIBUTIONS WHERE HOLDER

4 DIES BEFORE ENTIRE INTEREST IS DISTRIBUTED.—

5 ‘‘(1) IN GENERAL.—A contract shall not be

6 treated as an annuity contract for purposes of this

7 chapter unless it provides that—

8 ‘‘(A) if any holder of such contract dies on

9 or after the annuity starting date and before

10 the entire interest in such contract has been

11 distributed, the remaining portion of such inter12 est will be distributed at least as rapidly as

13 under the method of distributions being used as

14 of the date of his death, and

15 ‘‘(B) if any holder of such contract dies be16 fore the annuity starting date, the entire inter17 est in such contract will be distributed within 5

18 years after the death of such holder.

19 ‘‘(2) EXCEPTION FOR CERTAIN AMOUNTS PAY20 ABLE OVER LIFE OF BENEFICIARY.—If—

21 ‘‘(A) any portion of the holder’s interest is

22 payable to (or for the benefit of) a designated

23 beneficiary,

24 ‘‘(B) such portion will be distributed (in

25 accordance with regulations) over the life of
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1 such designated beneficiary (or over a period

2 not extending beyond the life expectancy of

3 such beneficiary), and

4 ‘‘(C) such distributions begin not later

5 than 1 year after the date of the holder’s death

6 or such later date as the Secretary may by reg7 ulations prescribe,

8 then for purposes of paragraph (1), the portion re9 ferred to in subparagraph (A) shall be treated as

10 distributed on the day on which such distributions

11 begin.

12 ‘‘(3) SPECIAL RULE WHERE SURVIVING SPOUSE

13 BENEFICIARY.—If the designated beneficiary re14 ferred to in paragraph (2)(A) is the surviving spouse

15 of the holder of the contract, paragraphs (1) and (2)

16 shall be applied by treating such spouse as the hold17 er of such contract.

18 ‘‘(4) DESIGNATED BENEFICIARY.—For pur19 poses of this subsection, the term ‘designated bene20 ficiary’ means any individual designated a bene21 ficiary by the holder of the contract.

22 ‘‘(5) EXCEPTION FOR CERTAIN ANNUITY CON23 TRACTS.—This subsection shall not apply to any an24 nuity contract—

25 ‘‘(A) which is provided—
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1 ‘‘(i) under a plan described in section

2 401(a) which includes a trust exempt from

3 tax under section 501, or

4 ‘‘(ii) under a plan described in section

5 403(a),

6 ‘‘(B) which is described in section 403(b),

7 ‘‘(C) which is an individual retirement an8 nuity or provided under an individual retire9 ment account or annuity, or

10 ‘‘(D) which is a qualified funding asset.

11 ‘‘(6) SPECIAL RULE WHERE HOLDER IS COR12 PORATION OR OTHER NON-INDIVIDUAL.—

13 ‘‘(A) IN GENERAL.—For purposes of this

14 subsection, if the holder of the contract is not

15 an individual, the primary annuitant shall be

16 treated as the holder of the contract.

17 ‘‘(B) PRIMARY ANNUITANT.—For purposes

18 of subparagraph (A), the term ‘primary annu19 itant’ means the individual, the events in the

20 life of whom are of primary importance in af21 fecting the timing or amount of the payout

22 under the contract.

23 ‘‘(7) TREATMENT OF CHANGES IN PRIMARY AN24 NUITANT WHERE HOLDER OF CONTRACT IS NOT AN

25 INDIVIDUAL.—For purposes of this subsection, in
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1 the case of a holder of an annuity contract which

2 is not an individual, if there is a change in a pri3 mary annuitant (as defined in paragraph (6)(B)),

4 such change shall be treated as the death of the

5 holder.

6 ‘‘(r) 10-PERCENT ADDITIONAL TAX ON EARLY DIS7 TRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.—

8 ‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any

9 taxpayer receives any amount from a qualified re10 tirement plan (as defined in section 4974(c)), the

11 taxpayer’s tax under this chapter for the taxable

12 year in which such amount is received shall be in13 creased by an amount equal to 10 percent of the

14 portion of such amount which is includible in gross

15 income.

16 ‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN

17 DISTRIBUTIONS.—Except as provided in paragraphs

18 (3) and (4), paragraph (1) shall not apply to any of

19 the following distributions:

20 ‘‘(A) IN GENERAL.—Distributions which

21 are—

22 ‘‘(i) made on or after the date on

which the employee attains age 591 23 ⁄2,
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1 ‘‘(ii) made to a beneficiary (or to the

2 estate of the employee) on or after the

3 death of the employee,

4 ‘‘(iii) attributable to the employee’s

5 being disabled within the meaning of sub6 section 72(m)(7) of the Internal Revenue

7 Code of 1986,

8 ‘‘(iv) part of a series of substantially

9 equal periodic payments (not less fre10 quently than annually) made for the life

11 (or life expectancy) of the employee or the

12 joint lives (or joint life expectancies) of

13 such employee and his designated bene14 ficiary,

15 ‘‘(v) made to an employee after sepa16 ration from service after attainment of age

17 55,

18 ‘‘(vi) dividends paid with respect to

19 stock of a corporation which are described

20 in section 404(k), or

21 ‘‘(vii) made from a Roth IRA (other

22 than a distribution described in section

23 30(d)(2)).

24 ‘‘(B) MEDICAL EXPENSES.—Distributions

25 made to the employee (other than distributions
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1 described in subparagraph (A), (C), or (D)) to

2 the extent such distributions do not exceed the

3 amount allowable as a deduction under section

4 31 to the employee for amounts paid during the

5 taxable year for medical care (determined with6 out regard to whether the employee itemizes de7 ductions for such taxable year).

8 ‘‘(C) PAYMENTS TO ALTERNATE PAYEES

9 PURSUANT TO QUALIFIED DOMESTIC RELA10 TIONS ORDERS.—Any distribution to an alter11 nate payee pursuant to a qualified domestic re12 lations order (within the meaning of section

13 414(p)(1)).

14 ‘‘(D) DISTRIBUTIONS TO UNEMPLOYED IN15 DIVIDUALS FOR HEALTH INSURANCE PRE16 MIUMS.—

17 ‘‘(i) IN GENERAL.—Distributions from

18 an individual retirement plan to an indi19 vidual after separation from employment—

20 ‘‘(I) if such individual has re21 ceived unemployment compensation

22 for 12 consecutive weeks under any

23 Federal or State unemployment com24 pensation law by reason of such sepa25 ration,
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1 ‘‘(II) if such distributions are

2 made during any taxable year during

3 which such unemployment compensa4 tion is paid or the succeeding taxable

5 year, and

6 ‘‘(III) to the extent such distribu7 tions do not exceed the amount paid

8 during the taxable year for insurance

9 described in section 213(d)(1)(D) of

10 the Internal Revenue Code of 1986

11 with respect to the individual and the

12 individual’s spouse and dependents.

13 ‘‘(ii) DISTRIBUTIONS AFTER REEM14 PLOYMENT.—Clause (i) shall not apply to

15 any distribution made after the individual

16 has been employed for at least 60 days

17 after the separation from employment to

18 which clause (i) applies.

19 ‘‘(iii) SELF-EMPLOYED INDIVID20 UALS.—To the extent provided in regula21 tions, a self-employed individual shall be

22 treated as meeting the requirements of

23 clause (i)(I) if, under Federal or State law,

24 the individual would have received unem-
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1 ployment compensation but for the fact the

2 individual was self-employed.

3 ‘‘(E) DISTRIBUTIONS FROM INDIVIDUAL

4 RETIREMENT PLANS FOR HIGHER EDUCATION

5 EXPENSES.—Distributions to an individual

6 from an individual retirement plan to the extent

7 such distributions do not exceed the qualified

8 higher education expenses (as defined in para9 graph (7)) of the taxpayer for the taxable year.

10 Distributions shall not be taken into account

11 under the preceding sentence if such distribu12 tions are described in subparagraph (A), (C), or

13 (D) or to the extent paragraph (1) does not

14 apply to such distributions by reason of sub15 paragraph (B).

16 ‘‘(F) DISTRIBUTIONS FROM CERTAIN

17 PLANS FOR FIRST HOME PURCHASES.—Dis18 tributions to an individual from an individual

19 retirement plan which are qualified first-time

20 homebuyer distributions (as defined in para21 graph (8)). Distributions shall not be taken into

22 account under the preceding sentence if such

23 distributions are described in subparagraph (A),

24 (C), (D), or (E) or to the extent paragraph (1)
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1 does not apply to such distributions by reason

2 of subparagraph (B).

3 ‘‘(3) LIMITATIONS.—

4 ‘‘(A) CERTAIN EXCEPTIONS NOT TO APPLY

5 TO INDIVIDUAL RETIREMENT PLANS.—Sub6 paragraphs (A)(v), and (C) of paragraph (2)

7 shall not apply to distributions from an indi8 vidual retirement plan.

9 ‘‘(B) PERIODIC PAYMENTS UNDER QUALI10 FIED PLANS MUST BEGIN AFTER SEPARA11 TION.—Paragraph (2)(A)(iv) shall not apply to

12 any amount paid from a trust described in sec13 tion 401(a) which is exempt from tax under

14 section 501(a) or from a contract described in

15 section 72(e)(5)(D)(ii) of the Internal Revenue

16 Code of 1986 unless the series of payments be17 gins after the employee separates from service.

18 ‘‘(4) CHANGE IN SUBSTANTIALLY EQUAL PAY19 MENTS.—

20 ‘‘(A) IN GENERAL.—If—

21 ‘‘(i) paragraph (1) does not apply to

22 a distribution by reason of paragraph

23 (2)(A)(iv), and

24 ‘‘(ii) the series of payments under

25 such paragraph are subsequently modified
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1 (other than by reason of death or dis2 ability)—

3 ‘‘(I) before the close of the 5-year

4 period beginning with the date of the

5 first payment and after the employee

attains age 591 6 ⁄2, or

7 ‘‘(II) before the employee attains

age 591 8 ⁄2, the taxpayer’s tax for the

9 1st taxable year in which such modi10 fication occurs shall be increased by

11 an amount, determined under regula12 tions, equal to the tax which (but for

13 paragraph (2)(A)(iv)) would have

14 been imposed, plus interest for the de15 ferral period.

16 ‘‘(B) DEFERRAL PERIOD.—For purposes

17 of this paragraph, the term ‘deferral period’

18 means the period beginning with the taxable

19 year in which (without regard to paragraph

20 (2)(A)(iv)) the distribution would have been in21 cludible in gross income and ending with the

22 taxable year in which the modification described

23 in subparagraph (A) occurs.

24 ‘‘(5) EMPLOYEE.—For purposes of this sub25 section, the term ‘employee’ includes any partici-
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1 pant, and in the case of an individual retirement

2 plan, the individual for whose benefit such plan was

3 established.

4 ‘‘(6) SPECIAL RULES FOR SIMPLE RETIREMENT

5 ACCOUNTS.—In the case of any amount received

6 from a simple retirement account (within the mean7 ing of section 408(p) during the 2-year period begin8 ning on the date such individual first participated in

9 any qualified salary reduction arrangement main10 tained by the individual’s employer under section

11 408(p)(2), paragraph (1) shall be applied by sub12 stituting ‘25 percent’ for ‘10 percent’.

13 ‘‘(7) QUALIFIED HIGHER EDUCATION EX14 PENSES.—For purposes of paragraph (2)(E)—

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

16 higher education expenses’ means qualified

17 higher education expenses (as defined in section

18 10(b)(2)) for education furnished to—

19 ‘‘(i) the taxpayer,

20 ‘‘(ii) the taxpayer’s spouse, or

21 ‘‘(iii) any child or grandchild of the

22 taxpayer or the taxpayer’s spouse, at an el23 igible educational institution (as defined in

24 section 10(b)(2)(B)).
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1 ‘‘(B) COORDINATION WITH OTHER PROVI2 SIONS.—For purposes of this subsection, sec3 tion 30 and section 32, qualified higher edu4 cation expenses in any taxable year shall be

5 treated as first paid with distributions under

6 section 32, next with distributions to which sec7 tion 30(d)(5)(v) (relating to early withdrawals

8 from Roth IRAs to pay higher education ex9 penses) applies, and finally from withdrawals to

10 which this subsection applies.

11 ‘‘(8) QUALIFIED FIRST-TIME HOMEBUYER DIS12 TRIBUTIONS.—For purposes of this subsection, the

13 term ‘qualified first-time homebuyer distribution’

14 has the meaning given to it in section 30(d)(6) and

15 the limits contained in such section shall apply on a

16 combined basis to this subsection and section 30.

17 Qualified acquisition costs (as defined in section

18 30(d)(6)) taken into account for purposes of section

19 30(d)(5)(vi) shall not also be taken into account sep20 arately for purposes of this subsection. A taxpayer

21 may elect to treat distributions from an account

22 other than Roth IRAs to which this subsection ap23 plies as a qualified first-time homeowner distribution

24 before determining whether a distribution from a
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1 Roth IRA is a qualified first-time homeowner dis2 tribution.

3 ‘‘(r) 10-PERCENT ADDITIONAL TAX FOR TAXABLE

4 DISTRIBUTIONS FROM MODIFIED ENDOWMENT CON5 TRACTS.—

6 ‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any

7 taxpayer receives any amount under a modified en8 dowment contract (as defined in section 7702A), the

9 taxpayer’s tax under this chapter for the taxable

10 year in which such amount is received shall be in11 creased by an amount equal to 10 percent of the

12 portion of such amount which is includible in gross

13 income.

14 ‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN

15 DISTRIBUTIONS.—Paragraph (1) shall not apply to

16 any distribution—

17 ‘‘(A) made on or after the date on which

the taxpayer attains age 591 18 ⁄2,

19 ‘‘(B) which is attributable to the tax20 payer’s becoming disabled (within the meaning

21 of subsection (m)(7)), or

22 ‘‘(C) which is part of a series of substan23 tially equal periodic payments (not less fre24 quently than annually) made for the life (or life

25 expectancy) of the taxpayer or the joint lives
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1 (or joint life expectancies) of such taxpayer and

2 his beneficiary.

3 ‘‘Subchapter C—Basis, Business Transactions

4 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.

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

6 ‘‘(a) IN GENERAL.—Except as otherwise provided in

7 this chapter, the amount of gross income to be recognized

8 on the sale, exchange, or other disposition of property

9 equals the excess of—

10 ‘‘(1) the amount realized from the disposition,

11 over

12 ‘‘(2) the taxpayer’s adjusted basis in the prop13 erty.

14 ‘‘(b) AMOUNT REALIZED.—The amount realized from

15 the disposition of property shall be sum of money received

16 plus the fair market value of the property (other than

17 money) received. See section 122(c) for the treatment of

18 installment sales.

19 ‘‘(c) NONRECOGNITION TRANSACTION.—Subsection

20 (a) shall not apply to nonrecognition transactions de21 scribed in this chapter.
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1 ‘‘(d) CONTRACTS MARKED TO MARKET.—

2 ‘‘(1) IN GENERAL.—Under regulations pre3 scribed by the Secretary, a markable contract held

4 by the taxpayer at the end of the year shall be treat5 ed as sold and reacquired for its fair market value

6 on the last business day of the taxable year. The

7 regulations shall adopt principles and definitions

8 similar to those that applied under section 1256 of

9 the Internal Revenue Code of 1986.

10 ‘‘(2) MARKABLE CONTRACT.—For purposes of

11 this subsection, ‘markable contract’ means—

12 ‘‘(A) any regulated futures contract,

13 ‘‘(B) any foreign currency contract,

14 ‘‘(C) any nonequity option,

15 ‘‘(D) any dealer equity option

16 as such terms were defined for purposes of section

17 1256 of the Internal Revenue Code of 1986.

18 ‘‘SEC. 72. BASIS.

19 ‘‘(a) BASIS, SALE, OR EXCHANGE.—Except to the ex20 tent inconsistent with provisions of this chapter, adjusted

21 basis and the existence of a sale or exchange shall be de22 termined in accordance with principles applicable under

23 the Internal Revenue Code of 1986.

24 ‘‘(b) DEFINITION OF BASIS.—For purposes of this

25 chapter, ‘basis’ means the adjusted basis of property. The
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1 adjusted basis of property is generally its cost, as adjusted

2 for actions or transactions that increase or decrease the

3 basis of property. Except as provided in section 73 (relat4 ing to business entities and basis in business entities), the

5 taxpayer’s adjusted basis on January 1, 2002, in an asset

6 acquired before that date, shall be its adjusted basis as

7 of December 31, 2001, as determined under the Internal

8 Revenue Code of 1986.

9 ‘‘SEC. 73. BASIS IN BUSINESS ENTITIES.

10 ‘‘(a) RULES FOR ALL BUSINESS ENTITIES.—

11 ‘‘(1) IN GENERAL.—A taxpayer’s basis in an in12 terest in a business entity shall equal—

13 ‘‘(A) the cost of acquiring the interest,

14 ‘‘(B) increased by the amount of cash and

15 basis of any property contributed to the entity,

16 and

17 ‘‘(C) decreased by the portion of any liqui18 dating distributions from the entity that are

19 treated as returns of capital in accordance with

20 rules prescribed by the Secretary.

21 ‘‘(2) INITIAL BASIS.—Except as otherwise pro22 vided in this section, a taxpayer’s basis on January

23 1, 2002, or any interest in a business entity held as

24 of December 31, 2001, shall be the basis of such in-
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1 terest as of December 31, 2001, as determined

2 under the Internal Revenue Code of 1986.

3 ‘‘(3) CROSS REFERENCES.—See section 75 for

4 rules relating to the effect of certain business trans5 actions on a taxpayer’s basis.

6 ‘‘(4) SPECIAL RULE FOR CONTRIBUTION OF

7 PERSONAL USE PROPERTY.—If a taxpayer contrib8 utes personal-use property (as defined in section

9 210(b)(3)(B)), the taxpayer’s basis in the property

10 shall not be increased by an amount in excess of the

11 fair market value of the property contributed.

12 ‘‘(b) SPECIAL RULES FOR PARTNERSHIP INTER13 ESTS.—

14 ‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A

15 partner’s basis in a partnership interest as of Janu16 ary 1, 2002, equals—

17 ‘‘(A) the partner’s basis in the partnership

18 as of the end of the taxable year ending on De19 cember 31, 2001, minus

20 ‘‘(B) the amount of the partner’s share of

21 the indebtedness of the partnership taken into

22 account in determining such basis.

23 ‘‘(2) NEGATIVE BASIS.—If the amount deter24 mined under paragraph (1) is negative, the taxpayer

25 has a negative basis in the partnership and such
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1 negative basis shall increase the gain on the sale or

2 disposition of the partnership interest (except to the

3 extent such negative basis has been adjusted by rea4 son of capital contributions).

5 ‘‘(3) ADJUSTMENT TO BASIS.—Except as other6 wise provided in this section, a partner’s basis in a

7 partnership interest shall be determined in accord8 ance with the general principles of this chapter ap9 plicable to an individual’s basis in an interest in a

10 business entity. A partner’s basis in a partnership

11 shall not be adjusted by reason of any—

12 ‘‘(A) distribution from the partnership (ex13 cept to the extent such distribution is treated as

14 distribution of basis in accordance with the gen15 eral principles of this chapter applicable to an

16 individual’s basis in an interest in a business

17 entity),

18 ‘‘(B) income, earnings, or loss of the part19 nership, or

20 ‘‘(C) any change in the partner’s share of

21 the partnership’s indebtedness.

22 ‘‘(4) SPECIAL RULE FOR TRANSITION DISTRIBU23 TIONS.—
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1 ‘‘(A) EFFECT OF TRANSITION DISTRIBU2 TION.—A transition distribution from partner3 ship to a partner shall—

4 ‘‘(i) reduce the partner’s basis in the

5 partnership, and

6 ‘‘(ii) not be included in gross income.

7 ‘‘(B) DEFINITION.—A ‘transition distribu8 tion’ is a distribution by a business entity to an

9 individual made during the first three months

10 of 2002 but only to the extent that such dis11 tribution, when added to all other distributions

12 of the entity to the individual after March 31,

13 2001, does not exceed the amount of taxable in14 come allocated by the entity to the individual

15 during the taxable year of the entity ending on

16 December 31, 2001.

17 ‘‘(5) PARTNERSHIP.—For purposes of this sec18 tion, ‘partnership’ includes a limited liability com19 pany that was taxable as a partnership under the

20 Internal Revenue Code of 1986.

21 ‘‘(c) SPECIAL RULES FOR SHARES OF S CORPORA22 TIONS.—Rules similar to those contained in subsection (b)

23 shall apply with respect to the basis of stock of a corpora24 tion that was treated as an S corporation under the Inter25 nal Revenue Code of 1986.
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1 ‘‘(d) SPECIAL RULES FOR PROPRIETORSHIPS.—

2 ‘‘(1) OLD PROPRIETORSHIP.—A proprietor’s

3 basis in any business activity conducted before Janu4 ary 1, 2002, which is treated as a business activity

5 as of such date equals—

6 ‘‘(A) the proprietor’s adjusted basis in the

7 assets of such business entity as of the end of

8 the taxable year ending on December 31, 2001,

9 minus

10 ‘‘(B) the balance of any indebtedness the

11 interest on which the proprietor had treated as

12 business interest under section 163(h)(2)(A) of

13 the Internal Revenue Code of 1986.

14 ‘‘(2) NEGATIVE BASIS.—If the amount deter15 mined under paragraph (1) is negative, the propri16 etor has a negative basis in the proprietorship and

17 such negative basis shall increase the gain on the

18 sale or disposition of the entity (except to the extent

19 such negative basis has been adjusted by reason of

20 capital contributions).

21 ‘‘(3) ADJUSTMENT TO BASIS.—Except as other22 wise provided in this section, a proprietor’s basis in

23 a proprietorship shall be determined in accordance

24 with the general principles of this chapter applicable
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1 to an individual’s basis in an interest in a business

2 entity.

3 ‘‘(4) PROPRIETORSHIP.—‘Proprietorship’

4 includes—

5 ‘‘(A) any family business that is not a

6 partnership, and

7 ‘‘(B) any business activity conducted by a

8 taxpayer other than as an employee if such ac9 tivity constitutes a business entity.

10 ‘‘(e) ANTI-AVOIDANCE RULE.—

11 ‘‘(1) IN GENERAL.—If a pass-through entity’s

12 distributions to an individual in its taxable year or

13 taxable years ending in 2001 exceeds 125 percent of

14 the individual’s distributive share of income for such

15 period, the amount of such excess distribution shall

16 be treated as a cash distribution to the partner on

17 January 1, 2002, and shall not reduce the partner’s

18 basis in his partnership interest.

19 ‘‘(2) PASS THROUGH ENTITY.—‘Pass through

20 entity’ means a partnership, proprietorship, or S

21 corporation.

22 ‘‘SEC. 74. GRATUITOUS TRANSFERS.

23 ‘‘(a) IN GENERAL.—If after December 31, 2001, a

24 taxpayer receives any property by gift, inheritance, or
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1 other gratuitous transfer, the taxpayer’s basis in the prop2 erty shall be the lesser of—

3 ‘‘(1) the fair market value of the property at

4 the time of transfer, or

5 ‘‘(2) the transferee’s basis in the property at

6 the time of transfer.

7 ‘‘(b) PROOF REQUIRED.—A taxpayer’s basis in an

8 asset received by gift, inheritance, or other gratuitous

9 transfer shall be presumed to be zero unless the taxpayer

10 can demonstrate to the satisfaction of the Secretary the

11 basis claimed by the taxpayer.

12 ‘‘SEC. 75. DISTRIBUTIONS FROM BUSINESS ENTITIES.

13 ‘‘(a) IN GENERAL.—Except as otherwise provided in

14 this section or in regulations issued by the Secretary in

15 accordance with this section—

16 ‘‘(1) CASH DISTRIBUTIONS.—Distributions of

17 cash by a business entity with respect to its equity

18 ownership shall be treated as dividends and included

19 in gross income.

20 ‘‘(2) DISTRIBUTIONS OF PROPERTY.—If a busi21 ness entity distributes property (other than stock or

22 other equity ownership described in paragraph (3) in

23 connection with a merger, acquisition or reorganiza24 tion), the fair market value of the property received
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1 shall be treated as a dividend and included in gross

2 income.

3 ‘‘(3) DISTRIBUTIONS OF STOCK OR OTHER EQ4 UITY OWNERSHIP.—If a taxpayer receives with re5 spect to its ownership interest in a business entity

6 stock or other ownership interests in such business

7 entity (as reorganized) or in another business entity

8 that is controlled by such business entity or is ac9 quiring or merging with such business entity, no

10 gain or loss shall be recognized on the distribution.

11 ‘‘(b) BASIS IN BUSINESS DIVISIONS.—In the case of

12 a spin-off, split-off, or split-up of a business entity in

13 which a taxpayer has basis, the taxpayer’s basis in the

14 original business entity shall be allocated among the new

15 and surviving entities in accordance with the relative fair

16 market values of the taxpayer’s interests in those entities.

17 If interests in the entities are publicly traded, fair market

18 values shall be based on public trading prices. In other

19 cases, the Secretary shall accept any reasonable allocation

20 made by the taxpayer if the taxpayer notifies the Secretary

21 of the allocation in an attachment to its tax return for

22 the taxable year of the transaction.

23 ‘‘(c) DISTRIBUTIONS CONSTITUTING RETURN OF

24 BASIS.—

25 ‘‘(1) COMPLETE LIQUIDATIONS.—
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1 ‘‘(A) IN GENERAL.—In the case of a dis2 tribution in complete liquidation of a business

3 entity, a taxpayer shall be treated as receiving

4 cash and assets of the entity in exchange for

5 the taxpayer’s equity in the business entity. In

6 such case, the taxpayer shall recognize gain to

7 the extent that the sum of the cash and fair

8 market value of assets received exceeds the tax9 payer’s basis in its interest in the business enti10 ty or shall recognize loss to the extent that the

11 basis exceeds the fair market value of cash and

12 assets received.

13 ‘‘(B) DISTRIBUTION OF EQUITY INTER14 ESTS.—In the case of a complete liquidation in

15 which at least 90 percent of the value of assets

16 and cash distributed to an equity holder is eq17 uity interests in other business entities con18 trolled by the distributing entity—

19 ‘‘(i) subparagraph (A) shall not apply,

20 ‘‘(ii) paragraph (3) of subsection (a)

21 shall apply,

22 ‘‘(iii) the cash and fair market value

23 of assets other than equity interests in

24 controlled entities shall be applied to re25 duce the taxpayer’s basis in the distrib-
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1 uting entity and gain will be recognized

2 only to the extent that the cash and such

3 fair market value exceeds the taxpayer’s

4 basis in the distributing entity, and

5 ‘‘(iv) the taxpayer’s remaining basis

6 shall be allocated among the distributed

7 equity interests in controlled entities in ac8 cordance with the relative fair market val9 ues of such interests.

10 ‘‘(C) DISTRIBUTION OF BUSINESS PROP11 ERTY.—Under regulations prescribed by the

12 Secretary, rules similar to those that applied to

13 partnerships under the Internal Revenue Code

14 of 1986 shall apply in lieu of subparagraph (A)

15 to distributions that include property used in a

16 trade or business if such property is contributed

17 to a new business entity within 180 days of the

18 distribution.

19 ‘‘(2) TRANSITION RULES.—See subsections (b)

20 and (d) of section 73 for transition rules relating to

21 partnerships and proprietorships.

22 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—

23 ‘‘(1) CERTAIN RULES OF APPLICATION.—
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1 ‘‘(A) PRINCIPLES APPLICABLE TO INTER2 NAL REVENUE CODE.—This section shall be ap3 plied without regard to—

4 ‘‘(i) continuity of business interest,

5 ‘‘(ii) continuity of ownership interest,

6 ‘‘(iii) requirements of section 355 of

7 the Internal Revenue Code of 1986 for

8 spin-offs, split-offs and split-ups,

9 ‘‘(iv) business purposes for a cor10 porate reorganization or restructuring (ex11 cept if the transaction is potentially abu12 sive), and

13 ‘‘(v) except as provided in paragraph

14 (3), rules treating dividends as returns of

15 capital because of the absence of earnings

16 and profits.

17 ‘‘(B) CONSTRUCTIVE RECEIPT.—If a tax18 payer is given the choice of receiving cash or an

19 equity interest in a business entity, the tax20 payer will be treated for purposes of this sec21 tion as if he received the cash and purchased

22 the equity interest.

23 ‘‘(C) DEBT VERSUS EQUITY.—The prin24 ciples distinguishing debt and equity that ap25 plied prior to the adopt of the Simplified USA
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1 Tax generally shall apply for purposes of apply2 ing this section. An investment in a business

3 entity shall not be considered debt unless—

4 ‘‘(i) it is reflected in the books and

5 records of the business entity as debt, and

6 ‘‘(ii) there is written evidence of the

7 investment that treats such investment as

8 indebtedness.

9 ‘‘(2) CONTROL.—For purposes of this section,

10 ‘control’ of a business entity means—

11 ‘‘(A) ownership of more than 50% of the

12 voting power held by equity holders of such en13 tity, or

14 ‘‘(B) ownership of rights to more than

15 50% of the periodic distributions that the busi16 ness entity may make to its equity holders and

17 50% of the distributions if the business entity

18 were liquidated.

19 ‘‘(3) REGULATIONS.—

20 ‘‘(A) SIGNIFICANT DOWNSIZING AND PAR21 TIAL LIQUIDATIONS.—The Secretary is author22 ized to issue regulations under which distribu23 tions resulting from a significant downsizing of

24 a business entity will be treated in part as re25 turn of equity holders’ capital.
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1 ‘‘(B) ASSUMPTION AND RELEASE OF LI2 ABILITY.—The Secretary shall prescribe regula3 tions addressing the consequences of a

4 distributee’s assumption of the liabilities of the

5 distributor.

6 ‘‘SEC. 76. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL

7 RESIDENCE.

8 ‘‘(a) EXCLUSION.—Gross income shall not include

9 gain from the sale or exchange of property if, during the

10 5-year period ending on the date of the sale or exchange,

11 such property has been owned and used by the taxpayer

12 as the taxpayer’s principal residence for periods aggre13 gating 2 years or more.

14 ‘‘(b) LIMITATIONS.—

15 ‘‘(1) IN GENERAL.—The amount of gain ex16 cluded from gross income under subsection (a) with

17 respect to any sale or exchange shall not exceed

18 $250,000.

19 ‘‘(2) $500,000 LIMITATION FOR CERTAIN JOINT

20 RETURNS.—Paragraph (1) shall be applied by sub21 stituting ‘$500,000’ for ‘$250,000’ if—

22 ‘‘(A) a husband and wife make a joint re23 turn for the taxable year of the sale or ex24 change of the property,
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1 ‘‘(B) either spouse meets the ownership re2 quirements of subsection (a) with respect to

3 such property,

4 ‘‘(C) both spouses meet the use require5 ments of subsection (a) with respect to such

6 property, and

7 ‘‘(D) neither spouse is ineligible for the

8 benefits of subsection (a) with respect to such

9 property by reason of paragraph (3).

10 ‘‘(3) APPLICATION TO ONLY 1 SALE OR EX11 CHANGE EVERY 2 YEARS.—

12 ‘‘(A) IN GENERAL.—Subsection (a) shall

13 not apply to any sale or exchange by the tax14 payer if, during the 2-year period ending on the

15 date of such sale or exchange, there was any

16 other sale or exchange by the taxpayer to which

17 subsection (a) applied.

18 ‘‘(B) PRE-MAY 7, 1997, SALES NOT TAKEN

19 INTO ACCOUNT.—Subparagraph (A) shall be

20 applied without regard to any sale or exchange

21 before May 7, 1997.

22 ‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET

23 CERTAIN REQUIREMENTS.—

24 ‘‘(1) IN GENERAL.—In the case of a sale or ex25 change to which this subsection applies, the owner-
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1 ship and use requirements of subsection (a) shall not

2 apply and subsection (b)(3) shall not apply; but the

3 amount of gain excluded from gross income under

4 subsection (a) with respect to such sale or exchange

5 shall not exceed—

6 ‘‘(A) the amount which bears the same

7 ratio to the amount which would be so excluded

8 under this section if such requirements had

9 been met, as

10 ‘‘(B) the shorter of—

11 ‘‘(i) the aggregate periods, during the

12 5-year period ending on the date of such

13 sale or exchange, such property has been

14 owned and used by the taxpayer as the

15 taxpayer’s principal residence, or

16 ‘‘(ii) the period after the date of the

17 most recent prior sale or exchange by the

18 taxpayer to which subsection (a) applied

19 and before the date of such sale or ex20 change,

21 bears to 2 years.

22 ‘‘(2) SALES AND EXCHANGES TO WHICH SUB23 SECTION APPLIES.—This subsection shall apply to

24 any sale or exchange if—
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1 ‘‘(A) subsection (a) would not (but for this

2 subsection) apply to such sale or exchange by

3 reason of—

4 ‘‘(i) a failure to meet the ownership

5 and use requirements of subsection (a), or

6 ‘‘(ii) subsection (b)(3), and

7 ‘‘(B) such sale or exchange is by reason of

8 a change in place of employment, health, or, to

9 the extent provided in regulations, unforeseen

10 circumstances.

11 ‘‘(d) SPECIAL RULES.—

12 ‘‘(1) JOINT RETURNS.—If a husband and wife

13 make a joint return for the taxable year of the sale

14 or exchange of the property, subsections (a) and (c)

15 shall apply if either spouse meets the ownership and

16 use requirements of subsection (a) with respect to

17 such property.

18 ‘‘(2) PROPERTY OF DECEASED SPOUSE.—For

19 purposes of this section, in the case of an unmarried

20 individual whose spouse is deceased on the date of

21 the sale or exchange of property, the period such un22 married individual owned and used such property

23 shall include the period such deceased spouse owned

24 and used such property before death.
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1 ‘‘(3) PROPERTY OWNED BY SPOUSE OR FORMER

2 SPOUSE.—For purposes of this section—

3 ‘‘(A) PROPERTY TRANSFERRED TO INDI4 VIDUAL FROM SPOUSE OR FORMER SPOUSE.—

5 In the case of an individual holding property

6 transferred to such individual by such individ7 ual’s spouse or former spouse in a transaction

8 incident to divorce, the period such individual

9 owns such property shall include the period the

10 transferor owned the property.

11 ‘‘(B) PROPERTY USED BY FORMER SPOUSE

12 PURSUANT TO DIVORCE DECREE, ETC.—Solely

13 for purposes of this section, an individual shall

14 be treated as using property as such individ15 ual’s principal residence during any period of

16 ownership while such individual’s spouse or

17 former spouse is granted use of the property

18 under a divorce or separation instrument.

19 ‘‘(4) TENANT-STOCKHOLDER IN COOPERATIVE

20 HOUSING CORPORATION.—For purposes of this sec21 tion, if the taxpayer holds stock as a tenant-stock22 holder in a cooperative housing corporation—

23 ‘‘(A) the holding requirements of sub24 section (a) shall be applied to the holding of

25 such stock, and
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1 ‘‘(B) the use requirements of subsection

2 (a) shall be applied to the house or apartment

3 which the taxpayer was entitled to occupy as

4 such stockholder.

5 ‘‘(5) INVOLUNTARY CONVERSIONS.—For pur6 poses of this section, the destruction, theft, seizure,

7 requisition, or condemnation of property shall be

8 treated as the sale of such property.

9 ‘‘(6) DETERMINATION OF USE DURING PERIODS

10 OF OUT-OF-RESIDENCE CARE.—In the case of a tax11 payer who—

12 ‘‘(A) becomes physically or mentally in13 capable of self-care, and

14 ‘‘(B) owns property and uses such property

15 as the taxpayer’s principal residence during the

16 5-year period described in subsection (a) for pe17 riods aggregating at least 1 year,

18 then the taxpayer shall be treated as using such

19 property as the taxpayer’s principal residence during

20 any time during such 5-year period in which the tax21 payer owns the property and resides in any facility

22 (including a nursing home) licensed by a State or

23 political subdivision to care for an individual in the

24 taxpayer’s condition.
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1 ‘‘(7) SALES OF REMAINDER INTERESTS.—For

2 purposes of this section—

3 ‘‘(A) IN GENERAL.—At the election of the

4 taxpayer, this section shall not fail to apply to

5 the sale or exchange of an interest in a prin6 cipal residence by reason of such interest being

7 a remainder interest in such residence, but this

8 section shall not apply to any other interest in

9 such residence which is sold or exchanged sepa10 rately.

11 ‘‘(B) EXCEPTION FOR SALES TO RELATED

12 PARTIES.—Subparagraph (A) shall not apply to

13 any sale to, or exchange with, a related party

14 (as defined in section 171).

15 ‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—

16 This section shall not apply to any sale or exchange by

17 an individual if rules relating to expatriation to avoid tax

18 apply to such individual.

19 ‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—

20 This section shall not apply to any sale or exchange with

21 respect to which the taxpayer elects not to have this sec22 tion apply.

23 ‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER

24 SECTION 1034.—For purposes of this section, in the case

25 of property the acquisition of which by the taxpayer re-
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1 sulted under section 1034 of the Internal Revenue Code

2 of 1986 (as in effect on the day before the date of the

3 enactment of the Taxpayer Relief Act of 1997) in the non4 recognition of any part of the gain realized on the sale

5 or exchange of another residence, in determining the pe6 riod for which the taxpayer has owned and used such

7 property as the taxpayer’s principal residence, there shall

8 be included the aggregate periods for which such other

9 residence (and each prior residence taken into account in

10 determining the holding period of such property) had been

11 so owned and used.

12 ‘‘SEC. 77. OTHER NONRECOGNITION TRANSACTIONS.

13 ‘‘(a) INVOLUNTARY CONVERSIONS.—Under regula14 tions prescribed by the Secretary, the involuntary conver15 sion of property held by an individual shall not result in

16 gross income to the individual to the extent that the indi17 vidual receives property in exchange for the involuntarily

18 converted property. To the extent that income is not rec19 ognized under this subsection, the taxpayer’s basis in the

20 converted property shall carry over to the new property.

21 ‘‘(b) CERTAIN REACQUISITIONS OF REAL PROP22 ERTY.—Under regulations prescribed by the Secretary,

23 gross income shall not be recognized in the case of certain

24 reacquisitions of real property. The regulations shall adopt
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1 principles similar to those under section 1038 of the Inter2 nal Revenue Code of 1986.

3 ‘‘(c) TRANSFERS OF PROPERTY BETWEEN SPOUSES

4 OR INCIDENT TO DIVORCE.—

5 ‘‘(1) GENERAL RULE.—Gross income shall not

6 be recognized on the transfer of property from an

7 individual to (or in trust for the benefit of)—

8 ‘‘(A) a spouse, or

9 ‘‘(B) a former spouse, but only if the

10 transfer is incident to divorce.

11 ‘‘(2) TRANSFER TREATED AS A GIFT.—

12 Any transfer described in paragraph (1) shall

13 be treated as a gift.

14 ‘‘(d) CERTAIN EXCHANGES OF INSURANCE POLI15 CIES.—Under regulations prescribed by the Secretary,

16 gross income shall not be recognized on the exchange of

17 insurance policies or another life insurance policy or an

18 annuity contract or the exchange of annuity contracts.

19 The regulations shall adopt principles similar to those

20 under section 1035 of the Internal Revenue Code of 1986.

21 ‘‘(e) CERTAIN EXCHANGES OF UNITED STATES OB22 LIGATIONS.—When so provided by regulations promul23 gated by the Secretary in connection with the issue of obli24 gations of the United States, no gain or loss shall be rec25 ognized on the surrender to the United States of obliga-
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1 tions of the United States issued under chapter 31 of title

2 31 in exchange solely for other obligations issued under

3 such chapter.

4 ‘‘SEC. 78. WASH SALES AND STRADDLES.

5 ‘‘(a) LOSSES FROM WASH SALES OF STOCK OR SE6 CURITIES.—Under regulations prescribed by the Sec7 retary, no loss shall be recognized on the wash sale of

8 stock or securities. The regulations shall adopt principles

9 similar to those under section 1091 of the Internal Rev10 enue Code of 1986.

11 ‘‘(b) STRADDLES.—Under regulations prescribed by

12 the Secretary, the loss that can be taken into account from

13 1 or more straddle positions shall be limited. The regula14 tions shall adopt principles similar to those under section

15 1038 of the Internal Revenue Code of 1986.

16 ‘‘SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANS17 ACTIONS.

18 ‘‘(a) NO LOSS ON PERSONAL USE PROPERTY.—No

19 loss shall be recognized on the sale or exchange of personal

20 use property (as defined in section 210(b)(3)(B)).

21 ‘‘(b) LIMITATION ON NET CAPITAL LOSS.—

22 ‘‘(1) IN GENERAL.—Losses from sales or ex23 changes of capital assets in a taxable year shall be

24 allowed only to the extent of the gains from such
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1 sales or exchanges, plus $3,000 ($1,500 in the case

2 of a married individual filing a separate return).

3 ‘‘(2) CAPITAL LOSS CARRYOVERS.—Under regu4 lations prescribed by the Secretary, any loss not al5 lowed by reason of paragraph (1) shall be carried

6 over to the following taxable year and treated as a

7 capital loss incurred in such year. There shall be no

8 limit on the number of years that a capital loss can

9 be carried forward.

10 ‘‘(3) CAPITAL ASSETS.—Under regulations pre11 scribed by the Secretary, the principles of the Inter12 nal Revenue Code of 1986 (including, without limi13 tation, sections 1234 (relating to options), 1234A

14 (relating to gains or losses from certain termi15 nations), 1253 (relating to franchises and trade16 marks) and 1258 (gain from certain financial trans17 actions) shall apply for purposes of determining

18 what is a capital asset and whether an event is to

19 be treated as a sale or exchange of capital assets, ex20 cept to the extent inconsistent with principles of this

21 chapter.

22 ‘‘(4) RECAPTURE.—If a taxpayer claimed de23 preciation, amortization or other cost recovery de24 ductions under the Internal Revenue Code of 1986

25 with respect to property which is subsequently sold
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1 or exchanged in a transaction that is not treated as

2 transaction of a business entity, the amount of gain

3 on the exchange of such property which is treated as

4 gain from the sale or exchange of a capital asset

5 shall be reduced (but not below zero) by the amount

6 of such deductions claimed with respect to the prop7 erty.

8 ‘‘Subchapter D—Rules for Exclusions from

9 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.

10 ‘‘SEC. 91. INTEREST ON TAX-EXEMPT BONDS.

11 ‘‘(a) EXCLUSION.—Except as provided in subsection

12 (b), gross income does not include interest on any State

13 or local bond.

14 ‘‘(b) EXCEPTIONS.—Subsection (a) shall not apply

15 to—

16 ‘‘(1) PRIVATE ACTIVITY BOND WHICH IS NOT A

17 QUALIFIED BOND.—Any private activity bond which

18 is not a qualified bond (within the meaning of para19 graph (3) of subsection (c)).

20 ‘‘(2) ARBITRAGE BOND.—Any arbitrage bond.
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1 ‘‘(3) BOND NOT IN REGISTERED FORM, ETC.—

2 Any bond unless such bond meets the applicable re3 quirements set forth in regulations.

4 ‘‘(c) DEFINITIONS—For purposes of this section—

5 ‘‘(1) STATE OR LOCAL BOND.—‘State or local

6 bond’ means an obligation of a State or political

7 subdivision thereof.

8 ‘‘(2) STATE.—‘State’ includes the District of

9 Columbia and any possession of the United States.

10 ‘‘(3) QUALIFIED BOND.—‘Qualified bond’

11 means any private activity bond if—

12 ‘‘(A) IN GENERAL.—Such bond is—

13 ‘‘(i) an exempt facility bond,

14 ‘‘(ii) a qualified mortgage bond,

15 ‘‘(iii) a qualified veterans’ mortgage

16 bond,

17 ‘‘(iv) a qualified small issue bond,

18 ‘‘(v) a qualified student loan bond,

19 ‘‘(vi) a qualified 253(c)(3) bond.

20 ‘‘(B) VOLUME CAP.—Such bond is issued

21 as part of an issue which meets the applicable

22 volume cap requirements set forth in regula23 tions.
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1 ‘‘(C) OTHER REQUIREMENTS.—Such bond

2 meets the applicable requirements set forth in

3 regulations.

4 ‘‘(d) REGULATIONS.—

5 ‘‘(1) STATUTORY REGULATIONS.—The Sec6 retary shall publish as regulations governing the ap7 plication of this section the text of part IV of sub8 chapter B of chapter 1 of the Internal Revenue Code

9 of 1986 (sections 141 through 149) with only such

10 changes as are required to conform cross references.

11 ‘‘(2) OTHER REGULATIONS.—The Secretary

12 shall have the authority to promulgate such other

13 regulations as he deems necessary or proper to im14 plement this section, except that no such regulations

15 shall conflict with the regulations mandated by para16 graph (1) except as provided in this subtitle.

17 ‘‘SEC. 92. COMBAT PAY.

18 ‘‘(a) ENLISTED PERSONNEL.—Gross income does not

19 include compensation received for active service as a mem20 ber below the grade of commissioned officer in the Armed

21 Forces of the United States for any month during any

22 part of which such member—

23 ‘‘(1) served in a combat zone, or

24 ‘‘(2) was hospitalized as a result of wounds, dis25 ease, or injury incurred while serving in a combat
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1 zone; but this paragraph shall not apply for any

2 month beginning more than 2 years after the date

3 of the termination of combatant activities in such

4 zone.

5 ‘‘(b) COMMISSIONED OFFICERS.—Gross income does

6 not include so much of the compensation as does not ex7 ceed $500 received for active service as a commissioned

8 officer in the Armed Forces of the United States for any

9 month during any part of which such officer—

10 ‘‘(1) served in a combat zone, or

11 ‘‘(2) was hospitalized as a result of wounds, dis12 ease, or injury incurred while serving in a combat

13 zone; but this paragraph shall not apply for any

14 month beginning more than 2 years after the date

15 of the termination of combatant activities in such

16 zone.

17 ‘‘(c) DEFINITIONS.—For purposes of this section—

18 ‘‘(1) ‘Commissioned officer’ does not include a

19 commissioned warrant officer.

20 ‘‘(2) ‘Combat zone’ means any area which the

21 President of the United States by Executive Order

22 designates, for purposes of this section or cor23 responding provisions of prior income tax laws, an

24 area in which Armed Forces of the United States
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1 are or have (after June 24, 1950) engaged in com2 bat.

3 ‘‘(3) Service is performed in a combat zone only

4 if performed on or after the date designated by the

5 President by Executive Order as the date of the

6 commencing of combatant activities in such zone,

7 and on or before the date designated by the Presi8 dent by Executive Order as the date of the termi9 nation of combatant activities in such zone; except

10 that June 25, 1950, shall be considered the date of

11 the commencing of combatant activities in the com12 bat zone designated in Executive Order 10195.

13 ‘‘(4) The term ‘compensation’ does not include

14 pensions and retirement pay.

15 ‘‘SEC. 93. QUALIFIED MILITARY BENEFIT.

16 ‘‘(a) IN GENERAL.—‘Qualified military benefit’

17 means any allowance or in-kind benefit (other than per18 sonal use of a vehicle) which—

19 ‘‘(1) is received by any member or former mem20 ber of the uniformed service of the United States or

21 any dependent of such member by reason of such

22 member’s status or service as a member of such uni23 formed services, and

24 ‘‘(2) was excludable from gross income on Sep25 tember 9, 1986, under any provision of law, regula-
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1 tion, or administrative practice which was in effect

2 on such date (other than a provision of this title).

3 ‘‘(b) NO OTHER BENEFIT TO BE EXCLUDABLE AS

4 PROVIDED BY THIS TITLE.—Notwithstanding any other

5 provision of law, no benefit shall be treated as a qualified

6 military benefit unless such benefit—

7 ‘‘(1) is a benefit described in subsection (a), or

8 ‘‘(2) is excludable from gross income under this

9 title without regard to any provision of law which is

10 not contained in this title and which is not contained

11 in a revenue Act.

12 ‘‘(c) LIMITATIONS ON MODIFICATIONS.—

13 ‘‘(1) IN GENERAL.—Except as provided in para14 graph (2), no modification or adjustment of any

15 qualified military benefit after September 9, 1986,

16 shall be taken into account.

17 ‘‘(2) EXCEPTION FOR CERTAIN ADJUSTMENTS

18 TO CASH BENEFITS.—Paragraph (1) shall not apply

19 to any adjustment to any qualified military benefit

20 payable in cash which—

21 ‘‘(A) is pursuant to a provision of law or

22 regulation (as in effect on September 9, 1986),

23 and
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1 ‘‘(B) is determined by reference to any

2 fluctuation in cost, price, currency, or other

3 similar index.

4 ‘‘SEC. 94. QUALIFIED FOSTER CARE PAYMENTS.

5 ‘‘(a) QUALIFIED FOSTER CARE PAYMENT DE6 FINED.—

7 ‘‘(1) IN GENERAL.—‘Qualified foster care pay8 ment’ means any amount—

9 ‘‘(A) which is paid by a state or political

10 subdivision thereof or by a placement agency

11 which is described in section 253(c)(3) and ex12 empt from tax under section 253(a), and

13 ‘‘(B) which is—

14 ‘‘(i) paid to the foster care provider

15 for caring for a qualified foster individual

16 in the foster care provider’s home, or

17 ‘‘(ii) a difficulty of care payment.

18 ‘‘(2) QUALIFIED FOSTER INDIVIDUAL.—‘Quali19 fied foster individual’ means any individual who is

20 living in a foster family home in which such indi21 vidual was placed by—

22 ‘‘(A) an agency of a State or a political

23 subdivision thereof, or

24 ‘‘(B) in the case of an individual who has

25 not attained age 19, an organization which is li-
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1 censed by a State (or political subdivision there2 of) as a placement agency and which is de3 scribed in section 253(c)(3) and exempt from

4 tax under section 253(a).

5 ‘‘(3) LIMITATION BASED ON NUMBER OF INDI6 VIDUALS OVER THE AGE OF 18.—In the case of any

7 foster home in which there is a qualified foster care

8 individual who has attained age 19, foster care pay9 ments (other than difficulty of care payments) for

10 any period to which such payments relate shall not

11 be excludable from gross income under subsection

12 (a) to the extent such payments are made for more

13 than 5 such qualified foster individuals.

14 ‘‘(b) DIFFICULTY OF CARE PAYMENTS.—For pur15 poses of this section—

16 ‘‘(1) DIFFICULTY OF CARE PAYMENTS.—‘Dif17 ficulty of care payments’ means payments to individ18 uals which are not described in subsection

19 (a)(1)(B)(i), and which—

20 ‘‘(A) are compensation for providing the

21 additional care of a qualified foster individual

22 which is—

23 ‘‘(i) required by reason of a physical,

24 mental, or emotional handicap of such in25 dividual with respect to which the State
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1 has determined that there is a need for ad2 ditional compensation, and

3 ‘‘(ii) provided in the home of the fos4 ter care provider, and

5 ‘‘(B) are designated by the payor as com6 pensation described in subparagraph (A).

7 ‘‘(2) LIMITATION BASED ON NUMBER OF INDI8 VIDUALS.—In the case of any foster home, difficulty

9 of care payments for any period to which such pay10 ments relate shall not be excludable from gross in11 come under subsection (a) to the extent such pay12 ments are made for more than—

13 ‘‘(A) 10 qualified foster individuals who

14 have not attained age 19, and

15 ‘‘(B) 5 qualified foster individuals not de16 scribed in subparagraph (A).

17 ‘‘SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS.

18 ‘‘(a) IN GENERAL.—Gross income does not include—

19 ‘‘(1) amounts received under workers’ com20 pensation acts as compensation for personal injuries

21 or sickness;

22 ‘‘(2) the amount of any damages received

23 (whether by suit or agreement and whether as lump

24 sums or as periodic payments) on account of per25 sonal injuries or sickness;
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1 ‘‘(3) amounts received through accident or

2 health insurance for medical care;

3 ‘‘(4) amounts received through accident or

4 health insurance for personal injuries or sickness

5 (other than for medical care), but only to the extent

6 such amounts (A) are not attributable to contribu7 tions by the employer which were not includible in

8 the gross income of the employee, and are (B) not

9 paid by the employer;

10 ‘‘(5) amounts received as pension, annuity, or

11 similar allowance for personal injuries or sickness re12 sulting from active service in the armed forces of

13 any country or in the Coast and Geodetic Survey or

14 the Public Health Service, or as a disability annuity

15 payable under the provisions of section 808 of the

16 Foreign Service Act of 1980; and

17 ‘‘(6) amounts received by an individual as dis18 ability income attributable to injuries incurred as a

19 direct result of a violent attack which the Secretary

20 of State determines to be a terrorist attack and

21 which occurred while such individual was an em22 ployee of the United States engaged in the perform23 ance of his official duties outside the United States.
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1 Paragraph (2) shall not apply to any punitive dam2 ages in connection with a case not involving physical

3 injury or physical sickness.

4 ‘‘(b) TERMINATION OF APPLICATION OF SUBSECTION

5 (a)(4) IN CERTAIN CASES.—

6 ‘‘(1) IN GENERAL.—Subsection (a)(4) shall not

7 apply in the case of an individual who is not de8 scribed in paragraph (2).

9 ‘‘(2) INDIVIDUALS TO WHOM SUBSECTION

10 (a)(4) CONTINUES TO APPLY.—An individual is de11 scribed in this paragraph if—

12 ‘‘(A) on or before September 24, 1975, he

13 was entitled to receive any amount described in

14 subsection (a)(4),

15 ‘‘(B) on September 24, 1975, he was a

16 member of any organization (or reserve compo17 nent thereof) referred to in subsection (a)(4) or

18 under a binding written commitment to become

19 such a member,

20 ‘‘(C) he receives an amount described in

21 subsection (a)(4) by reason of a combat-related

22 injury, or

23 ‘‘(D) on application therefore, he would be

24 entitled to receive disability compensation from

25 the Veterans’ Administration.
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1 ‘‘(3) SPECIAL RULES FOR COMBAT-RELATED IN2 JURIES.—For purposes of this subsection, the term

3 ‘combat-related injury’ means personal injury or

4 sickness—

5 ‘‘(A) which is incurred—

6 ‘‘(i) as a direct result of armed con7 flict,

8 ‘‘(ii) while engaged in extrahazardous

9 service, or

10 ‘‘(iii) under conditions simulating war;

11 or

12 ‘‘(B) which is caused by an instrumentality

13 of war.

14 In the case of an individual who is not described in

15 subparagraph (A) or (B) of paragraph (2), except as

16 provided in paragraph (4), the only amounts taken

17 into account under subsection (a)(4) shall be the

18 amounts which he receives by reason of a combat19 related injury.

20 ‘‘(4) AMOUNT EXCLUDED TO BE NOT LESS

21 THAN VETERANS’ DISABILITY COMPENSATION.—In

22 the case of any individual described in paragraph

23 (2), the amounts excludable under subsection (a)(4)

24 for any period with respect to any individual shall

25 not be less than the maximum amount which such
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1 individual, on application therefor, would be entitled

2 to receive as disability compensation from the Vet3 erans’ Administration.

4 ‘‘SEC. 96. MEALS OR LODGING FURNISHED FOR THE CON5 VENIENCE OF THE EMPLOYER.

6 ‘‘(a) MEALS AND LODGING FURNISHED TO EM7 PLOYEE, HIS SPOUSE, AND HIS DEPENDENTS, PURSU8 ANT TO EMPLOYMENT.—There shall be excluded from

9 gross income of an employee the value of any meals or

10 lodging furnished to him, his spouse, or any of his depend11 ents by or on behalf of his employer for the convenience

12 of the employer, but only if—

13 ‘‘(1) in the case of meals, the meals are fur14 nished on the business premises of the employer, or

15 ‘‘(2) in the case of lodging, the employee is re16 quired to accept such lodging on the business prem17 ises of his employer as a condition of his employ18 ment.

19 ‘‘(b) SPECIAL RULES.—For the purposes of sub20 section (a)—

21 ‘‘(1) PROVISIONS OF EMPLOYMENT CONTRACT

22 OR STATE STATUTE NOT TO BE DETERMINATIVE.—

23 In determining whether meals or lodging are fur24 nished for the convenience of the employer, the pro25 visions of an employment contract or of a State stat-
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1 ute fixing terms of employment shall not be deter2 minative of whether the meals or lodging are in3 tended as compensation.

4 ‘‘(2) CERTAIN FACTORS NOT TAKEN INTO AC5 COUNT WITH RESPECT TO MEALS.—In determining

6 whether meals are furnished for the convenience of

7 the employer, the fact that a charge is made for

8 such meals, and the fact that the employee may ac9 cept or decline such meals, shall not be taken into

10 account.

11 ‘‘(3) CERTAIN FIXED CHARGES FOR MEALS.—

12 ‘‘(A) IN GENERAL.—If—

13 ‘‘(i) an employee is required to pay on

14 a periodic basis a fixed charge for his

15 meals, and

16 ‘‘(ii) such meals are furnished by the

17 employer for the convenience of the em18 ployer,

19 there shall be excluded from the employee’s

20 gross income an amount equal to such fixed

21 charge.

22 ‘‘(B) APPLICATION OF SUBPARAGRAPH

23 (A).—Subparagraph (A) shall apply—
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1 ‘‘(i) whether the employee pays the fixed charge

2 out of his stated compensation or out of his own

3 funds, and

4 ‘‘(ii) only if the employee is required to make

5 the payment whether he accepts or declines the

6 meals.

7 ‘‘(c) EMPLOYEES LIVING IN CERTAIN CAMPS.—

8 ‘‘(1) IN GENERAL.—In the case of an individual

9 who is furnished lodging in a camp located in a for10 eign country by or on behalf of his employer, such

11 camp shall be considered to be part of the business

12 premises of the employer.

13 ‘‘(2) CAMP.—For purposes of this section, a

14 camp constitutes lodging which is—

15 ‘‘(A) provided by or on behalf of the em16 ployer for the convenience of the employer be17 cause the place at which such individual renders

18 services is in a remote area where satisfactory

19 housing is not available on the open market,

20 ‘‘(B) located, as near as practicable, in the

21 vicinity of the place at which such individual

22 renders services, and

23 ‘‘(C) furnished in a common area (or en24 clave) which is not available to the public and
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1 which normally accommodates 10 or more em2 ployees.

3 ‘‘(d) LODGING FURNISHED BY CERTAIN EDU4 CATIONAL INSTITUTIONS TO EMPLOYEES.—

5 ‘‘(1) IN GENERAL.—In the case of an employee

6 of an educational institution, gross income shall not

7 include the value of qualified campus lodging fur8 nished to such employee during the taxable year.

9 ‘‘(2) EXCEPTION IN CASES OF INADEQUATE

10 RENT.—Paragraph (1) shall not apply to the extent

11 of the excess of—

12 ‘‘(A) the lesser of—

13 ‘‘(i) 5 percent of the appraised value

14 of the qualified campus lodging, or

15 ‘‘(ii) the average of the rentals paid

16 by individuals (other than employees or

17 students of the educational institution)

18 during such calendar year for lodging pro19 vided by the educational institution which

20 is comparable to the qualified campus lodg21 ing provided to the employee, over

22 ‘‘(B) the rent paid by the employee for the

23 qualified campus lodging during such calendar

24 year.
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1 The appraised value under subparagraph (A)(i) shall

2 be determined as of the close of the calendar year

3 in which the taxable year begins, or, in the case of

4 a rental period not greater than 1 year, at any time

5 during the calendar year in which such period be6 gins.

7 ‘‘(3) QUALIFIED CAMPUS LODGING.—For pur8 poses of this subsection, the term ‘qualified campus

9 lodging’ means lodging to which subsection (a) does

10 not apply and which is—

11 ‘‘(A) located on, or in the proximity of, a

12 campus of the educational institution, and

13 ‘‘(B) furnished to the employee, his spouse,

14 and any of his dependents by or on behalf of

15 such institution for use as a residence.

16 ‘‘(4) EDUCATIONAL INSTITUTION.—For pur17 poses of this paragraph, the term ‘educational insti18 tution’ means an eligible educational institution as

19 defined in section 10(b)(2)(B).

20 ‘‘SEC. 97. CERTAIN FRINGE BENEFITS.

21 ‘‘(a) PURPOSE.—This section includes definitions and

22 rules applicable to the exclusion from gross income for cer23 tain fringe benefits.
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1 ‘‘(b) NO-ADDITIONAL-COST SERVICE DEFINED.—

2 ‘No-additional-cost service’ means any service provided by

3 an employer to an employee for use by such employee if—

4 ‘‘(1) such service is offered for sale to cus5 tomers in the ordinary course of the line of business

6 of the employer in which the employee is performing

7 services, and

8 ‘‘(2) the employer incurs no substantial addi9 tional cost (including forgone revenue) in providing

10 such service to the employee (determined without re11 gard to any amount paid by the employee for such

12 service).

13 ‘‘(c) QUALIFIED EMPLOYEE DISCOUNT DEFINED.—

14 ‘‘(1) QUALIFIED EMPLOYEE DISCOUNT.—The

15 term ‘qualified employee discount’ means any em16 ployee discount with respect to qualified property or

17 services to the extent such discount does not

18 exceed—

19 ‘‘(A) in the case of property, the gross

20 profit percentage of the price at which the prop21 erty is being offered by the employer to cus22 tomers, or

23 ‘‘(B) in the case of services, 20 percent of

24 the price at which the services are being offered

25 by the employer to customers.
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1 ‘‘(2) GROSS PROFIT PERCENTAGE.—

2 ‘‘(A) IN GENERAL.—‘Gross profit percent3 age’ means the percent which—

4 ‘‘(i) the excess of the aggregate sales

5 price of property sold by the employer to

6 customers over the aggregate cost of such

7 property to the employer, is of

8 ‘‘(ii) the aggregate sales price of such

9 property.

10 ‘‘(B) DETERMINATION OF GROSS PROFIT

11 PERCENTAGE.—Gross profit percentage shall be

12 determined on the basis of—

13 ‘‘(i) all property offered to customers

14 in the ordinary course of the line of busi15 ness of the employer in which the employee

16 is performing services (or a reasonable

17 classification of property selected by the

18 employer), and

19 ‘‘(ii) the employer’s experience during a

20 representative period.

21 ‘‘(3) EMPLOYEE DISCOUNT DEFINED.—‘Em22 ployee discount’ means the amount by which—

23 ‘‘(A) the price at which the property or

24 services are provided by the employer to an em25 ployee for use by such employee, is less than
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1 ‘‘(B) the price at which such property or

2 services are being offered by the employer to

3 customers.

4 ‘‘(4) QUALIFIED PROPERTY OR SERVICES.—

5 ‘Qualified property or services’ means any property

6 (other than real property and other than personal

7 property of a kind held for investment) or services

8 which are offered for sale to customers in the ordi9 nary course of the line of business of the employer

10 in which the employee is performing services.

11 ‘‘(c) DE MINIMIS FRINGE DEFINED.—

12 ‘‘(1) IN GENERAL.—‘De minimis fringe’ means

13 any property or service the value of which is (after

14 taking into account the frequency with which similar

15 fringes are provided by the employer to the employ16 er’s employees) so small as to make accounting for

17 it unreasonable or administratively impracticable.

18 ‘‘(2) TREATMENT OF CERTAIN EATING FACILI19 TIES.—The operation by an employer of any eating

20 facility for employees shall be treated as a de mini21 mis fringe if—

22 ‘‘(A) such facility is located on or near the

23 business premises of the employer, and
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1 ‘‘(B) revenue derived from such facility

2 normally equals or exceeds the direct operating

3 costs of such facility.

4 The preceding sentence shall apply with respect to

5 any highly compensated employee only if access to

6 the facility is available on substantially the same

7 terms to each member of a group of employees

8 which is defined under a reasonable classification set

9 up by the employer which does not discriminate in

10 favor of highly compensated employees.

11 ‘‘(3) ON-PREMISES GYMS AND OTHER ATHLETIC

12 FACILITIES.—

13 ‘‘(A) IN GENERAL.—De minimis fringe

14 benefits include the provision of on-premises

15 athletic facility by an employer to its employees.

16 ‘‘(B) ON-PREMISES ATHLETIC FACILITY.—

17 For purposes of this paragraph, ‘on-premises

18 athletic facility’ means any gym or other ath19 letic facility—

20 ‘‘(i) which is located on the premises

21 of the employer,

22 ‘‘(ii) which is operated by the em23 ployer, and
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1 ‘‘(iii) substantially all the use of which

2 is by employees of the employer, their

3 spouses, and their dependent children.

4 ‘‘(d) CERTAIN EDUCATIONAL TRAINING BENE5 FITS.—Amounts paid or expenses incurred by the em6 ployer for education or training provided to the employee

7 shall be excluded from gross income under section 4 if

8 (and only if) such amounts or expenses are ordinary and

9 necessary business expenses and are not for an advanced

10 degree or to qualify an employee for a new line of work.

11 ‘‘(e) REGULATIONS.—The Secretary shall prescribe

12 regulations under this section, including regulations that

13 continue certain rules contained in section 132 to the In14 ternal Revenue Code of 1986 related to the fringe benefits

15 described in this section.

16 ‘‘Subchapter E—Rules Relating to Deductions

‘‘Sec. 101. Charitable, etc. organizations.

‘‘Sec. 102. Private foundations.

17 ‘‘SEC. 101. CHARITABLE, ETC. ORGANIZATIONS.

18 ‘‘(a) PURPOSE.—This section provides definitions for

19 purposes of determining the philanthropic transfer deduc20 tion and for other purposes of this chapter and chapter

21 2.

22 ‘‘(b) REGULAR CHARITY.—

23 ‘‘(1) IN GENERAL.—
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1 ‘‘(A) REGULAR CHARITY.—‘Regular char2 ity’ means—

3 ‘‘(i) a church or a convention or asso4 ciation of churches,

5 ‘‘(ii) an educational organization

6 which normally maintains a regular faculty

7 and curriculum and normally has a regu8 larly enrolled body of pupils or students in

9 attendance at the place where its edu10 cational activities are regularly carried on,

11 ‘‘(iii) an organization the principal

12 purpose or functions of which are the pro13 viding of medical or hospital care or med14 ical education or medical research, if the

15 organization is a hospital, or if the organi16 zation is a medical research organization

17 directly engaged in the continuous active

18 conduct of medical research in conjunction

19 with a hospital,

20 ‘‘(iv) an organization which normally

21 receives a substantial part of its support

22 (exclusive of income received in the exer23 cise or performance by such organization

24 of its charitable, educational, or other pur25 pose or function constituting the basis for
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1 its exemption under section 253(a)) from

2 the United States or any State or political

3 subdivision thereof or from direct or indi4 rect contributions from the general public,

5 and which is organized and operated exclu6 sively to receive, hold, invest, and admin7 ister property and to make expenditures to

8 or for the benefit of a college or university

9 which is an organization referred to in

10 clause (ii) of this subparagraph and which

11 is an agency or instrumentality of a State

12 or political subdivision thereof, or which is

13 owned or operated by a State or political

14 subdivision thereof or by an agency or in15 strumentality of one or more States or po16 litical subdivisions,

17 ‘‘(v) a governmental unit referred to

18 in subsection (c)(1),

19 ‘‘(vi) an organization referred to in

20 subsection (c)(2) which normally receives a

21 substantial part of its support (exclusive of

22 income received in the exercise or perform23 ance by such organization of its charitable,

24 educational, or other purpose or function

25 constituting the basis for its exemption
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1 under section 253(a)) from a governmental

2 unit referred to in subsection (c)(1) or

3 from direct or indirect contributions from

4 the general public,

5 ‘‘(vii) a private foundation described

6 in subparagraph (C), or

7 ‘‘(viii) an organization described in

8 section 102(a) (2) or (3).

9 ‘‘(B) SPECIAL RULE FOR MEDICAL RE10 SEARCH ORGANIZATIONS.—For purposes of de11 termining whether a contribution is to a regular

12 charity, a medical research organization shall

13 not be treated as described in clause (iii) of

14 paragraph (2) unless during the calendar year

15 in which the contribution is made such organi16 zation is committed to spend such contributions

17 for such research before January 1 of the fifth

18 calendar year which begins after the date such

19 contribution is made,

20 ‘‘(C) CERTAIN PRIVATE FOUNDATIONS.—

21 The private foundations referred to in subpara22 graph (A)(vii) and subsection (e)(1)(B) are—

23 ‘‘(i) a private operating foundation (as

24 defined in section 4942(j)(3)),
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1 ‘‘(ii) any other private foundation (as

2 defined in section 102(a)) which, not later

3 than the 15th day of the third month after

4 the close of the foundation’s taxable year

5 in which contributions are received, makes

6 qualifying distributions (as defined in sec7 tion 4942(g), without regard to paragraph

8 (3) thereof), which are treated, after the

9 application of section 4942(g)(3), as dis10 tributions out of corpus (in accordance

11 with section 4942(h)) in an amount equal

12 to 100 percent of such contributions, and

13 with respect to which the taxpayer obtains

14 adequate records or other sufficient evi15 dence from the foundation showing that

16 the foundation made such qualifying dis17 tributions, and

18 ‘‘(iii) a private foundation all of the

19 contributions to which are pooled in a com20 mon fund and which would be described in

21 section 102(a)(3) but for the right of any

22 substantial contributor (hereafter in this

23 clause called ‘donor’) or his spouse to des24 ignate annually the recipients, from among

25 organizations described in paragraph (1) of
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1 section 102(a), of the income attributable

2 to the donor’s contribution to the fund and

3 to direct (by deed or by will) the payment,

4 to an organization described in such para5 graph (1), of the corpus in the common

6 fund attributable to the donor’s contribu7 tion; but this clause shall apply only if all

8 of the income of the common fund is re9 quired to be (and is) distributed to one or

10 more organizations described in such para11 graph (1) not later than the 15th day of

12 the third month after the close of the tax13 able year in which the income is realized

14 by the fund and only if all of the corpus

15 attributable to any donor’s contribution to

16 the fund is required to be (and is) distrib17 uted to one or more of such organizations

18 not later than one year after his death or

19 after the death of his surviving spouse if

20 she has the right to designate the recipi21 ents of such corpus.

22 ‘‘(2) REFERENCES.—Any reference in other law

23 or in legal documents to an organization described

24 in a clause of section 170(b)(1)(A) of the Internal

25 Revenue Code of 1986 shall constitute a reference to
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1 an organization described in the same clause of sec2 tion 101(b)(1)(A).

3 ‘‘(c) CHARITY.—For purposes of determining the de4 ductibility of a philanthropic transfer, ‘charitable contribu5 tion’ means a contribution or gift for the use of—

6 ‘‘(1) A State, a possession of the United States,

7 or any political subdivision of any of the foregoing,

8 or the United States or the District of Columbia,

9 but only if the contribution or gift is made for exclu10 sively public purposes.

11 ‘‘(2) A corporation, trust, or community chest,

12 fund, or foundation—

13 ‘‘(A) created or organized in the United

14 States or in any possession thereof, or under

15 the law of the United States, any State, the

16 District of Columbia, or any possession of the

17 United States;

18 ‘‘(B) organized and operated exclusively

19 for religious, charitable, scientific, literary, or

20 educational purposes (but only if no part of its

21 activities involve the provision of athletic facili22 ties or equipment) or for the prevention of cru23 elty to children or animals,
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1 ‘‘(C) no part of the net earnings of which

2 inures to the benefit of any private shareholder

3 or individual, and

4 ‘‘(D) which qualifies for exemption from

5 the business tax under section 253(c) and is not

6 disqualified for tax exemption by reason of at7 tempting to influence legislation, and which

8 does not participate in, or intervene in (includ9 ing the publishing or distributing of state10 ments), any political campaign on behalf of (or

11 in opposition to) any candidate for public office.

12 ‘‘(3) [intentionally deleted]

13 ‘‘(4) In the case of a contribution or gift by an

14 individual, a domestic fraternal society, order, or as15 sociation, operating under the lodge system, but only

16 if such contribution or gift is to be used exclusively

17 for religious, charitable, scientific, literary, or edu18 cational purposes, or for the prevention of cruelty to

19 children or animals.

20 ‘‘(5) A cemetery company owned and operated

21 exclusively for the benefit of its members, or any

22 corporation chartered solely for burial purposes as a

23 cemetery corporation and not permitted by its char24 ter to engage in any business not necessarily inci25 dent to that purpose, if such company or corporation
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1 is not operated for profit and no part of the net

2 earnings of such company or corporation inures to

3 the benefit of any private shareholder or individual.

4 ‘‘(d) RULES FOR SUBSECTION (c).—

5 ‘‘(1) LIMITATIONS.—A contribution or gift by a

6 corporation to a trust, chest, fund, or foundation

7 shall be deductible by reason of subsection (c)(2)(B)

8 only if it is to be used within the United States or

9 any of its possessions exclusively for purposes speci10 fied in subparagraph (B).

11 ‘‘(2) REFERENCES.—Any reference in other law

12 or in legal documents to an organization described

13 in a paragraph of section 170(c) of the Internal Rev14 enue Code of 1986 shall constitute a reference to an

15 organization described in the same paragraph num16 ber of section 101(c) if an organization is described

17 in such paragraph.

18 ‘‘(e) QUALIFIED CONSERVATION CONTRIBUTION.—

19 ‘‘(1) IN GENERAL.—‘Qualified conservation con20 tribution’ means a contribution—

21 ‘‘(A) of a qualified real property interest,

22 ‘‘(B) to a qualified organization,

23 ‘‘(C) exclusively for conservation purposes.
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1 ‘‘(2) QUALIFIED REAL PROPERTY INTEREST.—

2 ‘Qualified real property interest’ means any of the

3 following interests in real property:

4 ‘‘(A) the entire interest of the donor other

5 than a qualified mineral interest,

6 ‘‘(B) a remainder interest, and

7 ‘‘(C) a restriction (granted in perpetuity)

8 on the use which may be made of the real prop9 erty.

10 ‘‘(3) QUALIFIED ORGANIZATION.—For purposes

11 of paragraph (1), the term ‘qualified organization’

12 means an organization which—

13 ‘‘(A) is described in clause (v) or (vi) of

14 subsection (b)(1)(A), or

15 ‘‘(B) is described in section 253(c)(3)

16 and—

17 ‘‘(i) meets the requirements of section

18 102(a)(2), or

19 ‘‘(ii) meets the requirements of sec20 tion 102(a)(3) and is controlled by an or21 ganization described in subparagraph (A)

22 or in clause (i) of this subparagraph.

23 ‘‘(4) CONSERVATION PURPOSE DEFINED.—
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1 ‘‘(A) IN GENERAL.—For purposes of this

2 subsection, the term ‘conservation purpose’

3 means—

4 ‘‘(i) the preservation of land areas for

5 outdoor recreation by, or the education of,

6 the general public,

7 ‘‘(ii) the protection of a relatively nat8 ural habitat of fish, wildlife, or plants, or

9 similar ecosystem,

10 ‘‘(iii) the preservation of open space

11 (including farmland and forest land) where

12 such preservation is—

13 ‘‘(I) for the scenic enjoyment of

14 the general public, or

15 ‘‘(II) pursuant to a clearly delin16 eated Federal, State, or local govern17 mental conservation policy, and will

18 yield a significant public benefit, or

19 ‘‘(iv) the preservation of an histori20 cally important land area or a certified his21 toric structure.

22 ‘‘(B) CERTIFIED HISTORIC STRUCTURE.—

23 For purposes of subparagraph (A)(iv), the term

24 ‘certified historic structure’ means any building,

25 structure, or land area which—
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1 ‘‘(i) is listed in the National Register,

2 or

3 ‘‘(ii) is located in a registered historic

4 district and is certified by the Secretary of

5 the Interior to the Secretary as being of

6 historic significance to the district.

7 A building, structure, or land area satisfies the

8 preceding sentence if it satisfies such sentence

9 either at the time of the transfer or on the due

10 date (including extensions) for filing the trans11 feror’s return under this chapter for the taxable

12 year in which the transfer is made.

13 ‘‘(5) EXCLUSIVELY FOR CONSERVATION PUR14 POSES.—For purposes of this subsection—

15 ‘‘(A) CONSERVATION PURPOSE MUST BE

16 PROTECTED.—A contribution shall not be treat17 ed as exclusively for conservation purposes un18 less the conservation purpose is protected in

19 perpetuity.

20 ‘‘(B) NO SURFACE MINING PERMITTED.—

21 ‘‘(i) IN GENERAL.—Except as pro22 vided in clause (ii), in the case of a con23 tribution of any interest where there is a

24 retention of a qualified mineral interest,

25 subparagraph (A) shall not be treated as
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1 met if at any time there may be extraction

2 or removal of minerals by any surface min3 ing method.

4 ‘‘(ii) SPECIAL RULE.—With respect to

5 any contribution of property in which the

6 ownership of the surface estate and min7 eral interests were separated before June

8 13, 1976, and remain so separated, sub9 paragraph (A) shall be treated as met if

10 the probability of surface mining occurring

11 on such property is so remote as to be neg12 ligible.

13 ‘‘(6) QUALIFIED MINERAL INTEREST.—For

14 purposes of this subsection, the term ‘qualified min15 eral interest’ means—

16 ‘‘(A) subsurface oil, gas, or other minerals,

17 and

18 ‘‘(B) the right to access to such minerals.

19 ‘‘(f) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL

20 EXPENSES.—No deduction shall be allowed under section

21 211 for traveling expenses (including amounts expended

22 for meals and lodging) while away from home, whether

23 paid directly or by reimbursement, unless there is no sig24 nificant element of personal pleasure, recreation, or vaca25 tion in such travel.
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1 ‘‘(g) TREATMENT OF CERTAIN AMOUNTS PAID TO OR

2 FOR THE BENEFIT OF INSTITUTIONS OF HIGHER EDU3 CATION.—For purposes of section 11, if as the result of

4 a contribution to or for the benefit of an educational

5 organization—

6 ‘‘(1) which is described in subsection

7 (b)(1)(A)(ii), and

8 ‘‘(2) which is an institution of higher education

9 (as defined in section 3304(f))

10 the taxpayer receives (directly or indirectly) as a result

11 of paying such amount the right to purchase tickets for

12 seating at an athletic event in an athletic stadium of such

13 institution, 80 percent of such contribution shall be treat14 ed as a charitable contribution (but only if such amount

15 would be allowable as a deduction but for the fact that

16 the taxpayer received the right to purchase tickets). If any

17 portion of a payment is for the purchase of such tickets,

18 such portion and the remaining portion (if any) of such

19 payment shall be treated as separate amounts for purposes

20 of this subsection.

21 ‘‘Subchapter F—Special Business Activities

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

22 ‘‘SEC. 111. RULES FOR RENTAL OF REAL ESTATE.

23 ‘‘(a) IN GENERAL.—Except as provided in subsection

24 (b)—
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1 ‘‘(1) the activity of rental of real estate is a

2 business activity to which the Simplified USA Tax

3 for businesses under chapter 2 applies,

4 ‘‘(2) a taxpayer shall not be entitled to any de5 ductions under this chapter with respect to rental

6 property, and

7 ‘‘(3) a taxpayer shall recognize gross income

8 only with respect to distributions from the rental ac9 tivity.

10 ‘‘(b) INSUBSTANTIAL RENTAL ACTIVITY.—

11 ‘‘(1) NOT RENTAL PROPERTY.—If an individual

12 or individuals own property, such individual or indi13 viduals and their families use the property on more

14 than 14 days during the taxable year for nonbusi15 ness purposes, the property is rented for no more

16 than 14 days during the taxable year, and the total

17 rental received by the individuals with respect to

18 such property does not exceed $10,000, the property

19 shall not be considered rental property or used in

20 the activity of rental of real estate during the tax21 able year for purposes of subsection (a) and the

22 Simplified USA Tax for businesses under chapter 2.

23 ‘‘(2) RENTS FROM NONRENTAL PROPERTY.—

24 Any rent from property described in paragraph (1)
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1 shall be included in gross income for purposes of the

2 Simplified USA Income Tax.

3 ‘‘(c) USE FOR A NONBUSINESS PURPOSE.—For pur4 poses of this section, ‘use for a nonbusiness purpose’

5 means use other than—

6 ‘‘(1) use for which fair rent is paid,

7 ‘‘(2) use in connection with the preparation of

8 the property for rental, or

9 ‘‘(3) use that serves a clear business purpose.

10 Use during any part of a day shall constitute use for that

11 day.

12 ‘‘Subchapter G—Accounting Methods and

13 Periods

‘‘Sec. 121. Taxable year.

‘‘Sec. 122. Cash method of accounting; installment sales.

14 ‘‘SEC. 121. TAXABLE YEAR.

15 ‘‘(a) IN GENERAL.—The taxable year for all individ16 uals subject to tax under this chapter shall be the calendar

17 year except as provided in subsection (b).

18 ‘‘(b) SHORT TAXABLE YEARS.—

19 ‘‘(1) BIRTH.—An individual’s taxable year in

20 year of his birth shall begin on the date of his birth.

21 ‘‘(2) DEATH.—An individual’s taxable year in

22 the year of his death shall end on the date of his

23 death.
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1 ‘‘SEC. 122. CASH METHOD OF ACCOUNTING; INSTALLMENT

2 SALES.

3 ‘‘(a) IN GENERAL.—All individuals shall determine

4 their income and deductions using the cash receipts and

5 disbursement method.

6 ‘‘(b) OID RULES.—

7 ‘‘(1) IN GENERAL.—Original issue discount

8 shall not be included in gross income until received.

9 ‘‘(2) PREVIOUSLY RECOGNIZED OID.—Original

10 issue discount included in income under the Internal

11 Revenue Code of 1986 shall increase the adjusted

12 basis of the instrument to which the original issue

13 discount related and shall not again be included in

14 income when received.

15 ‘‘(c) INSTALLMENT SALES.—

16 ‘‘(1) IN GENERAL.—Taxpayers shall take into

17 account income from installment sales when re18 ceived.

19 ‘‘(2) REGULATIONS.—The Secretary shall pro20 mulgate regulations implementing paragraph (1).

21 Such regulations shall generally follow the principles

22 of sections 453, 453A and 453B of the Internal Rev23 enue Code of 1986, except to the extent such prin24 ciples are inconsistent with other provisions of this

25 chapter.
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1 ‘‘(d) CONSTRUCTIVE RECEIPT.—Income shall be

2 treated as received when constructively received.

3 ‘‘(e) EFFECT OF CHANGE OF ACCOUNTING METH4 OD.—Rules similar to those under section 226 shall apply

5 to ensure that a taxpayer does not deduct the same ex6 pense twice or include the same item in income twice.

7 ‘‘Subchapter H—Nonresident Aliens

‘‘Sec. 131. Tax on nonresident alien individuals.

‘‘Sec. 132. Tax treatment of certain community income of nonresident aliens.

8 ‘‘SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS.

9 ‘‘(a) NONBUSINESS INCOME.—

10 ‘‘(1) INCOME OTHER THAN CERTAIN GAINS.—

11 There is hereby imposed for each taxable year a tax

12 of 30 percent of the amount received from sources

13 within the United States by a nonresident alien indi14 vidual as—

15 ‘‘(A) interest (other than portfolio interest

16 (as defined in subsection (b)(2)), deposit inter17 est (as defined in subsection (b)(3)) and origi18 nal issue discount, dividends, rents, salaries,

19 wages, premiums, annuities, compensations, re20 munerations, emoluments, and other fixed or

21 determinable annual periodical gains, profits

22 and income,
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1 ‘‘(B) gains from the disposal of timber,

2 coal, or iron ore with a retained economic inter3 est,

4 ‘‘(C) in the case of the sale of an original

5 discount obligation or payment on an original

6 issue discount obligation, the interest accrued

7 while the individual was a nonresident alien,

8 and

9 ‘‘(D) includible social security benefits (as

10 defined in section 3(b)(2)).

11 ‘‘(2) CAPITAL GAINS OF CERTAIN ALIENS.—In

12 the case of a nonresident alien individual present in

13 the United States for a period or periods aggre14 gating 183 days or more during the taxable year,

15 there is hereby imposed a tax of 30 percent of the

16 amount by which the gains, derived from sources

17 within the United States, from the sale or exchange

18 at any time during such year exceeds his losses, allo19 cable to sources within the United States, from the

20 sale or exchange at any time during such year of

21 capital assets.

22 ‘‘(3) TAX DOES NOT APPLY TO BUSINESS IN23 COME.—The taxes imposed by this section shall not

24 apply to the income of any business entity, except to
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1 the extent such income is distributed as compensa2 tion, dividends, or interest.

3 ‘‘(b) SPECIAL RULES AND DEFINITIONS.—

4 ‘‘(1) CERTAIN ANNUITIES.—The taxes imposed

5 by subsection (a) shall not apply to any amount re6 ceived as an annuity under a qualified annuity plan

7 described in section 403(a)(1), or from a qualified

8 trust described in section 401(a) and exempt under

9 section 253(a) if—

10 ‘‘(A) all of the personal services by reason

11 of which the annuity is payable were either—

12 ‘‘(i) personal services performed out13 side the United States by an individual

14 who, at the time of performance of such

15 personal services, was a nonresident alien,

16 or

17 ‘‘(ii) personal services by a non18 resident alien temporarily present in the

19 United States for a period or periods not

20 exceeding 90 days during a taxable year,

21 whose compensation for such services did

22 not exceed $3,000, and who performed

23 such services for—

24 ‘‘(I) a nonresident alien indi25 vidual, foreign partnership, or foreign
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1 corporation, not engaged in a trade or

2 business within the United States, or

3 ‘‘(II) for an office or place of

4 business maintained in a foreign coun5 try or in a possession of the United

6 States by an individual who is a cit7 izen or resident of the United States

8 or by a domestic partnership or a do9 mestic corporation, and

10 ‘‘(B) at the time the first amount is paid

11 as annuity under the annuity plan or by the

12 trust, 90 percent or more of the employees for

13 whom contributions or benefits are provided

14 under such plan are citizens or residents of the

15 United States.

16 ‘‘(2) PORTFOLIO INTEREST.—

17 ‘‘(A) IN GENERAL.—‘Portfolio interest’

18 means—

19 ‘‘(i) interest on obligations in reg20 istered form if the United States person

21 who would otherwise be required to with22 hold tax on such interest under section

23 1441(a) receives a statement that the ben24 eficial owner of the obligation is not a

25 United States person, and
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1 ‘‘(ii) interest on obligations in nonreg2 istered form if appropriate precautions are

3 taken to ensure that such obligations will

4 be sold only to persons who are not United

5 States persons and such interest is paid

6 outside the United States.

7 ‘‘(B) EXCEPTIONS.—Under rules to be

8 prescribed by the Secretary, portfolio interest

9 does not include—

10 ‘‘(i) interest received by a 10-percent

11 equity owner, or

12 ‘‘(ii) contingent interest.

13 ‘‘(3) DEPOSIT INTEREST.—‘Deposit interest’

14 means interest on deposits which are—

15 ‘‘(A) deposits with persons carrying on a

16 banking business (including savings and loans),

17 and

18 ‘‘(B) amounts held by an insurance com19 pany under an agreement to pay interest there20 on.

21 ‘‘(4) OTHER EXCEPTIONS.—The taxes imposed

22 by subsection (a) shall not apply to—

23 ‘‘(A) a percentage of any dividend paid by

24 a business entity, 80 percent of whose gross re25 ceipts are not taken into account under chapter
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1 1 because they are from outside the United

2 States, equal to the percentage of gross receipts

3 not so taken into account,

4 ‘‘(B) gambling winnings (except to the ex5 tent that the Secretary determines by regula6 tion that the collection of the tax is administra7 tively feasible),

8 ‘‘(C) compensation paid by a foreign em9 ployer to a nonresident alien individual for the

10 period he is temporarily present in the United

11 States as a nonimmigrant under subparagraph

12 (F) or (J) of section 101(a)(15) of the Immi13 gration and Nationality Act, as amended,

14 ‘‘(D) interest from a series E or series H

15 savings bond if the individual acquired the bond

16 while a resident of the Ryuku Islands or the

17 Trust Territory of the Pacific Islands, or

18 ‘‘(E) amounts earned or payable to any

19 person who is a bona fide resident of Puerto

20 Rico, Guam, American Samoa, or the Northern

21 Mariana Islands (and, therefore, is subject to

22 the tax imposed by subchapter A).

23 ‘‘(c) EXPATRIATION TO AVOID TAX.—

24 ‘‘(1) IN GENERAL.—A nonresident alien indi25 vidual who at any time within the 10-year period im-
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1 mediately preceding the close of the taxable year lost

2 United States citizenship shall be taxable in the

3 manner described in paragraph (2) unless none of

4 the principal purposes of losing citizenship was

5 avoidance of tax under subchapter A or subtitle B.

6 ‘‘(2) ALTERNATIVE TAX.—A nonresident alien

7 individual described in paragraph (1) shall be sub8 ject to tax on the items taxable under subsection (a)

9 as determined without regard to exceptions listed or

10 based on definitions contained in subsection (b)

11 using the rate schedule for single individuals under

12 section 215. If the taxes determined under sub13 section (a) are greater than the tax determined

14 under this subsection, the greater tax shall apply.

15 ‘‘SEC. 132. TAX TREATMENT OF CERTAIN COMMUNITY IN16 COME OF NONRESIDENT ALIENS.

17 ‘‘(a) GENERAL RULE.—In the case of a married cou18 ple one or both of whom are nonresident alien individuals

19 and who have community income for the taxable year,

20 such community income shall be treated as follows:

21 ‘‘(1) Compensation income shall be treated as

22 income of the spouse who rendered the services,

23 ‘‘(2) Partnership distributions shall be treated

24 as the related distributive shares of partnership in25 come would be treated under section 1402(a)(5),
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1 ‘‘(3) Community income which is derived from

2 the separate property of a spouse shall be treated as

3 income of that spouse, and

4 ‘‘(4) All other such community income shall be

5 treated as provided in the applicable community

6 property law.

7 ‘‘(b) EXCEPTION WHERE ELECTION UNDER SEC8 TION 6013(g) IS IN EFFECT.—Subsection (a) shall not

9 apply if an election under subsection (g) or (h) of section

10 6013 (relating to election to treat nonresident alien indi11 viduals as residents of the United States) is in effect.

12 ‘‘SEC. 133. RELATIONSHIP WITH TREATIES.

13 ‘‘(a) STATEMENT OF POLICY.—It is the intention of

14 the USA Tax Code to promote a worldwide tax system

15 in which each nation taxes—

16 ‘‘(1) under an individual tax, only the income of

17 individuals who are residents or citizens of that na18 tion, and

19 ‘‘(2) under a business tax only the business ac20 tivity in such nation.

21 ‘‘(b) EFFECT OF TREATIES.—No tax shall be im22 posed under section 131(a) on income that is exempt from

23 tax by reason of a treaty between the nation of which the

24 nonresident alien is a citizen or resident and the United

25 States. If any such treaty requires that a lower rate of
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1 tax be imposed on some or all of the items of income sub2 ject to tax under section 331(a), such lower rate shall

3 apply to such items in the case of persons to whom such

4 treaty applies.

5 ‘‘(c) EFFECT OF UNILATERAL ACTION BY FOREIGN

6 NATION.—No tax shall be imposed under section 331(a)

7 on nonresident aliens who are citizens or residents of an8 other nation if—

9 ‘‘(1) such nation exempts from its income and

10 withholding taxes nonresident alien individuals who

11 are residents or citizens of the United States,

12 ‘‘(2) such nation has entered into a tax infor13 mation sharing agreement with the United States,

14 and

15 ‘‘(3) the Secretary certifies that the preceding

16 two requirements have been satisfied.

17 ‘‘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.
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‘‘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.

1 ‘‘SEC. 140. PREPAYMENT OF TAX BY TRUSTS AND ESTATES.

2 ‘‘(a) PREPAYMENT OF TAX.—A trust or estate shall

3 prepay the Simplified USA Tax for individuals in accord4 ance with the provisions of this subchapter.

5 ‘‘(b) IMPOSITION OF TAX.—There is hereby imposed

6 a tax on the taxable income of trusts and estates (as deter7 mined in accordance with this subchapter) a tax deter8 mined 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.

9 ‘‘(c) INFLATION ADJUSTMENT.—The schedule in

10 subsection (b) shall be adjusted for inflation in accordance

11 with section 23.

12 ‘‘(d) BUSINESS ACTIVITIES.—

13 ‘‘(1) TAX ON BUSINESS ACTIVITY DETERMINED

14 AT BUSINESS LEVEL.—If a trust engages in business

15 activity (as defined in section 206(b)), it shall be
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1 considered a business entity with respect to such ac2 tivities for purposes of the business tax under chap3 ter 2. The business entity shall be considered an

4 asset of the trust.

5 ‘‘(2) BUSINESS ENTITY AS SOLE BENE6 FICIARY.—If the only beneficiaries of a trust are

7 business entities, no tax shall be imposed on such

8 trust under this subchapter.

9 ‘‘SEC. 141. APPLICATION OF TAX.

10 ‘‘(a) IN GENERAL.—The tax imposed by section 140

11 shall apply to the taxable income of estates or of any kind

12 of property held in trust, including—

13 ‘‘(1) income accumulated in trust for the ben14 efit of unborn or unascertained persons or persons

15 with contingent interests, and income accumulated

16 or held for future distribution under the terms of

17 the will or trust;

18 ‘‘(2) income which is to be distributed currently

19 by the fiduciary to the beneficiaries, and income col20 lected by a guardian of an infant which is to be held

21 or distributed as the court may direct;

22 ‘‘(3) income received by estates of deceased per23 sons during the period of administration or settle24 ment of the estate; and
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1 ‘‘(4) income which, in the discretion of the fidu2 ciary, may be either distributed to the beneficiaries

3 or accumulated.

4 ‘‘(b) COMPUTATION AND PAYMENT.—The taxable in5 come of an estate or trust shall be computed in the same

6 manner as in the case of an individual, except as otherwise

7 provided in this subchapter. The tax shall be computed

8 on such taxable income and shall be paid by the fiduciary.

9 For purposes of this subsection, a foreign trust or foreign

10 estate shall be treated as a nonresident alien individual

11 who is not present in the United States at any time.

12 ‘‘(c) EXCLUSION OF INCLUDIBLE GAIN FROM TAX13 ABLE INCOME.—The taxable income of a trust does not

14 include the amount of any includible gain as defined in

15 section 144(b) reduced by any deductions properly allo16 cable thereto.

17 ‘‘SEC. 142. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.

18 ‘‘(a) USA DEDUCTION AND FAMILY LIVING ALLOW19 ANCE.—

20 ‘‘(1) NO DEDUCTION OR ALLOWANCE.—A trust

21 or estate shall not be allowed any USA Deductions

22 or a Family Living Allowance.

23 ‘‘(2) SPECIAL DEDUCTION.—For purposes of

24 determining taxable income, trusts and estates shall
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1 be entitled to the following deductions from gross

2 income—

3 ‘‘(A) ESTATE.—An estate shall be allowed

4 a deduction of $600.

5 ‘‘(B) DISTRIBUTING TRUST.—A trust

6 which, under its governing instrument, is re7 quired to distribute all of its income currently

8 shall be allowed a deduction of $300.

9 ‘‘(C) OTHER TRUSTS.—Trusts not de10 scribed in subparagraph (B) shall be allowed a

11 deduction of $100.

12 ‘‘(b) DEDUCTION FOR AMOUNTS PAID OR PERMA13 NENTLY SET ASIDE FOR A CHARITABLE PURPOSE.—

14 ‘‘(1) GENERAL RULE.—In the case of an estate

15 or trust, there shall be allowed as a deduction in

16 computing its taxable income (in lieu of the philan17 thropic transfer deduction) any amount of the gross

18 income, without limitation, which pursuant to the

19 terms of the governing instrument is, during the

20 taxable year, paid for a purpose specified in section

21 101(c) (determined without regard to section

22 101(c)(2)(A)). If a charitable contribution is paid

23 after the close of such taxable year and on or before

24 the last day of the year following the close of such

25 taxable year, then the trustee or administrator may
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1 elect to treat such contribution as paid during such

2 taxable year. The election shall be made at such

3 time and in such manner as the Secretary prescribes

4 by regulations.

5 ‘‘(2) POOLED INCOME FUNDS.—In the case of

6 a pooled income fund (as defined in paragraph (3)),

7 there shall also be allowed as a deduction in com8 puting its taxable income any amount of the gross

9 income attributable to gain from the sale of a capital

10 asset held for more than 1 year, without limitation,

11 which pursuant to the terms of the governing instru12 ment is, during the taxable year, permanently set

13 aside for a purpose specified in section 101(c).

14 ‘‘(3) DEFINITION OF POOLED INCOME FUND.—

15 For purposes of paragraph (2), a pooled income

16 fund is a trust—

17 ‘‘(A) to which each donor transfers prop18 erty, contributing an irrevocable remainder in19 terest in such property to or for the use of an

20 organization described in section 101(b)(1)(A)

21 (other than in clauses (vii) or (viii)), and retain22 ing an income interest for the life of one or

23 more beneficiaries (living at the time of such

24 transfer),
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1 ‘‘(B) in which the property transferred by

2 each donor is commingled with property trans3 ferred by other donors who have made or make

4 similar transfers,

5 ‘‘(C) which cannot have investments in se6 curities which are exempt from taxes imposed

7 by this subtitle,

8 ‘‘(D) which includes only amounts received

9 from transfers which meet the requirements of

10 this paragraph,

11 ‘‘(E) which is maintained by the organiza12 tion to which the remainder interest is contrib13 uted and of which no donor or beneficiary of an

14 income interest is a trustee, and

15 ‘‘(F) from which each beneficiary of an in16 come interest receives income, for each year for

17 which he is entitled to receive the income inter18 est referred to in subparagraph (A), determined

19 by the rate of return earned by the trust for

20 such year.

21 For purposes of determining the amount of any

22 charitable contribution allowable by reason of a

23 transfer of property to a pooled fund, the value of

24 the income interest shall be determined on the basis

25 of the highest rate of return earned by the fund for
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1 any of the 3 taxable years immediately preceding the

2 taxable year of the fund in which the transfer is

3 made. In the case of funds in existence less than 3

4 taxable years preceding the taxable year of the fund

5 in which a transfer is made the rate of return shall

6 be deemed to be 6 percent per annum, except that

7 the Secretary may prescribe a different rate of re8 turn.

9 ‘‘(c) UNUSED LOSS CARRYOVERS.—If on the termi10 nation of an estate or trust, the estate or trust has a loss

11 carryover then such carryover shall be allowed as a deduc12 tion, in accordance with regulations prescribed by the Sec13 retary, to the beneficiaries succeeding to the property of

14 the estate or trust.

15 ‘‘(d) CERTAIN DISTRIBUTIONS BY CEMETERY PER16 PETUAL CARE FUNDS.—In the case of a cemetery per17 petual care fund which—

18 ‘‘(1) was created pursuant to local law by a tax19 able cemetery corporation for the care and mainte20 nance of cemetery property, and

21 ‘‘(2) is treated for the taxable year as a trust

22 for purposes of this subchapter,

23 any amount distributed by such fund for the care and

24 maintenance of gravesites which have been purchased

25 from the cemetery corporation before the beginning of the
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1 taxable year of the trust and with respect to which there

2 is an obligation to furnish care and maintenance shall be

3 considered to be a distribution solely for purposes of sec4 tions 144 and 146, but only to the extent that the aggre5 gate amount so distributed during the taxable year does

6 not exceed $5 multiplied by the aggregate number of such

7 gravesites.

8 ‘‘SEC. 143. DEFINITIONS AND RULES APPLICABLE TO SUB9 CHAPTER I.

10 ‘‘For purposes of this subchapter—

11 ‘‘(a) DISTRIBUTABLE NET INCOME.—‘Distributable

12 net income’ means, with respect to any taxable year, the

13 taxable income of the estate or trust computed with the

14 following modifications—

15 ‘‘(1) No deduction shall be taken under sections

16 144 and 146 (relating to additional deductions).

17 ‘‘(2) No deduction shall be taken under section

18 142(a)(2) (relating to deduction for personal exemp19 tions).

20 ‘‘(3) Gains from the sale or exchange of capital

21 assets shall be excluded to the extent that such gains

22 are allocated to corpus and are not (A) paid, cred23 ited, or required to be distributed to any beneficiary

24 during the taxable year, or (B) paid, permanently

25 set aside, or to be used for the purposes specified
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1 in section 142(b). Losses from the sale or exchange

2 of capital assets shall be excluded, except to the ex3 tent such losses are taken into account in deter4 mining the amount of gains from the sale or ex5 change of capital assets which are paid, credited, or

6 required to be distributed to any beneficiary during

7 the taxable year.

8 ‘‘(4) For purposes only of rules under section

9 ll, there shall be excluded those items of gross in10 come constituting extraordinary dividends or taxable

11 stock dividends which the fiduciary, acting in good

12 faith, does not pay or credit to any beneficiary by

13 reason of his determination that such dividends are

14 allocable to corpus under the terms of the governing

15 instrument and applicable local law.

16 ‘‘(5) There shall be included any tax-exempt in17 terest.

18 ‘‘(6) In the case of a foreign trust—

19 ‘‘(A) There shall be included the amounts

20 of gross income from sources without the

21 United States, reduced by any amounts which

22 would be deductible in respect of disbursements

23 allocable to such income but for the provisions

24 of section 265(a)(1) (relating to disallowance of

25 certain deductions).
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1 ‘‘(B) Gross income from sources within the

2 United States shall be determined without re3 gard to section 894 (relating to income exempt

4 under treaty).

5 ‘‘(C) Paragraph (3) shall not apply to a

6 foreign trust. In the case of such a trust, there

7 shall be included gains from the sale or ex8 change of capital assets, reduced by losses from

9 such sales or exchanges to the extent such

10 losses do not exceed gains from such sales or

11 exchanges.

12 If the estate or trust is allowed a deduction under section

13 142(b), the amount of the modifications specified in para14 graphs (5) and (6) shall be reduced to the extent that the

15 amount of income which is paid, permanently set aside,

16 or to be used for the purposes specified in section 142(b)

17 is deemed to consist of items specified in those para18 graphs. For this purpose, such amount shall (in the ab19 sence of specific provisions in the governing instrument)

20 be deemed to consist of the same proportion of each class

21 of items of income of the estate or trust as the total of

22 each class bears to the total of all classes.

23 ‘‘(b) INCOME.—‘Income’, when not preceded by the

24 words ‘taxable’, ‘distributable net’, ‘undistributed net’, or

25 ‘gross’, means the amount of income of the estate or trust
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1 for the taxable year determined under the terms of the

2 governing instrument and applicable local law. Items of

3 gross income constituting extraordinary dividends or tax4 able stock dividends which the fiduciary, acting in good

5 faith, determines to be allocable to corpus under the terms

6 of the governing instrument and applicable local law shall

7 not be considered income.

8 ‘‘(c) BENEFICIARY.—‘Beneficiary’ includes heir, leg9 atee, devisee.

10 ‘‘(d) TREATMENT OF PROPERTY DISTRIBUTED IN

11 KIND.—

12 ‘‘(1) BASIS OF BENEFICIARY.—The basis of any

13 property received by a beneficiary in a distribution

14 from an estate or trust shall be—

15 ‘‘(A) the adjusted basis of such property in

16 the hands of the estate or trust immediately be17 fore the distribution, adjusted for

18 ‘‘(B) any gain or loss recognized to the es19 tate or trust on the distribution.

20 ‘‘(2) AMOUNT OF DISTRIBUTION.—In the case

21 of any distribution of property (other than cash), the

22 amount taken into account under sections 146(a)(2)

23 and 147(a)(2) shall be the lesser of—
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1 ‘‘(A) the basis of such property in the

2 hands of the beneficiary (as determined under

3 paragraph (1)), or

4 ‘‘(B) the fair market value of such prop5 erty.

6 ‘‘(3) ELECTION TO RECOGNIZE GAIN.—

7 ‘‘(A) IN GENERAL.—In the case of any dis8 tribution of property (other than cash) to which

9 an election under this paragraph applies—

10 ‘‘(i) paragraph (2) shall not apply,

11 ‘‘(ii) gain or loss shall be recognized

12 by the estate or trust in the same manner

13 as if such property had been sold to the

14 distributee at its fair market value, and

15 ‘‘(iii) the amount taken into account

16 under sections 146(a)(2) and 147(a)(2)

17 shall be the fair market value of such

18 property.

19 ‘‘(B) ELECTION.—Any election under this

20 paragraph shall apply to all distributions made

21 by the estate or trust during a taxable year and

22 shall be made on the return of such estate or

23 trust for such taxable year.

24 Any such election, once made, may be revoked

25 only with the consent of the Secretary.
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1 ‘‘(4) EXCEPTION FOR DISTRIBUTIONS DE2 SCRIBED IN SECTION 148(a).—This subsection shall

3 not apply to any distribution described in section

4 148(a).

5 ‘‘(f) TREATMENT OF MULTIPLE TRUSTS.—For pur6 poses of this subchapter, under regulations prescribed by

7 the Secretary, 2 or more trusts shall be treated as 1 trust

8 if—

9 ‘‘(1) such trusts have substantially the same

10 grantor or grantors and substantially the same pri11 mary beneficiary or beneficiaries, and

12 ‘‘(2) a principal purpose of such trusts is the

13 avoidance of the tax imposed by this chapter.

14 For purposes of the preceding sentence, a husband and

15 wife shall be treated as 1 person.

16 ‘‘(g) CERTAIN PAYMENTS OF ESTIMATED TAX

17 TREATED AS PAID BY BENEFICIARY.—Under rules pre18 scribed by the Secretary, a trustee may elect to treat any

19 portion of a payment of estimated tax made by such trust

20 for any taxable year of the trust as a payment made by

21 a beneficiary of such trust. This rule shall also apply in

22 the case of a taxable year reasonably expected to be the

23 last taxable year of an estate.

24 ‘‘(h) FOREIGN TRUSTS AND FOREIGN INCOME.—The

25 Secretary shall prescribe special rules for foreign trusts
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1 and foreign income of trusts. Those rules should generally

2 be consistent with the rules under subchapter J of chapter

3 1 of the Internal Revenue Code of 1986, except that they

4 shall take into account the principles of the Simplified

5 USA Tax.

6 ‘‘(i) CERTAIN REVOCABLE TRUSTS TREATED AS

7 PART OF ESTATE.—

8 ‘‘(1) IN GENERAL.—If both the executor (if

9 any) of an estate and the trustee of a qualified rev10 ocable trust elect the treatment provided in this sec11 tion, such trust shall be treated and taxed as part

12 of such estate (and not as a separate trust) for all

13 taxable years of the estate ending after the date of

14 the decedent’s death and before the applicable date.

15 ‘‘(2) QUALIFIED REVOCABLE TRUST.—For pur16 poses of this subsection, ‘qualified revocable trust’

17 means any trust (or portion thereof) which was

18 treated under section 158 as owned by the decedent

19 of the estate referred to in paragraph (1) by reason

20 of a power in the grantor (determined without re21 gard to section 154(e).

22 ‘‘(3) APPLICABLE DATE.—For purposes of this

23 subsection, ‘applicable date’ means—

24 ‘‘(A) if no return of tax imposed by chap25 ter 11 is required to be filed, the date which is
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1 2 years after the date of the decedent’s death,

2 and

3 ‘‘(B) if such a return is required to be

4 filed, the date which is 6 months after the date

5 of the final determination of the liability for tax

6 imposed by chapter 11.

7 ‘‘(4) ELECTION.—The election under this sub8 section shall be made not later than the time pre9 scribed for filing the return of tax imposed by this

10 chapter for the first taxable year of the estate (de11 termined with regard to extensions) and, once made,

12 shall be irrevocable.

13 ‘‘SEC. 144. DEDUCTION FOR TRUSTS DISTRIBUTING CUR14 RENT INCOME ONLY.

15 ‘‘(a) DEDUCTION.—In the case of any trust the terms

16 of which—

17 ‘‘(1) provide that all of its income is required

18 to be distributed currently, and

19 ‘‘(2) do not provide that any amounts are to be

20 paid, permanently set aside, or used for the purposes

21 specified in section 142(b) (relating to deduction for

22 charitable, etc., purposes),

23 there shall be allowed as a deduction in computing the

24 taxable income of the trust the amount of the income for

25 the taxable year which is required to be distributed cur-
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1 rently. This section shall not apply in any taxable year

2 in which the trust distributes amounts other than amounts

3 of income described in paragraph (1).

4 ‘‘(b) LIMITATION ON DEDUCTION.—If the amount of

5 income required to be distributed currently exceeds the

6 distributable net income of the trust for the taxable year,

7 the deduction shall be limited to the amount of the distrib8 utable net income. For this purpose, the computation of

9 distributable net income shall not include items of income

10 which are not included in the gross income of the trust

11 and the deductions allocable thereto.

12 ‘‘SEC. 145. INCLUSION OF AMOUNTS IN GROSS INCOME OF

13 BENEFICIARIES OF TRUSTS DISTRIBUTING

14 CURRENT INCOME ONLY.

15 ‘‘(a) INCLUSION.—Subject to subsection (b), the

16 amount of income for the taxable year required to be dis17 tributed currently by a trust described in section 144 shall

18 be included in the gross income of the beneficiaries to

19 whom the income is required to be distributed, whether

20 distributed or not. If such amount exceeds the distribut21 able net income, there shall be included in the gross in22 come of each beneficiary an amount which bears the same

23 ratio to distributable net income as the amount of income

24 required to be distributed to such beneficiary bears to the
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1 amount of income required to be distributed to all bene2 ficiaries.

3 ‘‘(b) CHARACTER OF AMOUNTS.—The amounts speci4 fied in subsection (a) shall have the same character in the

5 hands of the beneficiary as in the hands of the trust. For

6 this purpose, the amounts shall be treated as consisting

7 of the same proportion of each class of items entering into

8 the computation of distributable net income of the trust

9 as the total of each class bears to the total distributable

10 net income of the trust, unless the terms of the trust spe11 cifically allocate different classes of income to different

12 beneficiaries. In the application of the preceding sentence,

13 the items of deduction entering into the computation of

14 distributable net income shall be allocated among the

15 items of distributable net income in accordance with regu16 lations prescribed by the Secretary.

17 ‘‘SEC. 146. DEDUCTION FOR ESTATES AND TRUSTS ACCU18 MULATING INCOME OR DISTRIBUTING COR19 PUS.

20 ‘‘(a) DEDUCTION.—In any taxable year there shall be

21 allowed as a deduction in computing the taxable income

22 of an estate or trust (other than a trust described in sec23 tion 144), the sum of—

24 ‘‘(1) any amount of income for such taxable

25 year required to be distributed currently (including
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1 any amount required to be distributed which may be

2 paid out of income or corpus to the extent such

3 amount is paid out of income for such taxable year);

4 and

5 ‘‘(2) any other amounts properly paid or cred6 ited or required to be distributed for such taxable

7 year;

8 but such deduction shall not exceed the distributable

9 net income of the estate or trust.

10 ‘‘(b) CHARACTER OF AMOUNTS DISTRIBUTED.—The

11 amount determined under subsection (a) shall be treated

12 as consisting of the same proportion of each class of items

13 entering into the computation of distributable net income

14 of the estate or trust as the total of each class bears to

15 the total distributable net income of the estate or trust

16 in the absence of the allocation of different classes of in17 come under the specific terms of the governing instru18 ment. In the application of the preceding sentence, the

19 items of deduction entering into the computation of dis20 tributable net income (including the deduction allowed

21 under section 142(b)) shall be allocated among the items

22 of distributable net income in accordance with regulations

23 prescribed by the Secretary.

24 ‘‘(c) LIMITATION ON DEDUCTION.—No deduction

25 shall be allowed under subsection (a) in respect of any por-
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1 tion of the amount allowed as a deduction under that sub2 section (without regard to this subsection) which is treated

3 under subsection (b) as consisting of any item of distribut4 able net income which is not included in the gross income

5 of the estate or trust.

6 ‘‘SEC. 147. INCLUSION OF AMOUNTS IN GROSS INCOME OF

7 BENEFICIARIES OF ESTATES AND TRUSTS AC8 CUMULATING INCOME OR DISTRIBUTING

9 CORPUS.

10 ‘‘(a) INCLUSION.—Subject to subsection (b), there

11 shall be included in the gross income of a beneficiary to

12 whom an amount specified in section 146(a) is paid, cred13 ited, or required to be distributed (by an estate or trust

14 described in section 146), the sum of the following

15 amounts:

16 ‘‘(1) AMOUNTS REQUIRED TO BE DISTRIBUTED

17 CURRENTLY.—The amount of income for the taxable

18 year required to be distributed currently to such

19 beneficiary, whether distributed or not. If the

20 amount of income required to be distributed cur21 rently to all beneficiaries exceeds the distributable

22 net income (computed without the deduction allowed

23 by section 142(b), relating to deduction for chari24 table, etc., purposes) of the estate or trust, then, in

25 lieu of the amount provided in the preceding sen-
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1 tence, there shall be included in the gross income of

2 the beneficiary an amount which bears the same

3 ratio to distributable net income (as so computed) as

4 the amount of income required to be distributed cur5 rently to such beneficiary bears to the amount re6 quired to be distributed currently to all beneficiaries.

7 For purposes of this section, the phrase ‘the amount

8 of income for the taxable year required to be distrib9 uted currently’ includes any amount required to be

10 paid out of income or corpus to the extent such

11 amount is paid out of income for such taxable year.

12 ‘‘(2) OTHER AMOUNTS DISTRIBUTED.—All

13 other amounts properly paid, credited, or required to

14 be distributed to such beneficiary for the taxable

15 year. If the sum of—

16 ‘‘(A) the amount of income for the taxable

17 year required to be distributed currently to all

18 beneficiaries, and

19 ‘‘(B) all other amounts properly paid, cred20 ited, or required to be distributed to all bene21 ficiaries

22 exceeds the distributable net income of the estate or

23 trust, then, in lieu of the amount provided in the

24 preceding sentence, there shall be included in the

25 gross income of the beneficiary an amount which
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1 bears the same ratio to distributable net income (re2 duced by the amounts specified in (A)) as the other

3 amounts properly paid, credited or required to be

4 distributed to the beneficiary bear to the other

5 amounts properly paid, credited, or required to be

6 distributed to all beneficiaries.

7 ‘‘(b) CHARACTER OF AMOUNTS.—The amounts de8 termined under subsection (a) shall have the same char9 acter in the hands of the beneficiary as in the hands of

10 the estate or trust. For this purpose, the amounts shall

11 be treated as consisting of the same proportion of each

12 class of items entering into the computation of distribut13 able net income as the total of each class bears to the

14 total distributable net income of the estate or trust unless

15 the terms of the governing instrument specifically allocate

16 different classes of income to different beneficiaries. In the

17 application of the preceding sentence, the items of deduc18 tion entering into the computation of distributable net in19 come (including the deduction allowed under section

20 142(b)) shall be allocated among the items of distributable

21 net income in accordance with regulations prescribed by

22 the Secretary. In the application of this subsection to the

23 amount determined under paragraph (1) of subsection (a),

24 distributable net income shall be computed without regard
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1 to any portion of the deduction under section 142(b) which

2 is not attributable to income of the taxable year.

3 ‘‘SEC. 148. SPECIAL RULES APPLICABLE TO SECTIONS 146

4 AND 147.

5 ‘‘(a) EXCLUSIONS.—There shall not be included as

6 amounts falling within section 146(a) or 147(a)—

7 ‘‘(1) GIFTS, BEQUESTS, ETC.—Any amount

8 which, under the terms of the governing instrument,

9 is properly paid or credited as a gift or bequest of

10 a specific sum of money or of specific property and

11 which is paid or credited all at once or in not more

12 than 3 installments. For this purpose an amount

13 which can be paid or credited only from the income

14 of the estate or trust shall not be considered as a

15 gift or bequest of a specific sum of money.

16 ‘‘(2) CHARITABLE, ETC., DISTRIBUTIONS.—Any

17 amount paid or permanently set aside or otherwise

18 qualifying for the deduction provided in section

19 142(b) (computed without regard to sections 508(d),

20 162, and 4948(c)(4)).

21 ‘‘(3) DENIAL OF DOUBLE DEDUCTION.—Any

22 amount paid, credited, or distributed in the taxable

23 year, if section 144 or section 146 applied to such

24 amount for a preceding taxable year of an estate or
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1 trust because credited or required to be distributed

2 in such preceding taxable year.

3 ‘‘(b) DISTRIBUTIONS IN FIRST SIXTY-FIVE DAYS OF

4 TAXABLE YEAR.—

5 ‘‘(1) GENERAL RULE.—If within the first 65

6 days of any taxable year of an estate or a trust, an

7 amount is properly paid or credited, such amount

8 shall be considered paid or credited on the last day

9 of the preceding taxable year.

10 ‘‘(2) LIMITATION.—Paragraph (1) shall apply

11 with respect to any taxable year of an estate or a

12 trust only if the executor of such estate or the fidu13 ciary of such trust (as the case may be) elects, in

14 such manner and at such time as the Secretary pre15 scribes by regulations, to have paragraph (1) apply

16 for such taxable year.

17 ‘‘(c) SEPARATE SHARES TREATED AS SEPARATE ES18 TATES OR TRUSTS.—For the sole purpose of determining

19 the amount of distributable net income in the application

20 of sections 146 and 147, in the case of a single trust hav21 ing more than one beneficiary, substantially separate and

22 independent shares of different beneficiaries in the trust

23 shall be treated as separate trusts. Rules similar to the

24 rules of the preceding provisions of this subsection shall

25 apply to treat substantially separate and independent
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1 shares of different beneficiaries in an estate having more

2 than 1 beneficiary as separate estates. The existence of

3 such substantially separate and independent shares and

4 the manner of treatment as separate trusts or estates, in5 cluding the application of sections 150 through 152, shall

6 be determined in accordance with regulations prescribed

7 by the Secretary.

8 ‘‘SEC. 149. CHARITABLE REMAINDER TRUSTS.

9 ‘‘(a) GENERAL RULE.—Notwithstanding any other

10 provision of this subchapter, the provisions of this section

11 shall, in accordance with regulations prescribed by the

12 Secretary, apply in the case of a charitable remainder an13 nuity trust and a charitable remainder unitrust.

14 ‘‘(b) CHARACTER OF DISTRIBUTIONS.—Amounts dis15 tributed by a charitable remainder annuity trust or by a

16 charitable remainder unitrust shall be considered as hav17 ing the following characteristics in the hands of a bene18 ficiary to whom is paid the annuity described in subsection

19 (d)(1)(A) or the payment described in subsection

20 (d)(2)(A):

21 ‘‘(1) First, as amounts of income (other than

22 gains, and amounts treated as gains, from the sale

23 or other disposition of capital assets) includible in

24 gross income to the extent of such income of the
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1 trust for the year and such undistributed income of

2 the trust for prior years;

3 ‘‘(2) Second, as a capital gain to the extent of

4 the capital gain of the trust for the year and the un5 distributed capital gain of the trust for prior years;

6 ‘‘(3) Third, as other income to the extent of

7 such income of the trust for the year and such un8 distributed income of the trust for prior years; and

9 ‘‘(4) Fourth, as a distribution of trust corpus.

10 For purposes of this section, the trust shall determine the

11 amount of its undistributed capital gain on a cumulative

12 net basis.

13 ‘‘(c) EXEMPTION FROM INCOME TAXES.—A chari14 table remainder annuity trust and a charitable remainder

15 unitrust shall, for any taxable year, not be subject to any

16 tax imposed by this chapter. Any such trust shall be liable

17 for tax on its unrelated business taxable income (within

18 the meaning of section 255).

19 ‘‘(d) DEFINITIONS.—

20 ‘‘(1) CHARITABLE REMAINDER ANNUITY

21 TRUST.—For purposes of this section, a charitable

22 remainder annuity trust is a trust—

23 ‘‘(A) from which a sum certain (which is

24 not less than 5 percent nor more than 50 per25 cent of the initial net fair market value of all
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1 property placed in trust) is to be paid, not less

2 often than annually, to one or more persons (at

3 least one of which is not an organization de4 scribed in section 101(c) and, in the case of in5 dividuals, only to an individual who is living at

6 the time of the creation of the trust) for a term

7 of years (not in excess of 20 years) or for the

8 life or lives of such individual or individuals,

9 ‘‘(B) from which no amount other than the

10 payments described in subparagraph (A) and

11 other than qualified gratuitous transfers de12 scribed in subparagraph (C) may be paid to or

13 for the use of any person other than an organi14 zation described in section 101(c),

15 ‘‘(C) following the termination of the pay16 ments described in subparagraph (A), the re17 mainder interest in the trust is to be trans18 ferred to, or for the use of, an organization de19 scribed in section 101(c) or is to be retained by

20 the trust for such a use or, to the extent the

21 remainder interest is in qualified employer secu22 rities (as defined in subsection (g)(4)), all or

23 part of such securities are to be transferred to

24 an employee stock ownership plan (as defined in
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1 section 4975(e)(7) in a qualified gratuitous

2 transfer (as defined by subsection (g)).

3 ‘‘(D) the value (determined under section

4 7520 of such remainder interest is at least 10

5 percent of the initial net fair market value of all

6 property placed in the trust.

7 ‘‘(2) CHARITABLE REMAINDER UNITRUST.—For

8 purposes of this section, a charitable remainder

9 unitrust is a trust—

10 ‘‘(A) from which a fixed percentage (which

11 is not less than 5 percent nor more than 50

12 percent) of the net fair market value of its as13 sets, valued annually, is to be paid, not less

14 often than annually, to one or more persons (at

15 least one of which is not an organization de16 scribed in section 101(c) and, in the case of in17 dividuals, only to an individual who is living at

18 the time of the creation of the trust) for a term

19 of years (not in excess of 20 years) or for the

20 life or lives of such individual or individuals,

21 ‘‘(B) from which no amount other than the

22 payments described in subparagraph (A) and

23 other than qualified gratuitous transfers de24 scribed in subparagraph (C) may be paid to or
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1 for the use of any person other than an organi2 zation described in section 101(c),

3 ‘‘(C) following the termination of the pay4 ments described in subparagraph (A), the re5 mainder interest in the trust is to be trans6 ferred to, or for the use of, an organization de7 scribed in section 101(c) or is to be retained by

8 the trust for such a use or, to the extent the

9 remainder interest is in qualified employer secu10 rities (as defined in subsection (g)(4)), all or

11 part of such securities are to be transferred to

12 an employee stock ownership plan (as defined in

13 section 4975(e)(7) in a qualified gratuitous

14 transfer (as defined by subsection (g)).

15 ‘‘(D) with respect to each contribution of

16 property to the trust, the value (determined

17 under section 7520 of such remainder interest

18 in such property is at least 10 percent of the

19 net fair market value of such property as of the

20 date such property is contributed to the trust.

21 ‘‘(3) EXCEPTION.—Notwithstanding the provi22 sions of paragraphs (2)(A) and (B), the trust instru23 ment may provide that the trustee shall pay the in24 come beneficiary for any year—
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1 ‘‘(A) the amount of the trust income, if

2 such amount is less than the amount required

3 to be distributed under paragraph (2)(A), and

4 ‘‘(B) any amount of the trust income

5 which is in excess of the amount required to be

6 distributed under paragraph (2)(A), to the ex7 tent that (by reason of subparagraph (A)) the

8 aggregate of the amounts paid in prior years

9 was less than the aggregate of such required

10 amounts.

11 ‘‘(4) SEVERANCE OF CERTAIN ADDITIONAL

12 CONTRIBUTIONS.—If—

13 ‘‘(A) any contribution is made to a trust

14 which before the contribution is a charitable re15 mainder unitrust, and

16 ‘‘(B) such contribution would (but for this

17 paragraph) result in such trust ceasing to be a

18 charitable unitrust by reason of paragraph

19 (2)(D), such contribution shall be treated as a

20 transfer to a separate trust under regulations

21 prescribed by the Secretary.

22 ‘‘(e) VALUATION FOR PURPOSES OF CHARITABLE

23 CONTRIBUTION.—For purposes of determining the

24 amount of any charitable contribution, the remainder in25 terest of a charitable remainder annuity trust or charitable
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1 remainder unitrust shall be computed on the basis that

2 an amount equal to 5 percent of the net fair market value

3 of its assets (or a greater amount, if required under the

4 terms of the trust instrument) is to be distributed each

5 year.

6 ‘‘(f) CERTAIN CONTINGENCIES PERMITTED.—

7 ‘‘(1) GENERAL RULE.—If a trust would, but for

8 a qualified contingency, meet the requirements of

9 paragraph (1)(A) or (2)(A) of subsection (d), such

10 trust shall be treated as meeting such requirements.

11 ‘‘(2) VALUE DETERMINED WITHOUT REGARD

12 TO QUALIFIED CONTINGENCY.—For purposes of de13 termining the amount of any charitable contribution

14 (or the actuarial value of any interest), a qualified

15 contingency shall not be taken into account.

16 ‘‘(3) QUALIFIED CONTINGENCY.—For purposes

17 of this subsection, the term ‘qualified contingency’

18 means any provision of a trust which provides that,

19 upon the happening of a contingency, the payments

20 described in paragraph (1)(A) or (2)(A) of sub21 section (d) (as the case may be) will terminate not

22 later than such payments would otherwise terminate

23 under the trust.

24 ‘‘(g) QUALIFIED GRATUITOUS TRANSFER OF QUALI25 FIED EMPLOYER SECURITIES.—
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1 ‘‘(1) IN GENERAL.—For purposes of this sec2 tion, the term ‘qualified gratuitous transfer’ means

3 a transfer of qualified employer securities to an em4 ployee stock ownership plan (as defined in section

5 4975(e)(7) but only to the extent that—

6 ‘‘(A) the securities transferred previously

7 passed from a decedent dying before January 1,

8 2002, to a trust described in paragraph (1) or

9 (2) of subsection (d),

10 ‘‘(B) no deduction under section 404 is al11 lowable with respect to such transfer,

12 ‘‘(C) such plan contains the provisions re13 quired by paragraph (3),

14 ‘‘(D) such plan treats such securities as

15 being attributable to employer contributions but

16 without regard to the limitations otherwise ap17 plicable to such contributions under section

18 404, and

19 ‘‘(E) the employer whose employees are

20 covered by the plan described in this paragraph

21 files with the Secretary a verified written state22 ment consenting to the application of sections

23 4978 and 4979A with respect to such employer.

24 ‘‘(2) EXCEPTION.—The term ‘qualified gratu25 itous transfer’ shall not include a transfer of quali-
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1 fied employer securities to an employee stock owner2 ship plan unless—

3 ‘‘(A) such plan was in existence on August

4 1, 1996,

5 ‘‘(B) at the time of the transfer, the dece6 dent and members of the decedent’s family

7 (within the meaning of section 171(a)(6)(D))

8 own (directly or through constructive ownership

9 rules) no more than 10 percent of the value of

10 the stock of the corporation referred to in para11 graph (4), and

12 ‘‘(C) immediately after the transfer, such

13 plan owns (after the application of section

14 318(a)(4) at least 60 percent of the value of the

15 outstanding stock of the corporation.

16 ‘‘(3) PLAN REQUIREMENTS.—A plan contains

17 the provisions required by this paragraph if such

18 plan provides that—

19 ‘‘(A) the qualified employer securities so

20 transferred are allocated to plan participants in

21 a manner consistent with section 401(a)(4),

22 ‘‘(B) plan participants are entitled to di23 rect the plan as to the manner in which such

24 securities which are entitled to vote and are al-
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1 located to the account of such participant are to

2 be voted,

3 ‘‘(C) an independent trustee votes the se4 curities so transferred which are not allocated

5 to plan participants,

6 ‘‘(D) each participant who is entitled to a

7 distribution from the plan has the rights de8 scribed in subparagraphs (A) and (B) of section

9 409(h)(1),

10 ‘‘(E) such securities are held in a suspense

11 account under the plan to be allocated each

12 year, up to the limitations under section 415(c),

13 after first allocating all other annual additions

14 for the limitation year, up to the limitations

15 under sections 415 (c) and (e), and

16 ‘‘(F) on termination of the plan, all securi17 ties so transferred which are not allocated to

18 plan participants as of such termination are to

19 be transferred to, or for the use of, an organi20 zation described in section 101(c). For purposes

21 of the preceding sentence, the term ‘inde22 pendent trustee’ means any trustee who is not

23 a member of the family (within the meaning of

24 section 171(a)(6)(D)) of the decedent or a 5-

25 percent shareholder. A plan shall not fail to be
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1 treated as meeting the requirements of section

2 401(a) by reason of meeting the requirements

3 of this subsection.

4 ‘‘(4) QUALIFIED EMPLOYER SECURITIES.—For

5 purposes of this section, the term ‘qualified employer

6 securities’ means employer securities (as defined in

7 section 409(l)) which are issued by a domestic

8 corporation—

9 ‘‘(A) which has no outstanding stock which

10 is readily tradable on an established securities

11 market, and

12 ‘‘(B) which has only 1 class of stock.

13 ‘‘(5) TREATMENT OF SECURITIES ALLOCATED

14 BY EMPLOYEE STOCK OWNERSHIP PLAN TO PER15 SONS RELATED TO DECEDENT OR 5-PERCENT

16 SHAREHOLDERS.—

17 ‘‘(A) IN GENERAL.—If any portion of the

18 assets of the plan attributable to securities ac19 quired by the plan in a qualified gratuitous

20 transfer are allocated to the account of—

21 ‘‘(i) any person who is related to the

22 decedent (within the meaning of section

23 171(a)(5) or a member of the decedent’s

24 family (within the meaning of section

25 171(a)(6)(D), or
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1 ‘‘(ii) any person who, at the time of

2 such allocation or at any time during the

3 1-year period ending on the date of the ac4 quisition of qualified employer securities by

5 the plan, is a 5-percent shareholder of the

6 employer maintaining the plan, the plan

7 shall be treated as having distributed (at

8 the time of such allocation) to such person

9 or shareholder the amount so allocated.

10 ‘‘(B) 5-PERCENT SHAREHOLDER.—For

11 purposes of subparagraph (A), the term ‘5-per12 cent shareholder’ means any person who owns

13 (directly or through the application of construc14 tive ownership rules) more than 5 percent of

15 the outstanding stock of the corporation which

16 issued such qualified employer securities or of

17 any corporation which is a member of the same

18 controlled group of corporations (within the

19 meaning of section 409(l)(4)) as such corpora20 tion.

21 ‘‘(C) CROSS REFERENCE.—For excise tax

22 on allocations described in subparagraph (A),

23 see section 4979A.

24 ‘‘(6) TAX ON FAILURE TO TRANSFER

25 UNALLOCATED SECURITIES TO CHARITY ON TERMI-
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1 NATION OF PLAN.—If the requirements of paragraph

2 (3)(F) are not met with respect to any securities,

3 there is hereby imposed a tax on the employer main4 taining the plan in an amount equal to the sum of—

5 ‘‘(A) the amount of the increase in the tax

6 which would be imposed by chapter 11 if such

7 securities were not transferred as described in

8 paragraph (1), and

9 ‘‘(B) interest on such amount at the un10 derpayment rate under section 6621 (and com11 pounded daily) from the due date for filing the

12 return of the tax imposed by chapter 11.

13 ‘‘SEC. 150. DEFINITIONS APPLICABLE TO EXCESS DISTRIBU14 TION RULES.

15 ‘‘(a) UNDISTRIBUTED NET INCOME.—For purposes

16 of sections 150 through 152, the term ‘undistributed net

17 income’ for any taxable year means the amount by which

18 the distributable net income of the trust for such taxable

19 year exceeds the sum of—

20 ‘‘(1) the amounts for such taxable year speci21 fied in paragraphs (1) and (2) of section 146(a),

22 and

23 ‘‘(2) the amount of taxes imposed on the trust

24 attributable to such distributable net income.
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1 ‘‘(b) ACCUMULATION DISTRIBUTION.—For purposes

2 of sections 150 through 152, except as provided in sub3 section (c), the term ‘accumulation distribution’ means,

4 for any taxable year of the trust, the amount by which—

5 ‘‘(1) the amounts specified in paragraph (2) of

6 section 146(a) for such taxable year, exceed

7 ‘‘(2) distributable net income for such year re8 duced (but not below zero) by the amounts specified

9 in paragraph (1) of section 146(a).

10 For purposes of section 152 (other than subsection (c)

11 thereof, relating to multiple trusts), the amounts specified

12 in paragraph (2) of section 146(a) shall not include

13 amounts properly paid, credited, or required to be distrib14 uted to a beneficiary from a trust (other than a foreign

15 trust) as income accumulated before the birth of such ben16 eficiary or before such beneficiary attains the age of 21.

17 If the amounts properly paid, credited, or required to be

18 distributed by the trust for the taxable year do not exceed

19 the income of the trust for such year, there shall be no

20 accumulation distribution for such year.

21 ‘‘(c) EXCEPTION FOR ACCUMULATION DISTRIBU22 TIONS FROM CERTAIN DOMESTIC TRUSTS.—For purposes

23 of sections 150 through 152—

24 ‘‘(1) IN GENERAL.—In the case of a qualified

25 trust, any distribution in any taxable year beginning
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1 after the date of the enactment of this subsection

2 shall be computed without regard to any undistrib3 uted net income.

4 ‘‘(2) QUALIFIED TRUST.—For purposes of this

5 subsection, the term ‘qualified trust’ means any

6 trust other than—

7 ‘‘(A) a foreign trust (or, except as provided

8 in regulations, a domestic trust which at any

9 time was a foreign trust), or

10 ‘‘(B) a trust created before March 1, 1984,

11 unless it is established that the trust would not

12 be aggregated with other trusts under section

13 143(f) if such section applied to such trust.

14 ‘‘(d) TAXES IMPOSED ON THE TRUST.—For purposes

15 of sections 150 through 152—

16 ‘‘(1) IN GENERAL.—The term ‘taxes imposed

17 on the trust’ means the amount of the taxes which

18 are imposed for any taxable year of the trust under

19 this chapter (without regard to sections 150 through

20 152) and which, under regulations prescribed by the

21 Secretary, are properly allocable to the undistributed

22 portions of distributable net income and gains in ex23 cess of losses from sales or exchanges of capital as24 sets. The amount determined in the preceding sen25 tence shall be reduced by any amount of such taxes
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1 deemed distributed under section 151(b) and (c) to

2 any beneficiary.

3 ‘‘(2) FOREIGN TRUSTS.—In the case of any for4 eign trust, the term ‘taxes imposed on the trust’ in5 cludes the amount, reduced as provided in the last

6 sentence of paragraph (1), of any income, war prof7 its, and excess profits taxes imposed by any foreign

8 country or possession of the United States on such

9 foreign trust which, as determined under paragraph

10 (1), are so properly allocable. Under rules or regula11 tions prescribed by the Secretary, in the case of any

12 foreign trust of which the settlor or another person

13 would be treated as owner of any portion of the

14 trust but for section 154(f), the term ‘taxes imposed

15 on the trust’ includes the allocable amount of any

16 income, war profits, and excess profits taxes imposed

17 by any foreign country or possession of the United

18 States on the settlor or such other person in respect

19 of trust income.

20 ‘‘SEC. 151. ACCUMULATION DISTRIBUTION ALLOCATED TO

21 PRECEDING YEARS.

22 ‘‘(a) AMOUNT ALLOCATED.—In the case of a trust

23 which is subject to sections 146 through 149, the amount

24 of the accumulation distribution of such trust for a taxable

25 year shall be deemed to be an amount within the meaning
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1 of paragraph (2) of section 146(a) distributed on the last

2 day of each of the preceding taxable years, commencing

3 with the earliest of such years, to the extent that such

4 amount exceeds the total of any undistributed net income

5 for all earlier preceding taxable years. The amount deemed

6 to be distributed in any such preceding taxable year under

7 the preceding sentence shall not exceed the undistributed

8 net income for such preceding taxable year. For purposes

9 of this subsection, undistributed net income for each of

10 such preceding taxable years shall be computed without

11 regard to such accumulation distribution and without re12 gard to any accumulation distribution determined for any

13 succeeding taxable year.

14 ‘‘(b) TOTAL TAXES DEEMED DISTRIBUTED.—If any

15 portion of an accumulation distribution for any taxable

16 year is deemed under subsection (a) to be an amount with17 in the meaning of paragraph (2) of section 146(a) distrib18 uted on the last day of any preceding taxable year, and

19 such portion of such distribution is not less than the un20 distributed net income for such preceding taxable year, the

21 trust shall be deemed to have distributed on the last day

22 of such preceding taxable year an additional amount with23 in the meaning of paragraph (2) of section 146(a). Such

24 additional amount shall be equal to the taxes imposed on

25 the trust for such preceding taxable year attributable to
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1 the undistributed net income. For purposes of this sub2 section, the undistributed net income and the taxes im3 posed on the trust for such preceding taxable year attrib4 utable to such undistributed net income shall be computed

5 without regard to such accumulation distribution and

6 without regard to any accumulation distribution deter7 mined for any succeeding taxable year.

8 ‘‘(c) PRO RATA PORTION OF TAXES DEEMED DIS9 TRIBUTED.—If any portion of an accumulation distribu10 tion for any taxable year is deemed under subsection (a)

11 to be an amount within the meaning of paragraph (2) of

12 section 146(a) distributed on the last day of any preceding

13 taxable year and such portion of the accumulation dis14 tribution is less than the undistributed net income for such

15 preceding taxable year, the trust shall be deemed to have

16 distributed on the last day of such preceding taxable year

17 an additional amount within the meaning of paragraph (2)

18 of section 146(a). Such additional amount shall be equal

19 to the taxes imposed on the trust for such taxable year

20 attributable to the undistributed net income multiplied by

21 the ratio of the portion of the accumulation distribution

22 to the undistributed net income of the trust for such year.

23 For purposes of this subsection, the undistributed net in24 come and the taxes imposed on the trust for such pre25 ceding taxable year attributable to such undistributed net
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1 income shall be computed without regard to the accumula2 tion distribution and without regard to any accumulation

3 distribution determined for any succeeding taxable year.

4 ‘‘(d) RULE WHEN INFORMATION IS NOT AVAIL5 ABLE.—If adequate records are not available to determine

6 the proper application of this subchapter to an amount

7 distributed by a trust, such amount shall be deemed to

8 be an accumulation distribution consisting of undistrib9 uted net income earned during the earliest preceding tax10 able year of the trust in which it can be established that

11 the trust was in existence.

12 ‘‘(e) DENIAL OF REFUND TO TRUSTS AND BENE13 FICIARIES.—No refund or credit shall be allowed to a trust

14 or a beneficiary of such trust for any preceding taxable

15 year by reason of a distribution deemed to have been made

16 by such trust in such year under this section.

17 ‘‘SEC. 152. TREATMENT OF AMOUNTS DEEMED DISTRIB18 UTED BY TRUST IN PRECEDING YEARS.

19 ‘‘(a) GENERAL RULE.—The total of the amounts

20 which are treated under section 151 as having been dis21 tributed by a trust in a preceding taxable year shall be

22 included in the income of a beneficiary of the trust when

23 paid, credited, or required to be distributed to the extent

24 that such total would have been included in the income

25 of such beneficiary under section 147(a)(2) (and, with re-
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1 spect to any tax-exempt interest to which section 103 ap2 plies, under section 147(b)) if such total had been paid

3 to such beneficiary on the last day of such preceding tax4 able year. The tax imposed by this subtitle on a beneficiary

5 for a taxable year in which any such amount is included

6 in his income shall be determined only as provided in this

7 section and shall consist of the sum of—

8 ‘‘(1) a partial tax computed on the taxable in9 come reduced by an amount equal to the total of

10 such amounts, at the rate and in the manner as if

11 this section had not been enacted,

12 ‘‘(2) a partial tax determined as provided in

13 subsection (b) of this section, and

14 ‘‘(3) in the case of a foreign trust, the interest

15 charge determined as provided in section 152.

16 ‘‘(b) TAX ON DISTRIBUTION.—

17 ‘‘(1) IN GENERAL.—The partial tax imposed by

18 subsection (a)(2) shall be determined.

19 ‘‘(A) by determining the number of pre20 ceding taxable years of the trust on the last day

21 of which an amount is deemed under section

22 151(a) to have been distributed,

23 ‘‘(B) by taking from the 5 taxable years

24 immediately preceding the year of the accumu25 lation distribution the 1 taxable year for which
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1 the beneficiary’s taxable income was the highest

2 and the 1 taxable year for which his taxable in3 come was the lowest,

4 ‘‘(C) by adding to the beneficiary’s taxable

5 income for each of the 3 taxable years remain6 ing after the application of subparagraph (B)

7 an amount determined by dividing the amount

8 deemed distributed under section 151 and re9 quired to be included in income under sub10 section (a) by the number of preceding taxable

11 years determined under subparagraph (A), and

12 ‘‘(D) by determining the average increase

13 in tax for the 3 taxable years referred to in sub14 paragraph (C) resulting from the application of

15 such subparagraph.

16 The partial tax imposed by subsection (a)(2) shall be

17 the excess (if any) of the average increase in tax de18 termined under subparagraph (D), multiplied by the

19 number of preceding taxable years determined under

20 subparagraph (A), over the amount of taxes (other

21 than the amount of taxes described in section

22 150(d)(2)) deemed distributed to the beneficiary

23 under sections 151 (b) and (c).

24 ‘‘(2) TREATMENT OF LOSS YEARS.—For pur25 poses of paragraph (1), the taxable income of the
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1 beneficiary for any taxable year shall be deemed to

2 be not less than zero.

3 ‘‘(3) CERTAIN PRECEDING TAXABLE YEARS NOT

4 TAKEN INTO ACCOUNT.—For purposes of paragraph

5 (1), if the amount of the undistributed net income

6 deemed distributed in any preceding taxable year of

7 the trust is less than 25 percent of the amount of

8 the accumulation distribution divided by the number

9 of preceding taxable years to which the accumulation

10 distribution is allocated under section 151(a), the

11 number of preceding taxable years of the trust with

12 respect to which an amount is deemed distributed to

13 a beneficiary under section 151(a) shall be deter14 mined without regard to such year.

15 ‘‘(4) EFFECT OF OTHER ACCUMULATION DIS16 TRIBUTIONS.—In computing the partial tax under

17 paragraph (1) for any beneficiary, the income of

18 such beneficiary for each of his prior taxable years

19 shall include amounts previously deemed distributed

20 to such beneficiary in such year under section 151

21 as a result of prior accumulation distributions

22 (whether from the same or another trust).

23 ‘‘(5) MULTIPLE DISTRIBUTIONS IN THE SAME

24 TAXABLE YEAR.—In the case of accumulation dis25 tributions made from more than one trust which are
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1 includible in the income of a beneficiary in the same

2 taxable year, the distributions shall be deemed to

3 have been made consecutively in whichever order the

4 beneficiary shall determine. Generation-skipping

5 transfer bears to the total accumulation distribution.

6 ‘‘(c) SPECIAL RULE FOR MULTIPLE TRUSTS.—

7 ‘‘(1) IN GENERAL.—If, in the same prior tax8 able year of the beneficiary in which any part of the

9 accumulation distribution from a trust (hereinafter

10 in this paragraph referred to as ‘‘third trust’’) is

11 deemed under section 151(a) to have been distrib12 uted to such beneficiary, some part of prior distribu13 tions by each of 2 or more other trusts is deemed

14 under section 151(a) to have been distributed to

15 such beneficiary, then subsections (b) and (c) of sec16 tion 151 shall not apply with respect to such part

17 of the accumulation distribution from such third

18 trust.

19 ‘‘(2) ACCUMULATION DISTRIBUTIONS FROM

20 TRUST NOT TAKEN INTO ACCOUNT UNLESS THEY

21 EQUAL OR EXCEED $1,000.—For purposes of para22 graph (1), an accumulation distribution from a trust

23 to a beneficiary shall be taken into account only if

24 such distribution, when added to any prior accumu25 lation distributions from such trust which are
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1 deemed under section 151(a) to have been distrib2 uted to such beneficiary for the same prior taxable

3 year of the beneficiary, equals or exceeds $1,000.

4 ‘‘SEC. 153. TRUST INCOME, DEDUCTIONS, AND CREDITS AT5 TRIBUTABLE TO GRANTORS AND OTHERS AS

6 SUBSTANTIAL OWNERS.

7 ‘‘Where it is specified in sections 153 through 161

8 that the grantor or another person shall be treated as the

9 owner of any portion of a trust, there shall then be in10 cluded in computing the taxable income and credits of the

11 grantor or the other person those items of income, deduc12 tions, and credits against tax of the trust which are attrib13 utable to that portion of the trust to the extent that such

14 items would be taken into account under this chapter in

15 computing taxable income or credits against the tax of an

16 individual. Any remaining portion of the trust shall be

17 subject to sections 140 through 152. No items of a trust

18 shall be included in computing the taxable income and

19 credits of the grantor or of any other person solely on the

20 grounds of his dominion and control over the trust under

21 section 61 (relating to definition of gross income) or any

22 other provision of this title, except as specified in this sub23 part.
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1 ‘‘SEC. 154. DEFINITIONS AND RULES.

2 ‘‘(a) ADVERSE PARTY.—For purposes of sections 153

3 through 160, ‘adverse party’ means any person having a

4 substantial beneficial interest in the trust which would be

5 adversely affected by the exercise or nonexercise of the

6 power which he possesses respecting the trust. A person

7 having a general power of appointment over the trust

8 property shall be deemed to have a beneficial interest in

9 the trust.

10 ‘‘(b) NONADVERSE PARTY.—For purposes of sections

11 153 through 160, ‘nonadverse party’ means any person

12 who is not an adverse party.

13 ‘‘(c) RELATED OR SUBORDINATE PARTY.—For pur14 poses of sections 153 through 161, ‘related or subordinate

15 party’ means any nonadverse party who is—

16 ‘‘(1) the grantor’s spouse if living with the

17 grantor;

18 ‘‘(2) any one of the following: The grantor’s fa19 ther, mother, issue, brother or sister; an employee of

20 the grantor; a corporation or any employee of a cor21 poration in which the stock holdings of the grantor

22 and the trust are significant from the viewpoint of

23 voting control; a subordinate employee of a corpora24 tion in which the grantor is an executive.

25 For purposes of subsection (f) and sections 156 and 157,

26 a related or subordinate party shall be presumed to be
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1 subservient to the grantor in respect of the exercise or

2 nonexercise of the powers conferred on him unless such

3 party is shown not to be subservient by a preponderance

4 of the evidence.

5 ‘‘(d) RULE WHERE POWER IS SUBJECT TO CONDI6 TION PRECEDENT.—A person shall be considered to have

7 a power described in sections 153 through 161 even

8 though the exercise of the power is subject to a precedent

9 giving of notice or takes effect only on the expiration of

10 a certain period after the exercise of the power.

11 ‘‘(e) GRANTOR TREATED AS HOLDING ANY POWER

12 OR INTEREST OF GRANTOR’S SPOUSE.—

13 ‘‘(1) IN GENERAL.—For purposes of sections

14 153 through 160, a grantor shall be treated as hold15 ing any power or interest held by—

16 ‘‘(A) any individual who was the spouse of

17 the grantor at the time of the creation of such

18 power or interest, or

19 ‘‘(B) any individual who became the spouse

20 of the grantor after the creation of such power

21 or interest, but only with respect to periods

22 after such individual became the spouse of the

23 grantor.

24 ‘‘(2) MARITAL STATUS.—For purposes of para25 graph (1)(A), an individual legally separated from
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1 his spouse under a decree of divorce or of separate

2 maintenance shall not be considered as married.

3 ‘‘(f) RULES NOT TO RESULT IN FOREIGN OWNER4 SHIP.—

5 ‘‘(1) IN GENERAL.—Notwithstanding any other

6 provision in sections 153 through 160, sections 153

7 through 160 shall apply only to the extent such ap8 plication results in an amount (if any) being cur9 rently taken into account (directly or through 1 or

10 more entities) under this chapter in computing the

11 income of a citizen or resident of the United States

12 or a domestic corporation.

13 ‘‘(2) EXCEPTIONS.—

14 ‘‘(A) CERTAIN REVOCABLE AND IRREV15 OCABLE TRUSTS.—Paragraph (1) shall not

16 apply to any portion of a trust if—

17 ‘‘(i) the power to revest absolutely in

18 the grantor title to the trust property to

19 which such portion is attributable is exer20 cisable solely by the grantor without the

21 approval or consent of any other person or

22 with the consent of a related or subordi23 nate party who is subservient to the grant24 or, or
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1 ‘‘(ii) the only amounts distributable

2 from such portion (whether income or cor3 pus) during the lifetime of the grantor are

4 amounts distributable to the grantor or the

5 spouse of the grantor.

6 ‘‘(B) COMPENSATORY TRUSTS.—Except as

7 provided in regulations, paragraph (1) shall not

8 apply to any portion of a trust distributions

9 from which are taxable as compensation for

10 services rendered.

11 ‘‘(3) SPECIAL RULES.—Except as otherwise

12 provided in regulations prescribed by the Secretary,

13 a controlled foreign corporation shall be treated as

14 a domestic corporation for purposes of paragraph

15 (1).

16 ‘‘(4) RECHARACTERIZATION OF PURPORTED

17 GIFTS.—In the case of any transfer directly or indi18 rectly from a partnership or foreign corporation

19 which the transferee treats as a gift or bequest, the

20 Secretary may recharacterize such transfer in such

21 circumstances as the Secretary determines to be ap22 propriate to prevent the avoidance of the purposes of

23 this subsection.

24 ‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR25 EIGN PERSON.—If—
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1 ‘‘(A) but for this subsection, a foreign per2 son would be treated as the owner of any por3 tion of a trust, and

4 ‘‘(B) such trust has a beneficiary who is a

5 United States person,

6 such beneficiary shall be treated as the grantor of

7 such portion to the extent such beneficiary has made

8 (directly or indirectly) transfers of property (other

9 than in a sale for full and adequate consideration)

10 to such foreign person.

11 ‘‘(6) REGULATIONS.—The Secretary shall pre12 scribe such regulations as may be necessary or ap13 propriate to carry out the purposes of this sub14 section, including regulations providing that para15 graph (1) shall not apply in appropriate cases.

16 ‘‘SEC. 155. REVERSIONARY INTERESTS.

17 ‘‘(a) GENERAL RULE.—The grantor shall be treated

18 as the owner of any portion of a trust in which he has

19 a reversionary interest in either the corpus or the income

20 therefrom, if, as of the inception of that portion of the

21 trust, the value of such interest exceeds 5 percent of the

22 value of such portion.

23 ‘‘(b) REVERSIONARY INTEREST TAKING EFFECT AT

24 DEATH OF MINOR LINEAL DESCENDANT BENE25 FICIARY.—In the case of any beneficiary who—
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1 ‘‘(1) is a lineal descendant of the grantor, and

2 ‘‘(2) holds all of the present interests in any

3 portion of a trust,

4 the grantor shall not be treated under subsection (a) as

5 the owner of such portion solely by reason of a rever6 sionary interest in such portion which takes effect upon

7 the death of such beneficiary before such beneficiary at8 tains age 21.

9 ‘‘(c) SPECIAL RULE FOR DETERMINING VALUE OF

10 REVERSIONARY INTEREST.—For purposes of subsection

11 (a), the value of the grantor’s reversionary interest shall

12 be determined by assuming the maximum exercise of dis13 cretion in favor of the grantor.

14 ‘‘(d) POSTPONEMENT OF DATE SPECIFIED FOR RE15 ACQUISITION.—Any postponement of the date specified for

16 the reacquisition of possession or enjoyment of the rever17 sionary interest shall be treated as a new transfer in trust

18 commencing with the date on which the postponement is

19 effective and terminating with the date prescribed by the

20 postponement. However, income for any period shall not

21 be included in the income of the grantor by reason of the

22 preceding sentence if such income would not be so includ23 ible in the absence of such postponement.
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1 ‘‘SEC. 156. POWER TO CONTROL BENEFICIAL ENJOYMENT.

2 ‘‘(a) GENERAL RULE.—The grantor shall be treated

3 as the owner of any portion of a trust in respect of which

4 the beneficial enjoyment of the corpus or the income there5 from is subject to a power of disposition, exercisable by

6 the grantor or a nonadverse party, or both, without the

7 approval or consent of any adverse party.

8 ‘‘(b) EXCEPTIONS FOR CERTAIN POWERS.—Sub9 section (a) shall not apply to the following powers regard10 less of by whom held:

11 ‘‘(1) POWER TO APPLY INCOME TO SUPPORT OF

12 A DEPENDENT.—A power described in section

13 159(b) to the extent that the grantor would not be

14 subject to tax under that section.

15 ‘‘(2) POWER AFFECTING BENEFICIAL ENJOY16 MENT ONLY AFTER OCCURRENCE OF EVENT.—A

17 power, the exercise of which can only affect the ben18 eficial enjoyment of the income for a period com19 mencing after the occurrence of an event such that

20 a grantor would not be treated as the owner under

21 section 155 if the power were a reversionary inter22 est; but the grantor may be treated as the owner

23 after the occurrence of the event unless the power is

24 relinquished.

25 ‘‘(3) POWER EXERCISABLE ONLY BY WILL.—A

26 power exercisable only by will, other than a power in
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1 the grantor to appoint by will the income of the

2 trust where the income is accumulated for such dis3 position by the grantor or may be so accumulated in

4 the discretion of the grantor or a nonadverse party,

5 or both, without the approval or consent of any ad6 verse party.

7 ‘‘(4) POWER TO ALLOCATE AMONG CHARITABLE

8 BENEFICIARIES.—A power to determine the bene9 ficial enjoyment of the corpus or the income there10 from if the corpus or income is irrevocably payable

11 for a purpose specified in section 101(c) (relating to

12 definition of charitable contributions) or to an em13 ployee stock ownership plan (as defined in section

14 4975(e)(7)) in a qualified gratuitous transfer (as de15 fined in section 149(g)(1)).

16 ‘‘(5) POWER TO DISTRIBUTE CORPUS.—A

17 power to distribute corpus either—

18 ‘‘(A) to or for a beneficiary or beneficiaries

19 or to or for a class of beneficiaries (whether or

20 not income beneficiaries) provided that the

21 power is limited by a reasonably definite stand22 ard which is set forth in the trust instrument;

23 or

24 ‘‘(B) to or for any current income bene25 ficiary, provided that the distribution of corpus
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1 must be chargeable against the proportionate

2 share of corpus held in trust for the payment

3 of income to the beneficiary as if the corpus

4 constituted a separate trust.

5 A power does not fall within the powers described in

6 this paragraph if any person has a power to add to

7 the beneficiary or beneficiaries or to a class of bene8 ficiaries designated to receive the income or corpus,

9 except where such action is to provide for after-born

10 or after-adopted children.

11 ‘‘(6) POWER TO WITHHOLD INCOME TEMPO12 RARILY.—A power to distribute or apply income to

13 or for any current income beneficiary or to accumu14 late the income for him, provided that any accumu15 lated income must ultimately be payable—

16 ‘‘(A) to the beneficiary from whom dis17 tribution or application is withheld, to his es18 tate, or to his appointees (or persons named as

19 alternate takers in default of appointment) pro20 vided that such beneficiary possesses a power of

21 appointment which does not exclude from the

22 class of possible appointees any person other

23 than the beneficiary, his estate, his creditors, or

24 the creditors of his estate, or
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1 ‘‘(B) on termination of the trust, or in con2 junction with a distribution of corpus which is

3 augmented by such accumulated income, to the

4 current income beneficiaries in shares which

5 have been irrevocably specified in the trust in6 strument.

7 Accumulated income shall be considered so payable

8 although it is provided that if any beneficiary does

9 not survive a date of distribution which could rea10 sonably have been expected to occur within the bene11 ficiary’s lifetime, the share of the deceased bene12 ficiary is to be paid to his appointees or to one or

13 more designated alternate takers (other than the

14 grantor or the grantor’s estate) whose shares have

15 been irrevocably specified. A power does not fall

16 within the powers described in this paragraph if any

17 person has a power to add to the beneficiary or

18 beneficiaries or to a class of beneficiaries designated

19 to receive the income or corpus except where such

20 action is to provide for after-born or after-adopted

21 children.

22 ‘‘(7) POWER TO WITHHOLD INCOME DURING

23 DISABILITY OF A BENEFICIARY.—A power exer24 cisable only during—
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1 ‘‘(A) the existence of a legal disability of

2 any current income beneficiary, or

3 ‘‘(B) the period during which any income

4 beneficiary shall be under the age of 21 years,

5 to distribute or apply income to or for such bene6 ficiary or to accumulate and add the income to cor7 pus. A power does not fall within the powers de8 scribed in this paragraph if any person has a power

9 to add to the beneficiary or beneficiaries or to a

10 class of beneficiaries designated to receive the in11 come or corpus, except where such action is to pro12 vide for after-born or after-adopted children.

13 ‘‘(8) POWER TO ALLOCATE BETWEEN CORPUS

14 AND INCOME.—A power to allocate receipts and dis15 bursements as between corpus and income, even

16 though expressed in broad language.

17 ‘‘(c) EXCEPTION FOR CERTAIN POWERS OF INDE18 PENDENT TRUSTEES.—Subsection (a) shall not apply to

19 a power solely exercisable (without the approval or consent

20 of any other person) by a trustee or trustees, none of

21 whom is the grantor, and no more than half of whom are

22 related or subordinate parties who are subservient to the

23 wishes of the grantor—
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1 ‘‘(1) to distribute, apportion, or accumulate in2 come to or for a beneficiary or beneficiaries, or to,

3 for, or within a class of beneficiaries; or

4 ‘‘(2) to pay out corpus to or for a beneficiary

5 or beneficiaries or to or for a class of beneficiaries

6 (whether or not income beneficiaries).

7 A power does not fall within the powers described in this

8 subsection if any person has a power to add to the bene9 ficiary or beneficiaries or to a class of beneficiaries des10 ignated to receive the income or corpus, except where such

11 action is to provide for after-born or after-adopted chil12 dren. For periods during which an individual is the spouse

13 of the grantor (within the meaning of section 154(e)(2)),

14 any reference in this subsection to the grantor shall be

15 treated as including a reference to such individual.

16 ‘‘(d) POWER TO ALLOCATE INCOME IF LIMITED BY

17 A STANDARD.—Subsection (a) shall not apply to a power

18 solely exercisable (without the approval or consent of any

19 other person) by a trustee or trustees, none of whom is

20 the grantor or spouse living with the grantor, to distribute,

21 apportion, or accumulate income to or for a beneficiary

22 or beneficiaries, or to, for, or within a class of bene23 ficiaries, whether or not the conditions of paragraph (6)

24 or (7) of subsection (b) are satisfied, if such power is lim25 ited by a reasonably definite external standard which is
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1 set forth in the trust instrument. A power does not fall

2 within the powers described in this subsection if any per3 son has a power to add to the beneficiary or beneficiaries

4 or to a class of beneficiaries designated to receive the in5 come or corpus except where such action is to provide for

6 after-born or after-adopted children.

7 ‘‘SEC. 157. ADMINISTRATIVE POWERS.

8 ‘‘The grantor shall be treated as the owner of any

9 portion of a trust in respect of which—

10 ‘‘(1) POWER TO DEAL FOR LESS THAN ADE11 QUATE AND FULL CONSIDERATION.—A power exer12 cisable by the grantor or a nonadverse party, or

13 both, without the approval or consent of any adverse

14 party enables the grantor or any person to purchase,

15 exchange, or otherwise deal with or dispose of the

16 corpus or the income therefrom for less than an ade17 quate consideration in money or money’s worth.

18 ‘‘(2) POWER TO BORROW WITHOUT ADEQUATE

19 INTEREST OR SECURITY.—A power exercisable by

20 the grantor or a nonadverse party, or both, enables

21 the grantor to borrow the corpus or income, directly

22 or indirectly, without adequate interest or without

23 adequate security except where a trustee (other than

24 the grantor) is authorized under a general lending
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1 power to make loans to any person without regard

2 to interest or security.

3 ‘‘(3) BORROWING OF THE TRUST FUNDS.—The

4 grantor has directly or indirectly borrowed the cor5 pus or income and has not completely repaid the

6 loan, including any interest, before the beginning of

7 the taxable year. The preceding sentence shall not

8 apply to a loan which provides for adequate interest

9 and adequate security, if such loan is made by a

10 trustee other than the grantor and other than a re11 lated or subordinate trustee subservient to the

12 grantor. For periods during which an individual is

13 the spouse of the grantor (within the meaning of

14 section 154(e)(2)), any reference in this paragraph

15 to the grantor shall be treated as including a ref16 erence to such individual.

17 ‘‘(4) GENERAL POWERS OF ADMINISTRATION.—

18 A power of administration is exercisable in a non19 fiduciary capacity by any person without the ap20 proval or consent of any person in a fiduciary capac21 ity. For purposes of this paragraph, the term ‘power

22 of administration’ means any one or more of the fol23 lowing powers: (A) a power to vote or direct the vot24 ing of stock or other securities of a corporation in

25 which the holdings of the grantor and the trust are
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1 significant from the viewpoint of voting control; (B)

2 a power to control the investment of the trust funds

3 either by directing investments or reinvestments, or

4 by vetoing proposed investments or reinvestments, to

5 the extent that the trust funds consist of stocks or

6 securities of corporations in which the holdings of

7 the grantor and the trust are significant from the

8 viewpoint of voting control; or (C) a power to reac9 quire the trust corpus by substituting other property

10 of an equivalent value.

11 ‘‘SEC. 158. POWER TO REVOKE.

12 ‘‘(a) GENERAL RULE.—The grantor shall be treated

13 as the owner of any portion of a trust, whether or not

14 he is treated as such owner under any other provision of

15 this part, where at any time the power to revest in the

16 grantor title to such portion is exercisable by the grantor

17 or a non-adverse party, or both.

18 ‘‘(b) POWER AFFECTING BENEFICIAL ENJOYMENT

19 ONLY AFTER OCCURRENCE OF EVENT.—Subsection (a)

20 shall not apply to a power the exercise of which can only

21 affect the beneficial enjoyment of the income for a period

22 commencing after the occurrence of an event such that

23 a grantor would not be treated as the owner under section

24 155 if the power were a reversionary interest. But the
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1 grantor may be treated as the owner after the occurrence

2 of such event unless the power is relinquished.

3 ‘‘SEC. 159. INCOME FOR BENEFIT OF GRANTOR.

4 ‘‘(a) GENERAL RULE.—The grantor shall be treated

5 as the owner of any portion of a trust, whether or not

6 he is treated as such owner under section 156, whose in7 come without the approval or consent of any adverse party

8 is, or, in the discretion of the grantor or a nonadverse

9 party, or both, may be—

10 ‘‘(1) distributed to the grantor or the grantor’s

11 spouse;

12 ‘‘(2) held or accumulated for future distribution

13 to the grantor or the grantor’s spouse; or

14 ‘‘(3) applied to the payment of premiums on

15 policies of insurance on the life of the grantor or the

16 grantor’s spouse (except policies of insurance irrev17 ocably payable for a purpose specified in section

18 101(c) (relating to definition of charitable contribu19 tions)).

20 This subsection shall not apply to a power the exercise

21 of which can only affect the beneficial enjoyment of the

22 income for a period commencing after the occurrence of

23 an event such that the grantor would not be treated as

24 the owner under section 153 if the power were a rever25 sionary interest; but the grantor may be treated as the
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1 owner after the occurrence of the event unless the power

2 is relinquished.

3 ‘‘(b) OBLIGATIONS OF SUPPORT.—Income of a trust

4 shall not be considered taxable to the grantor under sub5 section (a) or any other provision of this chapter merely

6 because such income in the discretion of another person,

7 the trustee, or the grantor acting as trustee or co-trustee,

8 may be applied or distributed for the support or mainte9 nance of a beneficiary (other than the grantor’s spouse)

10 whom the grantor is legally obligated to support or main11 tain, except to the extent that such income is so applied

12 or distributed. In cases where the amounts so applied or

13 distributed are paid out of corpus or out of other than

14 income for the taxable year, such amounts shall be consid15 ered to be an amount paid or credited within the meaning

16 of paragraph (2) of section 146(a) and shall be taxed to

17 the grantor under section 147.

18 ‘‘SEC. 160. PERSON OTHER THAN GRANTOR TREATED AS

19 SUBSTANTIAL OWNER.

20 ‘‘(a) GENERAL RULE.—A person other than the

21 grantor shall be treated as the owner of any portion of

22 a trust with respect to which:

23 ‘‘(1) such person has a power exercisable solely

24 by himself to vest the corpus or the income there25 from in himself, or
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1 ‘‘(2) such person has previously partially re2 leased or otherwise modified such a power and after

3 the release or modification retains such control as

4 would, within the principles of sections 153 to 159,

5 inclusive, subject a grantor of a trust to treatment

6 as the owner thereof.

7 ‘‘(b) EXCEPTION WHERE GRANTOR IS TAXABLE.—

8 Subsection (a) shall not apply with respect to a power over

9 income, as originally granted or thereafter modified, if the

10 grantor of the trust or a transferor (to whom section 161

11 applies) is otherwise treated as the owner under sections

12 153 through 159 or section 161.

13 ‘‘(c) OBLIGATIONS OF SUPPORT.—Subsection (a)

14 shall not apply to a power which enables such person, in

15 the capacity of trustee or cotrustee, merely to apply the

16 income of the trust to the support or maintenance of a

17 person whom the holder of the power is obligated to sup18 port or maintain except to the extent that such income

19 is so applied. In cases where the amounts so applied or

20 distributed are paid out of corpus or out of other than

21 income of the taxable year, such amounts shall be consid22 ered to be an amount paid or credited within the meaning

23 of paragraph (2) of section 146(a) and shall be taxed to

24 the holder of the power under section 147.
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1 ‘‘(d) EFFECT OF RENUNCIATION OR DISCLAIMER.—

2 Subsection (a) shall not apply with respect to a power

3 which has been renounced or disclaimed within a reason4 able time after the holder of the power first became aware

5 of its existence.

6 ‘‘SEC. 161. FOREIGN TRUSTS HAVING ONE OR MORE

7 UNITED STATES BENEFICIARIES.

8 ‘‘(a) TRANSFEROR TREATED AS OWNER.—

9 ‘‘(1) IN GENERAL.—A United States person

10 who directly or indirectly transfers property to a for11 eign trust (other than a trust described in section

12 6048(a)(3)(B)(ii)) shall be treated as the owner for

13 his taxable year of the portion of such trust attrib14 utable to such property if for such year there is a

15 United States beneficiary of any portion of such

16 trust.

17 ‘‘(2) EXCEPTIONS.—Paragraph (1) shall not

18 apply—

19 ‘‘(A) TRANSFERS BY REASON OF DEATH.—

20 To any transfer by reason of the death of the

21 transferor.

22 ‘‘(B) TRANSFERS AT FAIR MARKET

23 VALUE.—To any transfer of property to a trust

24 in exchange for consideration of at least the fair

25 market value of the transferred property. For
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1 purposes of the preceding sentence, consider2 ation other than cash shall be taken into ac3 count at its fair market value.

4 ‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO

5 ACCOUNT UNDER FAIR MARKET VALUE EXCEP6 TION.—

7 ‘‘(A) IN GENERAL.—In determining wheth8 er paragraph (2)(B) applies to any transfer by

9 a person described in clause (ii) or (iii) of sub10 paragraph (C), there shall not be taken into

11 account—

12 ‘‘(i) except as provided in regulations,

13 any obligation of a person described in

14 subparagraph (C), and

15 ‘‘(ii) to the extent provided in regula16 tions, any obligation which is guaranteed

17 by a person described in subparagraph (C).

18 ‘‘(B) TREATMENT OF PRINCIPAL PAY19 MENTS ON OBLIGATION.—Principal payments

20 by the trust on any obligation referred to in

21 subparagraph (A) shall be taken into account

22 on and after the date of the payment in deter23 mining the portion of the trust attributable to

24 the property transferred.
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1 ‘‘(C) PERSONS DESCRIBED.—The persons

2 described in this subparagraph are—

3 ‘‘(i) the trust,

4 ‘‘(ii) any grantor, owner, or bene5 ficiary of the trust, and

6 ‘‘(iii) any person who is related (with7 in the meaning of section 143(i)(2)(B) to

8 any grantor, owner, or beneficiary of the

9 trust.

10 ‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN

11 GRANTOR WHO LATER BECOMES A UNITED STATES

12 PERSON.—

13 ‘‘(A) IN GENERAL.—If a nonresident alien

14 individual has a residency starting date within

15 5 years after directly or indirectly transferring

16 property to a foreign trust, this section and sec17 tion 6048 shall be applied as if such individual

18 transferred to such trust on the residency start19 ing date an amount equal to the portion of such

20 trust attributable to the property transferred by

21 such individual to such trust in such transfer.

22 ‘‘(B) TREATMENT OF UNDISTRIBUTED IN23 COME.—For purposes of this section, undistrib24 uted net income for periods before such individ25 ual’s residency starting date shall be taken into
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1 account in determining the portion of the trust

2 which is attributable to property transferred by

3 such individual to such trust but shall not oth4 erwise be taken into account.

5 ‘‘(C) RESIDENCY STARTING DATE.—For

6 purposes of this paragraph, an individual’s resi7 dency starting date is the residency starting

8 date determined under section 7701(b)(2)(A).

9 ‘‘(5) OUTBOUND TRUST MIGRATIONS.—If—

10 ‘‘(A) an individual who is a citizen or resi11 dent of the United States transferred property

12 to a trust which was not a foreign trust, and

13 ‘‘(B) such trust becomes a foreign trust

14 while such individual is alive, then this section

15 and section 6048 shall be applied as if such in16 dividual transferred to such trust on the date

17 such trust becomes a foreign trust an amount

18 equal to the portion of such trust attributable

19 to the property previously transferred by such

20 individual to such trust. A rule similar to the

21 rule of paragraph (4)(B) shall apply for pur22 poses of this paragraph.

23 ‘‘(b) TRUSTS ACQUIRING UNITED STATES BENE24 FICIARIES.—If—
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1 ‘‘(1) subsection (a) applies to a trust for the

2 transferor’s taxable year, and

3 ‘‘(2) subsection (a) would have applied to the

4 trust for his immediately preceding taxable year but

5 for the fact that for such preceding taxable year

6 there was no United States beneficiary for any por7 tion of the trust,

8 then, for purposes of this chapter, the transferor shall be

9 treated as having income for the taxable year (in addition

10 to his other income for such year) equal to the undistrib11 uted net income (at the close of such immediately pre12 ceding taxable year) attributable to the portion of the

13 trust referred to in subsection (a).

14 ‘‘(c) TRUSTS TREATED AS HAVING A UNITED

15 STATES BENEFICIARY.—

16 ‘‘(1) IN GENERAL.—For purposes of this sec17 tion, a trust shall be treated as having a United

18 States beneficiary for the taxable year unless—

19 ‘‘(A) under the terms of the trust, no part

20 of the income or corpus of the trust may be

21 paid or accumulated during the taxable year to

22 or for the benefit of a United States person,

23 and

24 ‘‘(B) if the trust were terminated at any

25 time during the taxable year, no part of the in-
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1 come or corpus of such trust could be paid to

2 or for the benefit of a United States person.

3 ‘‘(2) ATTRIBUTION OF OWNERSHIP.—For pur4 poses of paragraph (1), an amount shall be treated

5 as paid or accumulated to or for the benefit of a

6 United States person if such amount is paid to or

7 accumulated for a foreign corporation, foreign part8 nership, or foreign trust or estate, and—

9 ‘‘(A) in the case of a foreign corporation,

10 such corporation is a controlled foreign corpora11 tion,

12 ‘‘(B) in the case of a foreign partnership,

13 a United States person is a partner of such

14 partnership, or

15 ‘‘(C) in the case of a foreign trust or es16 tate, such trust or estate has a United States

17 beneficiary (within the meaning of paragraph

18 (1)).

19 ‘‘(3) CERTAIN UNITED STATES BENEFICIARIES

20 DISREGARDED.—A beneficiary shall not be treated

21 as a United States person in applying this section

22 with respect to any transfer of property to foreign

23 trust if such beneficiary first became a United

24 States person more than 5 years after the date of

25 such transfer.
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1 ‘‘(d) REGULATIONS.—The Secretary shall prescribe

2 such regulations as may be necessary or appropriate to

3 carry out the purposes of this section.

4 ‘‘SEC. 162. LIMITATION ON CHARITABLE DEDUCTION.

5 ‘‘In computing the deduction allowable under section

6 142(c) to a trust, no amount otherwise allowable under

7 section 142(c) as a deduction shall be allowed as a deduc8 tion with respect to income of the taxable year which is

9 allocable to unrelated business income for such year.

10 ‘‘SEC. 163. INCOME OF AN ESTATE OR TRUST IN CASE OF DI11 VORCE, ETC.

12 ‘‘(a) INCLUSION IN GROSS INCOME OF WIFE.—There

13 shall be included in the gross income of a wife who is di14 vorced or legally separated under a decree of divorce or

15 of separate maintenance (or who is separated from her

16 husband under a written separation agreement) the

17 amount of the income of any trust which such wife is enti18 tled to receive and which, except for this section, would

19 be includible in the gross income of her husband, and such

20 amount shall not, despite any other provision of this sub21 title, be includible in the gross income of such husband.

22 This subsection shall not apply to that part of any such

23 income of the trust which the terms of the decree, written

24 separation agreement, or trust instrument fix, in terms

25 of an amount of money or a portion of such income, as
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1 a sum which is payable for the support of minor children

2 of such husband. In case such income is less than the

3 amount specified in the decree, agreement, or instrument,

4 for the purpose of applying the preceding sentence, such

5 income, to the extent of such sum payable for such sup6 port, shall be considered a payment for such support.

7 ‘‘(b) WIFE CONSIDERED A BENEFICIARY.—For pur8 poses of computing the taxable income of the estate or

9 trust and the taxable income of a wife to whom subsection

10 (a) applies, such wife shall be considered as the bene11 ficiary.

12 ‘‘(c) CROSS REFERENCE.—For definitions of ‘hus13 band’ and ‘wife’, as used in this section, see section

14 7701(a)(17).

15 ‘‘SEC. 164. RECOGNITION OF GAIN ON CERTAIN TRANSFERS

16 TO CERTAIN FOREIGN TRUSTS AND ESTATES.

17 ‘‘(a) IN GENERAL.—Except as provided in regula18 tions, in the case of any transfer of property by a United

19 States person to a foreign estate or trust, for purposes

20 of this subtitle, such transfer shall be treated as a sale

21 or exchange for an amount equal to the fair market value

22 of the property transferred, and the transferor shall recog23 nize as gain the excess of—

24 ‘‘(1) the fair market value of the property so

25 transferred, over
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1 ‘‘(2) the adjusted basis (for purposes of deter2 mining gain) of such property in the hands of the

3 transferor.

4 ‘‘(b) EXCEPTION.—Subsection (a) shall not apply to

5 a transfer to a trust by a United States person to the

6 extent that any person is treated as the owner of such

7 trust under section 153.

8 ‘‘(c) TREATMENT OF TRUSTS WHICH BECOME FOR9 EIGN TRUSTS.—If a trust which is not a foreign trust be10 comes a foreign trust, such trust shall be treated for pur11 poses of this section as having transferred, immediately

12 before becoming a foreign trust, all of its assets to a for13 eign trust.

14 ‘‘SEC. 165. TREATMENT OF FUNERAL TRUSTS.

15 ‘‘(a) IN GENERAL.—In the case of a qualified funeral

16 trust, sections 144 through 161 shall not apply, and no

17 deduction shall be allowed by section 142(b).

18 ‘‘(b) QUALIFIED FUNERAL TRUST.—‘Qualified fu19 neral trust’ means any trust (other than a foreign trust)

20 if—

21 ‘‘(1) the trust arises as a result of a contract

22 with a person engaged in the trade or business of

23 providing funeral or burial services or property nec24 essary to provide such services,
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1 ‘‘(2) the sole purpose of the trust is to hold, in2 vest, and reinvest funds in the trust and to use such

3 funds solely to make payments for such services or

4 property for the benefit of the beneficiaries of the

5 trust,

6 ‘‘(3) the only beneficiaries of such trust are in7 dividuals with respect to whom such services or

8 property are to be provided at their death under

9 contracts described in paragraph (1),

10 ‘‘(4) the only contributions to the trust are con11 tributions by or for the benefit of such beneficiaries,

12 ‘‘(5) the trustee elects the application of this

13 subsection, and

14 ‘‘(6) the trust would (but for the election de15 scribed in paragraph (5)) be treated as owned under

16 sections 153 through 161 by the purchasers of the

17 contracts described in paragraph (1).

18 ‘‘(c) DOLLAR LIMITATION ON CONTRIBUTIONS.—

19 ‘‘(1) IN GENERAL.—Any trust which accepts

20 aggregate contributions by or for the benefit of an

21 individual in excess of $7,000 shall not be a quali22 fied funeral trust.

23 ‘‘(2) RELATED TRUSTS.—For purposes of para24 graph (1), all trusts having trustees which are re25 lated persons shall be treated as 1 trust. For pur-
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1 poses of the preceding sentence, persons are related

2 if—

3 ‘‘(A) the relationship between such persons

4 is described in section 171(a)(5), or

5 ‘‘(B) the Secretary determines that treat6 ing such persons as related is necessary to pre7 vent avoidance of the purposes of this section.

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

9 any contract referred to in subsection (b)(1) which

10 is entered into during any calendar year after 2001,

11 the dollar amount referred to in paragraph (1) shall

12 be adjusted for inflation in accordance with section

13 23.

14 ‘‘(d) APPLICATION OF RATE SCHEDULE.—Section

15 140(b) shall be applied to each qualified funeral trust by

16 treating each beneficiary’s interest in each such trust as

17 a separate trust.

18 ‘‘(e) TREATMENT OF AMOUNTS REFUNDED TO PUR19 CHASER ON CANCELLATION.—No gain or loss shall be rec20 ognized to a purchaser of a contract described in sub21 section (b)(1) by reason of any payment from such trust

22 to such purchaser by reason of cancellation of such con23 tract. If any payment referred to in the preceding sentence

24 consists of property other than money, the basis of such

25 property in the hands of such purchaser shall be the same
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1 as the trust’s basis in such property immediately before

2 the payment.

3 ‘‘(f) SIMPLIFIED REPORTING.—The Secretary may

4 prescribe rules for simplified reporting of all trusts having

5 a single trustee.

6 ‘‘SEC. 166. INCOME IN RESPECT OF A DECEDENT.

7 ‘‘(a) INCLUSION IN GROSS INCOME.—

8 ‘‘(1) GENERAL USE.—The amount of all items

9 of gross income in respect of a decedent which are

10 not properly includible in respect of a taxable period

11 in which falls the date of his death, or a prior pe12 riod, shall be included in gross income, for the tax13 able year when received, of—

14 ‘‘(A) the estate of the decedent, if the right

15 to receive the amount is acquired by the dece16 dent’s estate,

17 ‘‘(B) the person who, by reason of the

18 death of the decedent, acquires the right to re19 ceive the amount, if the right to receive the

20 amount is not acquired by the decedent’s estate

21 from the decedent,

22 ‘‘(C) the person who acquires from the de23 cedent the right to receive the amount by be24 quest, devise or inheritance, if the amount is re-
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1 ceived after a distribution by the decedent’s es2 tate of such right.

3 ‘‘(2) DEFINITION.—The Secretary shall pre4 scribe regulations on the treatment of income from

5 sales of rights to receive income and installment

6 sales.

7 ‘‘(b) The amount of any homeowner deduction or for8 eign tax credit in respect of a decedent which is not prop9 erly allowable to the decedent with respect to the taxable

10 period in which falls the date of his death, or a prior pe11 riod, shall be allowed in accordance with regulations that

12 reflect the principles of section 691(b) of the Internal Rev13 enue Code of 1986.

14 ‘‘Subchapter J—Definitions and Rules of

15 Application

‘‘Sec. 171. Definitions.

‘‘Sec. 172. Rules of application.

16 ‘‘SEC. 171. DEFINITIONS.

17 ‘‘(a) IN GENERAL.—When used in this chapter,

18 where not otherwise distinctly expressed or manifestly in19 compatible with the intent thereof—

20 ‘‘(1) BUSINESS ENTITY.—The definition of

21 ‘business entity’ in section 206 (relating to the busi22 ness tax) shall apply.

23 ‘‘(2) BUSINESS TAX.—‘Business tax’ and ‘Sim24 plified USA Tax for businesses’ mean the tax im-
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1 posed by section 201 and, to the extent required by

2 the context, the provisions of chapter 2.

3 ‘‘(3) INTERNAL REVENUE CODE OF 1986.—‘In4 ternal Revenue Code of 1986’ means the Internal

5 Revenue Code of 1986 as in effect immediately be6 fore the enactment of the Simplified USA Tax Act

7 of 2001.

8 ‘‘(4) UNITED STATES.—‘United States’ means

9 the States and the District of Columbia.

10 ‘‘(5) RELATED PARTY.—‘Related party’

11 means—

12 ‘‘(A) Members of a family, as defined in

13 paragraph (6)(D);

14 ‘‘(B) An individual and a business entity

15 more than 50 percent in value of which is

16 owned, directly or indirectly, by or for such in17 dividual (applying rules of constructive owner18 ship);

19 ‘‘(C) Two business entities that are eligible

20 to file a consolidated return under chapter 2;

21 ‘‘(D) A grantor and a fiduciary of any

22 trust;

23 ‘‘(E) A fiduciary of a trust and a fiduciary

24 of another trust, if the same person is a grantor

25 of both trusts;
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1 ‘‘(F) A fiduciary of a trust and a bene2 ficiary of such trust;

3 ‘‘(G) A fiduciary of a trust and a bene4 ficiary of another trust, if the same person is

5 a grantor of both trusts;

6 ‘‘(H) A fiduciary of a trust and a corpora7 tion more than 50 percent in value of the out8 standing stock of which is owned, directly or in9 directly, by or for the trust or by or for a per10 son who is a grantor of the trust;

11 ‘‘(I) A person and an organization to

12 which section 251 (relating to certain edu13 cational and charitable organizations which are

14 exempt from tax) applies and which is con15 trolled directly or indirectly by such person or

16 (if such person is an individual) by members of

17 the family of such individual;

18 ‘‘(J) Two business entities if the same per19 sons own more than 50 percent of the value of

20 each (applying rules of constructive ownership),

21 with value measured by—

22 ‘‘(i) the value of the outstanding stock

23 in the case of a corporation,

24 ‘‘(ii) the capital interest or the profits

25 interest, whichever is greater, in the case
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1 of a partnership or limited liability com2 pany;

3 ‘‘(K) Except in the case of a sale or ex4 change in satisfaction of a pecuniary bequest,

5 an executor of an estate and a beneficiary of

6 such estate.

7 ‘‘(6) CONSTRUCTIVE OWNERSHIP.—For pur8 poses of determining, in applying paragraph (5), the

9 ownership of a business entity—

10 ‘‘(A) Stock or other equity interest owned,

11 directly or indirectly, by or for a corporation,

12 partnership, estate, or trust shall be considered

13 as being owned proportionately by or for its

14 shareholders, partners, or beneficiaries;

15 ‘‘(B) An individual shall be considered as

16 owning the stock or other equity interest owned,

17 directly or indirectly, by or for his family;

18 ‘‘(C) An individual owning (otherwise than

19 by the application of subparagraph (B)) any

20 stock in a corporation or other equity interest

21 in another form of business entity shall be con22 sidered as owning the stock owned, directly or

23 indirectly, by or for his partner;

24 ‘‘(D) The family of an individual shall in25 clude only his brothers and sisters (whether by
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1 the whole or half blood), spouse, ancestors, and

2 lineal descendants; and

3 ‘‘(E) Stock or other equity interest con4 structively owned by a person by reason of the

5 application of subparagraph (A) shall, for the

6 purpose of applying subparagraph (A), (B), or

7 (C), be treated as actually owned by such per8 son, but stock or other equity interest construc9 tively owned by an individual by reason of the

10 application of subparagraph (B) or (C) shall

11 not be treated as owned by him for the purpose

12 of again applying either of such paragraphs in

13 order to make another the constructive owner of

14 such stock or equity interest.

15 ‘‘(6) EARNED INCOME.—

16 ‘‘(A) IN GENERAL.—‘Earned income’

17 means—

18 ‘‘(i) wages, salaries, tips, and other

19 employee compensation, plus

20 ‘‘(ii) the amount of the taxpayer’s net

21 earnings from self-employment for the tax22 able year (within the meaning of section

23 1402(a)).

24 ‘‘(B) SPECIAL RULES.—For purposes of

25 subparagraph (A)—
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1 ‘‘(i) the earned income of an indi2 vidual shall be computed without regard to

3 any community property laws,

4 ‘‘(ii) no amount received as a pension

5 or annuity shall be taken into account,

6 ‘‘(iii) no income of nonresident alien

7 individuals not connected with United

8 States business shall be taken into ac9 count, and

10 ‘‘(iv) no amount received for services

11 provided by an individual while the indi12 vidual is an inmate at a penal institution

13 shall be taken into account.

14 ‘‘(b) TERMS DEFINED IN CHAPTER 1.—If a term

15 that is used but not defined in this chapter or in section

16 7701 is defined in chapter 2, the definition in chapter 2

17 shall apply except if manifestly incompatible with the in18 tent of the provision in which the term is used.

19 ‘‘SEC. 172. RULES OF APPLICATION.

20 ‘‘(a) DEFINITIONS.—Any definition included in this

21 chapter shall apply for all purposes of this chapter

22 unless—

23 ‘‘(1) such definition is limited to the purposes

24 of a particular chapter, section, or subsection, or
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1 ‘‘(2) the definition clearly would not be applica2 ble in a particular context.

3 ‘‘(b) INTERPRETATIONS CONSISTENT WITH INTER4 NAL REVENUE CODE OF 1986.—Terms not defined in this

5 chapter or elsewhere in this title, but defined in the Inter6 nal Revenue Code of 1986, shall be interpreted in a man7 ner consistent with the Internal Revenue Code of 1986,

8 except to the extent such interpretation would be incon9 sistent with the principles and purposes of this chapter.’’

10 (c) EXEMPTION FROM PROHIBITED TRANSACTION

11 TAX.—Section 4975(g) of the Code is amended by—

12 (1) striking ‘‘or’’ at the end of paragraph (2),

13 (2) deleting the period at the end of paragraph

14 (3) and inserting ‘‘; or’’,

15 (3) and inserting the following new paragraph

16 (4):

17 ‘‘(4) to a Roth IRA in the case of a loan to or

18 equity investment in a controlled business entity as

19 permitted by section 30(f)).’’
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1 TITLE III—SIMPLIFIED USA TAX

2 FOR BUSINESSES

3 SEC. 301. REPEAL OF CORPORATE INCOME TAX; NEW TAX

4 PAID BY CORPORATIONS AND OTHER BUSI5 NESSES.

6 (a) IN GENERAL.—Chapter 2 of the Internal Rev7 enue Code is renumbered chapter 3 and following new

8 chapter is inserted after chapter 1:

9 ‘‘CHAPTER 2—SIMPLIFIED USA TAX FOR

10 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.

11 ‘‘Subchapter A—Imposition of Tax

‘‘Sec. 201. Tax imposed.

12 ‘‘SEC. 201. TAX IMPOSED.

13 ‘‘(a) TAXABLE BUSINESS ACTIVITY.—A tax is im14 posed on the sale of goods and services in the United

15 States by a business entity. The amount of the tax equals

16 the amount by which—
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1 ‘‘(1) the business tax exceeds,

2 ‘‘(2) the payroll tax credit.

3 ‘‘(b) BUSINESS TAX IMPOSED.—

4 ‘‘(1) IN GENERAL.—The ‘business tax’ imposed

5 on a business entity that sells or leases property or

6 sells services in the United States equals the sum

7 of—

8 ‘‘(A) 8 percent of the portion of the gross

9 profits of the business entity for the taxable

10 year that does not exceed $150,000, and

11 ‘‘(B) 12 percent of such portion of the

12 gross profits of the business entity for the tax13 able year that exceeds $150,000.

14 ‘‘(2) LIMITATION ON APPLICATION OF BENE15 FITS OF GRADUATED RATE SCHEDULE.—The Sec16 retary shall prescribe rules under which the gross

17 profits of business entities under common control

18 are aggregated for purposes of applying the benefit

19 of the lower rate described in subparagraph (A) of

20 paragraph (1). Such rules shall be similar to rules

21 applicable under sections 1551 and 1561 of the In22 ternal Revenue Code of 1986.

23 ‘‘(c) PAYROLL TAX CREDIT.—The ‘payroll tax credit’

24 is a credit for the social security, railroad retirement and

25 hospital insurance taxes paid by an employer, as deter-
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1 mined in accordance with subchapter L (sections 281

2 through 283).

3 ‘‘(d) IMPORT TAX.—For rules relating to the import

4 tax imposed by this chapter, see subchapter M (sections

5 286 through 288).

6 ‘‘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.

7 ‘‘SEC. 202. GROSS PROFITS.

8 ‘‘ ‘Gross profits’ means for a taxable year of a busi9 ness entity the amount by which—

10 ‘‘(1) the taxable receipts of the business entity

11 for the taxable year exceed,

12 ‘‘(2) the deductible amounts for the business

13 entity for the taxable year.

14 ‘‘SEC. 203. TAXABLE RECEIPTS.

15 ‘‘(a) IN GENERAL.—‘Taxable receipts’ means all re16 ceipts from the sale of property, use of property, and per17 formance of services in the United States.

18 ‘‘(b) GAMES OF CHANCE.—Amounts received for

19 playing games of chance by business entities engaging in

20 the activity of providing such games shall be treated as

21 receipts from the sale of property or services.
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1 ‘‘(c) IN-KIND RECEIPTS.—The taxable receipts at2 tributable to the receipt of property, use of property or

3 services in whole or partial exchange for property, use of

4 property or services equal the fair market value of the

5 services or property received.

6 ‘‘(d) TAXES.—Taxable receipts do not include any ex7 cise tax, sales tax, custom duty, or other separately stated

8 levy imposed by a Federal, State, or local government re9 ceived by a business entity in connection with the sale of

10 property or services or the use of property.

11 ‘‘(e) FINANCIAL RECEIPTS.—

12 ‘‘(1) IN GENERAL.—Except as provided in sub13 chapter G (relating to financial intermediation and

14 financial institutions), taxable receipts do not in15 clude financial receipts.

16 ‘‘(2) FINANCIAL RECEIPTS.—‘Financial re17 ceipts’ include—

18 ‘‘(A) interest,

19 ‘‘(B) dividends and other distributions by a

20 business entity,

21 ‘‘(C) proceeds from the sale of stock, other

22 ownership interests in business entities, or

23 other financial instruments (as defined in sec24 tion 242(b)(3)),

25 ‘‘(D) proceeds from life insurance policies,
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1 ‘‘(E) proceeds from annuities,

2 ‘‘(F) proceeds from currency hedging or

3 exchanges, and

4 ‘‘(G) proceeds from other financial trans5 actions.

6 ‘‘(f) CROSS REFERENCES.—

7 ‘‘(1) FINANCIAL INTERMEDIATION.—See sub8 chapters F and G for rules relating to financial

9 intermediation.

10 ‘‘(2) EXPORTS, SALES IN THE UNITED

11 STATES.—See subchapter J for the exclusion from

12 gross receipts for export sales and for rules on sales

13 of property and services in the United States.

14 ‘‘(3) LAND.—See subchapter E for rules relat15 ing to certain sales of land.

16 ‘‘(4) INSURANCE PROCEEDS.—See section 237

17 for rules on the inclusion of certain insurance pro18 ceeds in taxable receipts.

19 ‘‘SEC. 204. DEDUCTIBLE AMOUNTS.

20 ‘‘(a) IN GENERAL.—‘Deductible amounts’ for a busi21 ness entity in a taxable year include—

22 ‘‘(1) the cost of business purchases in the tax23 able year (as determined under section 205),

24 ‘‘(2) such entity’s loss carryover deduction (as

25 determined under section 207) , and
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1 ‘‘(3) the transition basis deduction (as deter2 mined under section 290).

3 ‘‘(b) FINANCIAL INTERMEDIATION.—See subchapters

4 F and G for special rules for business entities engaging

5 in financial intermediation.

6 ‘‘SEC. 205. COST OF BUSINESS PURCHASES.

7 ‘‘(a) BUSINESS PURCHASES.—

8 ‘‘(1) IN GENERAL.—‘Business purchases’ means

9 the acquisition of—

10 ‘‘(A) property,

11 ‘‘(B) the use of property, or

12 ‘‘(C) services

13 in the United States for use in a business activity.

14 ‘‘(2) EXAMPLES.—Business purchases include

15 (without limitation) the—

16 ‘‘(A) purchase or rental of real property,

17 ‘‘(B) purchase or rental of capital equip18 ment,

19 ‘‘(C) purchase of supplies and inventory,

20 ‘‘(D) purchase of services from inde21 pendent contractors,

22 ‘‘(E) purchase of financial intermediation

23 services (as determined in accordance with sec24 tion 236),
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1 ‘‘(F) purchase of a business loss policy (as

2 determined in accordance with section 237),

3 and

4 ‘‘(G) imports for use in a business activity.

5 ‘‘(3) EXCLUSIONS.—Business purchases do not

6 include—

7 ‘‘(A) payments for use of money or capital,

8 such as interest or dividends (except to the ex9 tent that a portion so paid is a fee for financial

10 intermediation services),

11 ‘‘(B) premiums for life insurance,

12 ‘‘(C) the acquisition of savings assets or

13 other financial instruments (as defined in sec14 tion 242(b)(3)).

15 ‘‘(D) property acquired outside the United

16 States (but such property shall be taken into

17 account as an import if imported),

18 ‘‘(E) services performed outside the United

19 States (unless treated as imported into the

20 United States),

21 ‘‘(F) compensation expenses for an indi22 vidual (other than amounts paid to an indi23 vidual in his capacity as a business entity), or

24 ‘‘(G) taxes (except as provided in sub25 section (b)(2) relating to product taxes).
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1 ‘‘(4) COMPENSATION EXPENSES.—‘Compensa2 tion expenses’ means—

3 ‘‘(A) wages, salaries or other cash payable

4 for services,

5 ‘‘(B) any taxes imposed on the recipient

6 that are withheld by the business entity,

7 ‘‘(C) the cost of property purchased to pro8 vide employees with compensation (other than

9 property incidental to the provision of fringe

10 benefits that are excluded from income under

11 the individual tax),

12 ‘‘(D) the cost of fringe benefits which are

13 includible in an employee’s, partner’s, or propri14 etor’s income under the Simplified USA Income

15 Tax (or are excluded solely because they con16 stitute employee savings), including (without

17 limitation)—

18 ‘‘(i) contributions to retirement and

19 severance benefit plans,

20 ‘‘(ii) premiums for the cost of life,

21 health, accident, disability and other insur22 ance policies for which the service provider,

23 members of his family, or persons des24 ignated by him or members of his family

25 are the beneficiaries,
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1 ‘‘(iii) rental of parking spaces or park2 ing fees (unless the parking space is used

3 for a vehicle that is regularly used in a

4 business activity);

5 ‘‘(iv) employer paid educational bene6 fits;

7 ‘‘(v) employer paid housing (other

8 than housing provided for the convenience

9 of the employer); and

10 ‘‘(vi) employer paid meals (other than

11 meals provided for the convenience of the

12 employer).

13 ‘‘(b) COST OF BUSINESS PURCHASES.—

14 ‘‘(1) IN GENERAL.—The ‘cost of a business

15 purchase’ is the amount paid or to be paid for the

16 business purchase.

17 ‘‘(2) TAXES.—

18 ‘‘(A) IN GENERAL.—The ‘cost of business

19 purchases’ includes any product taxes paid with

20 respect to the property or services purchased.

21 ‘‘(B) PRODUCT TAX.—‘Product tax’ means

22 any excise tax, sales or use tax, custom duty, or

23 other separately stated levy imposed by a Fed24 eral, State, or local government on the produc25 tion, severance or consumption of property or
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1 on the provision of services, whether or not sep2 arately stated, and including any such taxes

3 that are technically imposed on the seller of

4 property or services.

5 ‘‘(C) TAXES NOT PRODUCT TAXES.—Prod6 uct taxes do not include—

7 ‘‘(i) the import tax,

8 ‘‘(ii) state and local property taxes,

9 ‘‘(iii) franchise or income taxes,

10 ‘‘(iv) payroll taxes and self-employ11 ment taxes, or

12 ‘‘(v) the business tax.

13 ‘‘(3) IMPORTS.—In the case of an import by a

14 business entity, the cost of the import is the import

15 price for purposes of the import tax. The import tax

16 is not part of the cost of the import.

17 ‘‘(c) PROPERTY AND SERVICES ACQUIRED FOR

18 PROPERTY.—If a business entity receives property or serv19 ices from a business entity in whole or partial exchange

20 for property or services, the property or services acquired

21 shall be treated as if they were purchased for an amount

22 equal to the fair market value of the services or property

23 received. For purposes of this section, property includes

24 stock and other equity interests in business other than

25 stock or an equity interest in the business entity acquiring
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1 the property or services. See section 210(b) for rules on

2 property or services received in exchange for an equity in3 terest in the recipient.

4 ‘‘(d) GAMBLING PAYMENTS.—In the case of a busi5 ness involving gambling, lotteries, or other games of

6 chance, business purchases include amounts paid to win7 ners.

8 ‘‘(e) SAVINGS ASSETS.—‘Savings assets’ means

9 stocks, bonds, securities, certificates of deposits, invest10 ments in partnerships and limited liability companies,

11 shares of mutual funds, life insurance policies, annuities,

12 and other similar savings or investment assets.

13 ‘‘(f) CROSS REFERENCES.—

14 ‘‘(1) FINANCIAL INTERMEDIATION AND INSUR15 ANCE.—For rules relating to fees for financial inter16 mediation services and insurance, see subchapter F.

17 ‘‘(2) LAND.—For special rules relating to the

18 acquisition of land, see subchapter E.

19 ‘‘(3) RENTAL REAL ESTATE.—For special rules

20 relating to the rental of real estate previously occu21 pied by an owner of the real estate, see section 232.

22 ‘‘(4) OUTSIDE THE UNITED STATES.—For spe23 cial rules relating to services performed outside the

24 United States but used inside the United States and

25 international services, see subchapter J.
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1 ‘‘SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY.

2 ‘‘(a) BUSINESS ENTITY.—For purposes of the busi3 ness tax, ‘business entity’ means any corporation, unincor4 porated association, partnership, limited liability company,

5 proprietorship, independent contractor, individual, or any

6 other person engaging in business activity in the United

7 States. An individual shall be considered a business entity

8 only with respect to the individual’s business activities.

9 ‘‘(b) BUSINESS ACTIVITY.—‘Business activity’ means

10 the sale of property or services, the leasing of property,

11 the development of property or services for subsequent

12 sale or use in producing property or services for subse13 quent sale. ‘Business activity’ does not include casual or

14 occasional sales of property used by an individual (other

15 than in a business activity), such as the sale by an indi16 vidual of a vehicle used by the individual.

17 ‘‘(c) EXCEPTION FOR CERTAIN EMPLOYEES.—

18 ‘‘(1) IN GENERAL.—‘Business activity’ does not

19 include—

20 ‘‘(A) the performance of services by an em21 ployee for an employer that is a business entity

22 with respect to the activity in which the em23 ployee is engaged, or

24 ‘‘(B) the performance of regular domestic

25 household services (including babysitting,

26 housecleaning, and lawn cutting) by an em-
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1 ployee of an employer that is an individual or

2 family.

3 ‘‘(2) EMPLOYEE DEFINED.—For purposes of

4 this subsection, ‘employee’ includes an individual

5 partner who provides services to a partnership or an

6 individual member who provides services to a limited

7 liability company, or a proprietor with respect to

8 compensation for services from his proprietorship.

9 ‘‘SEC. 207. LOSS CARRYOVER DEDUCTION.

10 ‘‘(a) DEDUCTION.—The ‘loss carryover deduction’ for

11 a taxable year is the lesser of—

12 ‘‘(1) the business entity’s gross profits for the

13 taxable year (determined without the loss carryover

14 deduction), or

15 ‘‘(2) the amount of the loss carryover to the

16 taxable year.

17 ‘‘(b) LOSS CARRYOVER.—

18 ‘‘(1) GENERAL RULE.—A loss for any taxable

19 year shall be a loss carryover to each of the 215 tax20 able years following the taxable year of the loss.

21 ‘‘(2) LOSS CARRYOVERS TO A TAXABLE YEAR.—

22 The loss carryover to a taxable year is the sum of

23 the loss carryovers from all prior taxable years be24 ginning on or after January 1, 2002, that can be

25 carried over to the taxable year.
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1 ‘‘(3) REDUCTION OF LOSS CARRYOVERS AS A

2 RESULT OF THE DEDUCTION.—A business entity’s

3 loss carryovers shall be reduced each year by the

4 amount of the loss carryover deduction for the year.

5 Loss carryovers shall be reduced in the order that

6 they arose.

7 ‘‘(c) LOSS FOR TAXABLE YEAR.—A business entity’s

8 loss (if any) for the taxable year equals the excess (if any)

9 of—

10 ‘‘(1) the sum of—

11 ‘‘(A) the cost of business purchases for the

12 taxable year, and

13 ‘‘(B) the transition basis adjustment for

14 the taxable year, over

15 ‘‘(2) taxable receipts for the taxable year.

16 ‘‘(d) SPECIAL RULES.—

17 ‘‘(1) CONSOLIDATED RETURNS.—In the case of

18 a consolidated return, the loss for a taxable year

19 shall be determined on a consolidated group basis.

20 In the case of a deconsolidation, the loss carryovers

21 from the consolidated group shall be allocated in ac22 cordance with rules to be prescribed by the Sec23 retary.

24 ‘‘(2) LOSS CARRYOVERS OF ACQUIRED BUSI25 NESS ENTITY.—
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1 ‘‘(A) IN GENERAL.—If a business entity

2 acquires another business entity in a trans3 action that is considered the acquisition of a

4 business entity and the two entities file a con5 solidated return or if two business entities

6 merge, the loss carryovers will survive and can

7 be applied against the taxable receipts attrib8 utable to the business activities carried on (or

9 in the case of a merger formerly carried on) by

10 either entity.

11 ‘‘(B) ASSET ACQUISITION.—If a business

12 entity acquires all or substantially all of the as13 sets of another entity in a transaction that is

14 considered an asset acquisition rather than the

15 acquisition of a business entity, the acquirer

16 will be treated as if it acquired the loss

17 carryovers of the selling entity. For purposes of

18 this rule, the assets of a business entity include

19 ownership interests in other business entities.

20 ‘‘(C) SUBSTANTIALLY ALL.—For purposes

21 of this paragraph ‘substantially all’ means more

22 than 80 percent of the fair market value of a

23 business entity’s net assets. Under rules pre24 scribed by the Secretary, the parties to a trans25 action may elect to treat acquisitions in excess
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1 of 70 percent of the fair market value of a busi2 ness entity’s net assets as acquisitions of ‘sub3 stantially all’ of a business entity’s net assets.

4 ‘‘Subchapter C—Capital Contributions,

5 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.

6 ‘‘SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.

7 ‘‘(a) BY BUSINESS ENTITY.—

8 ‘‘(1) CASH.—If a business entity contributes

9 cash to a business entity of which it is or becomes

10 a partial or full owner, the amount contributed is

11 not a deductible amount to the contributor or a tax12 able receipt to the recipient.

13 ‘‘(2) PROPERTY OR SERVICES.—If a business

14 entity contributes property or services to a business

15 entity of which it is or becomes a partial or full

16 owner, the transaction will not result in taxable re17 ceipts to the contributor or a deduction for a busi18 ness purchase for the recipient and will not con19 stitute a sale resulting in taxable receipts to the con20 tributor.

21 ‘‘(b) BY INDIVIDUAL.—
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1 ‘‘(1) CASH.—If an individual contributes cash

2 to a business entity, the cash received is not a tax3 able receipt.

4 ‘‘(2) NEW PROPERTY.—If an individual contrib5 utes to a business entity property that the individual

6 purchased for the business entity but which was not

7 used by any person after its purchase, the property

8 shall be considered purchased by such business enti9 ty from the person from which the individual pur10 chased the property.

11 ‘‘(3) PERSONAL USE PROPERTY.—

12 ‘‘(A) IN GENERAL.—If an individual con13 tributes personal use property to a business en14 tity in which the individual has an ownership

15 interest or for which the individual receives an

16 ownership interest, the business entity shall not

17 be permitted to deduct the value of the property

18 received as a business expense. The business

19 entity will have a tax basis in the contributed

20 property equal to the contributor’s basis.

21 ‘‘(B) PERSONAL USE PROPERTY.—‘Per22 sonal use property’ means any property used by

23 an individual at any time other than in a busi24 ness activity.
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1 ‘‘(4) SERVICES.—If an individual contributes

2 services to a business entity in which the individual

3 has an ownership interest or receives an ownership

4 interest, the business entity shall not be permitted to

5 deduct the value of the services received (or the

6 value of the equity interest provided to the services

7 provider).

8 ‘‘SEC. 211. DISTRIBUTIONS OF PROPERTY.

9 ‘‘(a) DISTRIBUTIONS OTHER THAN TO CONTROL10 LING BUSINESS.—If a business entity distributes all or a

11 portion of its assets to its owners (other than a controlling

12 business entity), the business entity will be treated as if

13 it sold the assets to its owners at fair market value. The

14 fair market value will be determined by the distributing

15 corporation and those determinations, unless unreason16 able, will be binding on the recipients.

17 ‘‘(b) DISTRIBUTIONS TO A CONTROLLING BUSI18 NESS.—If a business entity distributes all or a portion of

19 its assets to a controlling business, the controlling busi20 ness will assume the distributing entity’s tax attributes

21 with respect to the assets and neither entity will have tax22 able receipts or a deduction as a result of the transaction.

23 ‘‘(c) DISTRIBUTION OF PERSONAL USE PROP24 ERTY.—If personal use property is distributed to the indi25 vidual who contributed the personal use property to a busi-
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1 ness entity, the fair market value of the property for pur2 poses of paragraph (a) shall equal the basis of the prop3 erty plus any enhancement in value of the property attrib4 utable to business purchases with respect to the property.

5 ‘‘(d) CONTROLLING BUSINESS ENTITY.—A business

6 entity is a ‘controlling business entity’ with respect to an7 other business entity if it owns directly or indirectly more

8 than 50 percent of the profits or capital interest in the

9 other business entity.

10 ‘‘(e) APPLICATION OF THIS SECTION.—This section

11 applies to both liquidating and nonliquidating distribu12 tions. Property shall be treated as distributed if the prop13 erty is used for a nonbusiness purpose (as defined in sec14 tion 232) for more than an insubstantial period of time

15 during a taxable year. See section 232 for rules relating

16 to certain rental property.

17 ‘‘SEC. 212. ASSET ACQUISITIONS.

18 ‘‘(a) IN GENERAL.—If a business entity transfers

19 some or all of its assets, the consideration received for

20 such assets shall be allocated among the assets transferred

21 in the same manner as was required by section 1060 of

22 the Internal Revenue Code of 1986. If the transferee and

23 transferor agree in writing on the allocation of any consid24 eration, or as to the fair market value of any of the assets,

25 such agreement shall be binding on both the transferor
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1 and transferee unless the Secretary determines that such

2 allocation (or fair market value) is not appropriate.

3 ‘‘(b) TAX CONSEQUENCES.—The tax consequences of

4 an asset acquisition shall be determined in accordance

5 with the rules of this chapter and shall be dependent upon

6 allocations made under subsection (a). In general, consid7 eration allocable to savings assets, such as stock in an8 other business entity, would not be included in taxable re9 ceipts of the transferor and would not be a business pur10 chase of the purchaser, but consideration allocable to the

11 sale of tangible property and intangible property (other

12 than savings assets) will constitute taxable receipts of the

13 seller and a business purchase of the purchaser.

14 ‘‘(c) ELECTION TO TREAT ASSET ACQUISITION AS A

15 STOCK ACQUISITION.—In the case of the sale of substan16 tially all of the assets of a business entity or substantially

17 all of the assets of a line of business or a separately stand18 ing business of a business entity, the transferee and trans19 feror can jointly elect to treat the acquisition as if it were

20 an acquisition of the stock of a business entity holding

21 the assets so transferred. In such case, the rules of section

22 213 shall apply.

23 ‘‘(d) AUTHORITY TO REQUIRE ALLOCATION AGREE24 MENT AND NOTICE TO THE SECRETARY.—If the Sec25 retary determines that certain types of asset acquisitions
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1 have significant possibilities of tax avoidance, the Sec2 retary may require—

3 ‘‘(1) parties to such types of acquisitions to

4 enter into agreements allocating consideration,

5 ‘‘(2) parties to acquisitions involving certain

6 kinds of assets to enter into agreements allocating

7 part of the consideration to those assets, or

8 ‘‘(3) parties to certain acquisitions to report in9 formation to the Secretary.

10 ‘‘(e) ASSET ACQUISITION RULES DO NOT APPLY IF

11 CONSIDERATION INCLUDES EQUITY IN PURCHASER.—

12 ‘‘(1) IN GENERAL.—If a business entity issues

13 its own equity or equity in a subsidiary or other con14 trolled entity as part of the consideration for the

15 transfer of assets to it, the transaction shall not be

16 treated as an asset acquisition and the rules of sec17 tion 13 shall apply.

18 ‘‘(2) EQUITY.—For purposes of this subsection,

19 equity means—

20 ‘‘(A) stock, in the case of a corporation,

21 ‘‘(B) partnership or similar interest, in the

22 case of a partnership or limited liability com23 pany, and

24 ‘‘(C) an ownership interest or interest in

25 profits in the case of any other business entity.
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1 ‘‘SEC. 213. MERGERS AND STOCK ACQUISITIONS.

2 ‘‘(a) MERGERS.—A merger of one business entity

3 into another or two businesses entities into a third busi4 ness entity or any other similar transaction shall have no

5 direct consequences under the business tax. The surviving

6 entity shall assume the tax attributes of the merged cor7 porations, including any loss carryovers and credit

8 carryovers.

9 ‘‘(b) STOCK ACQUISITION.—The acquisition of all or

10 substantially all of the ownership interest in one business

11 entity either for cash or in exchange for ownership in the

12 acquiring entity or an entity controlled by the acquired

13 entity shall have no direct consequences under the busi14 ness tax.

15 ‘‘SEC. 214. SPIN-OFFS, SPLIT-OFFS, ETC.

16 ‘‘A spin-off, split-off or split-up of a business entity

17 shall have no direct tax consequences under the business

18 tax.

19 ‘‘SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES.

20 ‘‘The Secretary shall prescribe rules for allocation of

21 loss carryovers and payroll tax credit carryovers in cases

22 of substantial shifts of assets from one business entity to

23 another business entity. Under such rules, a portion of a

24 business entity’s carryovers may be deemed transferred

25 when assets are transferred.
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1 ‘‘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.

2 ‘‘SEC. 220. GENERAL ACCOUNTING RULES.

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

4 221, a business entity shall use an accrual method of ac5 counting for purposes of determining the timing of rec6 ognition of taxable receipts and deduction of business pur7 chases. All business purchases shall be deducted when in8 curred (in the case of a business entity using the accrual

9 method of accounting) or when paid (in case of a business

10 entity using the cash method of accounting) without re11 gard to whether the business purchases are for or relate

12 to—

13 ‘‘(1) inventory,

14 ‘‘(2) assets with a useful life of more than one

15 year, or

16 ‘‘(3) property that will be used to produce other

17 property.

18 ‘‘(b) ECONOMIC PERFORMANCE.—For purposes of

19 determining whether an amount has been incurred, the all

20 events test shall not be treated as met any earlier than

21 when economic performance with respect to such item oc22 curs.
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1 ‘‘(c) CONSISTENT ACCOUNTING METHODS.—Except

2 as otherwise expressly provided in this chapter, a business

3 entity shall secure the consent of the Secretary before

4 changing the method of accounting by which it determines

5 gross profits. This provision shall not apply to changes

6 required by the adoption of the business tax.

7 ‘‘SEC. 221. USE OF THE CASH METHOD OF ACCOUNTING.

8 ‘‘(a) IN GENERAL.—A business entity that was per9 mitted to use and used the cash method of accounting

10 under the Internal Revenue Code of 1986 shall be per11 mitted to continue to use the cash method of accounting.

12 ‘‘(b) NEW BUSINESS ENTITIES.—A new business en13 tity shall be permitted to use the cash method of account14 ing if permitted to under regulations prescribed by the

15 Secretary.

16 ‘‘(c) CHANGE OR EXPANSION OF BUSINESS.—Sub17 section (a) shall cease to apply to a business entity that

18 changes or expands its business such that under regula19 tions prescribed by the Secretary it is no longer eligible

20 to use the cash method of accounting.

21 ‘‘(d) REGULATIONS.—

22 ‘‘(1) USE OF CASH METHOD.—The Secretary

23 shall prescribe regulations defining which business

24 entities may use the cash method of accounting. In

25 general, those regulations shall be consistent with
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1 the rules under sections 447 and 448 of the Internal

2 Revenue Code of 1986, except that all corporations

3 shall be treated as C corporations were treated

4 under those sections. The regulations shall not re5 quire a business entity described in subsection (a) to

6 convert to the accrual method prior to January 1,

7 2003.

8 ‘‘(2) CHANGE IN ACCOUNTING METHOD.—The

9 Secretary shall prescribe regulations to prevent dou10 ble counting of taxable receipts and deductible ex11 penses in the case of a change in accounting method.

12 ‘‘SEC. 222. TAXABLE YEAR.

13 ‘‘(a) COMPUTATION OF GROSS PROFITS.—Gross

14 profits shall be computed on the basis of a business enti15 ty’s taxable year.

16 ‘‘(b) TAXABLE YEAR.—‘Taxable year’ means—

17 ‘‘(1) the taxpayer’s annual accounting period, if

18 it is a calendar year or a fiscal year;

19 ‘‘(2) the calendar year, if subsection (g) applies;

20 or

21 ‘‘(3) the period for which the return is made if

22 the return is made for a period of less than 12

23 months.
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1 ‘‘(c) ANNUAL ACCOUNTING PERIOD.—‘Annual ac2 counting period’ means the annual period on the basis of

3 which the business entity regularly keeps its books.

4 ‘‘(d) CALENDAR YEAR.—‘Calendar year’ means a pe5 riod of 12 months ending on December 31.

6 ‘‘(e) FISCAL YEAR.—‘Fiscal year’ means a period of

7 12 months ending on the last day of any month other than

8 December. In the case of any business entity that has

9 made the election provided by subsection (f), the term

10 means the annual period (varying from 52 to 53 weeks)

11 so elected.

12 ‘‘(f) ELECTION OF 52–53 WEEK YEAR.—

13 ‘‘(1) GENERAL RULE.—A business entity which,

14 in keeping its books, regularly computes its income

15 or profits on a basis of an annual period which var16 ies from 52 to 53 weeks and ends always on the

17 same day of the week and ends always—

18 ‘‘(A) on whatever date such same day of

19 the week last occurs in a calendar month, or

20 ‘‘(B) on whatever date such same day of

21 the week falls which is nearest to the last day

22 of a calendar month,

23 may elect to compute its gross profits on the basis

24 of such annual period.
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1 ‘‘(2) REGULATIONS.—The Secretary shall pre2 scribe such regulations as he deems necessary for

3 the application of this subsection, including regula4 tions relating to the application of effective dates to

5 taxpayers using a 52–53 week year.

6 ‘‘(g) CALENDAR YEAR REQUIRED.—

7 ‘‘(1) NO ACCOUNTING PERIOD.—A business en8 tity’s taxable year shall be the calendar year if the

9 business entity does not have an annual accounting

10 period or has an annual accounting period that does

11 not qualify as a fiscal year.

12 ‘‘(2) NEW BUSINESS ENTITY.—The taxable

13 year of a business entity that begins business activ14 ity after December 31, 2001, shall be the calendar

15 year (or a 52–53 week fiscal year ending in Decem16 ber) unless the business entity can demonstrate a

17 business reason for selecting an accounting period

18 other than the calendar year.

19 ‘‘(h) TRANSITION RULE FOR BUSINESS ENTITIES

20 WITH A FISCAL YEAR.—

21 ‘‘(1) IN GENERAL.—A business entity with a

22 taxable year that is not the calendar year shall have

23 a short taxable year ending on December 31, 2001,

24 and a subsequent taxable year beginning on January

25 1, 2002, and ending on the day immediately pre-
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1 ceding the beginning of the business entity’s next

2 fiscal year.

3 ‘‘(2) BUSINESS ENTITIES WITH 52–53 WEEK

4 YEAR ENDING IN DECEMBER.—

5 ‘‘(A) IN GENERAL.—If a business entity

6 has a 52–53 week taxable year (under the In7 ternal Revenue Code of 1986) that ends in De8 cember 2001, it may elect to begin its first tax9 able year for the business tax on the first day

10 immediately following the last day of such tax11 able year.

12 ‘‘(B) NO ELECTION.—If a business entity

13 that has a 52–53 week taxable year that ends

14 in December 2001, does not make the election

15 under subparagraph (A) or is prohibited from

16 making such election by subparagraph (C), the

17 business entity’s taxable year under the Inter18 nal Revenue Code of 1986 that would end in

19 December 2001 shall end on December 31,

20 2001.

21 ‘‘(C) ANTI-ABUSE RULE.—Subparagraph

22 (A) shall not apply to any taxpayer that enters

23 into business transactions in 2001 following the

24 scheduled end of its fiscal year with business

25 entities that are not subject to the business tax
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1 at the time of such transactions if such trans2 actions deviate from the normal course of busi3 ness in order to achieve some tax benefit.

4 ‘‘SEC. 223. LONG-TERM CONTRACTS.

5 ‘‘(a) IN GENERAL.—In the case of a long-term

6 contract—

7 ‘‘(1) CONTRACTOR EXPENSES.—The contractor

8 shall be entitled to deduct its business purchases

9 when paid or incurred.

10 ‘‘(2) CONTRACTOR RECEIPTS.—The contractor

11 shall recognize taxable receipts—

12 ‘‘(A) in the case of a project in which the

13 acquirer has no ownership interest in the

14 project until delivery—

15 ‘‘(i) upon delivery of the project, in

16 the case of an accrual basis contractor, or

17 ‘‘(ii) upon the later of delivery of the

18 project or the receipt of payment, in the

19 case of cash-basis contractor.

20 ‘‘(B) in the case of a project in which the

21 acquirer obtains an ownership interest as the

22 project is constructed—

23 ‘‘(i) when the contractor has the right

24 to payments, in the case of an accrual

25 basis contractor, or
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1 ‘‘(ii) upon the later of when the con2 tractor receives the cash or has the right

3 to payments, in the case of a cash basis

4 contractor.

5 ‘‘(3) ACQUIRER EXPENSES.—The acquirer that

6 is a business entity shall be entitled to deduct its

7 costs of the business purchase—

8 ‘‘(A) in the case of a cash-basis acquirer,

9 at such time as a cash basis contractor would

10 be required to treat the amounts paid as tax11 able receipts, or

12 ‘‘(B) in the case of an accrual-basis

13 acquirer, at such time as an accrual basis con14 tractor would be required to treat the amounts

15 paid or due as taxable receipts.

16 ‘‘(b) RIGHT TO PAYMENTS.—

17 ‘‘(1) IN GENERAL.—A contractor shall be treat18 ed as having a right to payments with respect to a

19 project at any time to the extent that the contractor

20 would not be required to return payments received

21 (or would be entitled to collect payments not yet re22 ceived) if the project were terminated at such time

23 by the contractor.

24 ‘‘(2) CONTRACTUAL PROVISIONS.—If a long25 term contract includes a procedure for paying the
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1 contractor as work is completed (for example, by

2 reason of a draw down from a trust account), the

3 contractual provisions shall generally govern when a

4 contractor has a right to payment.

5 ‘‘(3) PERCENTAGE COMPLETION METHOD OF

6 ACCOUNTING.—If a long-term contract does not in7 clude a mechanism for paying the contractor as

8 work is completed, the percentage-of-completion

9 method of accounting shall be used to determine the

10 timing of taxable receipts of the contractor and busi11 ness purchases of the acquirer.

12 ‘‘(c) LONG-TERM CONTRACT.—

13 ‘‘(1) IN GENERAL.—‘Long-term contract’

14 means—

15 ‘‘(A) any contract that covers service or

16 production through parts of two different cal17 endar years if the contract includes a formal

18 deposit and draw-down mechanism, and

19 ‘‘(B) any contract for the manufacture,

20 building, installation, or construction of prop21 erty if such contract is not completed within the

22 taxable year of the contractor in which such

23 contract is entered into.

24 ‘‘(2) EXCEPTION.—A contract for the manufac25 ture of property shall not be treated as a long-term
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1 contract unless such contract involves the manufac2 ture of—

3 ‘‘(A) any unique item of a type which is

4 not normally included in the finished goods in5 ventory of the taxpayer, or

6 ‘‘(B) any item which normally requires

7 more than 12 calendar months to complete.

8 ‘‘(d) CONSISTENCY.—The Secretary may require

9 business entities to file statements containing such infor10 mation with respect to long-term contracts as the Sec11 retary may prescribe to ensure consistency in reporting.

12 ‘‘(e) FOREIGN CONTRACTS.—This section shall not

13 be construed to permit a deduction for a business purchase

14 for the cost of property produced outside the United

15 States pursuant to a long-term contract at any time prior

16 to the import of such property into the United States.

17 ‘‘SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS.

18 ‘‘(a) RECEIPT OF PRICE ADJUSTMENT.—In the case

19 of a post-sale price adjustment attributable to a business

20 purchase which was taken into account in computing gross

21 profits for a prior taxable year, the amount of such adjust22 ment shall be treated as a reduction or increase, as the

23 case may be, in the cost of business purchases for the tax24 able year in which the adjustment is made or incurred.
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1 ‘‘(b) ISSUANCE OF PRICE ADJUSTMENT.—In the case

2 of a post-sale price adjustment attributable to a sale the

3 receipts from which were taken into account in deter4 mining taxable receipts for a prior taxable year, the

5 amount of such adjustment shall be treated as a reduction

6 or increase, as the case may be, in taxable receipts for

7 the taxable year in which the adjustment is made or in8 curred.

9 ‘‘(c) POST-SALE PRICE ADJUSTMENT.—‘Post-sale

10 price adjustment’ means a refund, rebate, or other price

11 allowance attributable to a sale of property or services or

12 an upward adjustment in price that was not previously

13 taken into account under the business entity’s method of

14 accounting.

15 ‘‘SEC. 225. BAD DEBTS.

16 ‘‘(a) SELLER.—If an amount owed to an accrual

17 basis business entity for property or services sold—

18 ‘‘(1) was taken into account as a taxable receipt

19 in a prior taxable year, and

20 ‘‘(2) becomes wholly or partially uncollectible

21 during the taxable year, then the seller shall treat

22 the amount as a reduction in taxable receipts for the

23 taxable year in which it becomes wholly or partially

24 uncollectible.
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1 ‘‘(b) NOTICE REQUIREMENT.—No reduction shall be

2 allowed under subsection (a) unless the seller notifies the

3 purchaser of the amount which the seller has treated as

4 wholly or partially uncollectible.

5 ‘‘(c) SUBSEQUENT COLLECTION.—If an amount

6 which was treated as uncollectible under subsection (a) is

7 subsequently collected, it shall be treated as a taxable re8 ceipt when collected.

9 ‘‘(d) PURCHASER.—If a purchaser receives notice

10 under subsection (b) from a seller and the purchaser has

11 treated the amount labeled uncollectible as a business pur12 chase in a prior taxable year, then the purchaser shall

13 treat such amount as a reduction in the cost of business

14 purchases in the taxable year to which the notice relates.

15 If the purchaser subsequently repays such amount, the re16 payment shall constitute the cost of a business purchase.

17 ‘‘SEC. 226. TRANSITION RULES.

18 ‘‘(a) NO DOUBLE DEDUCTIONS.—A business entity

19 shall not be entitled to treat as a ‘cost of business pur20 chase’ any amount that the business entity deducted in

21 computing taxable income under the income tax in effect

22 prior the effective date of the business tax.

23 ‘‘(b) NO DOUBLE INCLUSION.—A business entity

24 shall not be required to include in taxable receipts any

25 receipt that the business entity took into account in com-
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1 puting taxable income under the income tax in effect prior

2 to the effect date of the business tax.

3 ‘‘(c) NO LOSS OF DEDUCTION.—An expense which—

4 ‘‘(1) a business entity would have been able to

5 deduct as a cost of a business purchase in an ac6 counting period before the effective date of the busi7 ness tax if the business tax had been in effect in

8 such period, and

9 ‘‘(2) the business entity would have been able to

10 deduct as an expense in computing taxable income

11 in a period after the business tax is effective if the

12 income tax had continued in effect,

13 shall be treated as a cost of a business purchase incurred

14 or paid at the time that it would have been paid or in15 curred under the income tax if the income tax had contin16 ued in effect. This subsection shall not apply to any

17 amount which is to be taken into account under sub18 chapter N (relating to amortization of transition basis, in19 ventory costs, and safe harbor leases), any amounts which

20 would have been deducted under the income tax through

21 loss carryover deductions, or any deductions deferred by

22 the uniform capitalization rules under section 263A of the

23 Internal Revenue Code of 1986.

24 ‘‘(d) ALL TAXABLE RECEIPTS TAXED.—A receipt

25 which—
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1 ‘‘(1) a business entity would have been required

2 to treat as a taxable receipt in an accounting period

3 before the effective date of the business tax if the

4 business tax had been in effect in such period, and

5 ‘‘(2) the business entity would have been re6 quired to include in gross income in a period after

7 the business tax is effective if the income tax had

8 continued in effect

9 shall be treated as a taxable receipt at the time that it

10 would have been included in income if the income tax had

11 continued in effect.

12 ‘‘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.

13 ‘‘SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR

14 NONBUSINESS USE.

15 ‘‘(a) IN GENERAL.—The acquisition of unimproved

16 land shall not constitute a business purchase if the unim17 proved land is not acquired to be used in a business activ18 ity or if the land is acquired for—

19 ‘‘(1) speculation,

20 ‘‘(2) development (including subdivision), or

21 ‘‘(3) temporary leasing or other use not com22 mensurate with the value of the land,

23 ‘‘(4) indefinite future use in a business activity,

24 or
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1 ‘‘(5) use in compensating employees.

2 ‘‘(b) FUTURE USE IN BUSINESS ACTIVITY.—Unim3 proved land will not be considered held for ‘indefinite fu4 ture use in a business activity’ if promptly upon acquisi5 tion, the purchaser or the lessee begins construction of im6 provements on the land (other than improvements, such

7 as paving or sewage lines, intended for indefinite future

8 development) that will be used in a business activity. Such

9 improvement must be commensurate with the value of the

10 land.

11 ‘‘(c) UNIMPROVED LAND.—‘Unimproved land’

12 means—

13 ‘‘(1) land with no buildings on it,

14 ‘‘(2) land with improvements if the value of the

15 improvements is relatively small in comparison to

16 the value of the land and it is anticipated that the

17 improvements will be demolished and not used,

18 ‘‘(3) land in excess of the amount reasonably

19 needed for the buildings located on it.

20 ‘‘(d) CONVERSION TO BUSINESS USE.—If the acqui21 sition of land is not treated as a business purchase by rea22 son of subsection (a) and the land is subsequently used

23 in a manner for which it could have been treated as a

24 business purchase, the cost of the land will be treated as

25 a business purchase when the improvements on the land
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1 are placed in service (or in the case of construction for

2 sale, substantially completed and advertised for sale).

3 ‘‘SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD

4 FOR NONBUSINESS USE.

5 ‘‘(a) TAX BASIS.—A business entity shall have a tax

6 basis in land equal to the cost of the land if such cost

7 is not deductible by reason of section 230(a) and the land

8 has not been converted to business use for purposes of

9 section 230(d).

10 ‘‘(b) TAXABLE RECEIPTS OF A LAND SALE.—The

11 taxable receipts from the sale of land (or portion thereof)

12 in which a business entity has a tax basis by reason of

13 subsection (a) shall be the amount by which the proceeds

14 exceed the basis of such land (or portion thereof).

15 ‘‘SEC. 232. CERTAIN RENTAL PROPERTY.

16 ‘‘(a) IN GENERAL.—Except as provided in subsection

17 (b), the activity of rental of real estate is a business activ18 ity to which the business tax applies.

19 ‘‘(b) NOT RENTAL PROPERTY.—Subsection (a) shall

20 not apply to property described in section 111(b)(1) (relat21 ing to property owned by individuals and used for at least

22 14 days for a nonbusiness purpose and rented for no more

23 than 14 days during the taxable year).

24 ‘‘(c) RENTAL PROPERTY BECOMES NONRENTAL

25 PROPERTY.—If property which is considered rental prop-
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1 erty for purposes of subsection (a) in one taxable year

2 ceases to be rental property (by reason of subsection (b))

3 in the following taxable year, the property (and any associ4 ated debt) shall be treated as distributed by the business

5 entity to its owners. Section 211(a) shall apply to such

6 distribution.

7 ‘‘Subchapter F—Insurance and

8 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.

9 ‘‘SEC. 235. GENERAL RULES.

10 ‘‘(a) TAXABLE RECEIPTS.—Except in the case of a

11 financial intermediation business, taxable receipts do not

12 include financial receipts (as defined in section 203(e)(2)).

13 ‘‘(b) BUSINESS PURCHASES.—Except in the case of

14 a financial intermediation business, business purchases do

15 not include the cost of financial instruments (as defined

16 in section 242(b)(3)) or payments for use of money or cap17 ital, other than fees for financial intermediation services.

18 ‘‘SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERV19 ICES.

20 ‘‘(a) BUSINESS PURCHASE.—Business purchases in21 clude explicit fees and implicit fees for financial intermedi22 ation services (except to the extent that such fees are for

23 services treated as performed outside the United States
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1 and not imported into the United States or for services

2 treated as exported.).

3 ‘‘(b) FINANCIAL INTERMEDIATION SERVICES.—The

4 definition of ‘financial intermediation service’ in section

5 241 applies for purposes of this section.

6 ‘‘(c) EXPLICIT FEES.—

7 ‘‘(1) IN GENERAL.—‘Explicit fees for financial

8 intermediation services’ means separately stated fees

9 for services provided by a business entity in the fi10 nancial intermediation business. Explicit fees do not

11 include fees for use of money or capital.

12 ‘‘(2) EXAMPLES.—Explicit fees for financial

13 intermediation services include (without limita14 tion)—

15 ‘‘(A) separately listed maintenance and

16 service charges of providers of financial inter17 mediation services,

18 ‘‘(B) loan documentation fees,

19 ‘‘(C) brokerage fees,

20 ‘‘(D) loan origination fees,

21 ‘‘(E) underwriting fees,

22 ‘‘(F) trustees’ fees, and

23 ‘‘(G) fees for credit checks.

24 ‘‘(3) EXCLUSIONS.—Explicit fees for financial

25 intermediation services do not include prepaid inter-
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1 est and other fees for use of money or capital even

2 if such fees are separately stated or are labeled as

3 service fees.

4 ‘‘(d) IMPLICIT FEES.—

5 ‘‘(1) IMPLICIT FEES ATTRIBUTABLE TO BOR6 ROWING.—

7 ‘‘(A) IN GENERAL.—Implicit fees attrib8 utable to borrowing from banks and other fi9 nancial institutions shall include the portion of

10 interest payments that the Secretary designates

11 as constituting service fees.

12 ‘‘(B) TIMING.—Implicit fees determined

13 under this paragraph shall not be deductible in

14 any taxable year prior to the taxable year in

15 which the interest is paid. If the amount of the

16 interest to which implicit fees relate was de17 ducted as original issue discount under the In18 ternal Revenue Code of 1986, the implicit fees

19 with respect to such interest shall not constitute

20 a deductible business purchase.

21 ‘‘(C) DESIGNATION BY SECRETARY.—

22 ‘‘(i) ESTIMATE OF DIFFERENTIAL.—

23 The Secretary shall estimate for each cal24 endar year the difference between the cost

25 of funds for banks and the rates of interest
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1 (including discount points) charged to the

2 most credit-worthy depositors of banks.

3 The determinations shall be made sepa4 rately for—

5 ‘‘(I) loans with terms of not more

6 than 3 years,

7 ‘‘(II) loans with terms of over 3

8 but not over 9 years, and

9 ‘‘(III) loans with terms of over 9

10 years.

11 ‘‘(ii) DESIGNATION OF IMPLICIT

12 FEES.—The Secretary shall designate the

13 differences determined under clause (i) as

14 the portion of interest expense on loans

15 from banks and other financial institutions

16 that constitutes an implicit fee for term

17 loans originated during the following cal18 endar year for the respective periods listed

19 in subclauses (I) through (III) of clause

20 (i). The difference determined for loans de21 scribed in subclause (I) of clause (i) shall

22 apply to determine the implicit fee portion

23 of interest on demand loans outstanding

24 during the following calendar year.
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1 ‘‘(iii) HISTORICAL DETERMINATION.—

2 The Secretary shall make an historical de3 termination in accordance with the prin4 ciples of this subparagraph to designate

5 the portion of interest on term loans made

6 before January 1, 2001, that will con7 stitute implicit fees.

8 ‘‘(2) IMPLICIT FEES FOR OTHER FINANCIAL

9 INTERMEDIATION ACTIVITY.—Implicit fees for finan10 cial intermediation services include the portion of the

11 fees or other charges paid to a provider of financial

12 intermediation services (other than lending) as such

13 provider designates in accordance with section 39.

14 ‘‘SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS.

15 ‘‘(a) IN GENERAL.—The cost of insurance premiums

16 on business loss policies that insure risks in the United

17 States constitute costs of business purchases. Proceeds

18 from such policies constitute taxable receipts.

19 ‘‘(b) BUSINESS LOSS POLICY.—A ‘business loss pol20 icy’ is an insurance policy—

21 ‘‘(1) owned by a business entity,

22 ‘‘(2) the beneficiary of which is the business en23 tity or another business entity doing business with

24 the owner of the policy,
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1 ‘‘(3) that has no inside buildup or other savings

2 component,

3 ‘‘(4) that covers losses on a loss incurred or

4 claims made basis during the term of the policy,

5 ‘‘(5) that has a term of not more than 2 years,

6 ‘‘(6) that is not a direct or indirect form of

7 compensation, and

8 ‘‘(7) that covers direct losses of the business,

9 such as—

10 ‘‘(A) damage to or theft of property used

11 in business activity,

12 ‘‘(B) tort claims against the business,

13 ‘‘(C) loss of use of business premises or

14 services,

15 ‘‘(D) malpractice, or

16 ‘‘(E) alleged or actual breach of fiduciary

17 obligations.

18 ‘‘SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS.

19 ‘‘(a) NONDEDUCTIBILITY.—The cost of insurance

20 policies that are not business loss policies are not deduct21 ible costs of business purchases.

22 ‘‘(b) PROCEEDS OF NONDEDUCTIBLE POLICIES.—In23 surance proceeds from policies described in subsection (a)

24 do not constitute taxable receipts.
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1 ‘‘(c) APPLICATION OF THIS SECTION TO CERTAIN

2 INSURANCE.—This section shall apply to life insurance

3 policies.

4 ‘‘SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL INTER5 MEDIATION SERVICES.

6 ‘‘(a) DEDUCTIBILITY OF FEES.—If a financial inter7 mediation business (as defined in section 241(b)) elects

8 to determine implicit fees for financial intermediation

9 services pursuant to this section and notify its business

10 customers of their share of the implicit fees in accordance

11 with this section, a business entity which receives such no12 tice may treat the amount reported in the notice as an

13 implicit fee for financial intermediation services in the cal14 endar year to which such notice relates.

15 ‘‘(b) ALLOCATION AND REPORTING.—

16 ‘‘(1) IN GENERAL.—A financial intermediation

17 business may—

18 ‘‘(A) allocate fees received for services for

19 which no separately stated fees (or implicit fees

20 for borrowing determined under section

21 236(d)(1)) are charged among recipients of

22 such services on a reasonable and consistent

23 basis, and

24 ‘‘(B) report to each recipient not later

25 than February 15th of each year the amount so
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1 allocated to it with respect to the immediately

2 preceding calendar year.

3 ‘‘(2) MAXIMUM FEES ALLOCATED.—The max4 imum amount that may be allocated by a financial

5 intermediation business for a calendar is the excess

6 of—

7 ‘‘(A) the gross profits of the financial

8 intermediation business for the calendar year

9 (as reasonably estimated by the financial inter10 mediation business), over

11 ‘‘(B) the explicit fees for financial inter12 mediation services received by the financial

13 intermediation business.

14 ‘‘(3) REASONABLE ALLOCATION.—An allocation

15 will not be considered reasonable unless it takes into

16 account and allocates fees to—

17 ‘‘(A) both services provided to business en18 tities and services provided to individuals (other

19 than in a business capacity), and

20 ‘‘(B) both persons who receive money from

21 the financial intermediation business and per22 sons who pay money to the financial intermedi23 ation business (even though amounts allocated

24 to the former do not constitute implicit fees).
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1 ‘‘(4) REGULATIONS.—The Secretary shall pre2 scribe regulations relating to the allocations under

3 this subsection, including regulations addressing—

4 ‘‘(A) rules for timing of deductions of im5 plicit fees paid by fiscal year recipients,

6 ‘‘(B) subsequent year adjustments if a fi7 nancial intermediation business allocates too

8 much in a calendar year,

9 ‘‘(C) rules for advance approval from the

10 Secretary for allocation procedures, and

11 ‘‘(D) safe-harbor alternatives to the alloca12 tion procedures described in this subsection.

13 ‘‘(c) NOT APPLICABLE TO LENDING SERVICES.—

14 This section shall not apply to lending services.

15 ‘‘Subchapter G—Financial Intermediation

16 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.

17 ‘‘SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL INTER18 MEDIATION BUSINESS.

19 ‘‘(a) FINANCIAL INTERMEDIATION BUSINESS.—The

20 providing of financial intermediation services shall be con21 sidered a business activity. The gross profit of a business

22 entity providing financial intermediation services shall be
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1 determined by taking into account the rules of this sub2 chapter.

3 ‘‘(b) SEPARATE BUSINESS ACTIVITY.—The provision

4 of financial intermediation services for unrelated persons

5 shall be considered a separate business activity and a busi6 ness shall be considered a separate entity with respect to

7 such activity. An entity engaging in such business is re8 ferred to in this chapter as a ‘financial intermediation

9 business’.

10 ‘‘(c) FINANCIAL INTERMEDIATION BY A BUSINESS.—

11 Section 246 shall apply to a business that provides finan12 cial intermediation services for itself and related parties

13 but generally does not provide such services for unrelated

14 parties.

15 ‘‘(d) DEFINITIONS.—

16 ‘‘(1) FINANCIAL INTERMEDIATION SERVICES.—

17 ‘Financial intermediation services’ include—

18 ‘‘(A) lending services,

19 ‘‘(B) insurance services,

20 ‘‘(C) market-making and dealer services,

21 and

22 ‘‘(D) any other service provided as busi23 ness activity in which a person acts as an inter24 mediary in—
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1 ‘‘(i) the transfer of property, services,

2 or financial assets, liabilities, risks or in3 struments (or income or expense derived

4 therefrom) between two or more persons,

5 or

6 ‘‘(ii) the pooling of economic risk

7 among other persons

8 and derives all or a portion of such person’s

9 gross receipts from streams of income or ex10 pense, discounts, or other financial flows associ11 ated with the matter with respect to which such

12 person is acting as an intermediary.

13 ‘‘(2) LENDING SERVICES.—‘Lending services’

14 means the regular making of loans and providing

15 credit to, or taking deposits from customers, but

16 does not include an installment or delayed payment

17 arrangement provided by a seller of property or serv18 ices under which additional charges or fees are im19 posed by the seller for the late payment.

20 ‘‘(3) MARKET-MAKING OR DEALER SERVICES.—

21 ‘Market-making or dealer services’ means services

22 provided by a person who—

23 ‘‘(A) regularly purchases financial instru24 ments from or sells financial instruments to
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1 customers in the ordinary course of a trade or

2 business,

3 ‘‘(B) regularly offers to enter into, assume,

4 offset, assign, or otherwise terminate positions

5 in financial instruments with customers in the

6 ordinary course of a trade or business.

7 ‘‘SEC. 242. GENERAL RULE FOR TAXATION.

8 ‘‘(a) IN GENERAL.—In the case of a financial inter9 mediation business, gross profits shall be computed by—

10 ‘‘(1) substituting financial receipts for taxable

11 receipts, and

12 ‘‘(2) including financial expenses as business

13 purchases.

14 ‘‘(b) DEFINITIONS.—

15 ‘‘(1) FINANCIAL RECEIPTS.—‘Financial re16 ceipts’ means all receipts other than amounts re17 ceived as contributions to capital.

18 ‘‘(2) FINANCIAL EXPENSES.—‘Financial ex19 penses’ include—

20 ‘‘(A) payments for principal and interest

21 that is properly allocable to the provision of fi22 nancial intermediation services,

23 ‘‘(B) the cost of and payments under fi24 nancial instruments (other than financial in25 struments in the person subject to the tax im-
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1 posed under this chapter and any person re2 lated to such person),

3 ‘‘(C) claims and cash surrender values paid

4 in connection with insurance or reinsurance

5 services, and

6 ‘‘(D) amounts paid for reinsurance.

7 ‘‘(3) FINANCIAL INSTRUMENT.—‘Financial in8 strument’ means any—

9 ‘‘(A) share of stock in a corporation,

10 ‘‘(B) equity ownership in any widely held

11 or publicly traded partnership, trust, or other

12 business entity,

13 ‘‘(C) note, bond, debenture, or other evi14 dence of indebtedness,

15 ‘‘(D) interest rate, currency, or equity no16 tional principal contract,

17 ‘‘(E) evidence or interest in, or a derivative

18 financial instrument in, any financial instru19 ment described in subparagraph (A), (B), (C),

20 or (D), or any currency, including any option,

21 forward contract, short position, and any simi22 lar financial instrument in such a financial in23 strument or currency, and

24 ‘‘(F) a position which—
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1 ‘‘(i) is not a financial instrument de2 scribed in subparagraph (A), (B), (C), (D)

3 or (E),

4 ‘‘(ii) is a hedge with respect to such

5 a financial instrument, and

6 ‘‘(iii) is clearly identified in the deal7 er’s records as being described in this sub8 paragraph before the close of the day on

9 which it was acquired or entered into.

10 ‘‘(c) INTERNATIONAL MATTERS.—For purposes of

11 this section in the case of a financial intermediation busi12 ness with activity in and outside the United States—

13 ‘‘(1) INCLUSION REGARDLESS OF SOURCE.—

14 ‘‘(A) Financial receipts shall be determined

15 without regard to whether they are received for

16 property or service provided in or outside the

17 United States, except that financial receipts do

18 not include amounts that—

19 ‘‘(i) are not taxable receipts (as deter20 mined without regard to this section), but

21 ‘‘(ii) would have been taxable receipts

22 (as determined without regard to this sec23 tion) if they had been received for services

24 or property in the United States.
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1 ‘‘(B) Financial expenses shall be deter2 mined without regard to whether they are re3 ceived for property or services acquired in or

4 outside the United States.

5 ‘‘(2) ALLOCATION.—Under regulations pre6 scribed by the Secretary, gross profits (as deter7 mined without regard to this paragraph) shall be re8 duced by the amount of financial intermediation

9 gross profit attributable to financial intermediation

10 activity provided outside the United States.

11 ‘‘(3) GROSS PROFIT ATTRIBUTABLE TO FINAN12 CIAL INTERMEDIATION ACTIVITY.—‘Gross profits at13 tributable to financial intermediation activity’ means

14 the excess of—

15 ‘‘(A) gross profits as determined under

16 this section (but without regard to paragraph

17 (2)), over

18 ‘‘(B) gross profits as determined without

19 regard to this subchapter.

20 ‘‘SEC. 243. SPECIAL RULES FOR BANKS.

21 ‘‘(a) IN GENERAL.—In the case of a bank, gross prof22 its shall be determined in accordance with section 242, ex23 cept that—

24 ‘‘(1) FINANCIAL RECEIPTS.—Financial receipts

25 shall include only—
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1 ‘‘(A) taxable receipts (as determined with2 out regard to this subchapter),

3 ‘‘(B) interest on loans made or acquired by

4 the bank,

5 ‘‘(C) gain on the sale of loans,

6 ‘‘(D) discount points received, and

7 ‘‘(E) any explicit fees for financial or fidu8 ciary services not included in subparagraphs

9 (A) through (E).

10 ‘‘(2) FINANCIAL EXPENSES.—Financial ex11 penses shall include only—

12 ‘‘(A) interest paid to depositors and on

13 other funds borrowed by the bank, and

14 ‘‘(B) reasonable additions to reserves for

15 bad debts.

16 ‘‘(3) FORECLOSURE PROPERTY.—Gross profits

17 shall properly take into account proceeds from the

18 operation or sale of foreclosure property.

19 ‘‘(b) BANK.—

20 ‘‘(1) IN GENERAL.—‘Bank’ means a bank or

21 trust company incorporated and doing business

22 under the laws of the United States, the District of

23 Columbia, or any State, a substantial part of the

24 business of which consists of receiving deposits and

25 making loans and discounts, or of exercising fidu-
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1 ciary powers similar to those exercised by national

2 banks under the authority of the Comptroller of the

3 Currency, and which is subject by law to supervision

4 and examination by State or Federal authority hav5 ing supervision over banking institutions or credit

6 unions. Such term includes domestic building and

7 loan associations and credit unions.

8 ‘‘(2) OTHER ACTIVITIES.—If a bank is engaged

9 in significant amounts of activities other than those

10 described in paragraph (1), the bank shall be consid11 ered as a separate business entity with respect to

12 such other activity.

13 ‘‘SEC. 244. INSURANCE COMPANIES.

14 ‘‘(a) IN GENERAL.—In the case of companies pro15 viding insurance services, gross profits shall be determined

16 in accordance with section 242, except—

17 ‘‘(1) subsection (c) of section 242 (relating to

18 international operations) shall not apply, and

19 ‘‘(2) the rules of subchapter J (sourcing rules)

20 shall apply to determine financial receipts and finan21 cial expenses.

22 ‘‘(b) RESULT INCONSISTENT WITH STATUTORY IN23 TENT.—If an insurance company determines that the ap24 plication of subsection (a) produces results inconsistent

25 with the territorial approach of the business tax, it may
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1 apply to the Secretary for permission to apply section

2 242(c) in lieu of subsection (a).

3 ‘‘SEC. 245. FINANCIAL PASS-THROUGH ENTITIES.

4 ‘‘(a) IN GENERAL.—In the case of a financial pass5 thru entity, gross profits shall be determined in accord6 ance with section 242, except—

7 ‘‘(1) financial receipts shall include contribu8 tions to capital,

9 ‘‘(2) financial expenses shall include—

10 ‘‘(A) distributions to persons holding inter11 ests in the pass-thru entity,

12 ‘‘(B) investments in related entities (in13 cluding wholly owned entities) engaging in real

14 estate investment.

15 ‘‘(b) PASS-THRU ENTITY.—

16 ‘‘(1) IN GENERAL.—‘Pass-thru entity’ means a

17 business entity that is intended to serve as a con18 duit. The Secretary shall prescribe regulations defin19 ing pass-thru entity. Such term shall include—

20 ‘‘(A) entities that would qualify as regu21 lated investment companies under the Internal

22 Revenue Code of 1986,

23 ‘‘(B) entities that would qualify as real es24 tate investment trusts under the Internal Rev25 enue Code of 1986,
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1 ‘‘(C) entities that would qualify as

2 REMICs under the Internal Revenue Code of

3 1986, and

4 ‘‘(D) partnerships whose purposes are to

5 invest the funds of the partners in financial in6 struments, distribute or reinvest the income

7 from such investments, and distribute or rein8 vest the proceeds from the sale of such instru9 ments.

10 ‘‘(2) ENGAGEMENT IN BUSINESS ACTIVITY.—

11 An entity will not qualify as a pass-thru entity if it

12 engages in more than an insubstantial amount of

13 rental or other business activity (other than invest14 ing in and selling financial instruments). The pre15 ceding sentence will not apply if the business entity

16 treats the business activity as engaged in by a sepa17 rate business entity (separately subject to tax under

18 this chapter).

19 ‘‘SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSI20 NESSES.

21 ‘‘(a) IN GENERAL.—If a business entity that is not

22 regularly in the business of providing financial intermedi23 ation services to unrelated parties engages in significant

24 financial intermediation activity, its gross profits shall be

25 increased by its gross profits from financial intermediation
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1 activity (determined as if such activity were activity of a

2 pass-thru entity that paid all costs of such financial inter3 mediation activity including—

4 ‘‘(1) compensation for persons engaging in such

5 activity,

6 ‘‘(2) equipment involved in such activity, and

7 ‘‘(3) office space for persons involved in such

8 activity).

9 ‘‘(b) PROXY.—A business entity to which subsection

10 (a) applies will be treated as satisfying the requirements

11 of that subsection if it increases its gross receipts by the

12 portion of employee compensation properly allocable to the

13 provision of financial intermediation services.

14 ‘‘(c) SIGNIFICANT FINANCIAL INTERMEDIATION.—A

15 business will be considered as engaging in substantial fi16 nancial intermediation if—

17 ‘‘(1) more than 5 percent of the compensation

18 paid by the business to its employees is for employ19 ees whose primary activity is the management of the

20 business’s investments in financial instruments, or

21 ‘‘(2) at all times during the taxable year and

22 the immediately preceding full taxable year, more

23 than 10 percent of its assets are financial instru24 ments other than—
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1 ‘‘(A) equity interests in business entities in

2 which it holds more than 50 percent in value of

3 the outstanding equity,

4 ‘‘(B) equity interests in joint ventures in

5 which the company is actively participating,

6 ‘‘(C) purchase money loans to its cus7 tomers, and

8 ‘‘(D) business loans and equity invest9 ments that serve a direct business purpose.

10 ‘‘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.

11 ‘‘SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES.

12 ‘‘(a) STATES.—Except as provided in section 252, a

13 state, political subdivision thereof and the District of Co14 lumbia shall be exempt from taxation under this chapter

15 on any gross profits derived from the exercise of any es16 sential governmental function.

17 ‘‘(b) POSSESSIONS.—The government of any posses18 sion of the United States shall be exempt from taxation

19 under this chapter on any gross profits earned by the pos20 session.
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1 ‘‘SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTI2 TIES.

3 ‘‘(a) CERTAIN ACTIVITIES TAXABLE.—A govern4 mental entity shall be considered a business and subject

5 to tax on any business activity of a type frequently pro6 vided by business entities subject to tax under this chap7 ter.

8 ‘‘(b) CERTAIN ACTIVITIES TREATED AS ESSENTIAL

9 GOVERNMENT FUNCTIONS.—Subsection (a) shall not

10 apply to the following activities, which shall be treated as

11 essential government functions:

12 ‘‘(1) Provision of mass transportation services.

13 ‘‘(2) Provision of public utility services.

14 ‘‘SEC. 253. TAX-EXEMPT ORGANIZATIONS.

15 ‘‘(a) EXEMPTION FROM TAXATION.—An organiza16 tion described in subsection (c) or (d) shall be exempt

17 from taxation under this chapter.

18 ‘‘(b) TAX ON UNRELATED BUSINESS ACTIVITY.—An

19 organization exempt from taxation under subsection (a)

20 shall be subject to tax to the extent provided in sections

21 255 and 256, but shall be considered a tax-exempt organi22 zation for purposes of any law that refers to tax-exempt

23 organizations.

24 ‘‘(c) LIST OF EXEMPT ORGANIZATIONS.—The fol25 lowing organizations are referred to in subsection (a):
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1 ‘‘(1) INSTRUMENTALITY OF THE UNITED

2 STATES.—Any corporation organized under Act of

3 Congress which is an instrumentality of the United

4 States but only if such corporation—

5 ‘‘(A) is exempt from Federal income

6 taxes—

7 ‘‘(i) under such Act as amended and

8 supplemented before July 18, 1984, or

9 ‘‘(ii) under this title without regard to

10 any provision of law which is not contained

11 in this title and which is not contained in

12 a revenue Act, or

13 ‘‘(B) is described in subsection (h).

14 ‘‘(2) TITLE HOLDING COMPANIES.—Corpora15 tions organized for the exclusive purpose of holding

16 title to property, collecting income therefrom, and

17 turning over the entire amount thereof, less ex18 penses, to an organization which itself is exempt

19 under this section. Rules similar to the rules of sub20 paragraph (G) of paragraph (25) shall apply for

21 purposes of this paragraph.

22 ‘‘(3) CHARITABLE, EDUCATIONAL AND RELI23 GIOUS ORGANIZATIONS.—Corporations, and any

24 community chest, fund, or foundation, organized and

25 operated exclusively for religious, charitable, sci-
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1 entific, testing for public safety, literary, or edu2 cational purposes, or to foster national or inter3 national amateur sports competition (but only if no

4 part of its activities involve the provision of athletic

5 facilities or equipment), or for the prevention of cru6 elty to children or animals, no part of the net earn7 ings of which inures to the benefit of any private

8 shareholder or individual, no substantial part of the

9 activities of which is carrying on propaganda, or oth10 erwise attempting, to influence legislation (except as

11 otherwise provided in subsection (g)), and which

12 does not participate in, or intervene in (including the

13 publishing or distributing of statements), any polit14 ical campaign on behalf of (or in opposition to) any

15 candidate for public office.

16 ‘‘(4) SOCIAL WELFARE ORGANIZATIONS, ETC.—

17 ‘‘(A) Civic leagues or organizations not or18 ganized for profit but operated exclusively for

19 the promotion of social welfare, or local associa20 tions of employees, the membership of which is

21 limited to the employees of a designated person

22 or persons in a particular municipality, and the

23 net earnings of which are devoted exclusively to

24 charitable, educational, or recreational pur25 poses.
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1 ‘‘(B) Subparagraph (A) shall not apply to

2 an entity unless no part of the net earnings of

3 such entity inures to the benefit of any private

4 shareholder or individual

5 ‘‘(5) LABOR AND AGRICULTURAL ORGANIZA6 TIONS.—Labor, agricultural, or horticultural organi7 zations.

8 ‘‘(6) TRADE ASSOCIATIONS.—Business leagues,

9 chambers of commerce, real-estate boards, boards of

10 trade, or professional football leagues (whether or

11 not administering a pension fund for football play12 ers) not organized for profit and no part of the net

13 earnings of which inures to the benefit of any pri14 vate shareholder or individual.

15 ‘‘(7) SOCIAL CLUBS.—Clubs organized for

16 pleasure, recreation, and other nonprofitable pur17 poses, substantially all of the activities of which are

18 for such purposes and no part of the net earnings

19 of which inures to the benefit of any private share20 holder.

21 ‘‘(8) CERTAIN FRATERNAL SOCIETIES.—Fra22 ternal beneficiary societies, orders, or associations—

23 ‘‘(A) operating under the lodge system or

24 for the exclusive benefit of the members of a
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1 fraternity itself operating under the lodge sys2 tem, and

3 ‘‘(B) providing for the payment of life,

4 sick, accident, or other benefits to the members

5 of such society, order, or association or their

6 dependents.

7 ‘‘(9) VEBA’S.—Voluntary employees’ bene8 ficiary associations providing for the payment of life,

9 sick, accident, or other benefits to the members of

10 such association or their dependents or designated

11 beneficiaries, if no part of the net earnings of such

12 association inures (other than through such pay13 ments) to the benefit of any private shareholder or

14 individual.

15 ‘‘(10) OTHER FRATERNAL ORGANIZATIONS.—

16 Domestic fraternal societies, orders, or associations,

17 operating under the lodge system—

18 ‘‘(A) the net earnings of which are devoted

19 exclusively to religious, charitable, scientific, lit20 erary, educational, and fraternal purposes, and

21 ‘‘(B) which do not provide for the payment

22 of life, sick, accident, or other benefits.

23 ‘‘(11) LOCAL TEACHERS’ RETIREMENT

24 FUNDS.—Teachers’ retirement fund associations of a

25 purely local character, if—
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1 ‘‘(A) no part of their net earnings inures

2 (other than through payment of retirement ben3 efits) to the benefit of any private shareholder

4 or individual, and

5 ‘‘(B) the income consists solely of amounts

6 received from public taxation, amounts received

7 from assessments on the teaching salaries of

8 members, and income in respect of investments.

9 ‘‘(12) CERTAIN COOPERATIVES.—

10 ‘‘(A) Benevolent life insurance associations

11 of a purely local character, mutual ditch or irri12 gation companies, mutual or cooperative tele13 phone companies, or like organizations; but only

14 if 85 percent or more of the income consists

15 of amounts collected from members for the sole

16 purpose of meeting losses and expenses.

17 ‘‘(B) In the case of a mutual or coopera18 tive telephone company, subparagraph (A) shall

19 be applied without taking into account any in20 come received or accrued—

21 ‘‘(i) from a nonmember telephone

22 company for the performance of commu23 nication services which involve members of

24 the mutual or cooperative telephone com25 pany,
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1 ‘‘(ii) from qualified pole rentals,

2 ‘‘(iii) from the sale of display listings

3 in a directory furnished to the members of

4 the mutual or cooperative telephone com5 pany, or

6 ‘‘(iv) from the prepayment of a loan

7 under section 306A, 306B, or 311 of the

8 Rural Electrification Act of 1936 (as in ef9 fect on January 1, 1987).

10 ‘‘(C) In the case of a mutual or cooperative

11 electric company, subparagraph (A) shall be ap12 plied without taking into account any income

13 received or accrued—

14 ‘‘(i) from qualified pole rentals, or

15 ‘‘(ii) from the prepayment of a loan

16 under section 306A, 306B, or 311 of the

17 Rural Electrification Act of 1936 (as in ef18 fect on January 1, 1987).

19 ‘‘(D) For purposes of this paragraph, the

20 term ‘qualified pole rental’ means any rental of

21 a pole (or other structure used to support

22 wires) if such pole (or other structure)—

23 ‘‘(i) is used by the telephone or elec24 tric company to support one or more wires

25 which are used by such company in pro-
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1 viding telephone or electric services to its

2 members, and

3 ‘‘(ii) is used pursuant to the rental to

4 support one or more wires (in addition to

5 the wires described in clause (i)) for use in

6 connection with the transmission by wire

7 of electricity or of telephone or other com8 munications.

9 For purposes of the preceding sentence, the

10 term ‘rental’ includes any sale of the right to

11 use the pole (or other structure).

12 ‘‘(13) NONPROFIT CEMETERIES.—Cemetery

13 companies owned and operated exclusively for the

14 benefit of their members or which are not operated

15 for profit; and any corporation chartered solely for

16 the purpose of the disposal of bodies by burial or

17 cremation which is not permitted by its charter to

18 engage in any business not necessarily incident to

19 that purpose and no part of the net earnings of

20 which inures to the benefit of any private share21 holder or individual.

22 ‘‘(14) GRANDFATHERED MUTUAL FINANCIAL

23 INSTITUTIONS.—

24 ‘‘(A) Credit unions without capital stock

25 organized and operated for mutual purposes
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1 and without profit, but only if organized before

2 July 1, 2001.

3 ‘‘(B) Certain corporations or associations

4 organized before September 1, 1957, and de5 scribed in subparagraphs (B) or (C) of section

6 501(c)(14) of the Internal Revenue Code of

7 1986.

8 ‘‘(15) GRANDFATHERED SMALL INSURANCE

9 COMPANIES.—Insurance companies organized before

10 July 1, 2001, and described in section 501(c)(15) of

11 the Internal Revenue Code of 1986.

12 ‘‘(16) CROP FINANCING ASSOCIATIONS.—Cor13 porations organized by an association subject to part

14 IV of this subchapter or members thereof, for the

15 purpose of financing the ordinary crop operations of

16 such members or other producers, and operated in

17 conjunction with such association. Exemption shall

18 not be denied any such corporation because it has

19 capital stock, if the dividend rate of such stock is

20 fixed at not to exceed the legal rate of interest in the

21 State of incorporation or 8 percent per annum,

22 whichever is greater, on the value of the consider23 ation for which the stock was issued, and if substan24 tially all such stock (other than nonvoting preferred

25 stock, the owners of which are not entitled or per-
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•HR 86 IH

1 mitted to participate, directly or indirectly, in the

2 profits of the corporation, on dissolution or other3 wise, beyond the fixed dividends) is owned by such

4 association, or members thereof; nor shall exemption

5 be denied any such corporation because there is ac6 cumulated and maintained by it a reserve required

7 by State law or a reasonable reserve for any nec8 essary purpose.

9 ‘‘(17) SUPPLEMENTAL EMPLOYMENT BENEFIT

10 TRUST.—

11 ‘‘(A) A trust or trusts forming part of a

12 plan providing for the payment of supplemental

13 unemployment compensation benefits, if—

14 ‘‘(i) under the plan, it is impossible,

15 at any time prior to the satisfaction of all

16 liabilities, with respect to employees under

17 the plan, for any part of the corpus or in18 come to be (within the taxable year or

19 thereafter) used for, or diverted to, any

20 purpose other than the providing of supple21 mental unemployment compensation bene22 fits,

23 ‘‘(ii) such benefits are payable to em24 ployees under a classification which is set

25 forth in the plan and which is found by the
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1 Secretary not to be discriminatory in favor

2 of employees who are highly compensated

3 employees (within the meaning of section

4 414(q)), and

5 ‘‘(iii) such benefits do not discrimi6 nate in favor of employees who are highly

7 compensated employees (within the mean8 ing of section 414(q). A plan shall not be

9 considered discriminatory within the mean10 ing of this clause merely because the bene11 fits received under the plan bear a uniform

12 relationship to the total compensation, or

13 the basic or regular rate of compensation,

14 of the employees covered by the plan.

15 ‘‘(B) Rules similar to those contained in

16 subparagraphs (B) through (E) of section

17 501(c)(7) of the Internal Revenue Code of 1986

18 shall apply to subparagraph (A).

19 ‘‘(18) GRANDFATHERED TRUSTS.—A trust or

20 trusts created before June 25, 1959, and described

21 in section 501(c)(18) of the Internal Revenue Code

22 of 1986.

23 ‘‘(19) CERTAIN VETERANS’ ORGANIZATIONS.—

24 A post or organization of past or present members

25 of the Armed Forces of the United States, or an
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1 auxiliary unit or society of, or a trust or foundation

2 for, any such post or organization—

3 ‘‘(A) organized in the United States or any

4 of its possessions,

5 ‘‘(B) at least 75 percent of the members of

6 which are past or present members of the

7 Armed Forces of the United States and sub8 stantially all of the other members of which are

9 individuals who are cadets or are spouses, wid10 ows, or widowers of past or present members of

11 the Armed Forces of the United States or of

12 cadets, and

13 ‘‘(C) no part of the net earnings of which

14 inures to the benefit of any private shareholder

15 or individual.

16 ‘‘(20) LEGAL SERVICE PLAN TRUSTS.—An or17 ganization or trust created or organized in the

18 United States, the exclusive function of which is to

19 form part of a qualified group legal services plan or

20 plans.

21 ‘‘(21) BLACK LUNG ACT TRUSTS.—A trust or

22 trusts established in writing, created or organized in

23 the United States, and contributed to by any person

24 (except an insurance company) if—
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1 ‘‘(A) the purpose of such trust or trusts is

2 exclusively—

3 ‘‘(i) to satisfy, in whole or in part, the

4 liability of such person for, or with respect

5 to, claims for compensation for disability

6 or death due to pneumoconiosis under

7 Black Lung Acts,

8 ‘‘(ii) to pay premiums for insurance

9 exclusively covering such liability,

10 ‘‘(iii) to pay administrative and other

11 incidental expenses of such trust in connec12 tion with the operation of the trust and the

13 processing of claims against such person

14 under Black Lung Acts, and

15 ‘‘(iv) to pay accident or health bene16 fits for retired miners and their spouses

17 and dependents (including administrative

18 and other incidental expenses of such trust

19 in connection therewith) or premiums for

20 insurance exclusively covering such bene21 fits; and

22 ‘‘(B) such trusts meets requirements simi23 lar to those contained in section 501(c)(21) of

24 the Internal Revenue Code of 1986.
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1 ‘‘(22) MULTIEMPLOYER ERISA TRUST.—A trust

2 created or organized in the United States and estab3 lished in writing by the plan sponsors of multiem4 ployer plans if—

5 ‘‘(A) the purpose of such trust is

6 exclusively—

7 ‘‘(i) to pay any amount described in

8 section 4223(c) or (h) of the Employee Re9 tirement Income Security Act of 1974, and

10 ‘‘(ii) to pay reasonable and necessary

11 administrative expenses in connection with

12 the establishment and operation of the

13 trust and the processing of claims against

14 the trust,

15 ‘‘(B) no part of the assets of the trust may

16 be used for, or diverted to, any purpose other

17 than—

18 ‘‘(i) the purposes described in sub19 paragraph (A), or

20 ‘‘(ii) prudent investment in securities,

21 obligations, or time or demand deposits,

22 ‘‘(C) such trust meets the requirements of

23 paragraphs (2), (3), and (4) of section 4223(b),

24 4223(h), or, if applicable, section 4223(c) of the
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1 Employee Retirement Income Security Act of

2 1974, and

3 ‘‘(D) the trust instrument provides that,

4 on dissolution of the trust, assets of the trust

5 may not be paid other than to plans which have

6 participated in the plan or, in the case of a

7 trust established under section 4223(h) of such

8 Act, to plans with respect to which employers

9 have participated in the fund.

10 ‘‘(23) GRANDFATHERED VETERANS’ INSURANCE

11 ORGANIZATION.—Any association organized before

12 1880 more than 75 percent of the members of which

13 are present or past members of the Armed Forces

14 and a principal purpose of which is to provide insur15 ance and other benefits to veterans or their depend16 ents.

17 ‘‘(24) ERISA TRUST.—A trust described in sec18 tion 4049 of the Employee Retirement Income Secu19 rity Act of 1974 (as in effect on the date of the en20 actment of the Single-Employer Pension Plan

21 Amendments Act of 1986).

22 ‘‘(25) REAL TITLE HOLDING CORPORATION OR

23 TRUST.—

24 ‘‘(A) Any corporation or trust which—
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1 ‘‘(i) has no more than 35 shareholders

2 or beneficiaries,

3 ‘‘(ii) has only 1 class of stock or bene4 ficial interest, and

5 ‘‘(iii) is organized for the exclusive

6 purposes of—

7 ‘‘(I) acquiring real property and

8 holding title to, and collecting income

9 from, such property, and

10 ‘‘(II) remitting the entire amount

11 of income from such property (less ex12 penses) to 1 or more organizations de13 scribed in subparagraph (C) which are

14 shareholders of such corporation or

15 beneficiaries of such trust.

16 ‘‘For purposes of clause (iii), the term ‘real

17 property’ shall not include any interest as a

18 tenant in common (or similar interest) and

19 shall not include any indirect interest.

20 ‘‘(B) A corporation or trust shall be de21 scribed in subparagraph (A) without regard to

22 whether the corporation or trust is organized by

23 1 or more organizations described in subpara24 graph (C).
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1 ‘‘(C) An organization is described in this

2 subparagraph if such organization is—

3 ‘‘(i) a qualified pension, profit shar4 ing, or stock bonus plan that meets the re5 quirements of section 401(a),

6 ‘‘(ii) a governmental plan (within the

7 meaning of section 414(d)),

8 ‘‘(iii) the United States, any State or

9 political subdivision thereof, or any agency

10 or instrumentality of any of the foregoing,

11 or

12 ‘‘(iv) any organization described in

13 paragraph (3).

14 ‘‘(D) A corporation or trust shall in no

15 event be treated as described in subparagraph

16 (A) unless such corporation or trust permits its

17 shareholders or beneficiaries—

18 ‘‘(i) to dismiss the corporation’s or

19 trust’s investment adviser, following rea20 sonable notice, upon a vote of the share21 holders or beneficiaries holding a majority

22 of interest in the corporation or trust, and

23 ‘‘(ii) to terminate their interest in the

24 corporation or trust by either, or both, of
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1 the following alternatives, as determined by

2 the corporation or trust:

3 ‘‘(I) by selling or exchanging

4 their stock in the corporation or inter5 est in the trust (subject to any Fed6 eral or State securities law) to any or7 ganization described in subparagraph

8 (C) so long as the sale or exchange

9 does not increase the number of

10 shareholders or beneficiaries in such

11 corporation or trust above 35, or

12 ‘‘(II) by having their stock or in13 terest redeemed by the corporation or

14 trust after the shareholder or bene15 ficiary has provided 90 days notice to

16 such corporation or trust.

17 ‘‘(E)(i) For purposes of this paragraph—

18 ‘‘(I) a corporation which is a qualified

19 subsidiary shall not be treated as a sepa20 rate corporation, and

21 ‘‘(II) all assets, liabilities, and items

22 of income, deduction, and credit of a quali23 fied subsidiary shall be treated as assets,

24 liabilities, and such items (as the case may
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1 be) of the corporation or trust described in

2 subparagraph (A).

3 ‘‘(ii) For purposes of this subparagraph,

4 the term ‘qualified subsidiary’ means any cor5 poration if, at all times during the period such

6 corporation was in existence, 100 percent of the

7 stock of such corporation is held by the cor8 poration or trust described in subparagraph

9 (A).

10 ‘‘(iii) For purposes of this subtitle, if any

11 corporation which was a qualified subsidiary

12 ceases to meet the requirements of clause (ii),

13 such corporation shall be treated as a new cor14 poration acquiring all of its assets (and assum15 ing all of its liabilities) immediately before such

16 cessation from the corporation or trust de17 scribed in subparagraph (A) in exchange for its

18 stock.

19 ‘‘(F) For purposes of subparagraph (A),

20 the term ‘real property’ includes any personal

21 property which is leased under, or in connection

22 with, a lease of real property, but only if the

23 rent attributable to such personal property for

24 the taxable year does not exceed 15 percent of

25 the total rent for the taxable year attributable
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1 to both the real and personal property leased

2 under, or in connection with, such lease.

3 ‘‘(G)(i) An organization shall not be treat4 ed as failing to be described in this paragraph

5 merely by reason of the receipt of any otherwise

6 disqualifying income which is incidentally de7 rived from the holding of real property.

8 ‘‘(ii) Clause (i) shall not apply if the

9 amount of gross income described in such

10 clause exceeds 10 percent of the organization’s

11 gross income for the taxable year unless the or12 ganization establishes to the satisfaction of the

13 Secretary that the receipt of gross income de14 scribed in clause (i) in excess of such limitation

15 was inadvertent and reasonable steps are being

16 taken to correct the circumstances giving rise to

17 such income.

18 ‘‘(26) STATE ESTABLISHED MEDICAL CARE IN19 SURER.—Any membership organization if—

20 ‘‘(A) such organization is established by a

21 State exclusively to provide coverage for medical

22 care on a not-for-profit basis to individuals de23 scribed in subparagraph (B) through—

24 ‘‘(i) insurance issued by the organiza25 tion, or
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1 ‘‘(ii) a health maintenance organiza2 tion under an arrangement with the orga3 nization,

4 ‘‘(B) the only individuals receiving such

5 coverage through the organization are

6 individuals—

7 ‘‘(i) who are residents of such State,

8 and

9 ‘‘(ii) who, by reason of the existence

10 or history of a medical condition—

11 ‘‘(I) are unable to acquire med12 ical care coverage for such condition

13 through insurance or from a health

14 maintenance organization, or

15 ‘‘(II) are able to acquire such

16 coverage only at a rate which is sub17 stantially in excess of the rate for

18 such coverage through the member19 ship organization,

20 ‘‘(C) the composition of the membership in

21 such organization is specified by such State,

22 and

23 ‘‘(D) no part of the net earnings of the or24 ganization inures to the benefit of any private

25 shareholder or individual. A spouse and any
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1 qualifying child) of an individual described in

2 subparagraph (B) (without regard to this sen3 tence) shall be treated as described in subpara4 graph (B).

5 ‘‘(27) GRANDFATHERED WORKERS COMPENSA6 TION ORGANIZATION.—Any membership organiza7 tion established before June 1, 1996, by a State ex8 clusively to reimburse its members for losses arising

9 under workmen’s compensation acts, and described

10 in section 501(c)(27) of the Internal Revenue Code

11 of 1986.

12 ‘‘(d) RELIGIOUS AND APOSTOLIC ORGANIZATIONS.—

13 The following organizations are referred to in subsection

14 (a): Religious or apostolic associations or corporations, if

15 such associations or corporations have a common treasury

16 or community treasury, even if such associations or cor17 porations engage in business for the common benefit of

18 the members, but only if such activity is treated as unre19 lated business activity.

20 ‘‘(e) COOPERATIVE HOSPITAL SERVICE ORGANIZA21 TIONS.—For purposes of this chapter, an organization

22 shall be treated as an organization organized and operated

23 exclusively for charitable purposes, if—

24 ‘‘(1) such organization is organized and oper25 ated solely—
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1 ‘‘(A) to perform, on a centralized basis,

2 one or more of the following services which, if

3 performed on its own behalf by a hospital which

4 is an organization described in subsection (c)(3)

5 and exempt from taxation under subsection (a),

6 would constitute activities in exercising or per7 forming the purpose or function constituting

8 the basis for its exemption: data processing,

9 purchasing (including the purchasing of insur10 ance on a group basis), warehousing, billing

11 and collection, food, clinical, industrial engi12 neering, laboratory, printing, communications,

13 record center, and personnel (including selec14 tion, testing, training, and education of per15 sonnel) services; and

16 ‘‘(B) to perform such services solely for

17 two or more hospitals each of which is—

18 ‘‘(i) an organization described in sub19 section (c)(3) which is exempt from tax20 ation under subsection (a),

21 ‘‘(ii) a constituent part of an organi22 zation described in subsection (c)(3) which

23 is exempt from taxation under subsection

24 (a) and which, if organized and operated

25 as a separate entity, would constitute an
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1 organization described in subsection (c)(3),

2 or

3 ‘‘(iii) owned and operated by the

4 United States, a State, the District of Co5 lumbia, or a possession of the United

6 States, or a political subdivision or an

7 agency or instrumentality of any of the

8 foregoing;

9 ‘‘(2) such organization is organized and oper10 ated on a cooperative basis and allocates or pays,

within 81 11 ⁄2 months after the close of its taxable year,

12 all net earnings to patrons on the basis of services

13 performed for them; and

14 ‘‘(3) if such organization has capital stock, all

15 of such stock outstanding is owned by its patrons.

16 ‘‘For purposes of this title, any organization which, by rea17 son of the preceding sentence, is an organization described

18 in subsection (c)(3) and exempt from taxation under sub19 section (a), shall be treated as a hospital and as an organi20 zation referred to in section 101(b)(1)(A)(iii).

21 ‘‘(f) COOPERATIVE SERVICE ORGANIZATIONS OF OP22 ERATING EDUCATIONAL ORGANIZATIONS.—For purposes

23 of this chapter, if an organization is—

24 ‘‘(1) organized and operated solely to hold,

25 commingle, and collectively invest and reinvest (in-
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1 cluding arranging for and supervising the perform2 ance by independent contractors of investment serv3 ices related thereto) in stocks and securities, the

4 moneys contributed thereto by each of the members

5 of such organization, and to collect income there6 from and turn over the entire amount thereof, less

7 expenses, to such members,

8 ‘‘(2) organized and controlled by one or more

9 such members, and

10 ‘‘(3) comprised solely of members that are orga11 nizations described in clause (ii) or (iv) of section

12 101(b)(1)(A)—

13 ‘‘(A) which are exempt from taxation

14 under subsection (a), or

15 ‘‘(B) the gross profits of which are ex16 cluded from taxation under section 251(a),

17 then such organization shall be treated as an organization

18 organized and operated exclusively for charitable purposes.

19 ‘‘(g) EXPENDITURES BY PUBLIC CHARITIES TO IN20 FLUENCE LEGISLATION.—

21 ‘‘(1) GENERAL RULE.—In the case of an orga22 nization to which this subsection applies, exemption

23 from taxation under subsection (a) shall be denied

24 because a substantial part of the activities of such

25 organization consists of carrying on propaganda, or
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1 otherwise attempting, to influence legislation, but

2 only if such organization normally—

3 ‘‘(A) makes lobbying expenditures in ex4 cess of the lobbying ceiling amount for such or5 ganization for each taxable year, or

6 ‘‘(B) makes grass roots expenditures in ex7 cess of the grass roots ceiling amount for such

8 organization for each taxable year.

9 ‘‘(2) DEFINITIONS.—For purposes of this

10 subsection—

11 ‘‘(A) LOBBYING EXPENDITURES.—‘Lob12 bying expenditures’ means expenditures for the

13 purpose of influencing legislation (as defined in

14 section 4911(d)).

15 ‘‘(B) LOBBYING CEILING AMOUNT.—The

16 lobbying ceiling amount for any organization

17 for any taxable year is 150 percent of the lob18 bying nontaxable amount for such organization

19 for such taxable year, determined under section

20 4911.

21 ‘‘(C) GRASS ROOTS EXPENDITURES.—

22 ‘Grass roots expenditures’ means expenditures

23 for the purpose of influencing legislation (as de24 fined in section 4911(d) without regard to para25 graph (1)(B) thereof).
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1 ‘‘(D) GRASS ROOTS CEILING AMOUNT.—

2 The grass roots ceiling amount for any organi3 zation for any taxable year is 150 percent of

4 the grass roots nontaxable amount for such or5 ganization for such taxable year, determined

6 under section 4911.

7 ‘‘(3) ORGANIZATIONS TO WHICH THIS SUB8 SECTION APPLIES.—This subsection shall apply to

9 any organization which has elected (in such manner

10 and at such time as the Secretary may prescribe) to

11 have the provisions of this subsection apply to such

12 organization and which, for the taxable year which

13 includes the date the election is made, is described

14 in subsection (c)(3) and is not described in para15 graph (4) and is not a private foundation.

16 ‘‘(4) DISQUALIFIED ORGANIZATIONS.—This

17 subsection does not apply to—

18 ‘‘(A) a church,

19 ‘‘(B) an integrated auxiliary of a church or

20 of a convention or association of churches, or

21 ‘‘(C) a member of an affiliated group of or22 ganizations (within the meaning of section

23 4911(f)(2)) if one or more members of such

24 group is described in subparagraph (A) or (B).
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1 ‘‘(5) YEARS FOR WHICH ELECTION IS EFFEC2 TIVE.—An election by an organization under this

3 subsection shall be effective for all taxable years of

4 such organization which—

5 ‘‘(A) end after the date the election is

6 made, and

7 ‘‘(B) begin before the date the election is

8 revoked by such organization (under regulations

9 prescribed by the Secretary).

10 ‘‘(6) NO EFFECT ON CERTAIN ORGANIZA11 TIONS.—With respect to any organization for a tax12 able year for which—

13 ‘‘(A) such organization is described in

14 paragraph (5), or

15 ‘‘(B) an election under this subsection is

16 not in effect for such organization, nothing in

17 this subsection or in section 4911 shall be con18 strued to affect the interpretation of the phrase,

19 ‘no substantial part of the activities of which is

20 carrying on propaganda, or otherwise attempt21 ing, to influence legislation,’ under subsection

22 (c)(3).

23 ‘‘(h) GOVERNMENT CORPORATIONS EXEMPT UNDER

24 SUBSECTION (c)(1).—For purposes of subsection (c)(1),
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1 the following organizations are described in this sub2 section:

3 ‘‘(1) The Central Liquidity Facility established

4 under title III of the Federal Credit Union Act (12

5 U.S.C. 1795 et seq.).

6 ‘‘(2) The Resolution Trust Corporation estab7 lished under section 21A of the Federal Home Loan

8 Bank Act.

9 ‘‘(3) The Resolution Funding Corporation es10 tablished under section 21B of the Federal Home

11 Loan Bank Act.

12 ‘‘(i) CERTAIN EDUCATIONAL ORGANIZATIONS.—An

13 organization shall not be eligible for exemption as an edu14 cational organization under subsection (c)(3) if a substan15 tial amount of its activities and funds are devoted to—

16 ‘‘(1) conducting seminars and other similar pro17 grams,

18 ‘‘(2) conducting research to educate Congress

19 or the general public about public policy issues,

20 ‘‘(3) producing books and pamphlets, or

21 ‘‘(4) a combination of the foregoing.

22 ‘‘SEC. 254. SPECIAL RULES FOR (c)(3) ORGANIZATIONS.

23 ‘‘(a) NEW ORGANIZATIONS MUST NOTIFY SEC24 RETARY.—Except as provided in subsection (c), an organi-
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1 zation shall not be treated as an organization described

2 in section 253(c)(3)—

3 ‘‘(1) unless that it has given notice to the Sec4 retary, in such manner as the Secretary may pre5 scribe, that it is applying for recognition of such sta6 tus, or

7 ‘‘(2) for any period before giving of such notice,

8 if such notice is given after the time prescribed by

9 the Secretary by regulations for giving notice under

10 this subsection.

11 ‘‘(b) PRESUMPTION THAT ORGANIZATIONS ARE PRI12 VATE FOUNDATIONS.—Except as provided in subsection

13 (c), any organization described in section 253(c)(3) and

14 which does not notify the Secretary, at such time and in

15 such manner as the Secretary may by regulations pre16 scribe, that it is not a private foundation (as defined in

17 section 102) shall be presumed to be a private foundation.

18 ‘‘(c) EXCEPTIONS.—Subsections (a) and (b) shall not

19 apply to—

20 ‘‘(1) organizations organized before October 10,

21 1969;

22 ‘‘(2) organizations which obtained recognition

23 of tax-exempt status under section 501(c)(3) of the

24 Internal Revenue Code of 1986 (in the case of sub25 section (a) only);
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1 ‘‘(3) organizations which were determined not

2 to be private foundations under the Internal Rev3 enue Code of 1986;

4 ‘‘(4) churches, their integrated auxiliaries, and

5 conventions and associations of churches;

6 ‘‘(5) any organization that is not a private

7 foundation and the gross receipts of which in each

8 taxable year are not more than $25,000, or

9 ‘‘(6) such other classes of organizations which

10 the Secretary may exempt.

11 ‘‘SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY.

12 ‘‘(a) IN GENERAL.—Each organization described in

13 subsection (b) shall be subject to the Simplified USA Tax

14 for businesses under section 201 on its gross profits from

15 its unrelated business activity.

16 ‘‘(b) ORGANIZATIONS SUBJECT TO TAX.—This sec17 tion shall apply to—

18 ‘‘(1) organizations exempt from the business

19 tax under section 253(a), other than instrumental20 ities of the United States described in section

21 253(c)(1).

22 ‘‘(2) colleges and universities which are instru23 mentalities of any government and corporations

24 owned by one or more such colleges or universities.
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1 ‘‘SEC. 256. UNRELATED BUSINESS ACTIVITY.

2 ‘‘(a) IN GENERAL.—‘Unrelated business activity’

3 means any trade or business the conduct of which is not

4 substantially related (aside from the need of such organi5 zation for income or funds or the use it makes of the prof6 its derived) to the exercise or performance by such organi7 zation of its charitable, educational, or other purpose or

8 function constituting the basis for its exemption under

9 section 253, except that such term does not include any

10 trade or business—

11 ‘‘(1) in which substantially all the work in car12 rying on such trade or business is performed for the

13 organization without compensation; or

14 ‘‘(2) which is carried on, in the case of an orga15 nization described in section 253(c)(3) or in the case

16 of a college or university described in section 255(b),

17 by the organization primarily for the convenience of

18 its members, students, patients, officers, or employ19 ees, which is the selling by the organization of items

20 of work-related clothes and equipment and items

21 normally sold through vending machines, through

22 food dispensing facilities, or by snack bars, for the

23 convenience of its members at their usual places of

24 employment; or
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1 ‘‘(3) which is the selling of merchandise, sub2 stantially all of which has been received by the orga3 nization as gifts or contributions.

4 ‘‘(b) ADVERTISING, ETC., ACTIVITIES.—For pur5 poses of this section, ‘trade or business’ includes any activ6 ity which is carried on for the production of income from

7 the sale of goods or the performance of services. For pur8 poses of the preceding sentence, an activity does not lose

9 identity as a trade or business merely because it is carried

10 on within a larger aggregate of similar activities or within

11 a larger complex of other endeavors which may, or may

12 not, be related to the exempt purposes of the organization.

13 Where an activity carried on for profit constitutes an un14 related trade or business, no part of such trade or business

15 shall be excluded from such classification merely because

16 it does not result in profit.

17 ‘‘(c) TRADE OR BUSINESS.—

18 ‘‘(1) CERTAIN BUSINESS ACTIVITIES.—An ac19 tivity shall not be considered a ‘trade or business’

20 solely because the activity is a business activity

21 (such as certain passive rental activity) that would

22 be subject to the business tax if conducted by a busi23 ness entity other than a tax-exempt organization.

24 ‘‘(2) REGULATIONS.—The Secretary shall pre25 scribe regulations defining a ‘trade or business.’
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1 Such regulations shall be consistent with the provi2 sions under sections 511 through 513 of the Internal

3 Revenue Code of 1986, except to the extent such

4 provisions are inconsistent with other principles of

5 the business tax. The regulations shall include exclu6 sions from the definition of ‘trade or business’ simi7 lar to those contained in section 513 of the Internal

8 Revenue Code for—

9 ‘‘(A) certain bingo games,

10 ‘‘(B) certain hospital services, and

11 ‘‘(C) certain public entertainment activity

12 at fairs and expositions by an organization

13 which regularly conducts, as one of its substan14 tial exempt purposes, an agricultural or edu15 cational fair or exhibition.

16 ‘‘(3) TRADE SHOWS.—The conduct of trade

17 shows and conventions shall not be excluded from

18 the definition of trade or business.

19 ‘‘Subchapter I—Cooperatives

Sec. 260. Patronage dividends of cooperatives.

20 ‘‘SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES.

21 ‘‘(a) PATRONAGE DIVIDENDS PAID BY SUPPLY CO22 OPERATIVES.—A qualified patronage dividend paid by a

23 supply cooperative to a patron shall be treated as if it is

24 a refund of a portion of the amounts paid by the patron
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1 for goods, services, or use of capital. In general, if the

2 supply cooperative included the amount received from the

3 patron in taxable receipts, the dividend shall reduce tax4 able receipts in the year incurred. If the recipient of the

5 dividend is a business entity which deducted the cost of

6 business purchases to which the dividend related, the re7 cipient will reduce its cost of business purchases by the

8 amount of the dividend in the year the dividend is paid

9 or incurred.

10 ‘‘(b) PATRONAGE DIVIDENDS PAID BY MARKETING

11 COOPERATIVES.—A qualified patronage dividend paid to

12 a patron by a marketing cooperative shall be treated as

13 an upward price adjustment in the amount received by the

14 patron for its goods marketed by the cooperative. In gen15 eral, the cooperative will increase its cost of business pur16 chases by the amount of the qualified patronage dividend

17 and the recipient will increase its taxable receipts by the

18 amount of the qualified patronage dividend.

19 ‘‘(c) DIVIDEND TREATMENT.—Only the portion of a

20 patronage dividend that is not a qualified patronage divi21 dend shall be treated as a dividend under this chapter and

22 chapter 2.

23 ‘‘(d) DEFINITIONS.—

24 ‘‘(1) QUALIFIED PATRONAGE DIVIDEND.—A

25 ‘qualified patronage dividend’ is that part of a pa-
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1 tronage dividend that is attributable to the patron’s

2 allocable share of patronage earnings of a marketing

3 cooperative or a supply cooperative.

4 ‘‘(2) SUPPLY COOPERATIVE.—A ‘supply cooper5 ative’ is a cooperative that sells goods or service to

6 patrons and provided patronage dividends with re7 spect to the quantity of purchases of the patrons.

8 ‘‘(3) MARKETING COOPERATIVE.—A ‘marketing

9 cooperative’ is a cooperative that sells goods pro10 duced by its members and provides patronage divi11 dends to the members based on the quantities of

12 goods sold or provided for sale.

13 ‘‘(e) SPECIAL RULES.—

14 ‘‘(1) NOTICES OF ALLOCATION AND PER-UNIT

15 RETAIN CERTIFICATES.—Except as provided in

16 paragraph (2), a notice of allocation, per-unit retain

17 certificate, or other similar document shall not be

18 treated as a patronage dividend until it is redeemed

19 in cash or property.

20 ‘‘(2) OPPORTUNITY TO RECEIVE CASH.—If a

21 patron is given an opportunity to receive a patron22 age dividend in cash, but instead chooses to accept

23 a per-unit retain certificate or a qualified notice of

24 allocation, the patron will be treated as receiving
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1 cash and simultaneously contributing to the capital

2 of the cooperative.

3 ‘‘(3) APPLICATION LIMITED TO QUALIFIED CO4 OPERATIVES.—Under rules to be prescribed by the

5 Secretary, this section shall apply only to coopera6 tives to which one of the following provisions of the

7 Internal Revenue Code of 1986 would have applied:

8 ‘‘(A) Section 501(c)(12) (relating to coop9 erative telephone companies and similar organi10 zations).

11 ‘‘(B) Section 501(c)(14) (relating to cer12 tain cooperative banks).

13 ‘‘(C) Section 521 (relating to farm co14 operatives).

15 ‘‘(D) Section 1381 (relating to coopera16 tives generally).

17 ‘‘(4) REGULATIONS.—The Secretary shall pre18 scribe regulations for the application of this section.

19 The regulations shall generally be consistent with

20 subchapter T of chapter 1 of the Internal Revenue

21 Code of 1986 except to the extent that such rules

22 are inconsistent with provisions of this chapter.

23 ‘‘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.
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‘‘Sec. 269. International communications.

‘‘Sec. 270. Insurance.

1 ‘‘SEC. 265. EXPORTS OF PROPERTY OR SERVICES.

2 ‘‘(a) GENERAL RULE.—Taxable receipts do not in3 clude amounts received by the exporter thereof for prop4 erty or services exported from the United States for use

5 or consumption outside the United States.

6 ‘‘(b) EXPORT THROUGH NONBUSINESS ENTITY.—

7 For purposes of subsection (a), if property or services are

8 sold to a governmental entity or a tax-exempt organization

9 for export and are exported other than in an activity of

10 such entity which is subject to the business tax, then the

11 seller of such property or services is deemed to be the ex12 porter thereof.

13 ‘‘(c) EXPORT OF SERVICES.—See section 267 for

14 rules for determining whether services are exported or im15 ported.

16 ‘‘SEC. 266. IMPORTS OF PROPERTY OR SERVICES.

17 ‘‘(a) IN GENERAL.—The import of property or serv18 ices for consumption in the United States shall constitute

19 a business purchase if such property or service is to be

20 used in a business activity in the United States. Property

21 being held for sale or retail by a business entity that is

22 in the business of selling goods shall be considered held

23 for ‘use in a business activity’.

24 ‘‘(b) AMOUNT OF BUSINESS PURCHASE.—
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1 ‘‘(1) IN GENERAL.—The cost of business pur2 chases with respect to the import of property or

3 services for use or consumption in the United States

4 is the customs value, price or other amount used for

5 purposes of determining the import tax under sec6 tion 286 or section 287.

7 ‘‘(2) IMPORT TAX.—The cost of business pur8 chases does not include any import tax paid. No de9 duction shall be allowed with respect to property or

10 service imported by a business entity unless the im11 port tax is paid with respect to such import.

12 ‘‘SEC. 267. IMPORT OR EXPORT OF SERVICES.

13 ‘‘(a) IN GENERAL.—Except as otherwise provided in

14 this subchapter or in rules prescribed under subchapter

15 G (relating to financial intermediation business), services

16 shall not be treated as imported or exported from the loca17 tion in which they are performed.

18 ‘‘(b) IMPORT OF SERVICES.—A business entity shall

19 be treated as importing a service if—

20 ‘‘(1) the entire benefit of the service will be re21 alized in the United States, and

22 ‘‘(2) the benefit will be realized in connection

23 with the United States business activities of the

24 business entity.
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1 ‘‘(c) EXPORT OF SERVICES.—A business will be

2 treating as exporting a service if—

3 ‘‘(1) the entire benefit of the service will be re4 alized outside of the United States, and

5 ‘‘(2) the benefit will be realized solely in con6 nection with the activities of the purchaser occurring

7 outside the United States.

8 ‘‘(d) SERVICES ACQUIRED FROM SERVICE PROVIDER

9 THAT PROVIDES SERVICES IN AND OUTSIDE THE UNITED

10 STATES.—

11 ‘‘(1) IN GENERAL.—If a business entity ac12 quires services from a service provider that provides

13 services both in and outside the United States and

14 the service provider shows on the invoice where the

15 services are provided—

16 ‘‘(A) the business entity shall treat the

17 services as provided where stated on the invoice,

18 and

19 ‘‘(B) the service provider shall treat as tax20 able receipts any services listed as provided in

21 the United States.

22 ‘‘(2) NO INVOICE.—If a business entity acquires

23 services from a service provider that provides serv24 ices both in and outside the United States and the
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1 service provider does not show on an invoice where

2 such services are provided—

3 ‘‘(A) the business entity shall treat the

4 services as if provided in the location to which

5 payment is sent, and

6 ‘‘(B) the service provider shall treat as tax7 able receipts any payments received in the

8 United States.

9 ‘‘(e) SPECIAL RULES PREVAIL.—See sections 268

10 and 269 for special rule relating to transportation and

11 communication services.

12 ‘‘SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES.

13 ‘‘(a) TRANSPORTATION OF PROPERTY.—

14 ‘‘(1) TAXABLE RECEIPTS.—

15 ‘‘(A) EXPORTS.—Taxable receipts do not

16 include receipts from the transportation of

17 property exported from the United States.

18 ‘‘(B) IMPORTS.—Taxable receipts include

19 receipts from transportation of property im20 ported into the United States only if such costs

21 are not taken into account in determining the

22 import tax.

23 ‘‘(C) PRESUMPTIONS.—The Secretary shall

24 prescribe regulations describing situations in

25 which a transporter of property must presume
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1 that no import tax has been paid on the cost

2 of its services.

3 ‘‘(2) BUSINESS PURCHASES.—

4 ‘‘(A) EXPORTS.—Business purchases do

5 not include amounts paid or incurred for the

6 cost of transportation of property exported from

7 the United States.

8 ‘‘(B) IMPORTS.—Amounts paid or incurred

9 for transportation of goods imported into the

10 United States, shall constitute a cost of busi11 ness purchase only to the extent that they are

12 taken into account in determining the customs

13 value for purposes of section 286(a) (relating

14 to the import tax).

15 ‘‘(b) TRANSPORTATION OF PASSENGERS.—

16 ‘‘(1) TAXABLE RECEIPTS.—Taxable receipts—

17 ‘‘(A) include receipts from the transpor18 tation of passengers from the United States to

19 a destination outside the United States, but

20 ‘‘(B) do not include receipts from the

21 transportation of passengers from outside the

22 United States to a destination in the United

23 States.

24 ‘‘(2) BUSINESS PURCHASES.—Business

25 purchases—
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1 ‘‘(A) include amounts paid or incurred in

2 a business activity for the transportation of

3 passengers from the United States to a destina4 tion outside the United States, but

5 ‘‘(B) do not include amounts paid or in6 curred for transportation of passengers from

7 outside the United States to a destination in

8 the United States.

9 ‘‘(3) SIMPLIFYING RULES.—The Secretary may

10 provide rules that simplify this subsection, including

11 rules under which—

12 ‘‘(A) half of receipts attributable to trans13 portation to or from the United States are

14 treated as taxable receipts,

15 ‘‘(B) half of the cost for business trips to

16 and from the United States are treated as busi17 ness purchases, and

18 ‘‘(C) all transportation expenses of a busi19 ness entity that has no regular business outside

20 the United States are treated as business pur21 chases.

22 ‘‘SEC. 269. INTERNATIONAL COMMUNICATIONS.

23 ‘‘(a) IN GENERAL.—For purposes of section 266,

24 communications services shall be treated as provided at
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1 the point of origin of the communications and shall not

2 be treated as imported or exported.

3 ‘‘(b) COMMUNICATIONS SERVICES.—Communications

4 services include—

5 ‘‘(1) telephone communications services,

6 ‘‘(2) courier services (except in the case of

7 transportation of property that is imported or ex8 ported),

9 ‘‘(3) satellite transmission services,

10 ‘‘(4) telegraph services,

11 ‘‘(5) facsimile transmission services, and

12 ‘‘(6) other similar services.

13 ‘‘SEC. 270. INSURANCE.

14 ‘‘(a) IN GENERAL.—Insurance services will be treat15 ed as provided at the location of the insurance company

16 providing the services. Except as the Secretary may pre17 scribe by regulations, insurance companies will be treated

18 as providing services at the location to which insurance

19 payments are made.

20 ‘‘(b) INSURED RISKS IN THE UNITED STATES.—If

21 insurance services are provided outside the United States

22 and the insured risk is located in the United States—

23 ‘‘(1) the insurance service shall be treated as

24 imported,
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1 ‘‘(2) the insurance premiums shall be subject to

2 the import tax, and

3 ‘‘(3) payments of insurance benefits shall not be

4 treated as imported.

5 ‘‘(c) INSURED RISK OUTSIDE THE UNITED

6 STATES.—If insurance services are provided inside the

7 United States and the insured risk is located outside the

8 United States—

9 ‘‘(1) insurance services shall be treated as ex10 ported,

11 ‘‘(2) payments of insurance benefits shall be

12 treated as payments for services outside the United

13 States, and shall not be deducted as business pur14 chases.

15 ‘‘(d) INSURANCE SERVICES.—Insurance services

16 means the provision of insurance and services related to

17 insurance other than insurance that is treated as a savings

18 asset.

19 ‘‘SEC. 271. BANKING SERVICES.

20 ‘‘The Secretary shall prescribe regulations on the lo21 cation of banking services and the extent to which such

22 services are to be treated as imported or exported.

23 ‘‘Subchapter K—Business Conducted in a

24 Possession

‘‘Sec. 276. Treatment of possessions.
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1 ‘‘SEC. 276. TREATMENT OF POSSESSIONS.

2 ‘‘(a) IN GENERAL.—For purposes of the business tax

3 imposed by this chapter, the U.S. possessions shall not

4 be treated as part of the United States.

5 ‘‘(b) EFFECT ON PAYROLL TAX CREDIT.—A busi6 ness entity may not claim a payroll tax credit with respect

7 to any payroll taxes paid with respect to income of resi8 dents of the U.S. possessions.

9 ‘‘(c) POSSESSION.—For purposes of this subchapter,

10 ‘U.S. possession’ or ‘possession’ means a possession of the

11 United States and includes the Commonwealth of Puerto

12 Rico and the Virgin Islands.

13 ‘‘Subchapter L—Payroll Tax Credit

‘‘Sec. 281. Amount of credit.

‘‘Sec. 282. Current-year payroll tax credit.

‘‘Sec. 283. Credit carryover.

14 ‘‘SEC. 281. AMOUNT OF CREDIT.

15 ‘‘(a) AMOUNT OF CREDIT.—The payroll tax credit for

16 a business entity for a taxable year is the lesser of—

17 ‘‘(1) the sum of—

18 ‘‘(A) the current-year payroll tax credit,

19 and

20 ‘‘(B) the credit carryovers to the taxable

21 year, or

22 ‘‘(2) the business entity’s business tax for the

23 taxable year (determined without regard to the pay24 roll tax credit).
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1 ‘‘(b) CONSOLIDATED RETURNS.—In the case of busi2 ness entities filing consolidated returns, the amount of the

3 credit shall be determined using the combined payroll tax

4 credits and credit carryovers of the business entities and

5 the combined business tax of the business entities.

6 ‘‘SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT.

7 ‘‘(a) IN GENERAL.—The ‘current-year payroll tax

8 credit’ is an amount equal to the sum of—

9 ‘‘(1) the employer’s share of the FICA tax im10 posed on wages of its employees during the taxable

11 year,

12 ‘‘(2) the employer’s share of the tier 1 railroad

13 retirement tax for its employees during the taxable

14 year,

15 ‘‘(3) one-half of the allocable portion of the

16 SECA tax imposed on individuals (other than inde17 pendent contractors and other business entities) who

18 provide services to the business entity.

19 ‘‘(b) DEFINITIONS.—

20 ‘‘(1) EMPLOYER’S SHARE OF THE FICA TAX.—

21 ‘Employer’s share of the FICA tax’ means the old22 age, survivors, disability and hospital insurance

23 taxes imposed by section 3111.
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1 ‘‘(2) EMPLOYER’S SHARE OF THE TIER 1 RAIL2 ROAD RETIREMENT TAX.—‘Employer’s share of the

3 tier 1 railroad retirement tax’ means—

4 ‘‘(A) the tier 1 railroad retirement tax im5 posed by section 3221(a), and

6 ‘‘(B) the portion of the tax imposed by sec7 tion 3211(a)(1) on employee representatives at8 tributable to the tax imposed by section 3111.

9 ‘‘(3) ONE-HALF OF THE ALLOCABLE PORTION

10 OF THE SECA TAX.—

11 ‘‘(A) SECA TAX.—‘SECA tax’ means the

12 self-employment tax imposed by section 1401.

13 ‘‘(B) PARTNERSHIPS.—Until such time as

14 the SECA tax and the Federal Insurance Con15 tributions Acts are amended to treat partners

16 of partnerships as employees, if a partner des17 ignates a partnership as a principal source of

18 employment income for the taxable year, one19 half of the partnership’s allocable portion of the

20 SECA tax of such partner equals the FICA tax

21 that the employer would have been required to

22 pay under section 3111 with respect to such

23 partner if the partner’s self-employment income

24 as reported by the partnership were wages sub25 ject to the FICA tax. A partner and partner-
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1 ship can agree to treat no portion of a partner’s

2 SECA tax as allocable to the partnership.

3 ‘‘(C) PROPRIETORSHIP.—In the case of an

4 individual who is a proprietor or sole owner and

5 provider of service to a business entity, the indi6 vidual shall allocate the portion of one-half of

7 his SECA tax not allocated pursuant to sub8 paragraph (B) to his business entities in ac9 cordance with rules prescribed by the Secretary.

10 ‘‘(c) SPECIAL RULE.—Under rules prescribed by the

11 Secretary, an individual subject to the self-employment tax

12 shall pay half of the self-employment tax on an amount

13 of self employment income not less than the amount of

14 the individual’s self-employment income taken into ac15 count by partnerships under subparagraph (B) of sub16 section (b)(3).

17 ‘‘SEC. 283. CREDIT CARRYOVER.

18 ‘‘(a) CARRYOVER.—A current-year credit that is not

19 applied in the taxable year in which earned shall constitute

20 a credit carryover until applied but for no more than 15

21 taxable years.

22 ‘‘(b) ORDER OF USE.—For purposes of determining

23 which credits are applied under section 281, if the total

24 credit allowable in a taxable year is less than the sum of

25 the current-year payroll credit and the carryover credits,
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1 the current-year payroll credit shall be considered applied

2 first and then credit carryovers shall be considered applied

3 in the order earned.

4 ‘‘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.

5 ‘‘SEC. 286. IMPOSITION OF TAX ON PROPERTY.

6 ‘‘(a) GENERAL RULE.—There is hereby imposed a

7 tax equal to 11 percent of the customs value of all prop8 erty entered into the United States for consumption, use

9 or warehousing.

10 ‘‘(b) LIABILITY FOR TAX.—The tax imposed on the

11 import of property by subsection (a) shall be paid by the

12 person entering the property into the United States for

13 consumption, use or warehousing. Such tax shall be due

14 and payable at the time of import.

15 ‘‘(c) IMPORTS OF PREVIOUSLY EXPORTED PROP16 ERTY.—In the case of any article that is classified under

17 a heading or subheading of subchapter I or II of chapter

18 98 of the Tariff Schedules of the United States, the tax

19 under this section shall be imposed only on that portion

20 of the customs value of such article that is dutiable under

21 such heading or subheading.

22 ‘‘(d) IMPORTS FOR PERSONAL CONSUMPTION.—The

23 import tax imposed by this section shall not apply to any

24 article entered into the United States duty free under sub-
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1 chapters I through VII of chapter 98 of the Tariff Sched2 ules of the United States.

3 ‘‘SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES.

4 ‘‘(a) GENERAL RULE.—There is hereby imposed a

5 tax equal to 11 percent of the cost of all services treated

6 as imported into the United States during the taxable year

7 of the service recipient.

8 ‘‘(b) LIABILITY FOR THE TAX.—The tax on the im9 port of services imposed by subsection (a) shall be paid

10 by the person who receives the imported services. The tax

11 shall be payable as if it were an addition to the business

12 tax imposed by section 201.

13 ‘‘(c) IMPORTED SERVICES.—For purposes of this sec14 tion, services shall be treated as imported if they are treat15 ed as imported under section 267 (general rules on import

16 of services) or section 270 (related to insurance).

17 ‘‘(d) SPECIAL RULE FOR INSURANCE.—The seller of

18 insurance that is treated as imported under section 270

19 shall be liable for the collection of the tax imposed by sub20 section (a) on the insurance and for paying such tax to

21 the Secretary. The first sentence of subsection (b) (relat22 ing to the person liable for the tax) shall apply to insur23 ance only to the extent that the seller of the insurance

24 services does not collect such tax.
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1 ‘‘SEC. 288. GENERAL RULES FOR THE IMPORT TAX.

2 ‘‘(a) IMPORT TAX.—‘Import tax’ means the tax im3 posed by section 286 on the import of property and the

4 tax imposed by section 287 on the import of services.

5 ‘‘(b) NO PAYROLL TAX CREDIT.—The payroll tax

6 credit shall not be allowed against the import tax.

7 ‘‘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.

8 ‘‘SEC. 290. AMORTIZATION OF TRANSITION BASIS.

9 ‘‘(a) TRANSITION BASIS DEDUCTION.—The ‘transi10 tion basis deduction’ for a taxable year is the sum of the

11 amortization allowance determined under this section for

12 the taxable year.

13 ‘‘(b) AMORTIZATION RULES.—The amortization al14 lowance for each category of amortizable basis shall be de15 termined by amortizing the amortizable basis of such cat16 egory ratably over the amortization period for the category

17 beginning January 1, 2002.

18 ‘‘(c) AMORTIZATION PERIOD.—The amortization pe19 riods shall be determined in accordance with the following

20 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
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1 ‘‘(d) CATEGORIES.—

2 ‘‘(1) CATEGORY I BASIS.—‘Category I basis’ is

3 the sum of the unrecovered bases as of January 1,

4 2002, of all depreciable property placed in service

5 prior to January 1, 2002, and the unamortized por6 tion of amortizable costs incurred before January 1,

7 2002, if—

8 ‘‘(A) cost recovery or amortization began

9 before January 1, 2002, and

10 ‘‘(B) the remaining recovery period or am11 ortization period as of January 1, 2002, is less

12 than 15 years.

13 ‘‘(2) CATEGORY II BASIS.—‘Category II basis’

14 is the sum of the unrecovered bases as of January

15 1, 2002, of all depreciable property placed in service

16 prior to January 1, 2002, and the unamortized por17 tion of amortizable costs incurred before January 1,

18 2002, if—

19 ‘‘(A) cost recovery or amortization began

20 before January 1, 2002, and

21 ‘‘(B) the remaining recovery period or am22 ortization period as of January 1, 2002, is 15

23 years or more.
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1 ‘‘(3) CATEGORY III BASIS.—‘Category III basis’

2 is the sum of the adjusted basis of each asset satis3 fying the following requirements:

4 ‘‘(A) The asset was placed in service prior

5 to January 1, 2002,

6 ‘‘(B) The asset was used in a business ac7 tivity in 2002,

8 ‘‘(C) The cost of the asset was capitalized

9 and not depreciable or otherwise recoverable

10 under the Internal Revenue Code of 1986, and

11 ‘‘(D) The cost of the asset would have con12 stituted deductible expenses under the business

13 tax if such cost had been incurred after 2001.

14 ‘‘(4) UNRECOVERED INVENTORY COSTS.—‘Un15 recovered inventory costs’ means the cost of goods

16 sold (as determined under the Internal Revenue

17 Code of 1986) if a business entity sold all of its in18 ventory (including inventory being produced) on the

19 effective date of the business tax.

20 ‘‘(e) RULES OF APPLICATION.—

21 ‘‘(1) REMAINING RECOVERY PERIOD.—

22 ‘‘(A) TIME OF MEASURE.—The remaining

23 recovery period shall be determined as of De24 cember 31, 2001, and shall include each taxable

25 year ending after such date in which a deduc-
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1 tion would have been allowed under the Internal

2 Revenue Code of 1986.

3 ‘‘(B) ACCOUNTING METHOD.—The remain4 ing recovery period shall be determined using

5 the cost recovery method and rules applicable

6 for determining taxable income under the Inter7 nal Revenue Code of 1986.

8 ‘‘(2) DEPLETABLE ASSETS.—Under rules pre9 scribed by the Secretary, this section shall apply to

10 the remaining cost basis of depletable property and

11 to other property for which a cost recovery method

12 other than one based on time is used.

13 ‘‘SEC. 291. SALES OF TRANSITION BASIS PROPERTY.

14 ‘‘(a) IN GENERAL.—Except as provided in subsection

15 (b), for purposes of determining the tax consequences of

16 a sale, retirement, casualty or conversion to personal use

17 of an asset whose basis or cost is taken into account under

18 section 90, the amount to be amortized shall be treated

19 as fully deducted upon the adoption of the business tax.

20 ‘‘(b) SUBSTANTIAL SALES.—

21 ‘‘(1) IN GENERAL.—In the case of a substantial

22 sale of assets to which the amortization rules of sec23 tion 90 apply, the purchaser and seller may jointly

24 elect to have the purchaser assume the amortization
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1 deductions attributable to such assets, in which

2 case—

3 ‘‘(A) the seller’s taxable receipts from such

4 sale shall be reduced by the amount of

5 unamortized basis or cost assumed by the pur6 chaser,

7 ‘‘(B) the purchaser may treat as a cost of

8 a business purchase only the portion of the pur9 chase price in excess of the amount of

10 unamortized basis or cost assumed,

11 ‘‘(C) the unamortized basis or cost as12 sumed shall continue to be amortized in the

13 manner amortized by the seller.

14 ‘‘(2) SUBSTANTIAL SALE.—A sale of assets by

15 a business entity to another business entity is a sub16 stantial sale if—

17 ‘‘(A) more than 20 percent (in fair market

18 value or in original cost) of the assets of the

19 seller are sold,

20 ‘‘(B) the total consideration for the sale

21 exceeds $1 million or 20 percent of the taxable

22 receipts of the seller for the taxable year pre23 ceding the year of the sale, or
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1 ‘‘(C) the sale satisfies other criteria estab2 lished by the Secretary to prevent distortions in

3 gross profits resulting from asset sales.

4 ‘‘SEC. 292. SAFE HARBOR LEASES.

5 ‘‘(a) IN GENERAL.—In the case of a safe harbor

6 lease, rental payments deemed to occur under the lease

7 and interest payments deemed to be made under the leases

8 shall constitute costs of business purchases, and rental in9 come and interest income deemed to be earned under the

10 lease shall constitute taxable receipts. The transition basis

11 deduction rules shall apply to the lessor’s adjusted basis

12 in assets subject to a safe harbor lease.

13 ‘‘(b) SAFE HARBOR LEASE.—‘Safe harbor lease’

14 means a sale and leaseback transaction entered into pur15 suant to section 168(f)(8) of the Internal Revenue Code,

16 as added by the Economic Recovery Tax Act of 1981,

17 when such provision was in effect but only if such trans18 action would not be treated as a sale and leaseback for

19 tax purposes but for that provision.

20 ‘‘SEC. 293. CARRYOVERS.

21 ‘‘(a) NO LOSS CARRYOVERS.—No deduction shall be

22 allowed under the business tax for net operating loss

23 carryovers, capital loss carryovers, or any other loss

24 carryovers from the income tax under the Internal Rev25 enue Code of 1986.
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1 ‘‘(b) NO CREDIT CARRYOVERS.—No credits shall be

2 allowed under the business tax for business credit

3 carryovers, minimum tax credit carryovers, or any other

4 credit carryovers from the income tax under the Internal

5 Revenue Code of 1986.

6 ‘‘SEC. 294. SECTION 481 ADJUSTMENTS.

7 ‘‘(a) POSITIVE NET SECTION 481 ADJUSTMENT

8 AMOUNT.—If, as of January 1, 2002, a business entity

9 has a positive net section 481 adjustment amount, the

10 amount shall be applied to reduce the transition basis in

11 accounts (for purposes of section 290) in the following

12 order:

13 ‘‘(1) First, to reduce the category I basis (but

14 not below zero),

15 ‘‘(2) Second, to reduce the category II basis

16 (but not below zero),

17 ‘‘(3) Third, to reduce the unrecovered inventory

18 costs.

19 ‘‘(b) NEGATIVE NET SECTION 481 ADJUSTMENT

20 AMOUNT.—If, as of January 1, 2002, a business entity

21 has a negative net section 481 adjustment amount, the

22 amount shall be applied to increase category I basis for

23 purposes of section 290.
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1 ‘‘(c) SECTION 481 ADJUSTMENT.—A business enti2 ty’s net section 481 adjustment is determined by

3 subtracting—

4 ‘‘(1) the sum of all additional deductions to

5 which a business entity would be entitled by reason

6 of section 481 of the Internal Revenue Code of 1986

7 for periods beginning on or after the effective date

8 of the business tax with respect to changes in ac9 counting methods made before such effective date,

10 from

11 ‘‘(2) the sum of all additional income which a

12 business entity would recognize by reason of section

13 481 of the Internal Revenue Code of 1986 for peri14 ods beginning on or after the effective date of the

15 business tax with respect to changes in accounting

16 methods made before such effective date,

17 in each case assuming that the income tax under the In18 ternal Revenue Code of 1986 remained in effect.

19 ‘‘Subchapter O—Rules for Administration,

20 Consolidated Returns

‘‘Sec. 301. Returns, due dates, etc.

‘‘Sec. 302. Consolidated returns.

21 ‘‘SEC. 301. RETURNS, DUE DATES, ETC.

22 ‘‘(a) IN GENERAL.—Until subtitle F is amended to

23 reflect the adoption of this chapter, the rules of subtitle
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1 F relating to C corporations shall apply to business enti2 ties with respect to—

3 ‘‘(1) returns and records;

4 ‘‘(2) time and place for paying tax;

5 ‘‘(3) assessment of taxes;

6 ‘‘(4) collections and liens;

7 ‘‘(5) abatements, credits, and refunds;

8 ‘‘(6) interest on underpayments and overpay9 ments;

10 ‘‘(7) additions to tax and penalties;

11 ‘‘(8) closing agreements and compromises;

12 ‘‘(9) crimes;

13 ‘‘(10) judicial proceedings;

14 ‘‘(11) discovery of liability and enforcement;

15 and

16 ‘‘(12) estimated taxes.

17 ‘‘(b) INDIVIDUALS ENGAGING IN BUSINESS ACTIVI18 TIES.—Under rules prescribed by the Secretary, individ19 uals engaging in business activities on their own or with

20 their spouses shall be permitted to file their business tax

21 returns with their individual tax returns and shall be sub22 ject to estimated tax rules for individual income tax re23 turns.
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1 ‘‘SEC. 302. CONSOLIDATED RETURNS.

2 ‘‘(a) IN GENERAL.—Business entities may file con3 solidated returns of business tax if they would have been

4 permitted to file consolidated returns under section 1501

5 of the Internal Revenue Code and such section were ap6 plied by treating each business entity as a corporation and

7 its owners or partners as shareholders.

8 ‘‘(b) FINANCIAL INSTITUTIONS.—Financial inter9 mediation businesses may be included in consolidated re10 turns, but each financial intermediation business must

11 compute its gross profits separately.

12 ‘‘(c) INTERCOMPANY TRANSACTIONS.—In computing

13 the gross profits of a consolidated group, intercompany

14 transactions can be taken into account, or at the election

15 of the filer, be disregarded (except in the case of trans16 actions with financial intermediation businesses).

17 ‘‘Subchapter P—Definitions and Rules of

18 Application

‘‘Sec. 310. Definitions.

‘‘Sec. 311. Rules of application.

19 ‘‘SEC. 310. DEFINITIONS.

20 ‘‘(a) IN GENERAL.—When used in this chapter,

21 where not otherwise distinctly expressed or manifestly in22 compatible with the intent thereof—
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1 ‘‘(1) USA INCOME TAX.—‘USA Income Tax’

2 and ‘Simplified USA Tax’ for individuals mean the

3 tax imposed by chapter 1.

4 ‘‘(2) INTERNAL REVENUE CODE OF 1986.—‘In5 ternal Revenue Code of 1986’ means the Internal

6 Revenue Code of 1986 as in effect immediately be7 fore the enactment of the Simplified USA Tax.

8 ‘‘(3) UNITED STATES.—‘United States’ means

9 the States and the District of Columbia.

10 ‘‘(b) TERMS DEFINED IN CHAPTER 2.—If a term

11 that is used but not defined in this chapter or in section

12 7701 is defined in chapter 1, the definition in chapter 1

13 shall apply except if manifestly incompatible with the in14 tent of the provision in which the term is used.

15 ‘‘SEC. 311. RULES OF APPLICATION.

16 ‘‘(a) DEFINITIONS.—Any definition included in this

17 chapter shall apply for all purposes of this chapter

18 unless—

19 ‘‘(1) such definition is limited to the purposes

20 of a particular chapter, section, or subsection, or

21 ‘‘(2) the definition clearly would not be applica22 ble in a particular context.

23 ‘‘(b) INTERPRETATIONS CONSISTENT WITH INTER24 NAL REVENUE CODE OF 1986.—Terms not defined in this

25 chapter or elsewhere in this title, but defined in the Inter-
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1 nal Revenue Code of 1986, shall be interpreted in a man2 ner consistent with the Internal Revenue Code of 1986,

3 except to the extent such interpretation would be incon4 sistent with the principles and purposes of this chapter.’’

5 (b) The amendments made by this section shall be

6 effective on January 1, 2002, except to the extent other7 wise specifically provided in the text of such amendments.

8 SEC. 302. REPEAL OF CHAPTER 6.

9 Chapter 6 of the Code (relating to consolidated re10 turns) is repealed as of January 1, 2002.

11 TITLE IV—DEFERRED

12 COMPENSATION PLANS

13 SEC. 401. PROVISIONS SAVED.

14 (a) IN GENERAL.—Except as otherwise provided in

15 this title, the sections contained in subchapter D of chap16 ter 1 of the Code (relating to deferred compensation, etc.)

17 are hereby saved as chapter 3.

18 (b) LIMITATIONS ON CHAPTER 3.—The following

19 new section is inserted before section 401 of the Code (as

20 saved by subsection (a)):

21 ‘‘SEC. 400. EFFECT OF CHAPTER 3.

22 ‘‘(a) IN GENERAL.—The provisions of chapter 3 (sec23 tions 401 through 420) are included in this subtitle for

24 purposes of cross-reference and for purposes of deter25 mining whether plans are exempt from the business tax
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1 and whether contributions to plans are deductible or ex2 cludable from gross income under chapter 1.

3 ‘‘(b) EFFECT ON BUSINESS TAX DEDUCTIONS.—

4 Notwithstanding any provision to the contrary in this

5 chapter, no provision of this chapter shall cause any

6 amount to be treated as a cost of business purchase or

7 to otherwise be deducted from gross receipts for purposes

8 of computing the Simplified USA for Tax Businesses

9 under chapter 2.

10 ‘‘(c) NO CREDITS.—Notwithstanding any provision

11 to the contrary in this chapter, no provision of this chapter

12 shall result in a tax credit against any tax imposed by

13 chapter 1 or chapter 2.

14 ‘‘(d) EFFECT OF FAILURE TO COMPLY WITH PROVI15 SIONS.—A failure to comply with applicable provisions in

16 this chapter could cause a plan to lose its exemption from

17 the business tax and, thereby subject certain business ac18 tivities of the plan to the business tax and/or result in

19 the constructive distribution of plan assets to plan partici20 pants.’’

21 (c) SECTION 408A SUSPERSEDED BY SECTION 30.—

22 Section 408A is repealed.

23 SEC. 402. CLERICAL AMENDMENTS.

24 (a) TABLE OF SECTIONS.—The table of sections for

25 subpart A of part 1 of chapter 3 of the USA Tax Code
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1 (formerly subchapter D of chapter 1 of the Code) is

2 amended by inserting at the beginning of the table:

3 ‘‘CHAPTER 3—DEFERRED COMPENSATION,

4 ETC.’’

5 (b) RENUMBERING OF CHAPTERS.—

6 (1) RENUMBER CHAPTERS.—Chapters 2 and 3

7 of the Code are renumbered 4 and 5 respectively.

8 Such renumbering shall be reflected in all tables and

9 headings in the Code.

10 (2) CROSS REFERENCES.—Any cross reference

11 to chapter 2 or 3 of the Code contained in any provi12 sion of the Code that is not amended by this Act or

13 in any other statute shall be treated as a reference

14 to such chapter as renumbered by paragraph 1.

15 TITLE V—REPEAL OF ESTATE

16 AND GIFT TAXES

17 SEC. 501. REPEAL OF GRATUITOUS TRANSFER TAXES.

18 Subtitle B of the Code (relating to estate and gift

19 taxes) is repealed.

20 SEC 502. EFFECTIVE DATE.

21 Section 501 shall apply to—

22 (1) gifts made after December 31, 2001;

23 (2) the estates of decedents dying after Decem24 ber 31, 2001, and
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1 (3) generating skipping transfers (within the

2 meaning of subchapter B of chapter 13 as in effect

3 before its repeal by this Act) occurring after Decem4 ber 31, 2001.

5 TITLE VI—TECHNICAL AND AD6 MINISTRATIVE CHANGES: EF7 FECTIVE DATES

8 SEC. 601. USA TAX CODE.

9 (a) REDESIGNATION OF THE CODE.—The Internal

10 Revenue Title enacted August 16, 1954, and as heretofore

11 and hereby amended may be cited as the ‘‘USA Tax

12 Code’’. The USA Tax Code, as hereinafter amended, may

13 be cited as the ‘‘USA Tax Code, as amended’’.

14 (b) REFERENCES IN LAWS, ETC.—Except where in15 appropriate, any reference in any law, Executive order, or

16 other document—

17 (1) to the Internal Revenue Code of 1954 or

18 the Internal Revenue Code of 1986 shall include a

19 reference to the USA Tax Code or the USA Tax

20 Code, as amended,

21 (2) to the USA Tax Code or the USA Tax

22 Code, as amended, shall include a reference, with re23 spect to periods before January 1, 2002, to the In24 ternal Revenue Code of 1954 or the Internal Rev25 enue Code of 1986.
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1 SEC. 602. REVISIONS TO THE CODE.

2 Not later than January 1, 2003, the Secretary shall

3 submit to Congress proposed changes in the USA Tax

4 Code that—

5 (1) eliminate cross-references to the Internal

6 Revenue Code of 1986 (except with respect to tran7 sition issues) and insert provisions similar to the

8 cross-referenced sections of the Internal Revenue

9 Code of 1986,

10 (2) revise subtitles C through J of the USA

11 Tax Code to fully reflect the amendments to subtitle

12 A of the Code made by this Act and the repeal of

13 subtitle B,

14 (3) include statutory definitions or rules in

15 cases where the Secretary concludes that the defini16 tions or rules cannot or should not be addressed by

17 regulation,

18 (4) revise chapter 4 of the USA Tax Code (as

19 renumbered by section 402 of this Act) (relating to

20 the self-employment tax) to conform to changes

21 made by this Act, and

22 (5) revise chapter 5 of the USA Tax Code (as

23 renumbered by section 402 of this Act) (relating to

24 withholding on nonresident aliens and foreign cor25 porations) to reflect changes made in this Act.
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1 SEC. 603. APPLICATION OF SUBTITLE F.

2 Until such time as subtitle F of the Code is amended

3 to reflect the amendments made by this Act, the provisions

4 of subtitle F shall be treated as generally applying to the

5 Simplified USA Tax—

6 (1) without regard to specific cross references,

7 (2) without regard to provisions relating to

8 partnerships, and

9 (3) as if the business tax under chapter 2 were

10 the corporate income tax and all business entities

11 were corporations (except for purposes of collection,

12 in which case the owners of noncorporate entities

13 shall be obligated for taxes owned by the entities to

14 the same extent as they would if the entity owed the

15 tax prior to the amendment of the Code).

16 SEC. 604. CLERICAL AMENDMENT.

17 The portion of the table at the beginning of the Code

18 listing subtitles and chapters of subtitle A is amended to

19 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.
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‘‘Chapter 3. Deferred compensation plans.

‘‘Chapter 4. Tax on self-employment income.

‘‘Chapter 5. Withholding of tax on nonresident aliens and foreign corporations.’’

1 SEC. 605. EFFECTIVE DATES.

2 (a) IN GENERAL.—Except as otherwise provided in

3 this Act, the amendments made by this Act shall be effec4 tive on January 1, 2002, with respect to tax years begin5 ning on such date.

6 (b) SPECIAL RULES FOR BUSINESSES WITH 52–53

7 WEEK YEAR.—If a business uses a 52–53 week taxable

8 year the amendments made by this Act shall apply to the

9 business with respect to its tax year beginning in the last

10 week in December except with respect to any transactions

11 occurring during 2001 that were structured to take advan12 tage of the application of this Act to such business at a

13 time when this Act did not apply to other businesses or

14 to individuals.

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