II

107TH CONGRESS

1ST SESSION S. 1040

To promote freedom, fairness, and economic opportunity for families by

reducing the power and reach of the Federal establishment.

IN THE SENATE OF THE UNITED STATES

JUNE 14, 2001

Mr. SHELBY introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To promote freedom, fairness, and economic opportunity for

families by reducing the power and reach of the Federal

establishment.

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; TABLE OF CONTENTS.

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

5 ‘‘Freedom and Fairness Restoration Act of 2001’’.

6 (b) TABLE OF CONTENTS.—

Sec. 1. Short title; table of contents.

TITLE I—TAX REDUCTION AND SIMPLIFICATION

Sec. 101. Individual income tax.

Sec. 102. Tax on business activities.

Sec. 103. Simplification of rules relating to qualified retirement plans.

Sec. 104. Repeal of alternative minimum tax.
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Sec. 105. Repeal of credits.

Sec. 106. Repeal of estate and gift taxes and obsolete income tax provisions.

Sec. 107. Effective date.

TITLE II—SUPERMAJORITY REQUIRED FOR TAX CHANGES

Sec. 201. Supermajority required.

1 TITLE I—TAX REDUCTION AND

2 SIMPLIFICATION

3 SEC. 101. INDIVIDUAL INCOME TAX.

4 (a) IN GENERAL.—Section 1 of the Internal Revenue

5 Code of 1986 is amended to read as follows:

6 ‘‘SECTION 1. TAX IMPOSED.

7 ‘‘There is hereby imposed on the taxable income of

8 every individual a tax equal to 19 percent (17 percent in

9 the case of taxable years beginning after December 31,

10 2002) of the taxable income of such individual for such

11 taxable year.’’

12 (b) TAXABLE INCOME.—Section 63 of such Code is

13 amended to read as follows:

14 ‘‘SEC. 63. TAXABLE INCOME.

15 ‘‘(a) IN GENERAL.—For purposes of this subtitle, the

16 term ‘taxable income’ means the excess of—

17 ‘‘(1) the sum of—

18 ‘‘(A) wages (as defined in section 3121(a)

19 without regard to paragraph (1) thereof) which

20 are paid in cash and which are received during

21 the taxable year for services performed in the

22 United States,
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1 ‘‘(B) retirement distributions which are in2 cludible in gross income for such taxable year,

3 plus

4 ‘‘(C) amounts received under any law of

5 the United States or of any State which is in

6 the nature of unemployment compensation, over

7 ‘‘(2) the standard deduction.

8 ‘‘(b) STANDARD DEDUCTION.—

9 ‘‘(1) IN GENERAL.—For purposes of this sub10 title, the term ‘standard deduction’ means the sum

11 of—

12 ‘‘(A) the basic standard deduction, plus

13 ‘‘(B) the additional standard deduction.

14 ‘‘(2) BASIC STANDARD DEDUCTION.—For pur15 poses of paragraph (1), the basic standard deduction

16 is—

17 ‘‘(A) $24,600 in the case of—

18 ‘‘(i) a joint return, or

19 ‘‘(ii) a surviving spouse (as defined in

20 section 2(a)),

21 ‘‘(B) $15,700 in the case of a head of

22 household (as defined in section 2(b)), and

23 ‘‘(C) $12,300 in the case of an

24 individual—
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1 ‘‘(i) who is not married and who is

2 not a surviving spouse or head of house3 hold, or

4 ‘‘(ii) who is a married individual filing

5 a separate return.

6 ‘‘(3) ADDITIONAL STANDARD DEDUCTION.—For

7 purposes of paragraph (1), the additional standard

8 deduction is $5,300 for each dependent (as defined

9 in section 152) who is described in section 151(c)(1)

10 for the taxable year and who is not required to file

11 a return for such taxable year.

12 ‘‘(c) RETIREMENT DISTRIBUTIONS.—For purposes of

13 subsection (a), the term ‘retirement distribution’ means

14 any distribution from—

15 ‘‘(1) a plan described in section 401(a) which

16 includes a trust exempt from tax under section

17 501(a),

18 ‘‘(2) an annuity plan described in section

19 403(a),

20 ‘‘(3) an annuity contract described in section

21 403(b),

22 ‘‘(4) an individual retirement account described

23 in section 408(a),

24 ‘‘(5) an individual retirement annuity described

25 in section 408(b),
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1 ‘‘(6) an eligible deferred compensation plan (as

2 defined in section 457),

3 ‘‘(7) a governmental plan (as defined in section

4 414(d)), or

5 ‘‘(8) a trust described in section 501(c)(18).

6 Such term includes any plan, contract, account, annuity,

7 or trust which, at any time, has been determined by the

8 Secretary to be such a plan, contract, account, annuity,

9 or trust.

10 ‘‘(d) INCOME OF CERTAIN CHILDREN.—For purposes

11 of this subtitle—

12 ‘‘(1) an individual’s taxable income shall include

13 the taxable income of each dependent child of such

14 individual who has not attained age 14 as of the

15 close of such taxable year, and

16 ‘‘(2) such dependent child shall have no liability

17 for tax imposed by section 1 with respect to such in18 come and shall not be required to file a return for

19 such taxable year.

20 ‘‘(e) INFLATION ADJUSTMENT.—

21 ‘‘(1) IN GENERAL.—In the case of any taxable

22 year beginning in a calendar year after 2001, each

23 dollar amount contained in subsection (b) shall be

24 increased by an amount determined by the Secretary

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

2 ‘‘(B) the cost-of-living adjustment for such

3 calendar year.

4 ‘‘(2) COST-OF-LIVING ADJUSTMENT.—For pur5 poses of paragraph (1), the cost-of-living adjustment

6 for any calendar year is the percentage (if any) by

7 which—

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

9 year, exceeds

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

11 ‘‘(3) CPI FOR ANY CALENDAR YEAR.—For pur12 poses of paragraph (2), the CPI for any calendar

13 year is the average of the Consumer Price Index as

14 of the close of the 12-month period ending on Au15 gust 31 of such calendar year.

16 ‘‘(4) CONSUMER PRICE INDEX.—For purposes

17 of paragraph (3), the term ‘Consumer Price Index’

18 means the last Consumer Price Index for all-urban

19 consumers published by the Department of Labor.

20 For purposes of the preceding sentence, the revision

21 of the Consumer Price Index which is most con22 sistent with the Consumer Price Index for calendar

23 year 1986 shall be used.

24 ‘‘(5) ROUNDING.—If any increase determined

25 under paragraph (1) is not a multiple of $10, such
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1 increase shall be rounded to the next highest mul2 tiple of $10.

3 ‘‘(f) MARITAL STATUS.—For purposes of this section,

4 marital status shall be determined under section 7703.’’

5 SEC. 102. TAX ON BUSINESS ACTIVITIES.

6 (a) IN GENERAL.—Section 11 of the Internal Rev7 enue Code of 1986 (relating to tax imposed on corpora8 tions) is amended to read as follows:

9 ‘‘SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.

10 ‘‘(a) TAX IMPOSED.—There is hereby imposed on

11 every person engaged in a business activity a tax equal

12 to 19 percent (17 percent in the case of taxable years be13 ginning after December 31, 2002) of the business taxable

14 income of such person.

15 ‘‘(b) LIABILITY FOR TAX.—The tax imposed by this

16 section shall be paid by the person engaged in the business

17 activity, whether such person is an individual, partnership,

18 corporation, or otherwise.

19 ‘‘(c) BUSINESS TAXABLE INCOME.—For purposes of

20 this section—

21 ‘‘(1) IN GENERAL.—The term ‘business taxable

22 income’ means gross active income reduced by the

23 deductions specified in subsection (d).

24 ‘‘(2) GROSS ACTIVE INCOME.—
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1 ‘‘(A) IN GENERAL.—For purposes of para2 graph (1), the term ‘gross active income’ means

3 gross receipts from—

4 ‘‘(i) the sale or exchange of property

5 or services in the United States by any

6 person in connection with a business activ7 ity, and

8 ‘‘(ii) the export of property or services

9 from the United States in connection with

10 a business activity.

11 ‘‘(B) EXCHANGES.—For purposes of this

12 section, the amount treated as gross receipts

13 from the exchange of property or services is the

14 fair market value of the property or services re15 ceived, plus any money received.

16 ‘‘(C) COORDINATION WITH SPECIAL RULES

17 FOR FINANCIAL SERVICES, ETC.—Except as

18 provided in subsection (e)—

19 ‘‘(i) the term ‘property’ does not in20 clude money or any financial instrument,

21 and

22 ‘‘(ii) the term ‘services’ does not in23 clude financial services.

24 ‘‘(3) EXEMPTION FROM TAX FOR ACTIVITIES OF

25 GOVERNMENTAL ENTITIES AND TAX-EXEMPT ORGA-
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1 NIZATIONS.—For purposes of this section, the term

2 ‘business activity’ does not include any activity of a

3 governmental entity or of any other organization

4 which is exempt from tax under this chapter.

5 ‘‘(d) DEDUCTIONS.—

6 ‘‘(1) IN GENERAL.—The deductions specified in

7 this subsection are—

8 ‘‘(A) the cost of business inputs for the

9 business activity,

10 ‘‘(B) wages (as defined in section 3121(a)

11 without regard to paragraph (1) thereof) which

12 are paid in cash for services performed in the

13 United States as an employee, and

14 ‘‘(C) retirement contributions to or under

15 any plan or arrangement which makes retire16 ment distributions (as defined in section 63(c))

17 for the benefit of such employees to the extent

18 such contributions are allowed as a deduction

19 under section 404.

20 ‘‘(2) BUSINESS INPUTS.—

21 ‘‘(A) IN GENERAL.—For purposes of para22 graph (1), the term ‘cost of business inputs’

23 means—
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1 ‘‘(i) the amount paid for property sold

2 or used in connection with a business ac3 tivity,

4 ‘‘(ii) the amount paid for services

5 (other than for the services of employees,

6 including fringe benefits paid by reason of

7 such services) in connection with a busi8 ness activity, and

9 ‘‘(iii) any excise tax, sales tax, cus10 toms duty, or other separately stated levy

11 imposed by a Federal, State, or local gov12 ernment on the purchase of property or

13 services which are for use in connection

14 with a business activity.

15 Such term shall not include any tax imposed by

16 chapter 2 or 21.

17 ‘‘(B) EXCEPTIONS.—Such term shall not

18 include—

19 ‘‘(i) items described in subparagraphs

20 (B) and (C) of paragraph (1), and

21 ‘‘(ii) items for personal use not in

22 connection with any business activity.

23 ‘‘(C) EXCHANGES.—For purposes of this

24 section, the amount treated as paid in connec25 tion with the exchange of property or services
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1 is the fair market value of the property or serv2 ices exchanged, plus any money paid.

3 ‘‘(e) SPECIAL RULES FOR FINANCIAL INTER4 MEDIATION SERVICE ACTIVITIES.—In the case of the

5 business activity of providing financial intermediation

6 services, the taxable income from such activity shall be

7 equal to the value of the intermediation services provided

8 in such activity.

9 ‘‘(f) EXCEPTION FOR SERVICES PERFORMED AS EM10 PLOYEE.—For purposes of this section, the term ‘business

11 activity’ does not include the performance of services by

12 an employee for the employee’s employer.

13 ‘‘(g) CARRYOVER OF CREDIT-EQUIVALENT OF EX14 CESS DEDUCTIONS.—

15 ‘‘(1) IN GENERAL.—If the aggregate deductions

16 for any taxable year exceed the gross active income

17 for such taxable year, the credit-equivalent of such

18 excess shall be allowed as a credit against the tax

19 imposed by this section for the following taxable

20 year.

21 ‘‘(2) CREDIT-EQUIVALENT OF EXCESS DEDUC22 TIONS.—For purposes of paragraph (1), the credit23 equivalent of the excess described in paragraph (1)

24 for any taxable year is an amount equal to—

25 ‘‘(A) the sum of—
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1 ‘‘(i) such excess, plus

2 ‘‘(ii) the product of such excess and

3 the 3-month Treasury rate for the last

4 month of such taxable year, multiplied by

5 ‘‘(B) the rate of the tax imposed by sub6 section (a) for such taxable year.

7 ‘‘(3) CARRYOVER OF UNUSED CREDIT.—If the

8 credit allowable for any taxable year by reason of

9 this subsection exceeds the tax imposed by this sec10 tion for such year, then (in lieu of treating such ex11 cess as an overpayment) the sum of—

12 ‘‘(A) such excess, plus

13 ‘‘(B) the product of such excess and the 3-

14 month Treasury rate for the last month of such

15 taxable year,

16 shall be allowed as a credit against the tax imposed

17 by this section for the following taxable year.

18 ‘‘(4) 3-MONTH TREASURY RATE.—For purposes

19 of this subsection, the 3-month Treasury rate is the

20 rate determined by the Secretary based on the aver21 age market yield (during any 1-month period se22 lected by the Secretary and ending in the calendar

23 month in which the determination is made) on out24 standing marketable obligations of the United States
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1 with remaining periods to maturity of 3 months or

2 less.’’

3 (b) TAX ON TAX-EXEMPT ENTITIES PROVIDING

4 NONCASH COMPENSATION TO EMPLOYEES.—Section

5 4977 of such Code is amended to read as follows:

6 ‘‘SEC. 4977. TAX ON NONCASH COMPENSATION PROVIDED

7 TO EMPLOYEES NOT ENGAGED IN BUSINESS

8 ACTIVITY.

9 ‘‘(a) IMPOSITION OF TAX.—There is hereby imposed

10 a tax equal to 19 percent (17 percent in the case of cal11 endar years beginning after December 31, 2002) of the

12 value of excludable compensation provided during the cal13 endar year by an employer for the benefit of employees

14 to whom this section applies.

15 ‘‘(b) LIABILITY FOR TAX.—The tax imposed by this

16 section shall be paid by the employer.

17 ‘‘(c) EXCLUDABLE COMPENSATION.—For purposes

18 of subsection (a), the term ‘excludable compensation’

19 means any remuneration for services performed as an em20 ployee other than—

21 ‘‘(1) wages (as defined in section 3121(a) with22 out regard to paragraph (1) thereof) which are paid

23 in cash,

24 ‘‘(2) remuneration for services performed out25 side the United States, and
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1 ‘‘(3) retirement contributions to or under any

2 plan or arrangement which makes retirement dis3 tributions (as defined in section 63(c)).

4 ‘‘(d) EMPLOYEES TO WHOM SECTION APPLIES.—

5 This section shall apply to an employee who is employed

6 in any activity by—

7 ‘‘(1) any organization which is exempt from

8 taxation under this chapter, or

9 ‘‘(2) any agency or instrumentality of the

10 United States, any State or political subdivision of

11 a State, or the District of Columbia.’’

12 SEC. 103. SIMPLIFICATION OF RULES RELATING TO QUALI13 FIED RETIREMENT PLANS.

14 (a) IN GENERAL.—The following provisions of the In15 ternal Revenue Code of 1986 are hereby repealed:

16 (1) NONDISCRIMINATION RULES.—

17 (A) Paragraphs (4) and (5) of section

18 401(a) (relating to nondiscrimination require19 ments).

20 (B) Sections 401(a)(10)(B) and 416 (re21 lating to top heavy plans).

22 (C) Section 401(a)(17) (relating to com23 pensation limit).
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1 (D) Sections 401(a)(26) and 410(b) (relat2 ing to minimum participation and coverage re3 quirements).

4 (E) Paragraphs (3), (8), (11), and (12) of

5 sections 401(k), and section 4979, (relating to

6 actual deferral percentage).

7 (F) Section 401(l) (relating to permitted

8 disparity in plan contributions or benefits).

9 (G) Section 401(m) (relating to non10 discrimination test for matching contributions

11 and employee contributions).

12 (H) Paragraphs (1)(D) and (12) of section

13 403(b) (relating to nondiscrimination require14 ments).

15 (I) Paragraph (3) of section 408(k) and

16 paragraph (6) (other than subparagraph (A)(i))

17 of such section (relating to simplified employee

18 pensions).

19 (2) CONTRIBUTION LIMITS.—

20 (A) Sections 401(a)(16), 403(b) (2) and

21 (3), and 415 (relating to limitations on benefits

22 and contributions under qualified plans).

23 (B) Sections 401(a)(30) and 402(g) (relat24 ing to limitation on exclusion for elective defer25 rals).
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1 (C) Paragraphs (3) and (7) of section

2 404(a) (relating to percentage of compensation

3 limits).

4 (D) Section 404(l) (relating to limit on in5 cludible compensation).

6 (3) RESTRICTIONS ON DISTRIBUTIONS.—

7 (A) Section 72(t) (relating to 10-percent

8 additional tax on early distributions from quali9 fied retirement plans).

10 (B) Sections 401(a)(9), 403(b)(10), and

11 4974 (relating to minimum distribution rules).

12 (C) Section 402(e)(4) (relating to net un13 realized appreciation).

14 (D) Section 4980A (relating to tax on ex15 cess distributions from qualified retirement

16 plans).

17 (4) SPECIAL REQUIREMENTS FOR PLAN BENE18 FITING SELF-EMPLOYED INDIVIDUALS.—Subsections

19 (a)(10)(A) and (d) of section 401.

20 (5) PROHIBITION OF TAX-EXEMPT ORGANIZA21 TIONS AND GOVERNMENTS FROM HAVING QUALIFIED

22 CASH OR DEFERRED ARRANGEMENTS.—Section

23 401(k)(4)(B).
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1 (b) EMPLOYER REVERSIONS OF EXCESS PENSION

2 ASSETS PERMITTED SUBJECT ONLY TO INCOME INCLU3 SION.—

4 (1) REPEAL OF TAX ON EMPLOYER REVER5 SIONS.—Section 4980 of such Code is hereby re6 pealed.

7 (2) EMPLOYER REVERSIONS PERMITTED WITH8 OUT PLAN TERMINATION.—Section 420 of such

9 Code is amended to read as follows:

10 ‘‘SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS.

11 ‘‘(a) IN GENERAL.—If there is a qualified transfer

12 of any excess pension assets of a defined benefit plan

13 (other than a multiemployer plan) to an employer—

14 ‘‘(1) a trust which is part of such plan shall not

15 be treated as failing to meet the requirements of sec16 tion 401(a) or any other provision of law solely by

17 reason of such transfer (or any other action author18 ized under this section), and

19 ‘‘(2) such transfer shall not be treated as a pro20 hibited transaction for purposes of section 4975.

21 The gross income of the employer shall include the amount

22 of any qualified transfer made during the taxable year.

23 ‘‘(b) QUALIFIED TRANSFER.—For purposes of this

24 section—
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1 ‘‘(1) IN GENERAL.—The term ‘qualified trans2 fer’ means a transfer—

3 ‘‘(A) of excess pension assets of a defined

4 benefit plan to the employer, and

5 ‘‘(B) with respect to which the vesting re6 quirements of subsection (c) are met in connec7 tion with the plan.

8 ‘‘(2) ONLY 1 TRANSFER PER YEAR.—No more

9 than 1 transfer with respect to any plan during a

10 taxable year may be treated as a qualified transfer

11 for purposes of this section.

12 ‘‘(c) VESTING REQUIREMENTS OF PLANS TRANSFER13 RING ASSETS.—The vesting requirements of this sub14 section are met if the plan provides that the accrued pen15 sion benefits of any participant or beneficiary under the

16 plan become nonforfeitable in the same manner which

17 would be required if the plan had terminated immediately

18 before the qualified transfer (or in the case of a partici19 pant who separated during the 1-year period ending on

20 the date of the transfer, immediately before such separa21 tion).

22 ‘‘(d) DEFINITION AND SPECIAL RULE.—For pur23 poses of this section—

24 ‘‘(1) EXCESS PENSION ASSETS.—The term ‘ex25 cess pension assets’ means the excess (if any) of—
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1 ‘‘(A) the amount determined under section

2 412(c)(7)(A)(ii), over

3 ‘‘(B) the greater of—

4 ‘‘(i) the amount determined under

5 section 412(c)(7)(A)(i), or

6 ‘‘(ii) 125 percent of current liability

7 (as defined in section 412(c)(7)(B)).

8 The determination under this paragraph shall be

9 made as of the most recent valuation date of the

10 plan preceding the qualified transfer.

11 ‘‘(2) COORDINATION WITH SECTION 412.—In

12 the case of a qualified transfer—

13 ‘‘(A) any assets transferred in a plan year

14 on or before the valuation date for such year

15 (and any income allocable thereto) shall, for

16 purposes of section 412, be treated as assets in

17 the plan as of the valuation date for such year,

18 and

19 ‘‘(B) the plan shall be treated as having a

20 net experience loss under section

21 412(b)(2)(B)(iv) in an amount equal to the

22 amount of such transfer and for which amorti23 zation charges begin for the first plan year

24 after the plan year in which such transfer oc25 curs, except that such section shall be applied
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1 to such amount by substituting ‘10 plan years’

2 for ‘5 plan years’.’’

3 SEC. 104. REPEAL OF ALTERNATIVE MINIMUM TAX.

4 Part VI of subchapter A of chapter 1 of the Internal

5 Revenue Code of 1986 is hereby repealed.

6 SEC. 105. REPEAL OF CREDITS.

7 Part IV of subchapter A of chapter 1 of the Internal

8 Revenue Code of 1986 is hereby repealed.

9 SEC. 106. REPEAL OF ESTATE AND GIFT TAXES AND OBSO10 LETE INCOME TAX PROVISIONS.

11 (a) REPEAL OF ESTATE AND GIFT TAXES.—

12 (1) IN GENERAL.—Subtitle B of the Internal

13 Revenue Code of 1986 is hereby repealed.

14 (2) EFFECTIVE DATE.—The repeal made by

15 paragraph (1) shall apply to the estates of decedents

16 dying, and gifts and generation-skipping transfers

17 made, after December 31, 2000.

18 (b) REPEAL OF OBSOLETE INCOME TAX PROVI19 SIONS.—

20 (1) IN GENERAL.—Except as provided in para21 graph (2), chapter 1 of the Internal Revenue Code

22 of 1986 is hereby repealed.

23 (2) EXCEPTIONS.—Paragraph (1) shall not

24 apply to—
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1 (A) sections 1, 11, and 63 of such Code,

2 as amended by this Act,

3 (B) those provisions of chapter 1 of such

4 Code which are necessary for determining

5 whether or not—

6 (i) retirement distributions are includ7 ible in the gross income of employees, or

8 (ii) an organization is exempt from

9 tax under such chapter, and

10 (C) subchapter D of such chapter 1 (relat11 ing to deferred compensation).

12 SEC. 107. EFFECTIVE DATE.

13 Except as otherwise provided in this title, the amend14 ments made by this title shall apply to taxable years begin15 ning after December 31, 2000.

16 TITLE II—SUPERMAJORITY

17 REQUIRED FOR TAX CHANGES

18 SEC. 201. SUPERMAJORITY REQUIRED.

19 (a) IN GENERAL.—It shall not be in order in the

20 House of Representatives or the Senate to consider any

21 bill, joint resolution, amendment thereto, or conference re22 port thereon that includes any provision that—

23 (1) increases any Federal income tax rate,

24 (2) creates any additional Federal income tax

25 rate,
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1 (3) reduces the standard deduction, or

2 (4) provides any exclusion, deduction, credit or

3 other benefit which results in a reduction in Federal

4 revenues.

5 (b) WAIVER OR SUSPENSION.—This section may be

6 waived or suspended in the House of Representatives or

7 the Senate only by the affirmative vote of three-fifths of

8 the Members, duly chosen and sworn.

Æ