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[House Report 115-958]
[From the U.S. Government Publishing Office]

115th Congress }                                            { Report
                       HOUSE OF REPRESENTATIVES 
 2d Session    }                                            { 115-958
               
_______________________________________________________________________

                                     

       PROTECTING FAMILY AND SMALL BUSINESS TAX CUTS ACT OF 2018

                               __________

                              R E P O R T

                                 of the

                      COMMITTEE ON WAYS AND MEANS

                        HOUSE OF REPRESENTATIVES

                                   on

                               H.R. 6760

                             together with

                            DISSENTING VIEWS

      [Including cost estimate of the Congressional Budget Office]
      

              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 September 24, 2018.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed
            
            
                                 ________
                       
                   U.S. GOVERNMENT PUBLISHING OFFICE
                
31-578                      WASHINGTON: 2018            
            

            
            
                            C O N T E N T S

                              ----------                              
                                                                   Page
  I. SUMMARY AND BACKGROUND..........................................18
          A. Purpose and Summary.................................    18
          B. Background and Need for Legislation.................    18
          C. Legislative History.................................    19
 II. EXPLANATION OF THE BILL.........................................19
III. VOTES OF THE COMMITTEE..........................................24
 IV. BUDGET EFFECTS OF THE BILL......................................29
          A. Committee Estimate of Budgetary Effects.............    29
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................    33
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................    33
  V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......40
          A. Committee Oversight Findings and Recommendations....    40
          B. Statement of General Performance Goals and 
              Objectives.........................................    40
          C. Information Relating to Unfunded Mandates...........    40
          D. Applicability of House Rule XXI 5(b)................    40
          E. Tax Complexity Analysis.............................    40
          F. Congressional Earmarks, Limited Tax Benefits, and 
              Limited Tariff Benefits............................    49
          G. Duplication of Federal Programs.....................    49
          H. Disclosure of Directed Rule Makings.................    49
 VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........49
          A. Changes in Existing Law Proposed by the Bill, as 
              Reported...........................................    49
VII. DISSENTING VIEWS...............................................681

115th Congress }                                           { Report
                        HOUSE OF REPRESENTATIVES
 2d Session    }                                           { 115-958

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

 
       PROTECTING FAMILY AND SMALL BUSINESS TAX CUTS ACT OF 2018

                                _______
                                

 September 24, 2018.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

Mr. Brady of Texas, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 6760]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 6760) to amend the Internal Revenue Code of 1986 to 
make permanent certain provisions of the Tax Cuts and Jobs Act 
affecting individuals, families, and small businesses, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE, ETC.

  (a) Short Title.--This Act may be cited as the ``Protecting Family 
and Small Business Tax Cuts Act of 2018''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.
  (c) References to the Tax Cuts and Jobs Act.--Title I of Public Law 
115-97 may be cited as the ``Tax Cuts and Jobs Act''.
  (d) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title, etc.

               TITLE I--INDIVIDUAL REFORM MADE PERMANENT

                        Subtitle A--Rate Reform

Sec. 101. Modification of rates.

   Subtitle B--Deduction for Qualified Business Income of Pass-thru 
                                Entities

Sec. 111. Deduction for qualified business income.
Sec. 112. Limitation on losses for taxpayers other than corporations.

         Subtitle C--Tax Benefits for Families and Individuals

Sec. 121. Increase in standard deduction.
Sec. 122. Increase in and modification of child tax credit.
Sec. 123. Increased limitation for certain charitable contributions.
Sec. 124. Increased contributions to ABLE accounts.
Sec. 125. Rollovers to ABLE programs from 529 programs.
Sec. 126. Treatment of certain individuals performing services in the 
Sinai Peninsula of Egypt.
Sec. 127. Extension of reduction in threshold for medical expense 
deduction.

                         Subtitle D--Education

Sec. 131. Treatment of student loans discharged on account of death or 
disability.

                 Subtitle E--Deductions and Exclusions

Sec. 141. Repeal of deduction for personal exemptions.
Sec. 142. Limitation on deduction for State and local, etc. taxes.
Sec. 143. Limitation on deduction for qualified residence interest.
Sec. 144. Modification of deduction for personal casualty losses.
Sec. 145. Termination of miscellaneous itemized deductions.
Sec. 146. Repeal of overall limitation on itemized deductions.
Sec. 147. Termination of exclusion for qualified bicycle commuting 
reimbursement.
Sec. 148. Qualified moving expense reimbursement exclusion limited to 
members of Armed Forces.
Sec. 149. Deduction for moving expenses limited to members of Armed 
Forces.
Sec. 150. Limitation on wagering losses.

         Subtitle F--Increase in Estate and Gift Tax Exemption

Sec. 151. Increase in estate and gift tax exemption.

    TITLE II--INCREASED EXEMPTION FOR ALTERNATIVE MINIMUM TAX MADE 
                               PERMANENT

Sec. 201. Increased exemption for individuals.

               TITLE I--INDIVIDUAL REFORM MADE PERMANENT

                        Subtitle A--Rate Reform

SEC. 101. MODIFICATION OF RATES.

  (a) Married Individuals Filing Joint Returns and Surviving Spouses.--
Section 1(a) is amended by striking the table contained therein and 
inserting the following:

 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $19,050.....................  10% of taxable income.
Over $19,050 but not over $77,400....  $1,905, plus 12% of the excess
                                        over $19,050.
Over $77,400 but not over $165,000...  $8,907, plus 22% of the excess
                                        over $77,400.
Over $165,000 but not over $315,000..  $28,179, plus 24% of the excess
                                        over $165,000.
Over $315,000 but not over $400,000..  $64,179, plus 32% of the excess
                                        over $315,000.
Over $400,000 but not over $600,000..  $91,379, plus 35% of the excess
                                        over $400,000.
Over $600,000........................  $161,379, plus 37% of the excess
                                        over $600,000.''.

  (b) Head of Households.--Section 1(b) is amended by striking the 
table contained therein and inserting the following:

 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $13,600.....................  10% of taxable income.
Over $13,600 but not over $51,800....  $1,360, plus 12% of the excess
                                        over $13,600.
Over $51,800 but not over $82,500....  $5,944, plus 22% of the excess
                                        over $51,800.
Over $82,500 but not over $157,500...  $12,698, plus 24% of the excess
                                        over $82,500.
Over $157,500 but not over $200,000..  $30,698, plus 32% of the excess
                                        over $157,500.
Over $200,000 but not over $500,000..  $44,298, plus 35% of the excess
                                        over $200,000.
Over $500,000........................  $149,298, plus 37% of the excess
                                        over $500,000.''.

  (c) Unmarried Individuals Other Than Surviving Spouses and Heads of 
Household.--Section 1(c) is amended by striking the table contained 
therein and inserting the following:

 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $500,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $500,000........................  $150,689.50, plus 37% of the
                                        excess over $500,000.''.

  (d) Married Individuals Filing Separate Returns.--Section 1(d) is 
amended by striking the table contained therein and inserting the 
following:

 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $300,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $300,000........................  $80,689.50, plus 37% of the
                                        excess over $300,000.''.

  (e) Estates and Trusts.--Section 1(e) is amended by striking the 
table contained therein and inserting the following:

 
       ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $2,550......................  10% of taxable income.
Over $2,550 but not over $9,150......  $255, plus 24% of the excess over
                                        $2,550.
Over $9,150 but not over $12,500.....  $1,839, plus 35% of the excess
                                        over $9,150.
Over $12,500.........................  $3,011.50, plus 37% of the excess
                                        over $12,500.''.

  (f) Inflation Adjustments.--Section 1(f) is amended--
          (1) by striking ``1993'' in paragraph (1) and inserting 
        ``2018'',
          (2) by amending paragraph (2)(A) to read as follows:
                  ``(A) by increasing the minimum and maximum dollar 
                amounts for each bracket for which a tax is imposed 
                under such table by the cost-of-living adjustment for 
                such calendar year, determined under this subsection 
                for such calendar year by substituting `2017' for 
                `2016' in paragraph (3)(A)(ii),'',
          (3) in paragraph (7)(B), by striking all that precedes 
        ``(other than with respect to'' and inserting the following:
                  ``(B) Special rule.--In the case of a table 
                prescribed in lieu of the table contained in subsection 
                (b), (c), or (d), subparagraph (A)'',
          (4) by striking paragraph (8), and
          (5) in the heading, by striking ``Phaseout of Marriage 
        Penalty in 15-percent Bracket; Adjustments'' and inserting 
        ``Adjustments''.
  (g) Special Rules for Certain Children With Unearned Income.--
          (1) In general.--Section 1(g) is amended by striking all that 
        precedes paragraph (2) and inserting the following:
  ``(g) Special Rules for Certain Children With Unearned Income.--
          ``(1) In general.--In the case of any child to whom this 
        subsection applies--
                  ``(A) Modifications to applicable rate brackets.--In 
                determining the amount of tax imposed by this section 
                for the taxable year on such child, the income tax 
                table otherwise applicable under this section to such 
                child shall be applied with the following 
                modifications:
                          ``(i) 24-percent bracket.--The maximum 
                        taxable income which is taxed at a rate below 
                        24 percent shall not be more than the sum of--
                                  ``(I) the earned taxable income of 
                                such child, plus
                                  ``(II) the minimum taxable income for 
                                the 24-percent bracket in the table 
                                under subsection (e) (as adjusted under 
                                subsection (f)) for the taxable year.
                          ``(ii) 35-percent bracket.--The maximum 
                        taxable income which is taxed at a rate below 
                        35 percent shall not be more than the sum of--
                                  ``(I) the earned taxable income of 
                                such child, plus
                                  ``(II) the minimum taxable income for 
                                the 35-percent bracket in the table 
                                under subsection (e) (as adjusted under 
                                subsection (f)) for the taxable year.
                          ``(iii) 37-percent bracket.--The maximum 
                        taxable income which is taxed at a rate below 
                        37 percent shall not be more than the sum of--
                                  ``(I) the earned taxable income of 
                                such child, plus
                                  ``(II) the minimum taxable income for 
                                the 37-percent bracket in the table 
                                under subsection (e) (as adjusted under 
                                subsection (f)) for the taxable year.
                  ``(B) Coordination with capital gains rates.--For 
                purposes of applying section 1(h)--
                          ``(i) the maximum zero rate amount shall not 
                        be more than the sum of--
                                  ``(I) the earned taxable income of 
                                such child, plus
                                  ``(II) the amount in effect under 
                                subsection (h)(13) for the taxable 
                                year, and
                          ``(ii) the maximum 15-percent rate amount 
                        shall not be more than the sum of--
                                  ``(I) the earned taxable income of 
                                such child, plus
                                  ``(II) the amount in effect under 
                                subsection (h)(12)(D) for the taxable 
                                year.''.
          (2) Earned taxable income.--Section 1(g)(3) is amended to 
        read as follows:
          ``(3) Earned taxable income.--For purposes of this 
        subsection, the term `earned taxable income' means, with 
        respect to any child for any taxable year, the taxable income 
        of such child reduced (but not below zero) by the net unearned 
        income of such child.''.
          (3) Conforming amendment.--So much of paragraph (5) of 
        section 1(g) as precedes subparagraph (A) thereof is amended to 
        read as follows:
          ``(5) Special rules for determining parent eligible to make 
        election.--For purposes of paragraph (7), the parent referred 
        to in subparagraph (A)(iv) thereof is--''.
  (h) Application of Income Tax Brackets to Capital Gains Brackets.--
Section 1(h) is amended--
          (1) in paragraph (1)(B)(i), by striking ``25 percent'' and 
        inserting ``22 percent'',
          (2) in paragraph (1)(C)(ii)(I), by striking ``which would 
        (without regard to this paragraph) be taxed at a rate below 
        39.6 percent'' and inserting ``below the maximum 15-percent 
        rate amount'', and
          (3) by adding at the end the following new paragraphs:
          ``(12) Maximum 15-percent rate amount defined.--For purposes 
        of this subsection, the maximum 15-percent rate amount shall 
        be--
                  ``(A) in the case of a joint return or surviving 
                spouse (as defined in section 2(a)), $479,000 (\1/2\ 
                such amount in the case of a married individual filing 
                a separate return),
                  ``(B) in the case of an individual who is the head of 
                a household (as defined in section 2(b)), $452,400,
                  ``(C) in the case of any other individual (other than 
                an estate or trust), $425,800, and
                  ``(D) in the case of an estate or trust, $12,700.
          ``(13) Determination of 0 percent rate bracket for estates 
        and trusts.--In the case of any estate or trust, paragraph 
        (1)(B) shall be applied by treating the amount determined in 
        clause (i) thereof as being equal to $2,600.
          ``(14) Inflation adjustment.--
                  ``(A) In general.--In the case of any taxable year 
                beginning after 2018, each of the dollar amounts in 
                paragraphs (12) and (13) shall be increased by an 
                amount equal to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii) the cost-of-living adjustment 
                        determined under subsection (f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 2017' 
                        for `calendar year 2016' in subparagraph 
                        (A)(ii) thereof.
                  ``(B) Rounding.--If any increase under subparagraph 
                (A) is not a multiple of $50, such increase shall be 
                rounded to the next lowest multiple of $50.''.
  (i) Application of Section 15.--
          (1) In general.--Subsection (a) of section 15 is amended by 
        striking ``If any rate of tax'' and inserting ``In the case of 
        a corporation, if any rate of tax''.
          (2) Conforming amendments.--
                  (A) Section 15 is amended by striking subsections 
                (d), (e), and (f).
                  (B) Section 6013(c) is amended by striking ``sections 
                15, 443, and 7851(a)(1)(A)'' and inserting ``section 
                443''.
                  (C) The heading of section 15 is amended by inserting 
                ``on corporations'' after ``effect of changes''.
                  (D) The table of sections for part III of subchapter 
                A of chapter 1 is amended by striking the item relating 
                to section 15 and inserting the following new item:

``Sec. 15. Effect of changes on corporations.''.

  (j) Conforming Amendments.--
          (1) Section 1 is amended by striking subsections (i) and (j).
          (2) Section 3402(q)(1) is amended by striking ``third 
        lowest'' and inserting ``fourth lowest''.
  (k) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2017.
          (2) Application of section 15.--Section 15 of the Internal 
        Revenue Code of 1986 shall not apply to any change in a rate of 
        tax by reason of--
                  (A) section 1(j) of such Code (as in effect before 
                its repeal by this section), or
                  (B) any amendment made by this Act.

   Subtitle B--Deduction for Qualified Business Income of Pass-thru 
                                Entities

SEC. 111. DEDUCTION FOR QUALIFIED BUSINESS INCOME.

  (a) In General.--Section 199A is amended by striking subsection (i).
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 112. LIMITATION ON LOSSES FOR TAXPAYERS OTHER THAN CORPORATIONS.

  (a) In General.--Section 461 is amended--
          (1) by amending subsection (l)(1) to read as follows:
          ``(1) Limitation.--In the case of a taxpayer other than a 
        corporation, any excess business loss of the taxpayer for the 
        taxable year shall not be allowed.'', and
          (2) by striking subsection (j) and redesignating subsections 
        (k) and (l) (as amended) as subsections (j) and (k), 
        respectively.
  (b) Conforming Amendments.--
          (1) Section 58(a)(2)(A) is amended by striking ``461(k)'' and 
        inserting ``461(j)''.
          (2) Section 461(i)(4) is amended by striking ``subsection 
        (k)'' and inserting ``subsection (j)''.
          (3) Section 464(d)(2)(B)(iii) is amended by striking 
        ``section 461(k)(2)(E)'' and inserting ``section 
        461(j)(2)(E)''.
          (4) Subparagraphs (B) and (C) of section 1256(e)(3) are each 
        amended by striking ``section 461(k)(4)'' and inserting 
        ``section 461(j)(4)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

         Subtitle C--Tax Benefits for Families and Individuals

SEC. 121. INCREASE IN STANDARD DEDUCTION.

  (a) In General.--Section 63(c)(2) is amended--
          (1) by striking ``$4,400'' in subparagraph (B) and inserting 
        ``$18,000'', and
          (2) by striking ``$3,000'' in subparagraph (C) and inserting 
        ``$12,000''.
  (b) Inflation Adjustment.--Section 63(c)(4) is amended to read as 
follows:
          ``(4) Adjustments for inflation.--
                  ``(A) In general.--In the case of a taxable year 
                beginning after 2018, each dollar amount in paragraph 
                (2)(B), (2)(C), or (5) or subsection (f) shall be 
                increased by an amount equal to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting for `2016' in 
                        subparagraph (A)(ii) thereof--
                                  ``(I) in the case of the dollar 
                                amounts contained in paragraph (2)(B) 
                                or (2)(C), `2017',
                                  ``(II) in the case of the dollar 
                                amounts contained in paragraph (5)(A) 
                                or subsection (f), `1987', and
                                  ``(III) in the case of the dollar 
                                amount contained in paragraph (5)(B), 
                                `1997'.
                  ``(B) Rounding.--If any increase under subparagraph 
                (A) is not a multiple of $50, such increase shall be 
                rounded to the next lowest multiple of $50.''.
  (c) Conforming Amendments.--
          (1) Section 1(f)(7)(A) is amended by striking ``section 
        63(c)(4),''.
          (2) Section 1(f)(7)(B) is amended by striking ``sections 
        63(c)(4) and'' and inserting ``section''.
          (3) Section 63(c) is amended by striking paragraph (7).
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 122. INCREASE IN AND MODIFICATION OF CHILD TAX CREDIT.

  (a) In General.--Section 24 is amended by striking subsections (a), 
(b), and (c) and inserting the following new subsections:
  ``(a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an amount 
equal to the sum of--
          ``(1) $2,000 for each qualifying child of the taxpayer, and
          ``(2) $500 for each qualifying dependent (other than a 
        qualifying child) of the taxpayer.
  ``(b) Limitation Based on Adjusted Gross Income.--The amount of the 
credit allowable under subsection (a) shall be reduced (but not below 
zero) by $50 for each $1,000 (or fraction thereof) by which the 
taxpayer's modified adjusted gross income exceeds $400,000 in the case 
of a joint return ($200,000 in any other case). For purposes of the 
preceding sentence, the term ``modified adjusted gross income'' means 
adjusted gross income increased by any amount excluded from gross 
income under section 911, 931, or 933.
  ``(c) Qualifying Child; Qualifying Dependent.--For purposes of this 
section--
          ``(1) Qualifying child.--The term `qualifying child' means 
        any qualifying dependent of the taxpayer--
                  ``(A) who is a qualifying child (as defined in 
                section 7706(c)) of the taxpayer,
                  ``(B) who has not attained age 17 at the close of the 
                calendar year in which the taxable year of the taxpayer 
                begins, and
                  ``(C) whose name and social security number are 
                included on the taxpayer's return of tax for the 
                taxable year.
          ``(2) Qualifying dependent.--The term `qualifying dependent' 
        means any dependent of the taxpayer (as defined in section 7706 
        without regard to all that follows `resident of the United 
        States' in section 7706(b)(3)(A)) whose name and TIN are 
        included on the taxpayer's return of tax for the taxable year.
          ``(3) Social security number defined.--For purposes of this 
        subsection, the term `social security number' means, with 
        respect to a return of tax, a social security number issued to 
        an individual by the Social Security Administration, but only 
        if the social security number is issued--
                  ``(A) to a citizen of the United States or pursuant 
                to subclause (I) (or that portion of subclause (III) 
                that relates to subclause (I)) of section 
                205(c)(2)(B)(i) of the Social Security Act, and
                  ``(B) on or before the due date of filing such 
                return.''.
  (b) Portion of Credit Refundable.--
          (1) In general.--Section 24(d)(1)(A) is amended to read as 
        follows:
                  ``(A) the credit which would be allowed under this 
                section determined--
                          ``(i) by substituting `$1,400' for `$2,000' 
                        in subsection (a)(1),
                          ``(ii) without regard to subsection (a)(2), 
                        and
                          ``(iii) without regard to this subsection and 
                        the limitation under section 26(a), or''.
          (2) Modification of limitation based on earned income.--
        Section 24(d)(1)(B)(i) is amended by striking ``$3,000'' and 
        inserting ``$2,500''.
          (3) Inflation adjustment.--Section 24(d) is amended by 
        inserting after paragraph (3) the following new paragraph:
          ``(4) Adjustment for inflation.--
                  ``(A) In general.--In the case of a taxable year 
                beginning after 2018, the $1,400 amount in paragraph 
                (1)(A)(i) shall be increased by an amount equal to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `2017' for `2016' in 
                        subparagraph (A)(ii) thereof.
                  ``(B) Rounding.--If any increase under subparagraph 
                (A) is not a multiple of $100, such increase shall be 
                rounded to the next lowest multiple of $100.
                  ``(C) Limitation.--The amount of any increase under 
                subparagraph (A) (after the application of subparagraph 
                (B)) shall not exceed $600.''.
          (4) Conforming amendments.--
                  (A) Section 24(e) is amended to read as follows:
  ``(e) Taxpayer Identification Requirement.--No credit shall be 
allowed under this section if the identifying number of the taxpayer 
was issued after the due date for filing the return of tax for the 
taxable year.''.
                  (B) Section 24 is amended by striking subsection (h).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 123. INCREASED LIMITATION FOR CERTAIN CHARITABLE CONTRIBUTIONS.

  (a) In General.--Section 170(b)(1)(G) is amended to read as follows:
                  ``(G) Cash contributions.--
                          ``(i) In general.--Any contribution of cash 
                        to an organization described in subparagraph 
                        (A) shall be allowed to the extent that the 
                        aggregate of such contributions does not exceed 
                        60 percent of the taxpayer's contribution base 
                        for the taxable year, reduced by the aggregate 
                        amount of contributions allowable under 
                        subparagraph (A) for such taxpayer for such 
                        year.
                          ``(ii) Carryover.--If the aggregate amount of 
                        contributions described in clause (i) exceeds 
                        the limitation of clause (i), such excess shall 
                        be treated (in a manner consistent with the 
                        rules of subsection (d)(1)) as a charitable 
                        contribution to which clause (i) applies in 
                        each of the 5 succeeding years in order of 
                        time.''.
  (b) Coordination With Limitations on Other Contributions.--
          (1) Coordination with 50 percent limitation.--Section 
        170(b)(1)(A) is amended by striking ``Any charitable 
        contribution'' and inserting ``Any charitable contribution 
        other than a contribution described in subparagraph (G)''.
          (2) Coordination with 30 percent limitation.--Section 
        170(b)(1)(B) is amended--
                  (A) in the matter preceding clause (i), by striking 
                ``to which subparagraph (A) applies'' and inserting 
                ``to which subparagraph (A) or (G) applies'',
                  (B) by amending clause (ii) to read as follows:
                          ``(ii) the excess of--
                                  ``(I) the sum of 50 percent of the 
                                taxpayer's contribution base for the 
                                taxable year, plus so much of the 
                                amount of charitable contributions 
                                allowable under subparagraph (G) as 
                                does not exceed 10 percent of such 
                                contribution base, over
                                  ``(II) the amount of charitable 
                                contributions allowable under 
                                subparagraphs (A) and (G) (determined 
                                without regard to subparagraph (C)).'', 
                                and
                  (C) in the matter following clause (ii), by striking 
                ``(to which subparagraph (A) does not apply)'' and 
                inserting ``(to which neither subparagraph (A) nor (G) 
                applies)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to contributions made in taxable years beginning after December 31, 
2017.

SEC. 124. INCREASED CONTRIBUTIONS TO ABLE ACCOUNTS.

  (a) Increase in Limitation for Contributions From Compensation of 
Individuals With Disabilities.--Section 529A(b)(2)(B)(ii) is amended by 
striking ``before January 1, 2026''.
  (b) Allowance of Saver's Credit for ABLE Contributions by Account 
Holder.--Section 25B(d)(1)(D) is amended by striking ``made before 
January 1, 2026,''.
  (c)  Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 125. ROLLOVERS TO ABLE PROGRAMS FROM 529 PROGRAMS.

  (a) In General.--Section 529(c)(3)(C)(i)(III) is amended by striking 
``before January 1, 2026,''.
  (b)  Effective Date.--The amendments made by this section shall apply 
to distributions after December 31, 2017.

SEC. 126. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING SERVICES IN THE 
                    SINAI PENINSULA OF EGYPT.

  (a) In General.--Section 112(c)(2) is amended--
          (1) by striking ``means any area'' and inserting ``means--
                  ``(A) any area'', and
          (2) by striking the period at the end and inserting ``, and
                  ``(B) the Sinai Peninsula of Egypt.''.
  (b) Period of Treatment.--Section 112(c)(3) is amended--
          (1) by striking ``only if performed'' and inserting ``only 
        if--
                  ``(A) in the case of an area described in paragraph 
                (2)(A), such service is performed'', and
          (2) by striking the period at the end and inserting ``, and
                  ``(B) in the case of the area described in paragraph 
                (2)(B), such service is performed during any period 
                with respect to which one or more members of the Armed 
                Forces of the United States are entitled to special pay 
                under section 310 of title 37, United States Code 
                (relating to special pay; duty subject to hostile fire 
                or imminent danger), for service performed in such 
                area.''.
  (c) Conforming Amendment.--The Tax Cuts and Jobs Act is amended by 
striking section 11026.
  (d) Effective Date.--The amendments made by this section shall apply 
with respect to services performed on or after the date of the 
enactment of this Act.

SEC. 127. EXTENSION OF REDUCTION IN THRESHOLD FOR MEDICAL EXPENSE 
                    DEDUCTION.

  (a) In General.--Section 213(a) is amended by inserting ``(7.5 
percent in the case of any taxable year beginning after December 31, 
2018, and ending before January 1, 2021)'' after ``10 percent''.
  (b) Conforming Amendments.--
          (1) Section 56(b)(1) is amended by striking subparagraph (B) 
        and by redesignating subparagraphs (C) through (F) as 
        subparagraphs (B) through (E), respectively.
          (2) Section 213 is amended by striking subsection (f).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2018.

                         Subtitle D--Education

SEC. 131. TREATMENT OF STUDENT LOANS DISCHARGED ON ACCOUNT OF DEATH OR 
                    DISABILITY.

  (a) In General.--Section 108(f)(5) is amended by striking ``after 
December 31, 2017, and before January 1, 2026''.
  (b) Effective Date.--The amendment made by this section shall apply 
to discharges of indebtedness after December 31, 2017.

                 Subtitle E--Deductions and Exclusions

SEC. 141. REPEAL OF DEDUCTION FOR PERSONAL EXEMPTIONS.

  (a) In General.--Part V of subchapter B of chapter 1 is hereby 
repealed.
  (b) Definition of Dependent Retained.--Section 152, prior to the 
repeal made by subsection (a), is hereby redesignated as section 7706 
and moved to the end of chapter 79.
  (c) Application to Trusts and Estates.--Section 642(b) is amended--
          (1) in paragraph (2)(C)--
                  (A) in clause (i), by striking ``the exemption amount 
                under section 151(d)'' and all that follows through the 
                period at the end and inserting ``the dollar amount in 
                effect under section 7706(d)(1)(B).'', and
                  (B) by striking clause (iii),
          (2) by striking paragraph (3), and
          (3) by striking ``Deduction For Personal Exemption'' in the 
        heading thereof and inserting ``Basic Deduction''.
  (d) Application to Nonresident Aliens.--Section 873(b) is amended by 
striking paragraph (3).
  (e) Modification of Return Requirement.--
          (1) In general.--Section 6012(a)(1) is amended to read as 
        follows:
          ``(1) Every individual who has gross income for the taxable 
        year, except that a return shall not be required of--
                  ``(A) an individual who is not married (determined by 
                applying section 7703) and who has gross income for the 
                taxable year which does not exceed the standard 
                deduction applicable to such individual for such 
                taxable year under section 63, or
                  ``(B) an individual entitled to make a joint return 
                if--
                          ``(i) the gross income of such individual, 
                        when combined with the gross income of such 
                        individual's spouse, for the taxable year does 
                        not exceed the standard deduction which would 
                        be applicable for such taxable year under 
                        section 63 if such individual and such 
                        individual's spouse made a joint return,
                          ``(ii) such individual's spouse does not make 
                        a separate return, and
                          ``(iii) neither such individual nor such 
                        individual's spouse is an individual described 
                        in section 63(c)(4) who has income (other than 
                        earned income) in excess of the amount in 
                        effect under section 63(c)(4)(A).''.
          (2) Bankruptcy estates.--Section 6012(a)(8) is amended by 
        striking ``the sum of the exemption amount plus''.
          (3) Conforming amendment.--Section 6012 is amended by 
        striking subsection (f).
  (f) Conforming Amendments.--
          (1) Section 1(f)(7), as amended by section 121, is amended--
                  (A) by striking ``, section 68(b)(2) or section 
                151(d)(4)'' in subparagraph (A) and inserting ``or 
                section 68(b)(2)'', and
                  (B) by striking ``(other than with respect to section 
                151(d)(4)(A))'' in subparagraph (B).
          (2) Section 1(g)(5)(A) is amended by striking ``section 
        152(e)'' and inserting ``section 7706(e)''.
          (3) Section 2(a)(1)(B) is amended--
                  (A) by striking ``section 152'' and inserting 
                ``section 7706'', and
                  (B) by striking ``with respect to whom the taxpayer 
                is entitled to a deduction for the taxable year under 
                section 151'' and inserting ``whose TIN is included on 
                the taxpayer's return of tax for the taxable year''.
          (4) Section 2(b)(1)(A)(i) is amended--
                  (A) in the matter preceding subclause (I)--
                          (i) by striking ``section 152(c)'' and 
                        inserting ``section 7706(c)'', and
                          (ii) by striking ``section 152(e)'' and 
                        inserting ``section 7706(e)'', and
                  (B) in subclause (II), by striking ``section 
                152(b)(2) or 152(b)(3)'' and inserting ``section 
                7706(b)(2) or 7706(b)(3)''.
          (5) Section 2(b)(1)(A)(ii) is amended by striking ``if the 
        taxpayer is entitled to a deduction for the taxable year for 
        such person under section 151'' and inserting ``if the taxpayer 
        included such person's TIN on the return of tax for the taxable 
        year''.
          (6) Section 2(b)(1)(B) is amended by striking ``if the 
        taxpayer is entitled to a deduction for the taxable year for 
        such father or mother under section 151'' and inserting ``if 
        such father or mother is a dependent of the taxpayer and the 
        taxpayer included such father or mother's TIN on the return of 
        tax for the taxable year''.
          (7) Section 2(b)(3)(B) is amended--
                  (A) by striking ``section 152(d)(2)'' in clause (i) 
                and inserting ``section 7706(d)(2)'', and
                  (B) by striking ``section 152(d)'' in clause (ii) and 
                inserting ``section 7706(d)''.
          (8) Section 21(b)(1)(A) is amended by striking ``section 
        152(a)(1)'' and inserting ``section 7706(a)(1)''.
          (9) Section 21(b)(1)(B) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (10) Section 21(e)(5)(A) is amended by striking ``section 
        152(e)'' and inserting ``section 7706(e)''.
          (11) Section 21(e)(5) is amended by striking ``section 
        152(e)(4)(A)'' in the matter following subparagraph (B) and 
        inserting ``section 7706(e)(4)(A)''.
          (12) Section 21(e)(6)(A) is amended to read as follows:
                  ``(A) who is a dependent of either the taxpayer or 
                the taxpayer's spouse for the taxable year, or''.
          (13) Section 21(e)(6)(B) is amended by striking ``section 
        152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (14) Section 25A(f)(1)(A)(iii) is amended by striking ``with 
        respect to whom the taxpayer is allowed a deduction under 
        section 151''.
          (15) Section 25A(g)(3) is amended by striking ``If a 
        deduction under section 151 with respect to an individual is 
        allowed to another taxpayer'' and inserting ``If an individual 
        is a dependent of another taxpayer''.
          (16) Section 25B(c)(2)(A) is amended by striking ``any 
        individual with respect to whom a deduction under section 151 
        is allowed to another taxpayer'' and inserting ``any individual 
        who is a dependent of another taxpayer''.
          (17) Section 25B(c)(2)(B) is amended by striking ``section 
        152(f)(2)'' and inserting ``section 7706(f)(2)''.
          (18) Section 32(c)(1)(A)(ii)(III) is amended by striking ``a 
        dependent for whom a deduction is allowable under section 151 
        to another taxpayer'' and inserting ``a dependent of another 
        taxpayer''.
          (19) Section 32(c)(3) is amended--
                  (A) in subparagraph (A)--
                          (i) by striking ``section 152(c)'' and 
                        inserting ``section 7706(c)'', and
                          (ii) by striking ``section 152(e)'' and 
                        inserting ``section 7706(e)'',
                  (B) in subparagraph (B), by striking ``unless the 
                taxpayer is entitled to a deduction under section 151 
                for such taxable year with respect to such individual 
                (or would be so entitled but for section 152(e)'' and 
                inserting ``if such individual is not treated as a 
                dependent of such taxpayer for such taxable year by 
                reason of section 7706(b)(2) (determined without regard 
                to section 7706(e))'', and
                  (C) in subparagraph (C), by striking ``section 
                152(c)(1)(B)'' and inserting ``section 7706(c)(1)(B)''.
          (20) Section 35(d)(1)(B) is amended by striking ``with 
        respect to whom the taxpayer is entitled to a deduction under 
        section 151(c)'' and inserting ``if the taxpayer included such 
        person's TIN on the return of tax for the taxable year''.
          (21) Section 35(d)(2) is amended--
                  (A) by striking ``section 152(e)'' and inserting 
                ``section 7706(e)'', and
                  (B) by striking ``section 152(e)(4)(A)'' and 
                inserting ``section 7706(e)(4)(A)''.
          (22) Section 36B(b)(2)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (23) Section 36B(b)(3)(B) is amended by striking ``unless a 
        deduction is allowed under section 151 for the taxable year 
        with respect to a dependent'' in the flush matter at the end 
        and inserting ``unless the taxpayer has a dependent for the 
        taxable year (and the taxpayer included such dependent's TIN on 
        the return of tax for the taxable year)''.
          (24) Section 36B(c)(1)(D) is amended by striking ``with 
        respect to whom a deduction under section 151 is allowable to 
        another taxpayer'' and inserting ``who is a dependent of 
        another taxpayer''.
          (25) Section 36B(d)(1) is amended by striking ``equal to the 
        number of individuals for whom the taxpayer is allowed a 
        deduction under section 151 (relating to allowance of deduction 
        for personal exemptions) for the taxable year'' and inserting 
        ``the sum of 1 (2 in the case of a joint return) plus the 
        number of individuals who are dependents of the taxpayer for 
        the taxable year''.
          (26) Section 36B(e)(1) is amended by striking ``1 or more 
        individuals for whom a taxpayer is allowed a deduction under 
        section 151 (relating to allowance of deduction for personal 
        exemptions) for the taxable year (including the taxpayer or his 
        spouse)'' and inserting ``1 or more of the taxpayer, the 
        taxpayer's spouse, or any dependent of the taxpayer''.
          (27) Section 42(i)(3)(D)(ii)(I) is amended by striking 
        ``section 152'' and inserting ``section 7706''.
          (28) Section 45R(e)(1)(A)(iv) is amended--
                  (A) by striking ``section 152(d)(2)'' and inserting 
                ``section 7706(d)(2)'', and
                  (B) by striking ``section 152(d)(2)(H)'' and 
                inserting ``section 7706(d)(2)(H)''.
          (29) Section 51(i)(1) is amended--
                  (A) by striking ``section 152(d)(2)'' in 
                subparagraphs (A) and (B) and inserting ``section 
                7706(d)(2)'', and
                  (B) by striking ``section 152(d)(2)(H)'' in 
                subparagraph (C) and inserting ``section 
                7706(d)(2)(H)''.
          (30) Section 56(b)(1)(D), as amended by the preceding 
        provisions of this Act, is amended--
                  (A) by striking ``, the deduction for personal 
                exemptions under section 151,'', and
                  (B) by striking ``and deduction for personal 
                exemptions'' in the heading thereof.
          (31) Section 63(b) is amended by adding ``and'' at the end of 
        paragraph (1), by striking paragraph (2), and by redesignating 
        paragraph (3) as paragraph (2).
          (32)(A) Section 63(c), as amended by section 121, is amended 
        by striking paragraph (3) and redesignating paragraphs (4), 
        (5), and (6) as paragraphs (3), (4), and (5), respectively.
          (B) Section 1(g)(4)(A)(ii)(I) is amended by striking 
        ``section 63(c)(5)(A)'' and inserting ``section 63(c)(4)(A)''.
          (33) Section 63(c)(4), as redesignated, is amended--
                  (A) by striking ``with respect to whom a deduction 
                under section 151 is allowable to'' and inserting ``who 
                is a dependent of'', and
                  (B) by striking ``certain'' in the heading thereof.
          (34) Section 63(d) is amended by adding ``and'' at the end of 
        paragraph (1), by striking paragraph (2), and by redesignating 
        paragraph (3) as paragraph (2).
          (35) Section 63(f) is amended by striking all that precedes 
        paragraph (3) and inserting the following:
  ``(f) Additional Standard Deduction for the Aged and Blind.--
          ``(1) In general.--For purposes of subsection (c)(1), the 
        additional standard deduction is, with respect to a taxpayer 
        for a taxable year, the sum of--
                  ``(A) $600 if the taxpayer has attained age 65 before 
                the close of such taxable year, and
                  ``(B) $600 if the taxpayer is blind as of the close 
                of such taxable year.
          ``(2) Application to married individuals.--
                  ``(A) Joint returns.--In the case of a joint return, 
                paragraph (1) shall be applied separately with respect 
                to each spouse.
                  ``(B) Certain married individuals filing 
                separately.--In the case of a married individual filing 
                a separate return, if--
                          ``(i) the spouse of such individual has no 
                        gross income for the calendar year in which the 
                        taxable year of such individual begins,
                          ``(ii) such spouse is not the dependent of 
                        another taxpayer for a taxable year beginning 
                        in the calendar year in which such individual's 
                        taxable year begins, and
                          ``(iii) the TIN of such spouse is included on 
                        such individual's return of tax for the taxable 
                        year,
                the additional standard deduction shall be determined 
                in the same manner as if such individual and such 
                individual's spouse filed a joint return.''.
          (36) Section 63(f)(3) is amended by striking ``paragraphs (1) 
        and (2)'' and inserting ``subparagraphs (A) and (B) of 
        paragraph (1)''.
          (37) Section 72(t)(2)(D)(i)(III) is amended by striking 
        ``section 152'' and inserting ``section 7706''.
          (38) Section 72(t)(7)(A)(iii) is amended by striking 
        ``section 152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (39) Section 105(b) is amended--
                  (A) by striking ``as defined in section 152'' and 
                inserting ``as defined in section 7706'',
                  (B) by striking ``section 152(f)(1)'' and inserting 
                ``section 7706(f)(1)'' and
                  (C) by striking ``section 152(e)'' and inserting 
                ``section 7706(e)''.
          (40) Section 105(c)(1) is amended by striking ``section 152'' 
        and inserting ``section 7706''.
          (41) Section 125(e)(1)(D) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (42) Section 129(c)(1) is amended to read as follows:
          ``(1) who is a dependent of such employee or of such 
        employee's spouse, or''.
          (43) Section 129(c)(2) is amended by striking ``section 
        152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (44) Section 132(h)(2)(B) is amended--
                  (A) by striking ``section 152(f)(1)'' and inserting 
                ``section 7706(f)(1)'', and
                  (B) by striking ``section 152(e)'' and inserting 
                ``section 7706(e)''.
          (45) Section 139D(c)(5) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (46) Section 139E(c)(2) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (47) Section 162(l)(1)(D) is amended by striking ``section 
        152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (48) Section 170(g)(1) is amended by striking ``section 152'' 
        and inserting ``section 7706''.
          (49) Section 170(g)(3) is amended by striking ``section 
        152(d)(2)'' and inserting ``section 7706(d)(2)''.
          (50) Section 172(d) is amended by striking paragraph (3).
          (51) Section 213(a) is amended by striking ``section 152'' 
        and inserting ``section 7706''.
          (52) Section 213(d)(5) is amended by striking ``section 
        152(e)'' and inserting ``section 7706(e)''.
          (53) Section 213(d)(11) is amended by striking ``section 
        152(d)(2)'' in the matter following subparagraph (B) and 
        inserting ``section 7706(d)(2)''.
          (54) Section 220(b)(6) is amended by striking ``with respect 
        to whom a deduction under section 151 is allowable to'' and 
        inserting ``who is a dependent of''.
          (55) Section 220(d)(2)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (56) Section 221(d)(4) is amended by striking ``section 152'' 
        and inserting ``section 7706''.
          (57) Section 222(c)(3) is amended by striking ``with respect 
        to whom a deduction under section 151 is allowable to'' and 
        inserting ``who is a dependent of''.
          (58) Section 223(b)(6) is amended by striking ``with respect 
        to whom a deduction under section 151 is allowable to'' and 
        inserting ``who is a dependent of''.
          (59) Section 223(d)(2)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (60) Section 401(h) is amended by striking ``section 
        152(f)(1)'' in the last sentence and inserting ``section 
        7706(f)(1)''.
          (61) Section 402(l)(4)(D) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (62) Section 409A(a)(2)(B)(ii)(I) is amended by striking 
        ``section 152(a)'' and inserting ``section 7706(a)''.
          (63) Section 441(f)(2)(B)(iii) is amended by striking ``, but 
        only the adjusted amount of the deductions for personal 
        exemptions as described in section 443(c)''.
          (64) Section 443 is amended--
                  (A) in subsection (b)--
                          (i) by striking paragraph (3), and
                          (ii) by striking ``modified taxable income'' 
                        and inserting ``taxable income'' each place 
                        such term appears,
                  (B) by striking subsection (c), and
                  (C) by redesignating subsections (d) and (e) as 
                subsections (c) and (d), respectively.
          (65) Section 501(c)(9) is amended by striking ``section 
        152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (66) Section 529(e)(2)(B) is amended by striking ``section 
        152(d)(2)'' and inserting ``section 7706(d)(2)''.
          (67) Section 529A(e)(4) is amended--
                  (A) by striking ``section 152(d)(2)(B)'' and 
                inserting ``section 7706(d)(2)(B)'', and
                  (B) by striking ``section 152(f)(1)(B)'' and 
                inserting ``section 7706(f)(1)(B)''.
          (68) Section 643(a)(2) is amended--
                  (A) by striking ``(relating to deduction for personal 
                exemptions)'' and inserting ``(relating to basic 
                deduction)'', and
                  (B) by striking ``Deduction for personal exemption'' 
                in the heading thereof and inserting ``Basic 
                deduction''.
          (69) Section 703(a)(2) is amended by striking subparagraph 
        (A) and by redesignating subparagraphs (B) through (F) as 
        subparagraphs (A) through (E), respectively.
          (70) Section 874 is amended by striking subsection (b) and by 
        redesignating subsection (c) as subsection (b).
          (71) Section 891 is amended by striking ``under section 151 
        and''.
          (72) Section 904(b)(1) is amended to read as follows:
          ``(1) Deduction for estates and trusts.--For purposes of 
        subsection (a), the taxable income of an estate or trust shall 
        be computed without any deduction under section 642(b).''.
          (73) Section 931(b)(1) is amended to read as follows:
          ``(1) any deduction from gross income, or''.
          (74) Section 933 is amended--
                  (A) by striking ``as a deduction from his gross 
                income any deductions (other than the deduction under 
                section 151, relating to personal exemptions)'' in 
                paragraph (1) and inserting ``any deduction from gross 
                income'', and
                  (B) by striking ``as a deduction from his gross 
                income any deductions (other than the deduction for 
                personal exemptions under section 151)'' in paragraph 
                (2) and inserting ``any deduction from gross income''.
          (75) Section 1212(b)(2)(B)(ii) is amended to read as follows:
                          ``(ii) in the case of an estate or trust, the 
                        deduction allowed for such year under section 
                        642(b).''.
          (76) Section 1361(c)(1)(C) is amended by striking ``section 
        152(f)(1)(C)'' and inserting ``section 7706(f)(1)(C)''.
          (77) Section 1402(a) is amended by striking paragraph (7).
          (78) Section 2032A(c)(7)(D) is amended by striking ``section 
        152(f)(2)'' and inserting ``section 7706(f)(2)''.
          (79) Section 3402(m)(1) is amended by striking ``other than 
        the deductions referred to in section 151 and''.
          (80) Section 3402(r)(2) is amended by striking ``the sum of--
        '' and all that follows and inserting ``the basic standard 
        deduction (as defined in section 63(c)) for an individual to 
        whom section 63(c)(2)(C) applies.''.
          (81) Section 5000A(b)(3)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (82) Section 5000A(c)(4)(A) is amended by striking ``the 
        number of individuals for whom the taxpayer is allowed a 
        deduction under section 151 (relating to allowance of deduction 
        for personal exemptions) for the taxable year'' and inserting 
        ``the sum of 1 (2 in the case of a joint return) plus the 
        number of the taxpayer's dependents for the taxable year''.
          (83) Section 6013(b)(3)(A) is amended--
                  (A) by striking ``had less than the exemption amount 
                of gross income'' in clause (ii) and inserting ``had no 
                gross income'',
                  (B) by striking ``had gross income of the exemption 
                amount or more'' in clause (iii) and inserting ``had 
                any gross income'', and
                  (C) by striking the flush language following clause 
                (iii).
          (84) Section 6014(a) is amended by striking ``section 
        6012(a)(1)(C)(i)'' and inserting ``section 
        6012(a)(1)(B)(iii)''.
          (85) Section 6014(b)(4) is amended by striking ``63(c)(5)'' 
        and inserting ``63(c)(4)''.
          (86) Section 6103(l)(21)(A)(iii) is amended to read as 
        follows:
                          ``(iii) the number of the taxpayer's 
                        dependents,''.
          (87) Section 6213(g)(2)(H) is amended by striking ``section 
        21 (relating to expenses for household and dependent care 
        services necessary for gainful employment) or section 151 
        (relating to allowance of deductions for personal exemptions)'' 
        and inserting ``subsection (a)(1)(B), (b)(1)(A)(ii), or 
        (b)(1)(B) of section 2 or section 21, 35(d)(1)(B), 
        36B(b)(3)(B), or 63(f)(2)(B)''.
          (88) Section 6334(d) is amended--
                  (A) by amending paragraph (2) to read as follows:
          ``(2) Exempt amount.--
                  ``(A) In general.--For purposes of paragraph (1), the 
                term `exempt amount' means an amount equal to--
                          ``(i) the sum of the amount determined under 
                        subparagraph (B) and the standard deduction, 
                        divided by
                          ``(ii) 52.
                  ``(B) Amount determined.--For purposes of 
                subparagraph (A), the amount determined under this 
                subparagraph is--
                          ``(i) the dollar amount in effect under 
                        section 7706(d)(1)(B), multiplied by
                          ``(ii) the number of the taxpayer's 
                        dependents for the taxable year in which the 
                        levy occurs.
                  ``(C) Verified statement.--Unless the taxpayer 
                submits to the Secretary a written and properly 
                verified statement specifying the facts necessary to 
                determine the proper amount under subparagraph (A), 
                subparagraph (A) shall be applied as if the taxpayer 
                were a married individual filing a separate return with 
                no dependents.'', and
                  (B) by striking paragraph (4).
          (89) Section 7702B(f)(2)(C)(iii) is amended by striking 
        ``section 152(d)(2)'' and inserting ``section 7706(d)(2)''.
          (90) Section 7703(a) is amended by striking ``part V of 
        subchapter B of chapter 1 and''.
          (91) Section 7703(b)(1) is amended by striking ``section 
        152(f)(1))'' and all that follows and inserting ``section 
        7706(f)(1)) who is a dependent of such individual for the 
        taxable year (or would be but for section 7706(e)),''.
          (92) Section 7706(a), as redesignated by this section, is 
        amended by striking ``this subtitle'' and inserting ``subtitle 
        A''.
          (93)(A) Section 7706(d)(1)(B), as redesignated by this 
        section, is amended by striking ``the exemption amount (as 
        defined in section 151(d))'' and inserting ``$4,150''.
          (B) Section 7706(d), as redesignated by this section, is 
        amended by adding at the end the following new paragraph:
          ``(6) Inflation adjustment.--In the case of any taxable year 
        beginning in a calendar year beginning after 2018, the $4,150 
        amount in paragraph (1)(B) shall be increased by an amount 
        equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                section 1(c)(2)(A) for the calendar year in which such 
                taxable year begins, determined by substituting 
                `calendar year 2017' for `calendar year 2016' in clause 
                (ii) thereof.
        If any increase determined under the preceding sentence is not 
        a multiple of $50, such increase shall be rounded to the next 
        lowest multiple of $50.''.
          (94) Section 7706(e)(3), as redesignated by this section, is 
        amended by inserting ``(as in effect before its repeal)'' after 
        ``section 151''.
          (95) Section 7706(f)(6)(B), as redesignated by this section, 
        is amended by striking clause (i) and designating clauses (ii), 
        (iii), and (iv) as clauses (i), (ii), and (iii), respectively.
          (96) The table of parts for subchapter B of chapter 1 is 
        amended by striking the item relating to part V.
          (97) The table of sections for chapter 79 is amended by 
        adding at the end the following new item:

``Sec. 7706. Dependent defined.''.

  (g) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 142. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. TAXES.

  (a) In General.--Section 164(b)(6) is amended by striking all that 
precedes ``The preceding sentence'' and inserting the following:
          ``(6) Limitation on individual deductions.--In the case of an 
        individual--
                  ``(A) no deduction shall be allowed under this 
                chapter for foreign real property taxes paid or accrued 
                during the taxable year, and
                  ``(B) the aggregate amount of the deduction allowed 
                under this chapter for taxes described in paragraphs 
                (1), (2), and (3) of subsection (a) and paragraph (5) 
                of this subsection paid or accrued by the taxpayer 
                during the taxable year shall not exceed $10,000 
                ($5,000 in the case of a married individual filing a 
                separate return).''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 143. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE INTEREST.

  (a) Interest on Home Equity Indebtedness.--Section 163(h)(3)(A) is 
amended by striking ``during the taxable year on'' and all that follows 
through ``residence of the taxpayer.'' and inserting ``during the 
taxable year on acquisition indebtedness with respect to any qualified 
residence of the taxpayer.''.
  (b) Limitation on Acquisition Indebtedness.--Section 163(h)(3)(B)(ii) 
is amended to read as follows:
                          ``(ii) Limitation.--The aggregate amount 
                        treated as acquisition indebtedness for any 
                        period shall not exceed the excess (if any) 
                        of--
                                  ``(I) $750,00 ($375,000, in the case 
                                of a married individual filing a 
                                separate return), over
                                  ``(II) the sum of the aggregate 
                                outstanding pre-October 13, 1987, 
                                indebtedness (as defined in 
                                subparagraph (D)) plus the aggregate 
                                outstanding pre-December 15, 2017, 
                                indebtedness (as defined in 
                                subparagraph (C)).''.
  (c) Treatment of Indebtedness Incurred on or Before December 15, 
2017.--Section 163(h)(3)(C) is amended to read as follows:
                  ``(C) Treatment of indebtedness incurred on or before 
                december 15, 2017.--
                          ``(i) In general.--In the case of any pre-
                        December 15, 2017, indebtedness, subparagraph 
                        (B)(ii) shall not apply and the aggregate 
                        amount of such indebtedness treated as 
                        acquisition indebtedness for any period shall 
                        not exceed the excess (if any) of--
                                  ``(I) $1,000,000 ($500,000, in the 
                                case of a married individual filing a 
                                separate return), over
                                  ``(II) the aggregate outstanding pre-
                                October 13, 1987, indebtedness (as 
                                defined in subparagraph (D)).
                          ``(ii) Pre-december 15, 2017, indebtedness.--
                        For purposes of this subparagraph--
                                  ``(I) In general.--The term `pre-
                                December 15, 2017, indebtedness' means 
                                indebtedness (other than pre-October 
                                13, 1987, indebtedness) incurred on or 
                                before December 15, 2017.
                                  ``(II) Binding written contract 
                                exception.--In the case of a taxpayer 
                                who enters into a written binding 
                                contract before December 15, 2017, to 
                                close on the purchase of a principal 
                                residence before January 1, 2018, and 
                                who purchases such residence before 
                                April 1, 2018, the term `pre-December 
                                15, 2017, indebtedness' shall include 
                                indebtedness secured by such residence.
                          ``(iii) Refinancing indebtedness.--
                                  ``(I) In general.--In the case of any 
                                indebtedness which is incurred to 
                                refinance indebtedness, such refinanced 
                                indebtedness shall be treated for 
                                purposes of this subparagraph as 
                                incurred on the date that the original 
                                indebtedness was incurred to the extent 
                                the amount of the indebtedness 
                                resulting from such refinancing does 
                                not exceed the amount of the refinanced 
                                indebtedness.
                                  ``(II) Limitation on period of 
                                refinancing.--Subclause (I) shall not 
                                apply to any indebtedness after the 
                                expiration of the term of the original 
                                indebtedness or, if the principal of 
                                such original indebtedness is not 
                                amortized over its term, the expiration 
                                of the term of the 1st refinancing of 
                                such indebtedness (or if earlier, the 
                                date which is 30 years after the date 
                                of such 1st refinancing).''.
  (d) Coordination With Treatment of Indebtedness Incurred on or Before 
October 13, 1987.--Section 163(h)(3)(D) is amended--
          (1) by striking clause (ii) and redesignating clauses (iii) 
        and (iv) as clauses (ii) and (iii), respectively, and
          (2) in clause (iii) (as so redesignated)--
                  (A) by striking ``clause (iii)'' in the matter 
                preceding subclause (I) and inserting ``clause (ii)'', 
                and
                  (B) by striking ``clause (iii)(I)'' in subclauses (I) 
                and (II) and inserting ``clause (ii)(I)''.
  (e) Coordination With Exclusion of Income From Discharge of 
Indebtedness.--Section 108(h)(2) is amended by striking ``$1,000,000 
($500,000'' and inserting ``$750,000 ($375,000''.
  (f) Conforming Amendment.--Section 163(h)(3) is amended by striking 
subparagraph (F).
  (g) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 144. MODIFICATION OF DEDUCTION FOR PERSONAL CASUALTY LOSSES.

  (a) In General.--Section 165(h)(5)(A) is amended by striking ``in a 
taxable year beginning after December 31, 2017, and before January 1, 
2026,''.
  (b) Conforming Amendments.--
          (1) Section 165(h)(5)(B) is amended by striking ``for any 
        taxable year to which subparagraph (A) applies''.
          (2) Section 165(h)(5) is amended by striking ``for taxable 
        years 2018 through 2025'' in the heading thereof and inserting 
        ``to losses attributable to federally declared disasters''.
  (c) Effective Date.--The amendments made by this section shall apply 
to losses sustained in taxable years beginning after December 31, 2017.

SEC. 145. TERMINATION OF MISCELLANEOUS ITEMIZED DEDUCTIONS.

  (a) In General.--Section 67 is amended--
          (1) by amending subsection (a) to read as follows:
  ``(a) In General.--In the case of an individual, miscellaneous 
itemized deductions shall not be allowed.'', and
          (2) by striking subsection (g).
  (b) Movement of Definition of Adjusted Gross Income for Estates and 
Trusts.--
          (1) Section 67 is amended by striking subsection (e).
          (2) Section 641 is amended by adding at the end the following 
        new subsection:
  ``(d) Computation of Adjusted Gross Income.--For purposes of this 
title, the adjusted gross income of an estate or trust shall be 
computed in the same manner as in the case of an individual, except 
that--
          ``(1) the deductions for costs which are paid or incurred in 
        connection with the administration of the estate or trust and 
        which would not have been incurred if the property were not 
        held in such trust or estate, and
          ``(2) the deductions allowable under sections 642(b), 651, 
        and 661,
shall be treated as allowable in arriving at adjusted gross income.''.
  (c) Conforming Amendments.--
          (1) Section 56(b)(1)(A) is amended to read as follows:
                  ``(A) Certain taxes.--No deduction (other than a 
                deduction allowable in computing adjusted gross income) 
                shall be allowed for any taxes described in paragraph 
                (1), (2), or (3) of section 164(a) or clause (ii) of 
                section 164(b)(5)(A).''.
          (2) Section 56(b)(1)(C), as amended by the preceding 
        provisions of this Act, is amended by striking ``subparagraph 
        (A)(ii)'' and inserting ``subparagraph (A)''.
          (3) Section 62(a) is amended by striking ``subtitle'' in the 
        matter preceding paragraph (1) and inserting ``title''.
          (4) Section 641(c)(2)(E) is amended to read as follows:
                  ``(E) Section 642(c) shall not apply.''.
          (5) Section 1411(a)(2) is amended by striking ``(as defined 
        in section 67(e))''.
          (6) Section 6654(d)(1)(C) is amended by striking clause 
        (iii).
          (7) Section 67 is amended in the heading, by striking ``2-
        percent floor on'' and inserting ``denial of''.
          (8) The table of sections for part 1 of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        67 and inserting the following new item:

``Sec. 67. Denial of miscellaneous itemized deductions.''.

  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 146. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

  (a) In General.--Part 1 of subchapter B of chapter 1 is amended by 
striking section 68 (and the item relating to such section in the table 
of sections for such part).
  (b) Conforming Amendments.--
          (1) Section 1(f)(7)(A), as amended by sections 121 and 141, 
        is amended by striking ``or section 68(b)(2)''.
          (2) Section 56(b)(1), as amended by the preceding provisions 
        of this Act, is amended by striking subparagraph (E).
          (3) Section 164(b)(5)(H)(ii)(III) is amended by striking 
        ``(as determined under section 68(b))''.
          (4) Section 164(b)(5)(H) is amended by adding at the end the 
        following new clause:
                          ``(iii) Applicable amount defined.--For 
                        purposes of clause (ii), the term `applicable 
                        amount' means--
                                  ``(I) $300,000 in the case of a joint 
                                return or a surviving spouse,
                                  ``(II) $275,000 in the case of a head 
                                of household,
                                  ``(III) $250,000 in the case of an 
                                individual who is not married and who 
                                is not a surviving spouse or head of 
                                household, and
                                  ``(IV) \1/2\ the amount applicable 
                                under subclause (I) in the case of a 
                                married individual filing a separate 
                                return.
                        For purposes of this paragraph, marital status 
                        shall be determined under section 7703. In the 
                        case of any taxable year beginning in calendar 
                        years after 2017, each of the dollar amounts in 
                        this clause shall be increased by an amount 
                        equal to such dollar amount, multiplied by the 
                        cost-of-living adjustment determined under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `2012' for `2016' in subparagraph 
                        (A)(ii) thereof. If any amount after adjustment 
                        under the preceding sentence is not a multiple 
                        of $50, such amount shall be rounded to the 
                        next lowest multiple of $50.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 147. TERMINATION OF EXCLUSION FOR QUALIFIED BICYCLE COMMUTING 
                    REIMBURSEMENT.

  (a) In General.--Section 132(f)(1) is amended by striking 
subparagraph (D).
  (b) Conforming Amendments.--
          (1) Section 132(f)(2) is amended by adding ``and'' at the end 
        of subparagraph (A), striking ``, and'' at the end of 
        subparagraph (B) and inserting a period, and striking 
        subparagraph (C).
          (2) Section 132(f)(4) is amended by striking ``(other than a 
        qualified bicycle commuting reimbursement)''.
          (3) Section 132(f) is amended by striking paragraph (8).
          (4) Section 274(l)(2) is amended by striking ``after December 
        31, 2017, and before January 1, 2026''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 148. QUALIFIED MOVING EXPENSE REIMBURSEMENT EXCLUSION LIMITED TO 
                    MEMBERS OF ARMED FORCES.

  (a) In General.--Section 132(g) is amended--
          (1) by striking ``by an individual'' in paragraph (1) and 
        inserting ``by a qualified military individual'', and
          (2) by striking paragraph (2) and inserting the following new 
        paragraph:
          ``(2) Qualified military individual.--For purposes of this 
        subsection, the term `qualified military individual' means a 
        member of the Armed Forces of the United States on active duty 
        who moves pursuant to a military order and incident to a 
        permanent change of station.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 149. DEDUCTION FOR MOVING EXPENSES LIMITED TO MEMBERS OF ARMED 
                    FORCES.

  (a) In General.--Section 217 is amended--
          (1) by amending subsection (a) to read as follows:
  ``(a) Deduction Allowed.--There shall be allowed as a deduction 
moving expenses paid or incurred during the taxable year by a member of 
the Armed Forces of the United States on active duty who moves pursuant 
to a military order and incident to a permanent change of station.'',
          (2) by striking subsections (c), (d), (f), and (g) and 
        redesignating subsections (h), (i), (j), and (k) as subsections 
        (c), (d), (f) and (g), respectively, and
          (3) by inserting after subsection (d), as so redesignated, 
        the following new subsection:
  ``(e) Expenses Furnished in Kind.--Any moving and storage expenses 
which are furnished in kind (or for which reimbursement or an allowance 
is provided, but only to the extent of the expenses paid or incurred)--
          ``(1) to such member, his spouse, or his dependents, shall 
        not be includible in gross income, and no reporting with 
        respect to such expenses shall be required by the Secretary of 
        Defense or the Secretary of Transportation, as the case may be, 
        and
          ``(2) to such member's spouse and his dependents with regard 
        to moving to a location other than the one to which such member 
        moves (or from a location other than the one from which such 
        member moves), this section shall apply with respect to the 
        moving expenses of his spouse and dependents as if his spouse 
        commenced work as an employee at a new principal place of work 
        at such location.''.
  (b) Conforming Amendments.--
          (1) Subsections (d)(3)(C) and (e) of section 23 are each 
        amended by striking ``section 217(h)(3)'' and inserting 
        ``section 217(c)(3)''.
          (2) Section 7872(f) is amended by striking paragraph (11).
          (3) Section 217 is amended in the heading by striking 
        ``moving expenses'' and inserting ``certain moving expenses of 
        members of armed forces''.
          (4) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        217 and inserting the following new item:

``Sec. 217. Certain moving expenses of members of Armed Forces.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 150. LIMITATION ON WAGERING LOSSES.

  (a) In General.--Section 165(d) is amended by striking ``in the case 
of taxable years beginning after December 31, 2017, and before January 
1, 2026,''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

         Subtitle F--Increase in Estate and Gift Tax Exemption

SEC. 151. INCREASE IN ESTATE AND GIFT TAX EXEMPTION.

  (a) In General.--Section 2010(c)(3) is amended in subparagraph (A), 
by striking ``$5,000,000'' and inserting ``$10,000,000''.
  (b) Conforming Amendments.--
          (1) Section 2001(g) is amended to read as follows:
  ``(g) Modifications to Gift Tax Payable to Reflect Different Tax 
Rates.--For purposes of applying subsection (b)(2) with respect to 1 or 
more gifts, the rates of tax under subsection (c) in effect at the 
decedent's death shall, in lieu of the rates of tax in effect at the 
time of such gifts, be used both to compute--
          ``(1) the tax imposed by chapter 12 with respect to such 
        gifts, and
          ``(2) the credit allowed against such tax under section 2505, 
        including in computing--
                  ``(A) the applicable credit amount under section 
                2505(a)(1), and
                  ``(B) the sum of the amounts allowed as a credit for 
                all preceding periods under section 2505(a)(2).''.
          (2) Section 2010(c)(3) is amended by striking subparagraph 
        (C).
  (c) Effective Date.--The amendments made by this section shall apply 
to estates of decedents dying and gifts made after December 31, 2017.

    TITLE II--INCREASED EXEMPTION FOR ALTERNATIVE MINIMUM TAX MADE 
                               PERMANENT

SEC. 201. INCREASED EXEMPTION FOR INDIVIDUALS.

  (a) In General.--Section 55(d)(1) is amended--
          (1) by striking ``$78,750'' in subparagraph (A) and inserting 
        ``$109,400'', and
          (2) by striking ``$50,600'' in subparagraph (B) and inserting 
        ``$70,300''.
  (b) Phase-out of Exemption Amount.--Section 55(d)(2) is amended--
          (1) by striking ``$150,000'' in subparagraph (A) and 
        inserting ``$1,000,000'', and
          (2) by striking subparagraphs (B) and (C) and by inserting 
        the following new subparagraphs:
                  ``(B) 50 percent of the dollar amount applicable 
                under subparagraph (A) in the case of a taxpayer 
                described in paragraph (1)(B) or (1)(C), and
                  ``(C) $75,000 in the case of a taxpayer described in 
                paragraph (1)(D).'',
  (c) Inflation Adjustment.--Section 55(d)(3) is amended to read as 
follows:
          ``(3) Inflation adjustment.--In the case of any taxable year 
        beginning in a calendar year after 2018, each dollar amount 
        described in clause (i) or (ii) of subparagraph (B) shall be 
        increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                section 1(f)(3) for the calendar year in which the 
                taxable year begins, determined by substituting--
                          ``(i) in the case of a dollar amount 
                        contained in paragraph (1)(D) or (2)(C) or in 
                        subsection (b)(1)(A), `calendar year 2011' for 
                        `calendar year 2016' in subparagraph (A)(ii) 
                        thereof, and
                          ``(ii) in the case of a dollar amount 
                        contained in paragraph (1)(A), (1)(B), or 
                        (2)(A), `calendar year 2017' for `calendar year 
                        2016' in subparagraph (A)(ii) thereof.
        Any increased amount determined under this paragraph shall be 
        rounded to the nearest multiple of $100 ($50 in the case of the 
        dollar amount contained in paragraph (2)(C)).''.
  (d) Conforming Amendment.--Section 55(d) is amended by striking 
paragraph (4).
  (e) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

                       I. SUMMARY AND BACKGROUND

                         A. Purpose and Summary

    H.R. 6760, as reported by the Committee on Ways and Means, 
makes permanent the comprehensive reforms to the Internal 
Revenue Code of 1986 to provide tax relief and simplification 
to American families, individuals, and small businesses that 
were enacted on a temporary basis by subtitles A and B of the 
Tax Cuts and Jobs Act (Public Law 115-97).

                 B. Background and Need for Legislation

    H.R. 6760 furthers the goals of the Tax Cuts and Jobs Act 
(Public Law 115-97) in comprehensively reforming the tax code 
to reduce tax burdens and encourage growth and job creation. 
Making permanent these important reforms that lower the tax 
burden on the middle class and create a healthier economy will 
promote stability, certainty, and growth.

                         C. Legislative History

Background

    H.R. 6760 was introduced on September 10, 2018, and was 
referred to the Committee on Ways and Means.

Committee action

    The Ways and Means Committee and the Subcommittee on Tax 
Policy have held extensive hearings over many years focused on 
the benefits of tax reform and permanent tax policy, including 
hearings during the 115th Congress that addressed the 
particular aspects of tax reform that are made permanent by 
H.R. 6760:
           Tax Reform and Small Business: Growing Our 
        Economy and Creating Jobs (May 23, 2018)
           Growing Our Economy and Creating Jobs (May 
        16, 2018)
           How Tax Reform Will Help America's Small 
        Businesses Grow and Create New Jobs (July 13, 2017)
           How Tax Reform Will Simplify Our Broken Tax 
        Code and Help Individuals and Families (July 19, 2017)
           How Tax Reform Will Grow our Economy and 
        Create Jobs (May 18, 2017)
           The President's Fiscal Year 2018 Budget 
        Proposals (May 24, 2017)

                      II. EXPLANATION OF THE BILL

                              PRESENT LAW

    On December 22, 2017, Public Law 115-97\1\ (referred to 
herein as the Tax Cuts and Jobs Act or the TCJA) was enacted 
into law. The TCJA made numerous changes to the income tax 
system, many of which expire for taxable years beginning after 
December 31, 2025. These temporary provisions include the 
following:
---------------------------------------------------------------------------
    \1\31 Stat. 2054.
---------------------------------------------------------------------------
          1. The TCJA modifies the tax rates and tax bracket 
        breakpoints in order to provide tax relief to 
        individuals and pass-through businesses.\2\ For taxable 
        years beginning after December 31, 2025, the tax rates 
        and brackets revert to their inflation-adjusted levels 
        based on the law as in existence in 2017.\3\
---------------------------------------------------------------------------
    \2\Sec. 11001 of the TCJA and sec. 1 of the Internal Revenue code 
of 1986, as amended (the ``Code'').
    \3\Because the TCJA modified the method used to index dollar 
amounts in the Code, switching the measurement of inflation from the 
Consumer Price Index (``CPI'') to the Chained Consumer Price Index 
(``C-CPI-U'') the C-CPI-U, and because this switch does not expire, the 
actual tax bracket breakpoints are projected to be lower in 2026 than 
they would have been had the TCJA not been enacted.
---------------------------------------------------------------------------
          2. The TCJA modifies the tax on unearned income of a 
        minor child (known as the ``kiddie tax'') such that the 
        tax is generally imposed using the tax brackets 
        applicable to trusts and estates, rather than with 
        reference to the child's parents' tax situation.\4\
---------------------------------------------------------------------------
    \4\Sec. 11001 of the TCJA and sec. 1 of the Code.
---------------------------------------------------------------------------
          3. The TCJA creates a deduction for qualified 
        business income, generally equaling up to 20-percent of 
        non-wage income for qualified individuals.\5\
---------------------------------------------------------------------------
    \5\Sec. 11011 of the TCJA and new sec. 199A of the Code. Note that 
the treatment of income relating to cooperatives under section 199A (as 
originally enacted on December 22, 2017) was modified by the 
Consolidated Appropriations Act, 2018, Pub. L. No. 115-141, enacted on 
March 23, 2018. For a description of the modification, see Joint 
Committee on Taxation, Technical Explanation of the Revenue Provisions 
of the House Amendment to the Senate Amendment to H.R. 1625 (Rules 
Committee Print 115-66), JCX-6-18, March 22, 2018, pp. 5-27.
---------------------------------------------------------------------------
          4. The TCJA limits the deduction for business losses 
        to $500,000 for joint filers and $250,000 for other 
        individuals.\6\
---------------------------------------------------------------------------
    \6\Sec. 11012 of the TCJA and sec. 461 of the Code.
---------------------------------------------------------------------------
          5. The TCJA increases the standard deduction to 
        $24,000 for married taxpayers filing jointly and 
        surviving spouses, $18,000 for heads of household, and 
        $12,000 for all other taxpayers.\7\ These amounts are 
        indexed for inflation. For taxable years beginning 
        after December 31, 2025, the standard deduction reverts 
        to its inflation-adjusted 2017 levels.
---------------------------------------------------------------------------
    \7\Sec. 11021 of the TCJA and sec. 63 of the Code.
---------------------------------------------------------------------------
          6. The TCJA increases the child tax credit from 
        $1,000 to $2,000, and increases the phaseout thresholds 
        to $400,000 for married couples filing a joint return 
        ($200,000 for all other taxpayers).\8\ Additionally, 
        the TCJA provides for a $500 non-refundable credit for 
        non-child dependents. The refundable child tax credit 
        is modified by lowering the earned income threshold 
        from $3,000 to $2,500, and increasing the maximum value 
        of the refundable credit to $1,400 (indexed). Finally, 
        the TCJA modifies the identification requirements 
        applicable to a child on whose behalf the credit is 
        claimed, requiring that the child's taxpayer 
        identification number be a Social Security number 
        issued by the due date of the return in order to 
        qualify for the $2,000 credit.
---------------------------------------------------------------------------
    \8\Sec. 11022 of the TCJA and sec. 24 of the Code.
---------------------------------------------------------------------------
          7. The TCJA increases the charitable contribution 
        percentage limit from 50 percent to 60 percent of the 
        contribution base (generally, adjusted gross income) 
        for contributions of cash to organizations described in 
        section 170(b)(1)(A) (generally, public charities and 
        certain private foundations that are not nonoperating 
        private foundations).\9\
---------------------------------------------------------------------------
    \9\Sec. 11023 of the TCJA and sec. 170(b)(1)(G) of the Code.
---------------------------------------------------------------------------
          8. The TCJA allows ABLE account owners to make 
        contributions of earned income, but not in excess of 
        the Federal poverty line, to their ABLE accounts, in 
        addition to the limitations imposed on other 
        contributions made to such accounts.\10\ Additionally 
        the TCJA allows individuals who make such contributions 
        to be eligible for the saver's credit. These 
        modifications do not apply for contributions made to 
        ABLE accounts after December 31, 2025.
---------------------------------------------------------------------------
    \10\Sec. 11024 of the TCJA and sec. 529A of the Code.
---------------------------------------------------------------------------
          9. The TCJA allows amounts in qualified tuition 
        programs (known as 529 accounts) to be rolled over into 
        ABLE accounts, subject to the overall contribution 
        limits on ABLE accounts.\11\ This provision does not 
        apply to rollovers made after December 31, 2025.
---------------------------------------------------------------------------
    \11\Sec. 11025 of the TCJA and secs. 529 and 529A of the Code.
---------------------------------------------------------------------------
          10. The TCJA grants combat zone tax benefits to those 
        members of the Armed Forces serving in the Sinai 
        Peninsula of Egypt.\12\
---------------------------------------------------------------------------
    \12\Sec. 11026 of the TCJA, affecting various Code sections.
---------------------------------------------------------------------------
          11. The TCJA reduces the threshold above which 
        unreimbursed medical expenses may be deducted from 10 
        percent to 7.5 percent of adjusted gross income 
        (``AGI'') for taxable years beginning after December 
        31, 2016 and ending before January 1, 2019.\13\
---------------------------------------------------------------------------
    \13\Sec. 11027 of the TCJA and sec. 213 of the Code.
---------------------------------------------------------------------------
          12. The TCJA provides that certain student loans that 
        are discharged on account of the death or disability of 
        the borrower are excluded from gross income.\14\ This 
        exclusion does not apply for student loans discharged 
        after December 31, 2025.
---------------------------------------------------------------------------
    \14\Sec. 11031 of the TCJA and sec. 108 of the Code.
---------------------------------------------------------------------------
          13. The TCJA reduces the amount of the personal 
        exemption deduction to zero.\15\ For taxable years 
        beginning after December 31, 2025, the personal 
        exemption deduction reverts to its inflation-adjusted 
        2017 level.
---------------------------------------------------------------------------
    \15\Sec. 11041 of the TCJA and sec. 151 of the Code.
---------------------------------------------------------------------------
          14. The TCJA limits the itemized deduction for State 
        and local property taxes (other than paid or accrued in 
        carrying on a trade or business, or an activity 
        described in section 212) and State and local income, 
        war profits, and excess profits taxes (or sales taxes 
        in lieu of income taxes) to $10,000 for all taxpayers 
        other than married taxpayers filing separate returns, 
        for whom the limit is $5,000.\16\ The TCJA also repeals 
        the deduction for foreign real property taxes (other 
        than paid or accrued in carrying on a trade or 
        business, or an activity described in section 212).
---------------------------------------------------------------------------
    \16\Sec. 11042 of the TCJA and sec. 164 of the Code.
---------------------------------------------------------------------------
          15. The TCJA reduces the $1 million limitation of 
        acquisition indebtedness with respect to which interest 
        is deductible to $750,000 ($375,000 in the case of 
        married taxpayers filing a separate return) in the case 
        of acquisition indebtedness incurred on or after 
        December 15, 2017.\17\ Additionally, under the TCJA, 
        home equity interest is not deductible.
---------------------------------------------------------------------------
    \17\Sec. 11043 of the TCJA and sec. 163 of the Code.
---------------------------------------------------------------------------
          16. The TCJA suspends the deduction for a personal 
        casualty loss, or for theft, unless such casualty loss 
        or theft is attributable to a disaster declared by the 
        President under section 401 of the Robert T. Stafford 
        Disaster Relief and Emergency Assistance Act.\18\
---------------------------------------------------------------------------
    \18\Sec. 11044 of the TCJA and sec. 165 of the Code.
---------------------------------------------------------------------------
          17. The TCJA suspends the deduction for miscellaneous 
        itemized deductions.\19\
---------------------------------------------------------------------------
    \19\Sec. 11045 of the TCJA and sec. 67 of the Code.
---------------------------------------------------------------------------
          18. The TCJA suspends the overall limitation on 
        itemized deductions (commonly referred to as the 
        ``Pease limitation'').\20\
---------------------------------------------------------------------------
    \20\Sec. 11046 of the TCJA and sec. 68 of the Code.
---------------------------------------------------------------------------
          19. The TCJA suspends the exclusion from gross income 
        and wages for qualified bicycle commuting 
        reimbursements.\21\
---------------------------------------------------------------------------
    \21\Sec. 11047 of the TCJA and sec. 132(f) of the Code.
---------------------------------------------------------------------------
          20. The TCJA suspends the exclusion from gross income 
        and wages for qualified moving expense reimbursements 
        for all taxpayers other than members of the Armed 
        Forces of the United States on active duty who move 
        pursuant to a military order and incident to a 
        permanent change of station.\22\
---------------------------------------------------------------------------
    \22\Sec. 11048 of the TCJA and sec. 132(g) of the Code.
---------------------------------------------------------------------------
          21. The TCJA suspends the above-the-line deduction 
        for moving expenses incurred in connection with the 
        relocation of a taxpayer for a new principal place of 
        work for all taxpayers other than members of the Armed 
        Forces of the United States on active duty who move 
        pursuant to a military order and incident to a 
        permanent change of station.\23\
---------------------------------------------------------------------------
    \23\Sec. 11049 of the TCJA and sec. 217 of the Code.
---------------------------------------------------------------------------
          22. The TCJA provides that wagering losses, and the 
        limitations applicable to those losses, include 
        expenses incurred in connection with the conduct of 
        such individual's gambling activity (and not only the 
        actual costs of the wagers incurred by such 
        individual).\24\
---------------------------------------------------------------------------
    \24\Sec. 11050 of the TCJA and sec. 165(d) of the Code.
---------------------------------------------------------------------------
          23. The TCJA doubles the estate and gift tax 
        exemption amounts, such that for 2018 the exemption 
        amount is $11.2 million per individual.\25\ For estates 
        of decedents dying and gifts made after December 31, 
        2025, the exemption amount reverts to its inflation-
        adjusted 2017 amount.
---------------------------------------------------------------------------
    \25\Sec. 11061 of the TCJA and sec. 2010 of the Code.
---------------------------------------------------------------------------
          24. The TCJA increases the alternative minimum tax 
        exemption amount to $109,400 for joint returns and 
        surviving spouses (half this amount for married 
        taxpayers filing a separate return) and $70,300 for all 
        other taxpayers (other than trusts and estates). 
        Additionally the phaseout thresholds for the exemption 
        amount are increased to $1,000,000 for married 
        taxpayers filing a joint return and $500,000 for all 
        other taxpayers (other than trusts and estates).\26\
---------------------------------------------------------------------------
    \26\Sec. 12001 of the TCJA and sec. 55 of the Code.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the tax relief provided by the 
Tax Cuts and Jobs Act has spurred economic growth and created 
jobs. The Committee believes it is appropriate to permanently 
extend the individual and pass-through business provisions that 
were temporary in the TCJA, in order to provide certainty to 
individuals, families, and small businesses and continue to 
drive economic growth and job creation.

                        EXPLANATION OF PROVISION

    For the above-described provisions that expire after 
December 31, 2025, the provision repeals the expiration date, 
thereby fully and permanently integrating the policy enacted by 
the Tax Cuts and Jobs Act into the tax code.
    The provision extends the reduction of the threshold above 
which unreimbursed medical expenses may be deducted, so that 
this reduction in the threshold from 10 percent to 7.5 percent 
of AGI applies to taxable years beginning after December 31, 
2016 and ending before January 1, 2021.

Other modifications contained in the provision

    The provision makes other modifications to certain 
provisions relating to the TCJA.
            Modification to capital gains bracket breakpoints
    The provision modifies the breakpoints between the zero and 
15-percent rate on long-term capital gains and qualified 
dividends, conforming the breakpoints to the maximum ordinary 
income amounts taxed at rates below the 22-percent bracket 
breakpoint on ordinary income. This modification assures that 
taxpayers cannot have long-term capital gains income taxed at a 
higher rate of tax than ordinary income would be taxed. The 
capital gains breakpoints applicable to trusts and estates are 
not modified under this provision.
            Modification of return requirement
    The provision modifies the tax filing requirement so that a 
married taxpayer does not need to file an income tax return if 
the combined gross income of the taxpayer (individual and 
spouse) is less than the applicable standard deduction, even if 
the individual and spouse do not have the same household as 
their home at the close of the taxable year.\27\
---------------------------------------------------------------------------
    \27\Sec. 6012(a)(1)(A)(iv) of the Code.
---------------------------------------------------------------------------
            Modification to section 15
    Section 15 provides a rule for the computation of tax in 
the event of a tax rate change (or a repeal of a tax) for a 
taxable year beginning on a date other than the first date of a 
taxpayer's taxable year. This provision does not apply to 
changes due to individual inflation adjustments or to changes 
in the individual tax rates made by the various tax Acts 
enacted in recent years. The provision modifies section 15 to 
apply only to changes in corporate tax rates.

Technical and clerical modifications contained in the provision

            Modification of rules related to rounding of income tax 
                    brackets
    The provision modifies the rounding rule applicable to the 
income tax brackets applicable to heads of household, so as to 
conform those rules to those that apply to the tax brackets 
applicable to unmarried individuals (other than heads of 
household or surviving spouses). Under the provision the income 
tax brackets for heads of household, unmarried individuals, and 
married individuals filing separately all round to the next 
lowest multiple of $25.
            ITIN requirement for non-child dependents
    The provision clarifies that a taxpayer identification 
number is necessary with respect to any non-child dependent for 
whom the $500 non-refundable credit is claimed. The taxpayer 
identification number may be either a Social Security number or 
an individual taxpayer identification number.
            Gross income requirement for non-child dependent
    The provision makes a technical change to provide that, as 
under 2017 law, an individual other than a child may qualify as 
a dependent of another taxpayer if such individual has gross 
income not in excess of $4,150. This amount is indexed for 
inflation.
            Increased limitation for certain charitable contributions
    The provision provides that the 60-percent limit for cash 
contributions is applied after (and reduced by) the amount of 
noncash contributions to organizations described in section 
170(b)(1)(A). For example, assume an individual with a 
contribution base of $100,000 for the taxable year makes a 
contribution of unappreciated property with a fair market value 
of $50,000 and a contribution of $10,000 cash to a qualified 
public charity. Under the provision, the cash contribution 
limit is determined after accounting for noncash contributions. 
Thus, in the above example, the $50,000 contribution of 
unappreciated property is accounted for first, using up the 
entire 50-percent contribution limit described in section 
170(b)(1)(A), but leaving $10,000 in allowable cash 
contributions under the 60-percent limit.
            Limitation on deduction for State and local, etc. taxes
    The provision makes a technical change to clarify that the 
$10,000 limitation on the itemized deduction for State and 
local property taxes (other than paid or accrued in carrying on 
a trade or business, or an activity described in section 212) 
and State and local income, war profits and excess profits 
taxes (or sales taxes in lieu of income taxes) applies with 
respect to all such State and local taxes otherwise deducible 
under chapter 1 of the Internal Revenue Code.

                             EFFECTIVE DATE

    The provision is generally effective for taxable years 
beginning after December 31, 2017.

                      III. VOTES OF THE COMMITTEE

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    The vote on the amendment offered by Mr. Pascrell to the 
amendment in the nature of a substitute to H.R. 6760, which 
would expand the itemized deduction for state and local taxes 
and increase the corporate tax rate, was not agreed to by a 
roll call vote of 15 yeas to 21 nays (with a quorum being 
present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Kind.........        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Crowley......        X   ........  .........
Ms. Black......................  ........        X   .........  Mr. Davis........        X   ........  .........
Mr. Reed.......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Mr. Higgins......  ........  ........  .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......        X   ........  .........
Ms. Noem.......................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........        X   ........  .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
Mr. LaHood.....................  ........        X   .........
Mr. Wenstrup...................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    The vote on the amendment offered by Mr. Neal to the 
amendment in the nature of a substitute to H.R. 6760, which 
would expand several individual tax credits and increase the 
top individual tax rate, was not agreed to by a roll call vote 
of 15 yeas to 21 nays (with a quorum being present). The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Kind.........        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Crowley......        X   ........  .........
Ms. Black......................  ........        X   .........  Mr. Davis........        X   ........  .........
Mr. Reed.......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......  ........  ........  .........
Ms. Noem.......................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........        X   ........  .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
Mr. LaHood.....................  ........        X   .........
Mr. Wenstrup...................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    The vote on the amendment offered by Mr. Thompson to the 
amendment in the nature of a substitute to H.R. 6760, which 
would expand the itemized deduction for casualty losses, 
include permanent provisions related to federally-declared 
disasters, and increase the corporate tax rate, was not agreed 
to by a roll call vote of 15 yeas to 21 nays (with a quorum 
being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Kind.........        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Crowley......        X   ........  .........
Ms. Black......................  ........        X   .........  Mr. Davis........        X   ........  .........
Mr. Reed.......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......  ........  ........  .........
Ms. Noem.......................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........        X   ........  .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
Mr. LaHood.....................  ........        X   .........
Mr. Wenstrup...................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    The vote on the amendment offered by Ms. Sanchez to the 
amendment in the nature of a substitute to H.R. 6760, which 
would make the 7.5 percent of adjusted gross income floor on 
the deduction for certain medical expenses permanent and 
increase the corporate tax rate, was not agreed to by a roll 
call vote of 15 yeas to 21 nays (with a quorum being present). 
The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Kind.........        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Crowley......        X   ........  .........
Ms. Black......................  ........        X   .........  Mr. Davis........        X   ........  .........
Mr. Reed.......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......  ........  ........  .........
Ms. Noem.......................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........        X   ........  .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
Mr. LaHood.....................  ........        X   .........
Mr. Wenstrup...................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    The vote on Mr. Reichert's motion to table Mr. Doggett's 
appeal of the ruling of the Chair was agreed to by a roll call 
vote of 21 yeas to 15 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Smith (NE).................        X   ........  .........  Mr. Blumenauer...  ........        X   .........
Ms. Jenkins....................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Marchant...................        X   ........  .........  Mr. Crowley......  ........        X   .........
Ms. Black......................        X   ........  .........  Mr. Davis........  ........        X   .........
Mr. Reed.......................        X   ........  .........  Ms. Sanchez......  ........        X   .........
Mr. Kelly......................        X   ........  .........  Mr. Higgins......  ........        X   .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......  ........  ........  .........
Ms. Noem.......................        X   ........  .........  Ms. DelBene......  ........        X   .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........  ........        X   .........
Mr. Smith (MO).................        X   ........  .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................        X   ........  .........
Ms. Walorski...................        X   ........  .........
Mr. Curbelo....................        X   ........  .........
Mr. Bishop.....................        X   ........  .........
Mr. LaHood.....................        X   ........  .........
Mr. Wenstrup...................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    The vote on the amendment offered by Mr. Larson to the 
amendment in the nature of a substitute to H.R. 6760, which 
would condition the provisions of the bill on an actuarial 
certification regarding the Social Security and Medicare Trust 
Funds was not agreed to by a roll call vote of 15 yeas to 21 
nays (with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Blumenauer...  ........  ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Kind.........        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Crowley......        X   ........  .........
Ms. Black......................  ........        X   .........  Mr. Davis........        X   ........  .........
Mr. Reed.......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......        X   ........  .........
Ms. Noem.......................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........        X   ........  .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
Mr. LaHood.....................  ........        X   .........
Mr. Wenstrup...................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    The vote on Mr. Reichert's motion to table Mr. Doggett's 
appeal of the ruling of the Chair was agreed to by a roll call 
vote of 21 yeas to 15 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Smith (NE).................        X   ........  .........  Mr. Blumenauer...  ........  ........  .........
Ms. Jenkins....................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Marchant...................        X   ........  .........  Mr. Crowley......  ........        X   .........
Ms. Black......................        X   ........  .........  Mr. Davis........  ........        X   .........
Mr. Reed.......................        X   ........  .........  Ms. Sanchez......  ........        X   .........
Mr. Kelly......................        X   ........  .........  Mr. Higgins......  ........        X   .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......  ........        X   .........
Ms. Noem.......................        X   ........  .........  Ms. DelBene......  ........        X   .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........  ........        X   .........
Mr. Smith (MO).................        X   ........  .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................        X   ........  .........
Ms. Walorski...................        X   ........  .........
Mr. Curbelo....................        X   ........  .........
Mr. Bishop.....................        X   ........  .........
Mr. LaHood.....................        X   ........  .........
Mr. Wenstrup...................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 6760, ``Protecting Family and Small 
Business Tax Cuts Act of 2018'' on September 13, 2018.
    H.R. 6760 was ordered favorably reported to the House of 
Representatives as amended by an amendment in the nature of a 
substitute offered by Chairman Brady by a roll call vote of 21 
yeas to 15 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Smith (NE).................        X   ........  .........  Mr. Blumenauer...  ........  ........  .........
Ms. Jenkins....................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Marchant...................        X   ........  .........  Mr. Crowley......  ........        X   .........
Ms. Black......................        X   ........  .........  Mr. Davis........  ........        X   .........
Mr. Reed.......................        X   ........  .........  Ms. Sanchez......  ........        X   .........
Mr. Kelly......................        X   ........  .........  Mr. Higgins......  ........        X   .........
Mr. Renacci....................  ........  ........  .........  Ms. Sewell.......  ........        X   .........
Ms. Noem.......................        X   ........  .........  Ms. DelBene......  ........        X   .........
Mr. Holding....................  ........  ........  .........  Ms. Chu..........  ........        X   .........
Mr. Smith (MO).................        X   ........  .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................        X   ........  .........
Ms. Walorski...................        X   ........  .........
Mr. Curbelo....................        X   ........  .........
Mr. Bishop.....................        X   ........  .........
Mr. LaHood.....................        X   ........  .........
Mr. Wenstrup...................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                    III. BUDGET EFFECTS OF THE BILL

               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 6760, as 
reported.
    The bill, as reported, is estimated to have the following 
effect on Federal fiscal year budget receipts for the period 
2019-2028:

    Clause 8 of rule XIII of the Rules of the House of 
Representatives requires that an estimate provided by the Joint 
Committee on Taxation to the Director of the Congressional 
Budget Office under section 201(f) of the Congressional Budget 
Act of 1974 for any major legislation shall, to the extent 
practicable, incorporate the budgetary effects of changes in 
economic output, employment, capital stock, and other 
macroeconomic variables resulting from such legislation. Major 
legislation is defined as legislation having a gross budgetary 
effect (before incorporating macroeconomic effects) that is 
greater in any fiscal year than 0.25 percent of the current 
projected gross domestic product of the United States for that 
fiscal year. The bill meets this definition of major 
legislation.
    The staff of the Joint Committee on Taxation is currently 
analyzing changes in economic output, employment, capital 
stock, and other macroeconomic variables resulting from the 
bill for purposes of determining these budgetary effects. 
However, it was not practicable to complete this analysis, 
which requires accounting for the effects of each provision in 
this bill, along with interactions between these provisions, by 
the filing of this report.

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

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee further states that the revenue provisions involve no 
new tax expenditures.

      C. Cost Estimate Prepared by the Congressional Budget Office

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

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 21, 2018.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 6760, the 
Protecting Family and Small Business Tax Cuts Act of 2018. It 
contains estimates of tax provisions prepared by the staff of 
the Joint Committee on Taxation.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Cecilia 
Pastrone.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 6760--Protecting Family and Small Business Tax Cuts Act of 2018

    Summary: H.R. 6760, the Protecting Family and Small 
Business Tax Cuts Act of 2018, would repeal the December 31, 
2025 expiration date for numerous provisions of U.S. tax law 
that were temporarily changed by the 2017 tax act (Public Law 
115-97). The bill would make permanent the individual income 
tax brackets and tax rates, standard deduction and child tax 
credit amounts, business income deduction, and exemption 
amounts for the Alternative Minimum Tax in effect under current 
law. Deductions for personal exemptions and certain itemized 
deductions would be permanently repealed.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting the bill would reduce revenues by about 
$597 billion over the 2019-2028 period, and increase outlays by 
$34 billion over the same period, leading to an increase in the 
deficit of $631 billion over the next 10 years. A portion of 
the changes in revenues would be from Social Security payroll 
taxes, which are off-budget. Excluding the estimated $687 
million increase in off-budget revenues over the next 10 years, 
JCT estimates that H.R. 6760 would increase on-budget deficits 
by about $632 billion over the period from 2019 to 2028. Pay-
as-you-go procedures apply because enacting the legislation 
would affect direct spending and revenues.
    JCT estimates that enacting H.R. 6760 would increase on-
budget deficits by more than $5 billion in at least one of the 
four 10-year periods beginning in 2029. CBO and JCT estimate 
that enacting the legislation would increase net direct 
spending by more than $2.5 billion in at least one of the four 
consecutive 10-year periods beginning in 2029.
    Because of the magnitude of the estimated budgetary 
effects, this bill is considered to be ``major legislation,'' 
as defined in section 5107 of H. Con. Res. 71, the Concurrent 
Resolution on the Budget for Fiscal Year 2018. Hence, it 
triggers the requirement that the cost estimate, to the extent 
practicable, include the budgetary impact of its macroeconomic 
effects. The staff of the Joint Committee on Taxation is 
currently analyzing changes in economic output, employment, 
capital stock, and other macroeconomic variables resulting from 
the bill for purposes of determining these budgetary effects. 
However, JCT indicates a macroeconomic analysis incorporating 
the full effects of all of the provisions in the bill, 
including interactions between these provisions, is not 
available at the time of filing of the committee report.
    JCT has determined that the tax provisions of the bill 
contain no intergovernmental or private sector mandates as 
defined in the Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 6760 is shown in the following table.
    Basis of estimate:

Revenues and direct spending

    The Congressional Budget Act of 1974, as amended, 
stipulates that revenue estimates provided by the staff of the 
Joint Committee on Taxation will be the official estimates for 
all tax legislation considered by the Congress. As such, CBO 
incorporates those estimates into its cost estimates of the 
effects of legislation. All of the estimates for the provisions 
of H.R. 6760 were provided by JCT.\1\ The date of enactment is 
generally assumed to be October 1, 2018.
---------------------------------------------------------------------------
    \1\For JCT's description of the bill and estimates of the 
provisions, which include detail beyond the summary presented below, 
see Joint Committee on Taxation, Description Of H.R. 6760, the 
``Protecting Family And Small Business Tax Cuts Act Of 2018,'' JCX-69-
18, https://www.jct.gov/publications.html?func=startdown&id=5134, and 
Estimated Revenue Effects of H.R. 6760, the ``Protecting Family And 
Small Business Tax Cuts Act Of 2018,'' JCX-71-18, https://www.jct.gov/
publications.html?func=startdown&id=5136.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      By fiscal year, in billions of dollars--
                                                  ----------------------------------------------------------------------------------------------------------------------------------------------
                                                      2018       2019       2020       2021       2022       2023       2024       2025       2026       2027       2028    2019-2023  2019-2028
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       CHANGES IN REVENUES
 
Estimated Changes in Revenues....................          0       -0.4       -2.0       -1.6        0.0        0.0       -0.1       -6.1     -102.4     -233.4     -250.9       -4.0     -596.8
    On-Budget....................................          0       -0.4       -2.0       -1.6        0.0        0.0       -0.1       -6.1     -102.6     -233.6     -251.1       -4.0     -597.5
    Off-Budgeta..................................          0          0          0          0          0          0          0          0        0.2        0.2        0.3          0        0.7
 
                                                                                   CHANGES IN DIRECT SPENDING
 
Total Changes in Direct Spending:
    Estimated Budget Authority...................          0          0          0          0          0          0          0          0          0       17.0       17.1          0       34.1
    Estimated Outlays............................          0          0          0          0          0          0          0          0          0       17.0       17.1          0       34.1
 
                                                                        NET INCREASE OR DECREASE (-) IN THE DEFICIT FROM
                                                                             CHANGES IN DIRECT SPENDING AND REVENUES
 
Effect on Deficit................................          0        0.4        2.0        1.6        0.0        0.0        0.1        6.1      102.4      250.4      268.0        4.0      630.9
    On-Budget Deficit............................          0        0.4        2.0        1.6        0.0        0.0        0.1        6.1      102.6      250.6      268.2        4.0      631.6
    Off-Budget Deficit...........................          0          0          0          0          0          0          0          0       -0.2       -0.2       -0.3          0       -0.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not add to totals due to rounding.
aOff-budget revenues result from changes in Social Security payroll tax receipts.

    Individual Reform Made Permanent. H.R. 6760 would make 
permanent numerous changes to tax law pertaining to individuals 
made by the 2017 tax act. Such provisions estimated to reduce 
revenues over the 2019 to 2028 period include the following 
changes made by the 2017 tax act, which would no longer expire 
in 2026:
           Establish seven brackets with tax rates of 
        10 percent, 12 percent, 22 percent, 24 percent, 32 
        percent, 35 percent, and 37 percent;
           Increase the standard deduction;
           Establish a deduction for qualified business 
        income;
           Repeal the overall limit on itemized 
        deductions (``Pease limitation'');
           Increase the child tax credit, and add a 
        $500 credit for non-child dependents; and
           Double the exemption amount allowed under 
        estate and gift taxes.
    Provisions estimated to increase revenues over the 2019 to 
2028 period include the following changes made by the 2017 tax 
act, which would no longer expire in 2026:
           Repeal deductions for personal exemptions; 
        and
           Repeal and limit certain itemized 
        deductions, including limiting the deduction for state 
        and local taxes to $10,000.
    The largest revenue reductions would result from the 
provision to permanently extend the current income tax rate and 
bracket structure, which JCT estimates would reduce revenues by 
$520 billion over the period from 2019 to 2028 and increase 
outlays for refundable tax credits by $2 billion over the same 
period. In addition, extending the increase in the standard 
deduction would reduce revenues by $286 billion over the period 
from 2019 to 2028 and increase outlays for refundable tax 
credits by $21 billion over the same period, according to JCT's 
estimates. Making the increased exemptions to the alternative 
minimum tax on individuals permanent would reduce revenues by 
$283 billion from 2019 to 2028.
    JCT also estimates that permanently extending the deduction 
for qualified business income would reduce revenues by $179 
billion over the period from 2019 to 2028, and that extending 
the modified child tax credit would, over the same 10-year 
period, reduce revenues by $155 billion and increase outlays 
for refundable tax credits by $53 billion. JCT estimates that 
additional revenue reductions, totaling $28 billion from 2019 
to 2028, would result from making the 2017 tax act 
modifications to estate and gift taxes permanent.
    The largest revenue increases would result from permanently 
repealing deductions for personal exemptions, which JCT 
estimates would increase revenues by $463 billion and reduce 
outlays for refundable credits by $36 billion over the 2019 to 
2028 period. In addition, JCT estimates that the permanent 
repeal and limitation of certain itemized deductions would 
increase revenues by $317 billion and reduce outlays for 
refundable credits by $828 million from 2019 to 2028.
    Pay-As-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in outlays and revenues that are 
subject to those pay-as-you-go procedures are shown in the 
following table. Only on-budget changes to outlays or revenues 
are subject to pay-as-you-go procedures.

                             CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 6760, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 13, 2018
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      By fiscal year, in billions of dollars--
                                                  ----------------------------------------------------------------------------------------------------------------------------------------------
                                                      2018       2019       2020       2021       2022       2023       2024       2025       2026       2027       2028    2019-2023  2019-2028
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              NET INCREASE IN THE ON-BUDGET DEFICIT
 
Statutory Pay-As-You-Go Effects..................          0        0.4        2.0        1.6        0.0        0.0        0.1        6.1      102.6      250.6      268.2        4.0      631.6
Memorandum:a
    Change in Outlays............................          0          0          0          0          0          0          0          0          0       17.0       17.1          0       34.1
    Change in On-Budget Revenues.................          0       -0.4       -2.0       -1.6        0.0        0.0       -0.1       -6.1     -102.6     -233.6     -251.1       -4.0     -597.5
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not add to totals due to rounding.
aA positive sign for outlays indicates an increase in outlays. A negative sign for revenues indicates a reduction in revenues.

    Increase in long term direct spending and deficits: JCT 
estimates that enacting H.R. 6760 would increase on-budget 
deficits by more than $5 billion in at least one of the four 
10-year periods beginning in 2029. CBO and JCT estimate that 
enacting the legislation would increase net direct spending by 
more than $2.5 billion in at least one of the four consecutive 
10-year periods beginning in 2029.
    Mandates: JCT has determined that H.R. 6760 contains no 
private-sector or intergovernmental mandates as defined by 
UMRA.
    Estimate prepared by: Staff of the Joint Committee on 
Taxation and Cecilia Pastrone.
    Estimate reviewed by: Joshua Shakin, Chief, Revenue 
Estimating Unit; John McClelland, Assistant Director for Tax 
Analysis.

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

          A. Committee Oversight Findings and Recommendations

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

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
bill contains no measure that authorizes funding, so no 
statement of general performance goals and objectives for which 
any measure authorizes funding is required.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                D. Applicability of House Rule XXI 5(b)

    Rule XXI 5(b) of the Rules of the House of Representatives 
provides, in part, that ``A bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase may not be considered as passed or agreed to 
unless so determined by a vote of not less than three-fifths of 
the Members voting, a quorum being present.'' The Committee has 
carefully reviewed the bill and states that the bill does not 
involve any Federal income tax rate increases within the 
meaning of the rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (``IRS Reform Act'') 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code of 1986 and has widespread applicability 
to individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, for each such provision identified by 
the staff of the Joint Committee on Taxation, a summary 
description of the provision is provided below along with an 
estimate of the number and type of affected taxpayers, and a 
discussion regarding the relevant complexity and administrative 
issues.
    Following the analysis of the staff of the Joint Committee 
on Taxation are the comments of the IRS and Treasury regarding 
each provision included in the complexity analysis.

Make permanent modification of tax rates, tax brackets, standard 
        deduction and repeal of personal exemptions (secs. 101, 121, 
        and 141 of the bill)

            Summary description of the provisions
    The bill makes permanent the structure of the individual 
income tax as modified in Pub. L. No. 97-115. Under the 
permanent rate structure, the tax brackets are 10-percent, 12-
percent, 22-percent, 24-percent, 32-percent, 35-percent and 37-
percent. The bill makes permanent the increase in the size the 
standard deduction amount (for 2018 the standard deduction is 
$24,000 for joint filers, $18,000 for heads of household and 
$12,000 for other filers), and makes permanent the elimination 
of personal exemptions.
            Number of affected taxpayers
    It is estimated that the provision will affect 
approximately 129 million tax returns in 2026.
            Discussion
    It is not anticipated that individuals will need to keep 
additional records due to these provisions. It should not 
result in an increase in disputes with the IRS, nor will 
regulatory guidance be necessary to implement this provision.
    The provision will save the IRS from needing to re-adjust 
its wage withholding tables to reflect the expiration of these 
provisions for the taxable year 2026. Further, the IRS will no 
longer need to modify its forms and publications to reflect the 
expiration of these provisions for taxable year 2026.
    Taxpayers who, under the provisions of Pub. L. No. 115-97, 
were able to claim the standard deduction rather than 
itemizing, will now continue to be able to do so after taxable 
year 2025. According to estimates by the staff of the Joint 
Committee on Taxation, approximately 89 percent of taxpayers 
will claim the standard deduction in 2026 under the bill, up 
from approximately 70 percent in 2017. For these taxpayers, it 
will not be necessary to file Schedule A to Form 1040, allowing 
a significant number to forgo record keeping inherent in 
itemizing below-the-line deductions. Moreover, by claiming the 
standard deduction, such taxpayers may qualify to use simpler 
versions of the Form 1040 (i.e., Form 1040EZ or Form 1040A) 
that are not available to individuals who itemize their 
deductions. These forms simplify the return preparation process 
by eliminating from the Form 1040 those items that do not apply 
to particular taxpayers.
    This reduction in complexity and record keeping also may 
result in a decline in the number of individuals using a tax 
preparation service, or tax preparation software, or a decline 
in the cost of such service or software. The provision also 
should reduce the number of disputes between taxpayers and the 
IRS regarding the substantiation of itemized deductions.

Make permanent the deduction for qualified business income (sec. 111 of 
        the bill)

            Summary description of the provisions
    The bill makes permanent the provision enacted in Pub. L. 
No. 115-97 (Code section 199A), as subsequently modified by 
Pub. L. No. 115-141. Under the provision, an individual 
taxpayer generally may deduct 20 percent of qualified business 
income from a partnership, S corporation, or sole 
proprietorship, as well as 20 percent of aggregate qualified 
REIT dividends and qualified publicly traded partnership 
income. Special rules apply to specified agricultural or 
horticultural cooperatives and their patrons.
    A limitation based on the greater of 50 percent of W-2 
wages paid, or the sum of 25 percent of W-2 wages paid plus a 
capital allowance, is phased in above a threshold amount of 
taxable income. A disallowance of the deduction with respect to 
specified service trades or businesses is also phased in above 
the same threshold amount of taxable income. The threshold 
amount is $157,500 (twice that amount or $315,000 in the case 
of a joint return), indexed. These limitations are fully phased 
in for a taxpayer with taxable income in excess of the 
threshold amount plus $50,000 ($100,000 in the case of a joint 
return).
    Qualified business income for a taxable year generally 
means the net amount of domestic qualified items of income, 
gain, deduction, and loss with respect to the taxpayer's 
qualified businesses. Qualified business income does not 
include any amount paid by an S corporation that is treated as 
reasonable compensation of the taxpayer. Similarly, qualified 
business income does not include any guaranteed payment for 
services rendered with respect to the trade or business, and to 
the extent provided in regulations, does not include any amount 
allocated or distributed by a partnership to a partner who is 
acting other than in his or her capacity as a partner for 
services. Qualified business income or loss does not include 
certain investment-related income, gain, deductions, or loss.
            Number of affected taxpayers
    It is estimated that the provision will affect over ten 
percent of small business tax returns.
            Discussion
    In the absence of making the provision permanent, the 
period of time with respect to which taxpayers could have to 
keep additional records, or might engage in disputes with the 
IRS regarding application of the provision, would end. On the 
other hand, in the absence of making the provision permanent, 
the IRS would have to revise forms and promulgate revised 
guidance relating to the end of the period in which the 
provision applies. Making the provision permanent provides more 
time for a body of law, including regulations or other 
guidance, to clarify the application of the provision generally 
as well as in particular fact situations, potentially 
facilitating taxpayer compliance with, and IRS administration 
of, the provision as it remains in effect. Over time, 
increasing familiarity of the provision may result in a decline 
in the annual number of questions that taxpayers ask the IRS, 
such as how to calculate qualified business income and how to 
apply the phaseins of the W-2 wage (or W-2 wage and capital) 
limit and of the exclusion of service business income in the 
case of taxpayers with taxable income exceeding the threshold 
amount of $157,500 (twice that amount or $315,000 in the case 
of a joint return), indexed. The possible decline in the volume 
of questions could improve efficiency of the IRS and permit the 
use of greater IRS resources for taxpayer service and 
administration of other aspects of the tax law. Making the 
provision permanent principally affects taxable years beginning 
after 2025, so the provision will have been in effect for 
several years by the end of 2025, potentially permitting tax 
advisors and tax software makers to improve aids for taxpayers' 
compliance. Consequently, making the provision permanent should 
not increase the tax preparation costs for most individuals.

Increase in child tax credit made permanent (sec. 122 of the bill)

            Summary description of the provisions
    The bill makes permanent the provision of Pub. L. No. 115-
97 that increases the value of the child tax credit to $2,000, 
and providing for a refundable child tax credit of up to $1,400 
per child. This $1,400 limitation is indexed for inflation. In 
order to qualify for the child tax credit, a Social Security 
number must be provided for the qualifying child for whom such 
credit is claimed.
            Number of affected taxpayers
    It is estimated that the provision will affect 
approximately 53 million tax returns in 2026.
            Discussion
    It is not anticipated that individuals will need to keep 
additional records due to these provisions. It should not 
result in an increase in disputes with the IRS, nor will 
regulatory guidance be necessary to implement this provision.
    The IRS will no longer need to modify its forms and 
publications for taxable year 2026 to reflect the expiration of 
this provision.

Make permanent the limitation on deduction for State and local income 
        taxes (sec. 142 of the bill)

            Summary description of the provisions
    The bill makes permanent the provision contained in Pub. L. 
No. 115-97 which provides that, the case of an individual, as a 
general matter, State, local, and foreign property taxes and 
State and local sales taxes are allowed as a deduction only 
when paid or accrued in carrying on a trade or business, or an 
activity described in section 212 (relating to expenses for the 
production of income).
    The bill makes permanent the exception provided by Pub. L. 
No. 115-97 to the above-stated rule. Under the provision a 
taxpayer may claim an itemized deduction of up to $10,000 
($5,000 for married taxpayer filing a separate return) for the 
aggregate of (i) State and local property taxes not paid or 
accrued in carrying on a trade or business, or an activity 
described in section 212, and (ii) State and local income, war 
profits, and excess profits taxes (or sales taxes in lieu of 
income, etc. taxes) paid or accrued in the taxable year. 
Foreign real property taxes may not be deducted under this 
exception.
            Number of affected taxpayers
    It is estimated that the provision will affect 
approximately 19 million tax returns in 2026.
            Discussion
    It is not anticipated that individuals will need to keep 
additional records due to this provision.
    To the extent the IRS would have needed to modify its forms 
and publications to reflect the expiration of this provision 
for taxable years beginning after 2025, it will no longer need 
to do so.

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

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                   G. Duplication of Federal Programs

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

                 H. Disclosure of Directed Rule Makings

    In compliance with Sec. 3(i) of H. Res. 5 (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee advises that the bill requires no 
directed rule makings within the meaning of such section.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

      A. Changes in Existing Law Proposed by the Bill, as Reported

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

         Changes in Existing Law Made by the Bill, as Reported

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

                     INTERNAL REVENUE CODE OF 1986

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

           *       *       *       *       *       *       *

CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *

Subchapter A--Determination of Tax Liability

           *       *       *       *       *       *       *

PART I--TAX ON INDIVIDUALS

           *       *       *       *       *       *       *

SEC. 1. TAX IMPOSED.

  (a) Married individuals filing joint returns and surviving 
spouses.--There is hereby imposed on the taxable income of--
          (1) every married individual (as defined in section 
        7703) who makes a single return jointly with his spouse 
        under section 6013, and
          (2) every surviving spouse (as defined in section 
        2(a)), a tax determined in accordance with the 
        following table:

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $36,900                       15% of taxable income.
Over $36,900 but not over $89,150      $5,535, plus 28% of the excess
                                        over $36,900.
Over $89,150 but not over $140,000     $20,165, plus 31% of the excess
                                        over $89,150.
Over $140,000 but not over $250,000    $35,928.50, plus 36% of the
                                        excess over $140,000.
Over $250,000                          $75,528.50, plus 39.6% of the
                                        excess over $250,000.]
------------------------------------------------------------------------

 
 
        If taxable income is:                     The tax is:
------------------------------------------------------------------------
Not over $19,050.....................  10% of taxable income.
Over $19,050 but not over $77,400....  $1,905, plus 12% of the excess
                                        over $19,050.
Over $77,400 but not over $165,000...  $8,907, plus 22% of the excess
                                        over $77,400.
Over $165,000 but not over $315,000..  $28,179, plus 24% of the excess
                                        over $165,000.
Over $315,000 but not over $400,000..  $64,179, plus 32% of the excess
                                        over $315,000.
Over $400,000 but not over $600,000..  $91,379, plus 35% of the excess
                                        over $400,000.
Over $600,000........................  $161,379, plus 37% of the excess
                                        over $600,000.

  (b) Heads of households.--There is hereby imposed on the 
taxable income of every head of a household (as defined in 
section 2(b)) a tax determined in accordance with the following 
table:

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $29,600                       15% of taxable income.
Over $29,600 but not over $76,400      $4,440, plus 28% of the excess
                                        over $29,600.
Over $76,400 but not over $127,500     $17,544, plus 31% of the excess
                                        over $76,400.
Over $127,500 but not over $250,000    $33,385, plus 36% of the excess
                                        over $127,500.
Over $250,000                          $77,485, plus 39.6% of the excess
                                        over $250,000.]
------------------------------------------------------------------------

 
 
        If taxable income is:                     The tax is:
------------------------------------------------------------------------
Not over $13,600.....................  10% of taxable income.
Over $13,600 but not over $51,800....  $1,360, plus 12% of the excess
                                        over $13,600.
Over $51,800 but not over $82,500....  $5,944, plus 22% of the excess
                                        over $51,800.
Over $82,500 but not over $157,500...  $12,698, plus 24% of the excess
                                        over $82,500.
Over $157,500 but not over $200,000..  $30,698, plus 32% of the excess
                                        over $157,500.
Over $200,000 but not over $500,000..  $44,298, plus 35% of the excess
                                        over $200,000.
Over $500,000........................  $149,298, plus 37% of the excess
                                        over $500,000.

  (c) Unmarried individuals (other than surviving spouses and 
heads of households).--There is hereby imposed on the taxable 
income of every individual (other than a surviving spouse as 
defined in section 2(a) or the head of a household as defined 
in section 2(b)) who is not a married individual (as defined in 
section 7703) a tax determined in accordance with the following 
table:

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $22,100                       15% of taxable income.
Over $22,100 but not over $53,500      $3,315, plus 28% of the excess
                                        over $22,100.
Over $53,500 but not over $115,000     $12,107, plus 31% of the excess
                                        over $53,500.
Over $115,000 but not over $250,000    $31,172, plus 36% of the excess
                                        over $115,000.
Over $250,000                          $79,772, plus 39.6% of the excess
                                        over $250,000.]
------------------------------------------------------------------------

 
 
        If taxable income is:                     The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $500,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $500,000........................  $150,689.50, plus 37% of the
                                        excess over $500,000.

  (d) Married individuals filing separate returns.--There is 
hereby imposed on the taxable income of every married 
individual (as defined in section 7703) who does not make a 
single return jointly with his spouse under section 6013, a tax 
determined in accordance with the following table:

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $18,450                       15% of taxable income.
Over $18,450 but not over $44,575      $2,767.50, plus 28% of the excess
                                        over $18,450.
Over $44,575 but not over $70,000      $10,082.50, plus 31% of the
                                        excess over $44,575.
Over $70,000 but not over $125,000     $17,964.25, plus 36% of the
                                        excess over $70,000.
Over $125,000                          $37,764.25, plus 39.6% of the
                                        excess over $125,000.]
------------------------------------------------------------------------

 
 
        If taxable income is:                     The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $300,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $300,000........................  $80,689.50, plus 37% of the
                                        excess over $300,000.

  (e) Estates and trusts.--There is hereby imposed on the 
taxable income of--
          (1) every estate, and
          (2) every trust, taxable under this subsection a tax 
        determined in accordance with the following table:

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $1,500                        15% of taxable income.
Over $1,500 but not over $3,500        $225, plus 28% of the excess over
                                        $1,500.
Over $3,500 but not over $5,500        $785, plus 31% of the excess over
                                        $3,500.
Over $5,500 but not over $7,500        $1,405, plus 36% of the excess
                                        over $5,500.
Over $7,500                            $2,125, plus 39.6% of the excess
                                        over $7,500.]
------------------------------------------------------------------------

 
 
        If taxable income is:                     The tax is:
------------------------------------------------------------------------
Not over $2,550......................  10% of taxable income.
Over $2,550 but not over $9,150......  $255, plus 24% of the excess over
                                        $2,550.
Over $9,150 but not over $12,500.....  $1,839, plus 35% of the excess
                                        over $9,150.
Over $12,500.........................  $3,011.50, plus 37% of the excess
                                        over $12,500.

  (f)  [Phaseout of Marriage Penalty in 15-Percent Bracket; 
Adjustments] Adjustments in tax tables so that inflation will 
not result in tax increases.--
          (1) In general.--Not later than December 15 of [1993] 
        2018, and each subsequent calendar year, the Secretary 
        shall prescribe tables which shall apply in lieu of the 
        tables contained in subsections (a), (b), (c), (d), and 
        (e) with respect to taxable years beginning in the 
        succeeding calendar year.
          (2) Method of prescribing tables.--The table which 
        under paragraph (1) is to apply in lieu of the table 
        contained in subsection (a), (b), (c), (d), or (e), as 
        the case may be, with respect to taxable years 
        beginning in any calendar year shall be prescribed--
                  [(A) except as provided in paragraph (8), by 
                increasing the minimum and maximum dollar 
                amounts for each bracket for which a tax is 
                imposed under such table by the cost-of-living 
                adjustment for such calendar year, determined--
                          [(i) except as provided in clause 
                        (ii), by substituting ``1992'' for 
                        ``2016'' in paragraph (3)(A)(ii), and
                          [(ii) in the case of adjustments to 
                        the dollar amounts at which the 36 
                        percent rate bracket begins or at which 
                        the 39.6 percent rate bracket begins, 
                        by substituting ``1993'' for ``2016'' 
                        in paragraph (3)(A)(ii),]
                  (A) by increasing the minimum and maximum 
                dollar amounts for each bracket for which a tax 
                is imposed under such table by the cost-of-
                living adjustment for such calendar year, 
                determined under this subsection for such 
                calendar year by substituting ``2017'' for 
                ``2016'' in paragraph (3)(A)(ii),
                  (B) by not changing the rate applicable to 
                any rate bracket as adjusted under subparagraph 
                (A), and
                  (C) by adjusting the amounts setting forth 
                the tax to the extent necessary to reflect the 
                adjustments in the rate brackets.
          (3) Cost-of-living adjustment.--For purposes of this 
        subsection--
                  (A) In general.--The cost-of-living 
                adjustment for any calendar year is the 
                percentage (if any) by which--
                          (i) the C-CPI-U for the preceding 
                        calendar year, exceeds
                          (ii) the CPI for calendar year 2016, 
                        multiplied by the amount determined 
                        under subparagraph (B).
                  (B) Amount determined.--The amount determined 
                under this clause is the amount obtained by 
                dividing--
                          (i) the C-CPI-U for calendar year 
                        2016, by
                          (ii) the CPI for calendar year 2016.
                  (C) Special rule for adjustments with a base 
                year after 2016.--For purposes of any provision 
                of this title which provides for the 
                substitution of a year after 2016 for ``2016'' 
                in subparagraph (A)(ii), subparagraph (A) shall 
                be applied by substituting ``the C-CPI-U for 
                calendar year 2016'' for ``the CPI for calendar 
                year 2016'' and all that follows in clause (ii) 
                thereof.
          (4) CPI for any calendar year.--For purposes of 
        paragraph (3), the CPI for any calendar year is the 
        average of the Consumer Price Index as of the close of 
        the 12-month period ending on August 31 of such 
        calendar year.
          (5) Consumer Price Index.--For purposes of paragraph 
        (4), the term ``Consumer Price Index'' means the last 
        Consumer Price Index for all-urban consumers published 
        by the Department of Labor. For purposes of the 
        preceding sentence, the revision of the Consumer Price 
        Index which is most consistent with the Consumer Price 
        Index for calendar year 1986 shall be used.
          (6) C-CPI-U.--For purposes of this subsection--
                  (A) In general.--The term ``C-CPI-U'' means 
                the Chained Consumer Price Index for All Urban 
                Consumers (as published by the Bureau of Labor 
                Statistics of the Department of Labor). The 
                values of the Chained Consumer Price Index for 
                All Urban Consumers taken into account for 
                purposes of determining the cost-of-living 
                adjustment for any calendar year under this 
                subsection shall be the latest values so 
                published as of the date on which such Bureau 
                publishes the initial value of the Chained 
                Consumer Price Index for All Urban Consumers 
                for the month of August for the preceding 
                calendar year.
                  (B) Determination for calendar year.--The C-
                CPI-U for any calendar year is the average of 
                the C-CPI-U as of the close of the 12-month 
                period ending on August 31 of such calendar 
                year.
          (7) Rounding.--
                  (A) In general.--If any increase determined 
                under paragraph (2)(A) [, section 63(c)(4), 
                section 68(b)(2) or section 151(d)(4)] is not 
                multiple of $50, such increase shall be rounded 
                to the next lowest multiple of $50.
                  [(B) Table for married individuals filing 
                separately.--In the case of a married 
                individual filing a separate return, 
                subparagraph (A)]
                  (B) Special rule._In the case of a table 
                prescribed in lieu of the table contained in 
                subsection (b), (c), or (d), subparagraph (A)  
                [(other than with respect to sections 63(c)(4) 
                and 151(d)(4)(A))]shall be applied by 
                substituting ``$25'' for ``$50'' each place it 
                appears.
          [(8) Elimination of marriage penalty in 15-percent 
        bracket.--With respect to taxable years beginning after 
        December 31, 2003, in prescribing the tables under 
        paragraph (1)--
                  [(A) the maximum taxable income in the 15-
                percent rate bracket in the table contained in 
                subsection (a) (and the minimum taxable income 
                in the next higher taxable income bracket in 
                such table) shall be 200 percent of the maximum 
                taxable income in the 15-percent rate bracket 
                in the table contained in subsection (c) (after 
                any other adjustment under this subsection), 
                and
                  [(B) the comparable taxable income amounts in 
                the table contained in subsection (d) shall be 
                \1/2\ of the amounts determined under 
                subparagraph (A).]
  [(g) Certain unearned income of children taxed as if parent's 
income.--
          [(1) In general.--In the case of any child to whom 
        this subsection applies, the tax imposed by this 
        section shall be equal to the greater of--
                  [(A) the tax imposed by this section without 
                regard to this subsection, or
                  [(B) the sum of--
                          [(i) the tax which would be imposed 
                        by this section if the taxable income 
                        of such child for the taxable year were 
                        reduced by the net unearned income of 
                        such child, plus
                          [(ii) such child's share of the 
                        allocable parental tax.]
  (g) Special Rules for Certain Children with Unearned 
Income.--
          (1) In general.--In the case of any child to whom 
        this subsection applies--
                  (A) Modifications to applicable rate 
                brackets.--In determining the amount of tax 
                imposed by this section for the taxable year on 
                such child, the income tax table otherwise 
                applicable under this section to such child 
                shall be applied with the following 
                modifications:
                          (i) 24-percent bracket.--The maximum 
                        taxable income which is taxed at a rate 
                        below 24 percent shall not be more than 
                        the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 24-percent 
                                bracket in the table under 
                                subsection (e) (as adjusted 
                                under subsection (f)) for the 
                                taxable year.
                          (ii) 35-percent bracket.--The maximum 
                        taxable income which is taxed at a rate 
                        below 35 percent shall not be more than 
                        the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 35-percent 
                                bracket in the table under 
                                subsection (e) (as adjusted 
                                under subsection (f)) for the 
                                taxable year.
                          (iii) 37-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 37 percent shall not be 
                        more than the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 37-percent 
                                bracket in the table under 
                                subsection (e) (as adjusted 
                                under subsection (f)) for the 
                                taxable year.
                  (B) Coordination with capital gains rates.--
                For purposes of applying section 1(h)--
                          (i) the maximum zero rate amount 
                        shall not be more than the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the amount in effect 
                                under subsection (h)(13) for 
                                the taxable year, and
                          (ii) the maximum 15-percent rate 
                        amount shall not be more than the sum 
                        of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the amount in effect 
                                under subsection (h)(12)(D) for 
                                the taxable year.
          (2) Child to whom subsection applies.--This 
        subsection shall apply to any child for any taxable 
        year if--
                  (A) such child--
                          (i) has not attained age 18 before 
                        the close of the taxable year, or
                          (ii)(I) has attained age 18 before 
                        the close of the taxable year and meets 
                        the age requirements of section 
                        152(c)(3) (determined without regard to 
                        subparagraph (B) thereof), and
                                  (II) whose earned income (as 
                                defined in section 911(d)(2)) 
                                for such taxable year does not 
                                exceed one-half of the amount 
                                of the individual's support 
                                (within the meaning of section 
                                152(c)(1)(D) after the 
                                application of section 
                                152(f)(5) (without regard to 
                                subparagraph (A) thereof)) for 
                                such taxable year,
                  (B) either parent of such child is alive at 
                the close of the taxable year, and
                  (C) such child does not file a joint return 
                for the taxable year.
          [(3) Allocable parental tax.--For purposes of this 
        subsection--
                  [(A) In general.--The term ``allocable 
                parental tax'' means the excess of--
                          [(i) the tax which would be imposed 
                        by this section on the parent's taxable 
                        income if such income included the net 
                        unearned income of all children of the 
                        parent to whom this subsection applies, 
                        over
                          [(ii) the tax imposed by this section 
                        on the parent without regard to this 
                        subsection.
                For purposes of clause (i), net unearned income 
                of all children of the parent shall not be 
                taken into account in computing any exclusion, 
                deduction, or credit of the parent.
                  [(B) Child's share.--A child's share of any 
                allocable parental tax of a parent shall be 
                equal to an amount which bears the same ratio 
                to the total allocable parental tax as the 
                child's net unearned income bears to the 
                aggregate net unearned income of all children 
                of such parent to whom this subsection applies.
                  [(C) Special rule where parent has different 
                taxable year.--Except as provided in 
                regulations, if the parent does not have the 
                same taxable year as the child, the allocable 
                parental tax shall be determined on the basis 
                of the taxable year of the parent ending in the 
                child's taxable year.]
          (3) Earned taxable income.--For purposes of this 
        subsection, the term ``earned taxable income'' means, 
        with respect to any child for any taxable year, the 
        taxable income of such child reduced (but not below 
        zero) by the net unearned income of such child.
          (4) Net unearned income.--For purposes of this 
        subsection--
                  (A) In general.--The term ``net unearned 
                income'' means the excess of--
                          (i) the portion of the adjusted gross 
                        income for the taxable year which is 
                        not attributable to earned income (as 
                        defined in section 911(d)(2)), over
                          (ii) the sum of--
                                  (I) the amount in effect for 
                                the taxable year under section 
                                63(c)(5)(A) (relating to 
                                limitation on standard 
                                deduction in the case of 
                                certain dependents), plus
                                  (II) the greater of the 
                                amount described in subclause 
                                (I) or, if the child itemizes 
                                his deductions for the taxable 
                                year, the amount of the 
                                itemized deductions allowed by 
                                this chapter for the taxable 
                                year which are directly 
                                connected with the production 
                                of the portion of adjusted 
                                gross income referred to in 
                                clause (i).
                  (B) Limitation based on taxable income.--The 
                amount of the net unearned income for any 
                taxable year shall not exceed the individual's 
                taxable income for such taxable year.
                  (C) Treatment of distributions from qualified 
                disability trusts.--For purposes of this 
                subsection, in the case of any child who is a 
                beneficiary of a qualified disability trust (as 
                defined in section 642(b)(2)(C)(ii)), any 
                amount included in the income of such child 
                under sections 652 and 662 during a taxable 
                year shall be considered earned income of such 
                child for such taxable year.
          (5) [Special rules for determining parent to whom 
        subsection applies.--] Special rules for determining 
        parent eligible to make election._[For purposes of this 
        subsection, the parent whose taxable income shall be 
        taken into account shall be--] For purposes of 
        paragraph (7), the parent referred to in subparagraph 
        (A)(iv) thereof is--
                  (A) in the case of parents who are not 
                married (within the meaning of section 7703), 
                the custodial parent (within the meaning of 
                [section 152(e)] section 7706(e)) of the child, 
                and
                  (B) in the case of married individuals filing 
                separately, the individual with the greater 
                taxable income.
          (6) Providing of parent's TIN.--The parent of any 
        child to whom this subsection applies for any taxable 
        year shall provide the TIN of such parent to such child 
        and such child shall include such TIN on the child's 
        return of tax imposed by this section for such taxable 
        year.
          (7) Election to claim certain unearned income of 
        child on parent's return.--
                  (A) In general.--If--
                          (i) any child to whom this subsection 
                        applies has gross income for the 
                        taxable year only from interest and 
                        dividends (including Alaska Permanent 
                        Fund dividends),
                          (ii) such gross income is more than 
                        the amount described in paragraph 
                        (4)(A)(ii)(I) and less than 10 times 
                        the amount so described,
                          (iii) no estimated tax payments for 
                        such year are made in the name and TIN 
                        of such child, and no amount has been 
                        deducted and withheld under section 
                        3406, and
                          (iv) the parent of such child (as 
                        determined under paragraph (5)) elects 
                        the application of subparagraph (B),
                such child shall be treated (other than for 
                purposes of this paragraph) as having no gross 
                income for such year and shall not be required 
                to file a return under section 6012.
                  (B) Income included on parent's return.--In 
                the case of a parent making the election under 
                this paragraph--
                          (i) the gross income of each child to 
                        whom such election applies (to the 
                        extent the gross income of such child 
                        exceeds twice the amount described in 
                        paragraph (4)(A)(ii)(I)) shall be 
                        included in such parent's gross income 
                        for the taxable year,
                          (ii) the tax imposed by this section 
                        for such year with respect to such 
                        parent shall be the amount equal to the 
                        sum of--
                                  (I) the amount determined 
                                under this section after the 
                                application of clause (i), plus
                                  (II) for each such child, 10 
                                percent of the lesser of the 
                                amount described in paragraph 
                                (4)(A)(ii)(I) or the excess of 
                                the gross income of such child 
                                over the amount so described, 
                                and
                          (iii) any interest which is an item 
                        of tax preference under section 
                        57(a)(5) of the child shall be treated 
                        as an item of tax preference of such 
                        parent (and not of such child).
                  (C) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph.
  (h) Maximum capital gains rate.--
          (1) In general.--If a taxpayer has a net capital gain 
        for any taxable year, the tax imposed by this section 
        for such taxable year shall not exceed the sum of--
                  (A) a tax computed at the rates and in the 
                same manner as if this subsection had not been 
                enacted on the greater of--
                          (i) taxable income reduced by the net 
                        capital gain; or
                          (ii) the lesser of--
                                  (I) the amount of taxable 
                                income taxed at a rate below 25 
                                percent; or
                                  (II) taxable income reduced 
                                by the adjusted net capital 
                                gain;
                  (B) 0 percent of so much of the adjusted net 
                capital gain (or, if less, taxable income) as 
                does not exceed the excess (if any) of--
                          (i) the amount of taxable income 
                        which would (without regard to this 
                        paragraph) be taxed at a rate below [25 
                        percent] 22 percent, over
                          (ii) the taxable income reduced by 
                        the adjusted net capital gain;
                  (C) 15 percent of the lesser of--
                          (i) so much of the adjusted net 
                        capital gain (or, if less, taxable 
                        income) as exceeds the amount on which 
                        a tax is determined under subparagraph 
                        (B), or
                          (ii) the excess of--
                                  (I) the amount of taxable 
                                income [which would (without 
                                regard to this paragraph) be 
                                taxed at a rate below 39.6 
                                percent] below the maximum 15-
                                percent rate amount, over
                                  (II) the sum of the amounts 
                                on which a tax is determined 
                                under subparagraphs (A) and 
                                (B),
                  (D) 20 percent of the adjusted net capital 
                gain (or, if less, taxable income) in excess of 
                the sum of the amounts on which tax is 
                determined under subparagraphs (B) and (C),
                  (E) 25 percent of the excess (if any) of--
                          (i) the unrecaptured section 1250 
                        gain (or, if less, the net capital gain 
                        (determined without regard to paragraph 
                        (11))), over
                          (ii) the excess (if any) of--
                                  (I) the sum of the amount on 
                                which tax is determined under 
                                subparagraph (A) plus the net 
                                capital gain, over
                                  (II) taxable income; and
                  (F) 28 percent of the amount of taxable 
                income in excess of the sum of the amounts on 
                which tax is determined under the preceding 
                subparagraphs of this paragraph.
          (2) Net capital gain taken into account as investment 
        income.--For purposes of this subsection, the net 
        capital gain for any taxable year shall be reduced (but 
        not below zero) by the amount which the taxpayer takes 
        into account as investment income under section 
        163(d)(4)(B)(iii).
          (3) Adjusted net capital gain.--For purposes of this 
        subsection, the term ``adjusted net capital gain'' 
        means the sum of--
                  (A) net capital gain (determined without 
                regard to paragraph (11)) reduced (but not 
                below zero) by the sum of--
                          (i) unrecaptured section 1250 gain, 
                        and
                          (ii) 28-percent rate gain, plus
                  (B) qualified dividend income (as defined in 
                paragraph (11)).
          (4) 28-percent rate gain.--For purposes of this 
        subsection, the term ``28-percent rate gain'' means the 
        excess (if any) of--
                  (A) the sum of--
                          (i) collectibles gain; and
                          (ii) section 1202 gain, over
                  (B) the sum of--
                          (i) collectibles loss;
                          (ii) the net short-term capital loss; 
                        and
                          (iii) the amount of long-term capital 
                        loss carried under section 
                        1212(b)(1)(B) to the taxable year.
          (5) Collectibles gain and loss.--For purposes of this 
        subsection--
                  (A) In general.--The terms ``collectibles 
                gain'' and ``collectibles loss'' mean gain or 
                loss (respectively) from the sale or exchange 
                of a collectible (as defined in section 408(m) 
                without regard to paragraph (3) thereof) which 
                is a capital asset held for more than 1 year 
                but only to the extent such gain is taken into 
                account in computing gross income and such loss 
                is taken into account in computing taxable 
                income.
                  (B) Partnerships, etc..--For purposes of 
                subparagraph (A), any gain from the sale of an 
                interest in a partnership, S corporation, or 
                trust which is attributable to unrealized 
                appreciation in the value of collectibles shall 
                be treated as gain from the sale or exchange of 
                a collectible. Rules similar to the rules of 
                section 751 shall apply for purposes of the 
                preceding sentence.
          (6) Unrecaptured section 1250 gain.--For purposes of 
        this subsection--
                  (A) In general.--The term ``unrecaptured 
                section 1250 gain'' means the excess (if any) 
                of--
                          (i) the amount of long-term capital 
                        gain (not otherwise treated as ordinary 
                        income) which would be treated as 
                        ordinary income if section 1250(b)(1) 
                        included all depreciation and the 
                        applicable percentage under section 
                        1250(a) were 100 percent, over
                          (ii) the excess (if any) of--
                                  (I) the amount described in 
                                paragraph (4)(B); over
                                  (II) the amount described in 
                                paragraph (4)(A).
                  (B) Limitation with respect to section 1231 
                property.--The amount described in subparagraph 
                (A)(i) from sales, exchanges, and conversions 
                described in section 1231(a)(3)(A) for any 
                taxable year shall not exceed the net section 
                1231 gain (as defined in section 1231(c)(3)) 
                for such year.
          (7) Section 1202 gain.--For purposes of this 
        subsection, the term ``section 1202 gain'' means the 
        excess of--
                  (A) the gain which would be excluded from 
                gross income under section 1202 but for the 
                percentage limitation in section 1202(a), over
                  (B) the gain excluded from gross income under 
                section 1202.
          (8) Coordination with recapture of net ordinary 
        losses under section 1231.--If any amount is treated as 
        ordinary income under section 1231(c), such amount 
        shall be allocated among the separate categories of net 
        section 1231 gain (as defined in section 1231(c)(3)) in 
        such manner as the Secretary may by forms or 
        regulations prescribe.
          (9) Regulations.--The Secretary may prescribe such 
        regulations as are appropriate (including regulations 
        requiring reporting) to apply this subsection in the 
        case of sales and exchanges by pass-thru entities and 
        of interests in such entities.
          (10) Pass-thru entity defined.--For purposes of this 
        subsection, the term ``pass-thru entity'' means--
                  (A) a regulated investment company;
                  (B) a real estate investment trust;
                  (C) an S corporation;
                  (D) a partnership;
                  (E) an estate or trust;
                  (F) a common trust fund; and
                  (G) a qualified electing fund (as defined in 
                section 1295).
          (11) Dividends taxed as net capital gain.--
                  (A) In general.--For purposes of this 
                subsection, the term ``net capital gain'' means 
                net capital gain (determined without regard to 
                this paragraph) increased by qualified dividend 
                income.
                  (B) Qualified dividend income.--For purposes 
                of this paragraph--
                          (i) In general.--The term ``qualified 
                        dividend income'' means dividends 
                        received during the taxable year from--
                                  (I) domestic corporations, 
                                and
                                  (II) qualified foreign 
                                corporations.
                          (ii) Certain dividends excluded.--
                        Such term shall not include--
                                  (I) any dividend from a 
                                corporation which for the 
                                taxable year of the corporation 
                                in which the distribution is 
                                made, or the preceding taxable 
                                year, is a corporation exempt 
                                from tax under section 501 or 
                                521,
                                  (II) any amount allowed as a 
                                deduction under section 591 
                                (relating to deduction for 
                                dividends paid by mutual 
                                savings banks, etc.), and
                                  (III) any dividend described 
                                in section 404(k).
                          (iii) Coordination with section 
                        246(c).--Such term shall not include 
                        any dividend on any share of stock--
                                  (I) with respect to which the 
                                holding period requirements of 
                                section 246(c) are not met 
                                (determined by substituting in 
                                section 246(c) ``60 days'' for 
                                ``45 days'' each place it 
                                appears and by substituting 
                                ``121- day period'' for ``91-
                                day period''), or
                                  (II) to the extent that the 
                                taxpayer is under an obligation 
                                (whether pursuant to a short 
                                sale or otherwise) to make 
                                related payments with respect 
                                to positions in substantially 
                                similar or related property.
                  (C) Qualified foreign corporations.--
                          (i) In general.--Except as otherwise 
                        provided in this paragraph, the term 
                        ``qualified foreign corporation'' means 
                        any foreign corporation if--
                                  (I) such corporation is 
                                incorporated in a possession of 
                                the United States, or
                                  (II) such corporation is 
                                eligible for benefits of a 
                                comprehensive income tax treaty 
                                with the United States which 
                                the Secretary determines is 
                                satisfactory for purposes of 
                                this paragraph and which 
                                includes an exchange of 
                                information program.
                          (ii) Dividends on stock readily 
                        tradable on United States securities 
                        market.--A foreign corporation not 
                        otherwise treated as a qualified 
                        foreign corporation under clause (i) 
                        shall be so treated with respect to any 
                        dividend paid by such corporation if 
                        the stock with respect to which such 
                        dividend is paid is readily tradable on 
                        an established securities market in the 
                        United States.
                          (iii) Exclusion of dividends of 
                        certain foreign corporations.--Such 
                        term shall not include--
                                  (I) any foreign corporation 
                                which for the taxable year of 
                                the corporation in which the 
                                dividend was paid, or the 
                                preceding taxable year, is a 
                                passive foreign investment 
                                company (as defined in section 
                                1297), and
                                  (II) any corporation which 
                                first becomes a surrogate 
                                foreign corporation (as defined 
                                in section 7874(a)(2)(B)) after 
                                the date of the enactment of 
                                this subclause, other than a 
                                foreign corporation which is 
                                treated as a domestic 
                                corporation under section 
                                7874(b).
                          (iv) Coordination with foreign tax 
                        credit limitation.--Rules similar to 
                        the rules of section 904(b)(2)(B) shall 
                        apply with respect to the dividend rate 
                        differential under this paragraph.
                  (D) Special rules.--
                          (i) Amounts taken into account as 
                        investment income.--Qualified dividend 
                        income shall not include any amount 
                        which the taxpayer takes into account 
                        as investment income under section 
                        163(d)(4)(B).
                          (ii) Extraordinary dividends.--If a 
                        taxpayer to whom this section applies 
                        receives, with respect to any share of 
                        stock, qualified dividend income from 1 
                        or more dividends which are 
                        extraordinary dividends (within the 
                        meaning of section 1059(c)), any loss 
                        on the sale or exchange of such share 
                        shall, to the extent of such dividends, 
                        be treated as long- term capital loss.
                          (iii) Treatment of dividends from 
                        regulated investment companies and real 
                        estate investment trusts.--A dividend 
                        received from a regulated investment 
                        company or a real estate investment 
                        trust shall be subject to the 
                        limitations prescribed in sections 854 
                        and 857.
          (12) Maximum 15-percent rate amount defined.--For 
        purposes of this subsection, the maximum 15-percent 
        rate amount shall be--
                  (A) in the case of a joint return or 
                surviving spouse (as defined in section 2(a)), 
                $479,000 (\1/2\ such amount in the case of a 
                married individual filing a separate return),
                  (B) in the case of an individual who is the 
                head of a household (as defined in section 
                2(b)), $452,400,
                  (C) in the case of any other individual 
                (other than an estate or trust), $425,800, and
                  (D) in the case of an estate or trust, 
                $12,700.
          (13) Determination of 0 percent rate bracket for 
        estates and trusts.--In the case of any estate or 
        trust, paragraph (1)(B) shall be applied by treating 
        the amount determined in clause (i) thereof as being 
        equal to $2,600.
          (14) Inflation adjustment.--
                  (A) In general.--In the case of any taxable 
                year beginning after 2018, each of the dollar 
                amounts in paragraphs (12) and (13) shall be 
                increased by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under subsection (f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2017'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                  (B) Rounding.--If any increase under 
                subparagraph (A) is not a multiple of $50, such 
                increase shall be rounded to the next lowest 
                multiple of $50.
  [(i) Rate reductions after 2000.--
          [(1) 10-percent rate bracket
                  [(A) In general.--In the case of taxable 
                years beginning after December 31, 2000--
                          [(i) the rate of tax under 
                        subsections (a), (b), (c), and (d) on 
                        taxable income not over the initial 
                        bracket amount shall be 10 percent, and
                          [(ii) the 15 percent rate of tax 
                        shall apply only to taxable income over 
                        the initial bracket amount but not over 
                        the maximum dollar amount for the 15-
                        percent rate bracket.
                  [(B) Initial bracket amount.--For purposes of 
                this paragraph, the initial bracket amount is--
                          [(i) $14,000 in the case of 
                        subsection (a),
                          [(ii) $10,000 in the case of 
                        subsection (b), and
                          [(iii) 1/2 the amount applicable 
                        under clause (i) (after adjustment, if 
                        any, under subparagraph (C)) in the 
                        case of subsections (c) and (d).
                  [(C) Inflation adjustment.--In prescribing 
                the tables under subsection (f) which apply 
                with respect to taxable years beginning in 
                calendar years after 2003--
                          [(i) the cost-of-living adjustment 
                        shall be determined under subsection 
                        (f)(3) by substituting ``2002'' for 
                        ``2016'' in subparagraph (A)(ii) 
                        thereof, and
                          [(ii) the adjustments under clause 
                        (i) shall not apply to the amount 
                        referred to in subparagraph (B)(iii).
                If any amount after adjustment under the 
                preceding sentence is not a multiple of $50, 
                such amount shall be rounded to the next lowest 
                multiple of $50.
          [(2) 25-, 28-, and 33-percent rate brackets.--The 
        tables under subsections (a), (b), (c), (d), and (e) 
        shall be applied--
                  [(A) by substituting ``25%'' for ``28%'' each 
                place it appears (before the application of 
                subparagraph (B)),
                  [(B) by substituting ``28%'' for ``31%'' each 
                place it appears, and
                  [(C) by substituting ``33%'' for ``36%'' each 
                place it appears.
          [(3) Modifications to income tax brackets for high-
        income taxpayers.--
                  [(A) 35-percent rate bracket.--In the case of 
                taxable years beginning after December 31, 
                2012--
                          [(i) the rate of tax under 
                        subsections (a), (b), (c), and (d) on a 
                        taxpayer's taxable income in the 
                        highest rate bracket shall be 35 
                        percent to the extent such income does 
                        not exceed an amount equal to the 
                        excess of--
                                  [(I) the applicable 
                                threshold, over
                                  [(II) the dollar amount at 
                                which such bracket begins, and
                          [(ii) the 39.6 percent rate of tax 
                        under such subsections shall apply only 
                        to the taxpayer's taxable income in 
                        such bracket in excess of the amount to 
                        which clause (i) applies.
                  [(B) Applicable threshold.--For purposes of 
                this paragraph, the term ``applicable 
                threshold'' means--
                          [(i) $450,000 in the case of 
                        subsection (a),
                          [(ii) $425,000 in the case of 
                        subsection (b),
                          [(iii) $400,000 in the case of 
                        subsection (c), and
                          [(iv) \1/2\ the amount applicable 
                        under clause (i) (after adjustment, if 
                        any, under subparagraph (C)) in the 
                        case of subsection (d).
                  [(C) Inflation adjustment.--For purposes of 
                this paragraph, with respect to taxable years 
                beginning in calendar years after 2013, each of 
                the dollar amounts under clauses (i), (ii), and 
                (iii) of subparagraph (B) shall be adjusted in 
                the same manner as under paragraph (1)(C)(i), 
                except that subsection (f)(3)(A)(ii) shall be 
                applied by substituting ``2012'' for ``2016''.
          [(4) Adjustment of tables.--The Secretary shall 
        adjust the tables prescribed under subsection (f) to 
        carry out this subsection.
  [(j) Modifications for taxable years 2018 through 2025.--
          [(1) In general.--In the case of a taxable year 
        beginning after December 31, 2017, and before January 
        1, 2026--
                  [(A) subsection (i) shall not apply, and
                  [(B) this section (other than subsection (i)) 
                shall be applied as provided in paragraphs (2) 
                through (6).
          [(2) Rate tables.--
                  [(A) Married individuals filing joint returns 
                and surviving spouses.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (a):

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $19,050.....................  10% of taxable income.
Over $19,050 but not over $77,400....  $1,905, plus 12% of the excess
                                        over $19,050.
Over $77,400 but not over $165,000...  $8,907, plus 22% of the excess
                                        over $77,400.
Over $165,000 but not over $315,000..  $28,179, plus 24% of the excess
                                        over $165,000.
Over $315,000 but not over $400,000..  $64,179, plus 32% of the excess
                                        over $315,000.
Over $400,000 but not over $600,000..  $91,379, plus 35% of the excess
                                        over $400,000.
Over $600,000........................  $161,379, plus 37% of the excess
                                        over $600,000.
------------------------------------------------------------------------

                  [(B) Heads of households.--The following 
                table shall be applied in lieu of the table 
                contained in subsection (b):

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $13,600.....................  10% of taxable income.
Over $13,600 but not over $51,800....  $1,360, plus 12% of the excess
                                        over $13,600.
Over $51,800 but not over $82,500....  $5,944, plus 22% of the excess
                                        over $51,800.
Over $82,500 but not over $157,500...  $12,698, plus 24% of the excess
                                        over $82,500.
Over $157,500 but not over $200,000..  $30,698, plus 32% of the excess
                                        over $157,500.
Over $200,000 but not over $500,000..  $44,298, plus 35% of the excess
                                        over $200,000.
Over $500,000........................  $149,298, plus 37% of the excess
                                        over $500,000.
------------------------------------------------------------------------

                  [(C) Unmarried individuals other than 
                surviving spouses and heads of households.--The 
                following table shall be applied in lieu of the 
                table contained in subsection (c):

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $500,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $500,000........................  $150,689.50, plus 37% of the
                                        excess over $500,000.
------------------------------------------------------------------------

                  [(D) Married individuals filing separate 
                returns.--The following table shall be applied 
                in lieu of the table contained in subsection 
                (d):

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525......................  10% of taxable income.
Over $9,525 but not over $38,700.....  $952.50, plus 12% of the excess
                                        over $9,525.
Over $38,700 but not over $82,500....  $4,453.50, plus 22% of the excess
                                        over $38,700.
Over $82,500 but not over $157,500...  $14,089.50, plus 24% of the
                                        excess over $82,500.
Over $157,500 but not over $200,000..  $32,089.50, plus 32% of the
                                        excess over $157,500.
Over $200,000 but not over $300,000..  $45,689.50, plus 35% of the
                                        excess over $200,000.
Over $300,000........................  $80,689.50, plus 37% of the
                                        excess over $300,000.
------------------------------------------------------------------------

                  [(E) Estates and trusts.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (e):

 
------------------------------------------------------------------------
        [If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $2,550......................  10% of taxable income.
Over $2,550 but not over $9,150......  $255, plus 24% of the excess over
                                        $2,550.
Over $9,150 but not over $12,500.....  $1,839, plus 35% of the excess
                                        over $9,150.
Over $12,500.........................  $3,011.50, plus 37% of the excess
                                        over $12,500.
------------------------------------------------------------------------

                  [(F) References to rate tables.--Any 
                reference in this title to a rate of tax under 
                subsection (c) shall be treated as a reference 
                to the corresponding rate bracket under 
                subparagraph (C) of this paragraph, except that 
                the reference in section 3402(q)(1) to the 
                third lowest rate of tax applicable under 
                subsection (c) shall be treated as a reference 
                to the fourth lowest rate of tax under 
                subparagraph (C).
          [(3) Adjustments.--
                  [(A) No adjustment in 2018.--The tables 
                contained in paragraph (2) shall apply without 
                adjustment for taxable years beginning after 
                December 31, 2017, and before January 1, 2019.
                  [(B) Subsequent years.--For taxable years 
                beginning after December 31, 2018, the 
                Secretary shall prescribe tables which shall 
                apply in lieu of the tables contained in 
                paragraph (2) in the same manner as under 
                paragraphs (1) and (2) of subsection (f) 
                (applied without regard to clauses (i) and (ii) 
                of subsection (f)(2)(A)), except that in 
                prescribing such tables--
                          [(i) subsection (f)(3) shall be 
                        applied by substituting ``calendar year 
                        2017'' for ``calendar year 2016'' in 
                        subparagraph (A)(ii) thereof,
                          [(ii) subsection (f)(7)(B) shall 
                        apply to any unmarried individual other 
                        than a surviving spouse or head of 
                        household, and
                          [(iii) subsection (f)(8) shall not 
                        apply.
          [(4) Special rules for certain children with unearned 
        income.--
                  [(A) In general.--In the case of a child to 
                whom subsection (g) applies for the taxable 
                year, the rules of subparagraphs (B) and (C) 
                shall apply in lieu of the rule under 
                subsection (g)(1).
                  [(B) Modifications to applicable rate 
                brackets.--In determining the amount of tax 
                imposed by this section for the taxable year on 
                a child described in subparagraph (A), the 
                income tax table otherwise applicable under 
                this subsection to the child shall be applied 
                with the following modifications:
                          [(i) 24-percent bracket.--The maximum 
                        taxable income which is taxed at a rate 
                        below 24 percent shall not be more than 
                        the sum of--
                                  [(I) the earned taxable 
                                income of such child, plus
                                  [(II) the minimum taxable 
                                income for the 24-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                          [(ii) 35-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 35 percent shall not be 
                        more than the sum of--
                                  [(I) the earned taxable 
                                income of such child, plus (II) 
                                the minimum taxable income for 
                                the 35-percent bracket in the 
                                table under paragraph (2)(E) 
                                (as adjusted under paragraph 
                                (3)) for the taxable year.
                          [(iii) 37-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 37 percent shall not be 
                        more than the sum of--
                                  [(I) the earned taxable 
                                income of such child, plus
                                  [(II) the minimum taxable 
                                income for the 37-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                  [(C) Coordination with capital gains rates.--
                For purposes of applying section 1(h) (after 
                the modifications under paragraph (5)(A))--
                          [(i) the maximum zero rate amount 
                        shall not be more than the sum of--
                                  [(I) the earned taxable 
                                income of such child, plus
                                  [(II) the amount in effect 
                                under paragraph (5)(B)(i)(IV) 
                                for the taxable year, and
                          [(ii) the maximum 15-percent rate 
                        amount shall not be more than the sum 
                        of--
                                  [(I) the earned taxable 
                                income of such child, plus
                                  [(II) the amount in effect 
                                under paragraph (5)(B)(ii)(IV) 
                                for the taxable year.
                  [(D) Earned taxable income.--For purposes of 
                this paragraph, the term ``earned taxable 
                income'' means, with respect to any child for 
                any taxable year, the taxable income of such 
                child reduced (but not below zero) by the net 
                unearned income (as defined in subsection 
                (g)(4)) of such child.
          [(5) Application of current income tax brackets to 
        capital gains brackets.--
                  [(A) In general.--Section 1(h)(1) shall be 
                applied--
                          [(i) by substituting ``below the 
                        maximum zero rate amount'' for ``which 
                        would (without regard to this 
                        paragraph) be taxed at a rate below 25 
                        percent'' in subparagraph (B)(i), and
                          [(ii) by substituting ``below the 
                        maximum 15-percent rate amount'' for 
                        ``which would (without regard to this 
                        paragraph) be taxed at a rate below 
                        39.6 percent'' in subparagraph 
                        (C)(ii)(I).
                  [(B) Maximum amounts defined.--For purposes 
                of applying section 1(h) with the modifications 
                described in subparagraph (A)--
                          [(i) Maximum zero rate amount.--The 
                        maximum zero rate amount shall be--
                                  [(I) in the case of a joint 
                                return or surviving spouse, 
                                $77,200,
                                  [(II) in the case of an 
                                individual who is a head of 
                                household (as defined in 
                                section 2(b)), $51,700,
                                  [(III) in the case of any 
                                other individual (other than an 
                                estate or trust), an amount 
                                equal to \1/2\ of the amount in 
                                effect for the taxable year 
                                under subclause (I), and
                                  [(IV) in the case of an 
                                estate or trust, $2,600.
                          [(ii) Maximum 15-percent rate 
                        amount.--The maximum 15- percent rate 
                        amount shall be--
                                  [(I) in the case of a joint 
                                return or surviving spouse, 
                                $479,000 (\1/2\ such amount in 
                                the case of a married 
                                individual filing a separate 
                                return),
                                  [(II) in the case of an 
                                individual who is the head of a 
                                household (as defined in 
                                section 2(b)), $452,400,
                                  [(III) in the case of any 
                                other individual (other than an 
                                estate or trust), $425,800, and
                                  [(IV) in the case of an 
                                estate or trust, $12,700.
                  [(C) Inflation adjustment.--In the case of 
                any taxable year beginning after 2018, each of 
                the dollar amounts in clauses (i) and (ii) of 
                subparagraph (B) shall be increased by an 
                amount equal to--
                          [(i) such dollar amount, multiplied 
                        by
                          [(ii) the cost-of-living adjustment 
                        determined under subsection (f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2017'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                If any increase under this subparagraph is not 
                a multiple of $50, such increase shall be 
                rounded to the next lowest multiple of $50.
          [(6) Section 15 not to apply.--Section 15 shall not 
        apply to any change in a rate of tax by reason of this 
        subsection.]

SEC. 2. DEFINITIONS AND SPECIAL RULES.

  (a) Definition of surviving spouse.--
          (1) In general.--For purposes of section 1, the term 
        ``surviving spouse'' means a taxpayer--
                  (A) whose spouse died during either of his 
                two taxable years immediately preceding the 
                taxable year, and
                  (B) who maintains as his home a household 
                which constitutes for the taxable year the 
                principal place of abode (as a member of such 
                household) of a dependent (i) who (within the 
                meaning of [section 152] section 7706, 
                determined without regard to subsections 
                (b)(1), (b)(2), and (d)(1)(B) thereof) is a 
                son, stepson, daughter, or stepdaughter of the 
                taxpayer, and (ii) [with respect to whom the 
                taxpayer is entitled to a deduction for the 
                taxable year under section 151] whose TIN is 
                included on the taxpayer's return of tax for 
                the taxable year.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half 
        of the cost of maintaining the household during the 
        taxable year is furnished by such individual.
          (2) Limitations.--Notwithstanding paragraph (1), for 
        purposes of section 1 a taxpayer shall not be 
        considered to be a surviving spouse--
                  (A) if the taxpayer has remarried at any time 
                before the close of the taxable year, or
                  (B) unless, for the taxpayer's taxable year 
                during which his spouse died, a joint return 
                could have been made under the provisions of 
                section 6013 (without regard to subsection 
                (a)(3) thereof).
          (3) Special rule where deceased spouse was in missing 
        status.--If an individual was in a missing status 
        (within the meaning of section 6013(f)(3)) as a result 
        of service in a combat zone (as determined for purposes 
        of section 112) and if such individual remains in such 
        status until the date referred to in subparagraph (A) 
        or (B), then, for purposes of paragraph (1)(A), the 
        date on which such individual died shall be treated as 
        the earlier of the date determined under subparagraph 
        (A) or the date determined under subparagraph (B):
                  (A) the date on which the determination is 
                made under section 556 of title 37 of the 
                United States Code or under section 5566 of 
                title 5 of such Code (whichever is applicable) 
                that such individual died while in such missing 
                status, or
                  (B) except in the case of the combat zone 
                designated for purposes of the Vietnam 
                conflict, the date which is 2 years after the 
                date designated under section 112 as the date 
                of termination of combatant activities in that 
                zone.
  (b) Definition of head of household.--
          (1) In general.--For purposes of this subtitle, an 
        individual shall be considered a head of a household 
        if, and only if, such individual is not married at the 
        close of his taxable year, is not a surviving spouse 
        (as defined in subsection (a)), and either--
                  (A) maintains as his home a household which 
                constitutes for more than one-half of such 
                taxable year the principal place of abode, as a 
                member of such household, of--
                          (i) a qualifying child of the 
                        individual (as defined in [section 
                        152(c)] section 7706(c), determined 
                        without regard to [section 152(e)] 
                        section 7706(e)), but not if such 
                        child--
                                  (I) is married at the close 
                                of the taxpayer's taxable year, 
                                and
                                  (II) is not a dependent of 
                                such individual by reason of 
                                [section 152(b)(2) or 
                                152(b)(3)] section 7706(b)(2) 
                                or 7706(b)(3), or both, or
                          (ii) any other person who is a 
                        dependent of the taxpayer, [if the 
                        taxpayer is entitled to a deduction for 
                        the taxable year for such person under 
                        section 151] if the taxpayer included 
                        such person's TIN on the return of tax 
                        for the taxable year, or
                  (B) maintains a household which constitutes 
                for such taxable year the principal place of 
                abode of the father or mother of the taxpayer, 
                [if the taxpayer is entitled to a deduction for 
                the taxable year for such father or mother 
                under section 151] if such father or mother is 
                a dependent of the taxpayer and the taxpayer 
                included such father or mother's TIN on the 
                return of tax for the taxable year.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half 
        of the cost of maintaining the household during the 
        taxable year is furnished by such individual.
          (2) Determination of status.--For purposes of this 
        subsection--
                  (A) an individual who is legally separated 
                from his spouse under a decree of divorce or of 
                separate maintenance shall not be considered as 
                married;
                  (B) a taxpayer shall be considered as not 
                married at the close of his taxable year if at 
                any time during the taxable year his spouse is 
                a nonresident alien; and
                  (C) a taxpayer shall be considered as married 
                at the close of his taxable year if his spouse 
                (other than a spouse described in subparagraph 
                (B)) died during the taxable year.
          (3) Limitations.--Notwithstanding paragraph (1), for 
        purposes of this subtitle a taxpayer shall not be 
        considered to be a head of a household--
                  (A) if at any time during the taxable year he 
                is a nonresident alien; or
                  (B) by reason of an individual who would not 
                be a dependent for the taxable year but for--
                          (i) subparagraph (H) of [section 
                        152(d)(2)] section 7706(d)(2), or
                          (ii) paragraph (3) of [section 
                        152(d)] section 7706(d).
  (c) Certain married individuals living apart.--For purposes 
of this part, an individual shall be treated as not married at 
the close of the taxable year if such individual is so treated 
under the provisions of section 7703(b).
  (d) Nonresident aliens.--In the case of a nonresident alien 
individual, the taxes imposed by sections 1 and 55 shall apply 
only as provided by section 871 or 877.
  (e) Cross reference.--For definition of taxable income, see 
section 63.

           *       *       *       *       *       *       *

            PART III--CHANGES IN RATES DURING A TAXABLE YEAR

[Sec. 15. Effect of changes.]
Sec. 15. Effect of changes on corporations.

SEC. 15. EFFECT OF CHANGES  ON CORPORATIONS.

  (a) General rule.--[If any rate of tax] In the case of a 
corporation, if any rate of tax imposed by this chapter 
changes, and if the taxable year includes the effective date of 
the change (unless that date is the first day of the taxable 
year), then--
          (1) tentative taxes shall be computed by applying the 
        rate for the period before the effective date of the 
        change, and the rate for the period on and after such 
        date, to the taxable income for the entire taxable 
        year; and
          (2) the tax for such taxable year shall be the sum of 
        that proportion of each tentative tax which the number 
        of days in each period bears to the number of days in 
        the entire taxable year.
  (b) Repeal of tax.--For purposes of subsection (a)--
          (1) if a tax is repealed, the repeal shall be 
        considered a change of rate; and
          (2) the rate for the period after the repeal shall be 
        zero.
  (c) Effective date of change.--For purposes of subsections 
(a) and (b)--
          (1) if the rate changes for taxable years ``beginning 
        after'' or ``ending after'' a certain date, the 
        following day shall be considered the effective date of 
        the change; and
          (2) if a rate changes for taxable years ``beginning 
        on or after'' a certain date, that date shall be 
        considered the effective date of the change.
  [(d) Section not to apply to inflation adjustments.--This 
section shall not apply to any change in rates under subsection 
(f) of section 1 (relating to adjustments in tax tables so that 
inflation will not result in tax increases).
  [(e) References to highest rate.--If the change referred to 
in subsection (a) involves a change in the highest rate of tax 
imposed by section 1 or 11(b), any reference in this chapter to 
such highest rate (other than in a provision imposing a tax by 
reference to such rate) shall be treated as a reference to the 
weighted average of the highest rates before and after the 
change determined on the basis of the respective portions of 
the taxable year before the date of the change and on or after 
the date of the change.
  [(f) Rate reductions enacted by Economic Growth and Tax 
Relief Reconciliation Act of 2001.--This section shall not 
apply to any change in rates under subsection (i) of section 1 
(relating to rate reductions after 2000).]

PART IV--CREDITS AGAINST TAX

           *       *       *       *       *       *       *

Subpart A--Nonrefundable Personal Credits

           *       *       *       *       *       *       *

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

  (a) Allowance of credit.--
          (1) In general.--In the case of an individual for 
        which there are 1 or more qualifying individuals (as 
        defined in subsection (b)(1)) with respect to such 
        individual, there shall be allowed as a credit against 
        the tax imposed by this chapter for the taxable year an 
        amount equal to the applicable percentage of the 
        employment-related expenses (as defined in subsection 
        (b)(2)) paid by such individual during the taxable 
        year.
          (2) Applicable percentage defined.--For purposes of 
        paragraph (1), the term ``applicable percentage'' means 
        35 percent reduced (but not below 20 percent) by 1 
        percentage point for each $2,000 (or fraction thereof) 
        by which the taxpayer's adjusted gross income for the 
        taxable year exceeds $15,000.
  (b) Definitions of qualifying individual and employment-
related expenses.--For purposes of this section--
          (1) Qualifying individual.--The term ``qualifying 
        individual'' means--
                  (A) a dependent of the taxpayer (as defined 
                in [section 152(a)(1)] section 7706(a)(1)) who 
                has not attained age 13,
                  (B) a dependent of the taxpayer (as defined 
                in [section 152] section 7706, determined 
                without regard to subsections (b)(1), (b)(2), 
                and (d)(1)(B)) who is physically or mentally 
                incapable of caring for himself or herself and 
                who has the same principal place of abode as 
                the taxpayer for more than one-half of such 
                taxable year, or
                  (C) the spouse of the taxpayer, if the spouse 
                is physically or mentally incapable of caring 
                for himself or herself and who has the same 
                principal place of abode as the taxpayer for 
                more than one-half of such taxable year.
          (2) Employment-related expenses.--
                  (A) In general.--The term ``employment-
                related expenses'' means amounts paid for the 
                following expenses, but only if such expenses 
                are incurred to enable the taxpayer to be 
                gainfully employed for any period for which 
                there are 1 or more qualifying individuals with 
                respect to the taxpayer:
                          (i) expenses for household services, 
                        and
                          (ii) expenses for the care of a 
                        qualifying individual.
                Such term shall not include any amount paid for 
                services outside the taxpayer's household at a 
                camp where the qualifying individual stays 
                overnight.
                  (B) Exception.--Employment-related expenses 
                described in subparagraph (A) which are 
                incurred for services outside the taxpayer's 
                household shall be taken into account only if 
                incurred for the care of--
                          (i) a qualifying individual described 
                        in paragraph (1)(A), or
                          (ii) a qualifying individual (not 
                        described in paragraph (1)(A)) who 
                        regularly spends at least 8 hours each 
                        day in the taxpayer's household.
                  (C) Dependent care centers.--Employment-
                related expenses described in subparagraph (A) 
                which are incurred for services provided 
                outside the taxpayer's household by a dependent 
                care center (as defined in subparagraph (D)) 
                shall be taken into account only if--
                          (i) such center complies with all 
                        applicable laws and regulations of a 
                        State or unit of local government, and
                          (ii) the requirements of subparagraph 
                        (B) are met.
                  (D) Dependent care center defined.--For 
                purposes of this paragraph, the term 
                ``dependent care center'' means any facility 
                which--
                          (i) provides care for more than six 
                        individuals (other than individuals who 
                        reside at the facility), and
                          (ii) receives a fee, payment, or 
                        grant for providing services for any of 
                        the individuals (regardless of whether 
                        such facility is operated for profit).
  (c) Dollar limit on amount creditable.--The amount of the 
employment-related expenses incurred during any taxable year 
which may be taken into account under subsection (a) shall not 
exceed--
          (1) $3,000 if there is 1 qualifying individual with 
        respect to the taxpayer for such taxable year, or
          (2) $6,000 if there are 2 or more qualifying 
        individuals with respect to the taxpayer for such 
        taxable year.
The amount determined under paragraph (1) or (2) (whichever is 
applicable) shall be reduced by the aggregate amount excludable 
from gross income under section 129 for the taxable year.
  (d) Earned income limitation.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amount of the employment-related 
        expenses incurred during any taxable year which may be 
        taken into account under subsection (a) shall not 
        exceed--
                  (A) in the case of an individual who is not 
                married at the close of such year, such 
                individual's earned income for such year, or
                  (B) in the case of an individual who is 
                married at the close of such year, the lesser 
                of such individual's earned income or the 
                earned income of his spouse for such year.
          (2) Special rule for spouse who is a student or 
        incapable of caring for himself.--In the case of a 
        spouse who is a student or a qualifying individual 
        described in subsection (b)(1)(C), for purposes of 
        paragraph (1), such spouse shall be deemed for each 
        month during which such spouse is a full-time student 
        at an educational institution, or is such a qualifying 
        individual, to be gainfully employed and to have earned 
        income of not less than--
                  (A) $250 if subsection (c)(1) applies for the 
                taxable year, or
                  (B) $500 if subsection (c)(2) applies for the 
                taxable year.
        In the case of any husband and wife, this paragraph 
        shall apply with respect to only one spouse for any one 
        month.
  (e) Special rules.--For purposes of this section--
          (1) Place of abode.--An individual shall not be 
        treated as having the same principal place of abode of 
        the taxpayer if at any time during the taxable year of 
        the taxpayer the relationship between the individual 
        and the taxpayer is in violation of local law.
          (2) Married couples must file joint return.--If the 
        taxpayer is married at the close of the taxable year, 
        the credit shall be allowed under subsection (a) only 
        if the taxpayer and his spouse file a joint return for 
        the taxable year.
          (3) Marital status.--An individual legally separated 
        from his spouse under a decree of divorce or of 
        separate maintenance shall not be considered as 
        married.
          (4) Certain married individuals living apart.--If--
                  (A) an individual who is married and who 
                files a separate return--
                          (i) maintains as his home a household 
                        which constitutes for more than one-
                        half of the taxable year the principal 
                        place of abode of a qualifying 
                        individual, and
                          (ii) furnishes over half of the cost 
                        of maintaining such household during 
                        the taxable year, and
                  (B) during the last 6 months of such taxable 
                year such individual's spouse is not a member 
                of such household,
        such individual shall not be considered as married.
          (5) Special dependency test in case of divorced 
        parents, etc..--If--
                  (A) [section 152(e)] section 7706(e) applies 
                to any child with respect to any calendar year, 
                and
                  (B) such child is under the age of 13 or is 
                physically or mentally incapable of caring for 
                himself,
        in the case of any taxable year beginning in such 
        calendar year, such child shall be treated as a 
        qualifying individual described in subparagraph (A) or 
        (B) of subsection (b)(1) (whichever is appropriate) 
        with respect to the custodial parent (as defined in 
        [section 152(e)(4)(A)] section 7706(e)(4)(A)), and 
        shall not be treated as a qualifying individual with 
        respect to the noncustodial parent.
          (6) Payments to related individuals.--No credit shall 
        be allowed under subsection (a) for any amount paid by 
        the taxpayer to an individual--
                  [(A) with respect to whom, for the taxable 
                year, a deduction under section 151(c) 
                (relating to deduction for personal exemptions 
                for dependents) is allowable either to the 
                taxpayer or his spouse, or]
                  (A) who is a dependent of either the taxpayer 
                or the taxpayer's spouse for the taxable year, 
                or
                  (B) who is a child of the taxpayer (within 
                the meaning of [section 152(f)(1)] section 
                7706(f)(1)) who has not attained the age of 19 
                at the close of the taxable year.
        For purposes of this paragraph, the term ``taxable 
        year'' means the taxable year of the taxpayer in which 
        the service is performed.
          (7) Student.--The term ``student'' means an 
        individual who during each of 5 calendar months during 
        the taxable year is a full-time student at an 
        educational organization.
          (8) Educational organization.--The term ``educational 
        organization'' means an educational organization 
        described in section 170(b)(1)(A)(ii).
          (9) Identifying information required with respect to 
        service provider.--No credit shall be allowed under 
        subsection (a) for any amount paid to any person 
        unless--
                  (A) the name, address, and taxpayer 
                identification number of such person are 
                included on the return claiming the credit, or
                  (B) if such person is an organization 
                described in section 501(c)(3) and exempt from 
                tax under section 501(a), the name and address 
                of such person are included on the return 
                claiming the credit.
        In the case of a failure to provide the information 
        required under the preceding sentence, the preceding 
        sentence shall not apply if it is shown that the 
        taxpayer exercised due diligence in attempting to 
        provide the information so required.
          (10) Identifying information required with respect to 
        qualifying individuals..--No credit shall be allowed 
        under this section with respect to any qualifying 
        individual unless the TIN of such individual is 
        included on the return claiming the credit.
  (f) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.

           *       *       *       *       *       *       *

SEC. 23. ADOPTION EXPENSES.

  (a) Allowance of credit.--
          (1) In general.--In the case of an individual, there 
        shall be allowed as a credit against the tax imposed by 
        this chapter the amount of the qualified adoption 
        expenses paid or incurred by the taxpayer.
          (2) Year credit allowed.--The credit under paragraph 
        (1) with respect to any expense shall be allowed--
                  (A) in the case of any expense paid or 
                incurred before the taxable year in which such 
                adoption becomes final, for the taxable year 
                following the taxable year during which such 
                expense is paid or incurred, and
                  (B) in the case of an expense paid or 
                incurred during or after the taxable year in 
                which such adoption becomes final, for the 
                taxable year in which such expense is paid or 
                incurred.
          (3) $10,000 credit for adoption of child with special 
        needs regardless of expenses.--In the case of an 
        adoption of a child with special needs which becomes 
        final during a taxable year, the taxpayer shall be 
        treated as having paid during such year qualified 
        adoption expenses with respect to such adoption in an 
        amount equal to the excess (if any) of $10,000 over the 
        aggregate qualified adoption expenses actually paid or 
        incurred by the taxpayer with respect to such adoption 
        during such taxable year and all prior taxable years.
  (b) Limitations.--
          (1) Dollar limitation.--The aggregate amount of 
        qualified adoption expenses which may be taken into 
        account under subsection (a) for all taxable years with 
        respect to the adoption of a child by the taxpayer 
        shall not exceed $10,000.
          (2) Income limitation.--
                  (A) In general.--The amount allowable as a 
                credit under subsection (a) for any taxable 
                year (determined without regard to subsection 
                (c)) shall be reduced (but not below zero) by 
                an amount which bears the same ratio to the 
                amount so allowable (determined without regard 
                to this paragraph but with regard to paragraph 
                (1)) as--
                          (i) the amount (if any) by which the 
                        taxpayer's adjusted gross income 
                        exceeds $150,000, bears to
                          (ii) $40,000.
                  (B) Determination of adjusted gross income.--
                For purposes of subparagraph (A), adjusted 
                gross income shall be determined without regard 
                to sections 911, 931, and 933.
          (3) Denial of double benefit.--
                  (A) In general.--No credit shall be allowed 
                under subsection (a) for any expense for which 
                a deduction or credit is allowed under any 
                other provision of this chapter.
                  (B) Grants.--No credit shall be allowed under 
                subsection (a) for any expense to the extent 
                that funds for such expense are received under 
                any Federal, State, or local program.
  (c) Carryforwards of unused credit.--
          (1) In general.--If the credit allowable under 
        subsection (a) for any taxable year exceeds the 
        limitation imposed by section 26(a) for such taxable 
        year reduced by the sum of the credits allowable under 
        this subpart (other than this section and section 25D), 
        such excess shall be carried to the succeeding taxable 
        year and added to the credit allowable under subsection 
        (a) for such taxable year.
          (2) Limitation.--No credit may be carried forward 
        under this subsection to any taxable year following the 
        fifth taxable year after the taxable year in which the 
        credit arose. For purposes of the preceding sentence, 
        credits shall be treated as used on a first-in first-
        out basis.
  (d) Definitions.--For purposes of this section--
          (1) Qualified adoption expenses.--The term 
        ``qualified adoption expenses'' means reasonable and 
        necessary adoption fees, court costs, attorney fees, 
        and other expenses--
                  (A) which are directly related to, and the 
                principal purpose of which is for, the legal 
                adoption of an eligible child by the taxpayer,
                  (B) which are not incurred in violation of 
                State or Federal law or in carrying out any 
                surrogate parenting arrangement,
                  (C) which are not expenses in connection with 
                the adoption by an individual of a child who is 
                the child of such individual's spouse, and
                  (D) which are not reimbursed under an 
                employer program or otherwise.
          (2) Eligible child.--The term ``eligible child'' 
        means any individual who--
                  (A) has not attained age 18, or
                  (B) is physically or mentally incapable of 
                caring for himself.
          (3) Child with special needs.--The term ``child with 
        special needs'' means any child if--
                  (A) a State has determined that the child 
                cannot or should not be returned to the home of 
                his parents,
                  (B) such State has determined that there 
                exists with respect to the child a specific 
                factor or condition (such as his ethnic 
                background, age, or membership in a minority or 
                sibling group, or the presence of factors such 
                as medical conditions or physical, mental, or 
                emotional handicaps) because of which it is 
                reasonable to conclude that such child cannot 
                be placed with adoptive parents without 
                providing adoption assistance, and
                  (C) such child is a citizen or resident of 
                the United States (as defined in [section 
                217(h)(3)] section 217(c)(3)).
  (e) Special rules for foreign adoptions.--In the case of an 
adoption of a child who is not a citizen or resident of the 
United States (as defined in [section 217(h)(3)] section 
217(c)(3))--
          (1) subsection (a) shall not apply to any qualified 
        adoption expense with respect to such adoption unless 
        such adoption becomes final, and
          (2) any such expense which is paid or incurred before 
        the taxable year in which such adoption becomes final 
        shall be taken into account under this section as if 
        such expense were paid or incurred during such year.
  (f) Filing requirements.--
          (1) Married couples must file joint returns.--Rules 
        similar to the rules of paragraphs (2), (3), and (4) of 
        section 21(e) shall apply for purposes of this section.
          (2) Taxpayer must include TIN.--
                  (A) In general.--No credit shall be allowed 
                under this section with respect to any eligible 
                child unless the taxpayer includes (if known) 
                the name, age, and TIN of such child on the 
                return of tax for the taxable year.
                  (B) Other methods.--The Secretary may, in 
                lieu of the information referred to in 
                subparagraph (A), require other information 
                meeting the purposes of subparagraph (A), 
                including identification of an agent assisting 
                with the adoption.
  (g) Basis adjustments.--For purposes of this subtitle, if a 
credit is allowed under this section for any expenditure with 
respect to any property, the increase in the basis of such 
property which would (but for this subsection) result from such 
expenditure shall be reduced by the amount of the credit so 
allowed.
  (h) Adjustments for inflation.--In the case of a taxable year 
beginning after December 31, 2002, each of the dollar amounts 
in subsection (a)(3) and paragraphs (1) and (2)(A)(i) of 
subsection (b) shall be increased by an amount equal to--
          (1) such dollar amount, multiplied by
          (2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which the 
        taxable year begins, determined by substituting 
        ``calendar year 2001'' for ``calendar year 2016'' in 
        subparagraph (A)(ii) thereof.
If any amount as increased under the preceding sentence is not 
a multiple of $10, such amount shall be rounded to the nearest 
multiple of $10.
  (i) Regulations.--The Secretary shall prescribe such 
regulations as may be appropriate to carry out this section and 
section 137, including regulations which treat unmarried 
individuals who pay or incur qualified adoption expenses with 
respect to the same child as 1 taxpayer for purposes of 
applying the dollar amounts in subsections (a)(3) and (b)(1) of 
this section and in section 137(b)(1).

SEC. 24. CHILD TAX CREDIT.

  [(a) Allowance of credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year 
with respect to each qualifying child of the taxpayer for which 
the taxpayer is allowed a deduction under section 151 an amount 
equal to $1,000.
  [(b) Limitations.--
          [(1) Limitation based on adjusted gross income.--The 
        amount of the credit allowable under subsection (a) 
        shall be reduced (but not below zero) by $50 for each 
        $1,000 (or fraction thereof) by which the taxpayer's 
        modified adjusted gross income exceeds the threshold 
        amount. For purposes of the preceding sentence, the 
        term ``modified adjusted gross income'' means adjusted 
        gross income increased by any amount excluded from 
        gross income under section 911, 931, or 933.
          [(2) Threshold amount.--For purposes of paragraph 
        (1), the term ``threshold amount'' means--
                  [(A) $110,000 in the case of a joint return,
                  [(B) $75,000 in the case of an individual who 
                is not married, and
                  [(C) $55,000 in the case of a married 
                individual filing a separate return.
        For purposes of this paragraph, marital status shall be 
        determined under section 7703.
  [(c) Qualifying child.--For purposes of this section--
          [(1) In general.--The term ``qualifying child'' means 
        a qualifying child of the taxpayer (as defined in 
        section 152(c)) who has not attained age 17.
          [(2) Exception for certain noncitizens.--The term 
        ``qualifying child'' shall not include any individual 
        who would not be a dependent if subparagraph (A) of 
        section 152(b)(3) were applied without regard to all 
        that follows ``resident of the United States''.]
  (a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an 
amount equal to the sum of--
          (1) $2,000 for each qualifying child of the taxpayer, 
        and
          (2) $500 for each qualifying dependent (other than a 
        qualifying child) of the taxpayer.
  (b) Limitation Based on Adjusted Gross Income.--The amount of 
the credit allowable under subsection (a) shall be reduced (but 
not below zero) by $50 for each $1,000 (or fraction thereof) by 
which the taxpayer's modified adjusted gross income exceeds 
$400,000 in the case of a joint return ($200,000 in any other 
case). For purposes of the preceding sentence, the term 
``modified adjusted gross income'' means adjusted gross income 
increased by any amount excluded from gross income under 
section 911, 931, or 933.
  (c) Qualifying Child; Qualifying Dependent.--For purposes of 
this section--
          (1) Qualifying child.--The term ``qualifying child'' 
        means any qualifying dependent of the taxpayer--
                  (A) who is a qualifying child (as defined in 
                section 7706(c)) of the taxpayer,
                  (B) who has not attained age 17 at the close 
                of the calendar year in which the taxable year 
                of the taxpayer begins, and
                  (C) whose name and social security number are 
                included on the taxpayer's return of tax for 
                the taxable year.
          (2) Qualifying dependent.--The term ``qualifying 
        dependent'' means any dependent of the taxpayer (as 
        defined in section 7706 without regard to all that 
        follows ``resident of the United States'' in section 
        7706(b)(3)(A)) whose name and TIN are included on the 
        taxpayer's return of tax for the taxable year.
          (3) Social security number defined.--For purposes of 
        this subsection, the term ``social security number'' 
        means, with respect to a return of tax, a social 
        security number issued to an individual by the Social 
        Security Administration, but only if the social 
        security number is issued--
                  (A) to a citizen of the United States or 
                pursuant to subclause (I) (or that portion of 
                subclause (III) that relates to subclause (I)) 
                of section 205(c)(2)(B)(i) of the Social 
                Security Act, and
                  (B) on or before the due date of filing such 
                return.
  (d) Portion of credit refundable.--
          (1) In general.--The aggregate credits allowed to a 
        taxpayer under subpart C shall be increased by the 
        lesser of--
                  [(A) the credit which would be allowed under 
                this section without regard to this subsection 
                and the limitation under section 26(a) or]
                  (A) the credit which would be allowed under 
                this section determined--
                          (i) by substituting ``$1,400'' for 
                        ``$2,000'' in subsection (a)(1),
                          (ii) without regard to subsection 
                        (a)(2), and
                          (iii) without regard to this 
                        subsection and the limitation under 
                        section 26(a), or
                  (B) the amount by which the aggregate amount 
                of credits allowed by this subpart (determined 
                without regard to this subsection) would 
                increase if the limitation imposed by section 
                26(a) were increased by the greater of--
                          (i) 15 percent of so much of the 
                        taxpayer's earned income (within the 
                        meaning of section 32) which is taken 
                        into account in computing taxable 
                        income for the taxable year as exceeds 
                        [$3,000] $2,500, or
                          (ii) in the case of a taxpayer with 3 
                        or more qualifying children, the excess 
                        (if any) of--
                                  (I) the taxpayer's social 
                                security taxes for the taxable 
                                year, over
                                  (II) the credit allowed under 
                                section 32 for the taxable 
                                year.
        The amount of the credit allowed under this subsection 
        shall not be treated as a credit allowed under this 
        subpart and shall reduce the amount of credit otherwise 
        allowable under subsection (a) without regard to 
        section 26(a). For purposes of subparagraph (B), any 
        amount excluded from gross income by reason of section 
        112 shall be treated as earned income which is taken 
        into account in computing taxable income for the 
        taxable year.
          (2) Social security taxes.--For purposes of paragraph 
        (1)--
                  (A) In general.--The term ``social security 
                taxes'' means, with respect to any taxpayer for 
                any taxable year--
                          (i) the amount of the taxes imposed 
                        by sections 3101 and 3201(a) on amounts 
                        received by the taxpayer during the 
                        calendar year in which the taxable year 
                        begins,
                          (ii) 50 percent of the taxes imposed 
                        by section 1401 on the self-employment 
                        income of the taxpayer for the taxable 
                        year, and
                          (iii) 50 percent of the taxes imposed 
                        by section 3211(a) on amounts received 
                        by the taxpayer during the calendar 
                        year in which the taxable year begins.
                  (B) Coordination with special refund of 
                social security taxes.--The term ``social 
                security taxes'' shall not include any taxes to 
                the extent the taxpayer is entitled to a 
                special refund of such taxes under section 
                6413(c).
                  (C) Special rule.--Any amounts paid pursuant 
                to an agreement under section 3121(l) (relating 
                to agreements entered into by American 
                employers with respect to foreign affiliates) 
                which are equivalent to the taxes referred to 
                in subparagraph (A)(i) shall be treated as 
                taxes referred to in such subparagraph.
          (3) Exception for taxpayers excluding foreign earned 
        income.--Paragraph (1) shall not apply to any taxpayer 
        for any taxable year if such taxpayer elects to exclude 
        any amount from gross income under section 911 for such 
        taxable year.
          (4) Adjustment for inflation.--
                  (A) In general.--In the case of a taxable 
                year beginning after 2018, the $1,400 amount in 
                paragraph (1)(A)(i) shall be increased by an 
                amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``2017'' for ``2016'' in subparagraph 
                        (A)(ii) thereof.
                  (B) Rounding.--If any increase under 
                subparagraph (A) is not a multiple of $100, 
                such increase shall be rounded to the next 
                lowest multiple of $100.
                  (C) Limitation.--The amount of any increase 
                under subparagraph (A) (after the application 
                of subparagraph (B)) shall not exceed $600.
  [(e) Identification requirements.--
          [(1) Qualifying child identification requirement.--No 
        credit shall be allowed under this section to a 
        taxpayer with respect to any qualifying child unless 
        the taxpayer includes the name and taxpayer 
        identification number of such qualifying child on the 
        return of tax for the taxable year and such taxpayer 
        identification number was issued on or before the due 
        date for filing such return.
          [(2) Taxpayer identification requirement.--No credit 
        shall be allowed under this section if the taxpayer 
        identification number of the taxpayer was issued after 
        the due date for filing the return for the taxable 
        year.]
  (e) Taxpayer Identification Requirement.--No credit shall be 
allowed under this section if the identifying number of the 
taxpayer was issued after the due date for filing the return of 
tax for the taxable year.
  (f) Taxable year must be full taxable year.--Except in the 
case of a taxable year closed by reason of the death of the 
taxpayer, no credit shall be allowable under this section in 
the case of a taxable year covering a period of less than 12 
months.
  (g) Restrictions on taxpayers who improperly claimed credit 
in prior year.--
          (1) Taxpayers making prior fraudulent or reckless 
        claims.--
                  (A) In general.--No credit shall be allowed 
                under this section for any taxable year in the 
                disallowance period.
                  (B) Disallowance period.--For purposes of 
                subparagraph (A), the disallowance period is--
                          (i) the period of 10 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to fraud, 
                        and
                          (ii) the period of 2 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to reckless 
                        or intentional disregard of rules and 
                        regulations (but not due to fraud).
          (2) Taxpayers making improper prior claims.--In the 
        case of a taxpayer who is denied credit under this 
        section for any taxable year as a result of the 
        deficiency procedures under subchapter B of chapter 63, 
        no credit shall be allowed under this section for any 
        subsequent taxable year unless the taxpayer provides 
        such information as the Secretary may require to 
        demonstrate eligibility for such credit.
  [(h) Special rules for taxable years 2018 through 2025.--
          [(1) In general.--In the case of a taxable year 
        beginning after December 31, 2017, and before January 
        1, 2026, this section shall be applied as provided in 
        paragraphs (2) through (7).
          [(2) Credit amount.--Subsection (a) shall be applied 
        by substituting ``$2,000'' for ``$1,000''.
          [(3) Limitation.--In lieu of the amount determined 
        under subsection (b)(2), the threshold amount shall be 
        $400,000 in the case of a joint return ($200,000 in any 
        other case).
          [(4) Partial credit allowed for certain other 
        dependents.--
                  [(A) In general.--The credit determined under 
                subsection (a) (after the application of 
                paragraph (2)) shall be increased by $500 for 
                each dependent of the taxpayer (as defined in 
                section 152) other than a qualifying child 
                described in subsection (c).
                  [(B) Exception for certain noncitizens.--
                Subparagraph (A) shall not apply with respect 
                to any individual who would not be a dependent 
                if subparagraph (A) of section 152(b)(3) were 
                applied without regard to all that follows 
                ``resident of the United States''.
                  [(C) Certain qualifying children.--In the 
                case of any qualifying child with respect to 
                whom a credit is not allowed under this section 
                by reason of paragraph (7), such child shall be 
                treated as a dependent to whom subparagraph (A) 
                applies.
          [(5) Maximum amount of refundable credit.--
                  [(A) In general.--The amount determined under 
                subsection (d)(1)(A) with respect to any 
                qualifying child shall not exceed $1,400, and 
                such subsection shall be applied without regard 
                to paragraph (4) of this subsection.
                  [(B) Adjustment for inflation.--In the case 
                of a taxable year beginning after 2018, the 
                $1,400 amount in subparagraph (A) shall be 
                increased by an amount equal to--
                          [(i) such dollar amount, multiplied 
                        by
                          [(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``2017'' for ``2016'' in subparagraph 
                        (A)(ii) thereof.
                If any increase under this clause is not a 
                multiple of $100, such increase shall be 
                rounded to the next lowest multiple of $100.
          [(6) Earned income threshold for refundable credit.--
        Subsection (d)(1)(B)(i) shall be applied by 
        substituting ``$2,500'' for ``$3,000''.
          [(7) Social security number required.--No credit 
        shall be allowed under this section to a taxpayer with 
        respect to any qualifying child unless the taxpayer 
        includes the social security number of such child on 
        the return of tax for the taxable year. For purposes of 
        the preceding sentence, the term ``social security 
        number'' means a social security number issued to an 
        individual by the Social Security Administration, but 
        only if the social security number is issued--
                  [(A) to a citizen of the United States or 
                pursuant to subclause (I) (or that portion of 
                subclause (III) that relates to subclause (I)) 
                of section 205(c)(2)(B)(i) of the Social 
                Security Act, and
                  [(B) before the due date for such return.]

           *       *       *       *       *       *       *

SEC. 25A. AMERICAN OPPORTUNITY AND LIFETIME LEARNING CREDITS.

  (a) Allowance of credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this 
chapter for the taxable year the amount equal to the sum of--
          (1) the American Opportunity Tax Credit, plus
          (2) the Lifetime Learning Credit.
  (b) American Opportunity Tax Credit.--
          (1) Per student credit.--In the case of any eligible 
        student for whom an election is in effect under this 
        section for any taxable year, the American Opportunity 
        Tax Credit is an amount equal to the sum of--
                  (A) 100 percent of so much of the qualified 
                tuition and related expenses paid by the 
                taxpayer during the taxable year (for education 
                furnished to the eligible student during any 
                academic period beginning in such taxable year) 
                as does not exceed $2,000, plus
                  (B) 25 percent of such expenses so paid as 
                exceeds $2,000 but does not exceed $4,000.
          (2) Limitations applicable to American Opportunity 
        Tax Credit.--
                  (A) Credit allowed only for 4 taxable 
                years.--An election to have this section apply 
                with respect to any eligible student for 
                purposes of the American Opportunity Tax Credit 
                under subsection (a)(1) may not be made for any 
                taxable year if such an election (by the 
                taxpayer or any other individual) is in effect 
                with respect to such student for any 4 prior 
                taxable years.
                  (B) Credit allowed for year only if 
                individual is at least 1/2 time student for 
                portion of year.--The American Opportunity Tax 
                Credit under subsection (a)(1) shall not be 
                allowed for a taxable year with respect to the 
                qualified tuition and related expenses of an 
                individual unless such individual is an 
                eligible student for at least one academic 
                period which begins during such year.
                  (C) Credit allowed only for first 4 years of 
                post-secondary education.--The American 
                Opportunity Tax Credit under subsection (a)(1) 
                shall not be allowed for a taxable year with 
                respect to the qualified tuition and related 
                expenses of an eligible student if the student 
                has completed (before the beginning of such 
                taxable year) the first 4 years of 
                postsecondary education at an eligible 
                educational institution.
                  (D) Denial of credit if student convicted of 
                a felony drug offense.--The American 
                Opportunity Tax Credit under subsection (a)(1) 
                shall not be allowed for qualified tuition and 
                related expenses for the enrollment or 
                attendance of a student for any academic period 
                if such student has been convicted of a Federal 
                or State felony offense consisting of the 
                possession or distribution of a controlled 
                substance before the end of the taxable year 
                with or within which such period ends.
          (3) Eligible student.--For purposes of this 
        subsection, the term ``eligible student'' means, with 
        respect to any academic period, a student who--
                  (A) meets the requirements of section 
                484(a)(1) of the Higher Education Act of 1965 
                (20 U.S.C. 1091(a)(1)), as in effect on the 
                date of the enactment of this section, and
                  (B) is carrying at least 1/2 the normal full-
                time work load for the course of study the 
                student is pursuing.
          (4) Restrictions on taxpayers who improperly claimed 
        American Opportunity Tax credit in prior years.--
                  (A) Taxpayers making prior fraudulent or 
                reckless claims.--
                          (i) In general.--No American 
                        Opportunity Tax Credit shall be allowed 
                        under this section for any taxable year 
                        in the disallowance period.
                          (ii) Disallowance period.--For 
                        purposes of subparagraph (A), the 
                        disallowance period is--
                                  (I) the period of 10 taxable 
                                years after the most recent 
                                taxable year for which there 
                                was a final determination that 
                                the taxpayer's claim of the 
                                American Opportunity Tax Credit 
                                under this section was due to 
                                fraud, and
                                  (II) the period of 2 taxable 
                                years after the most recent 
                                taxable year for which there 
                                was a final determination that 
                                the taxpayer's claim of the 
                                American Opportunity Tax Credit 
                                under this section was due to 
                                reckless or intentional 
                                disregard of rules and 
                                regulations (but not due to 
                                fraud).
                  (B) Taxpayers making improper prior claims.--
                In the case of a taxpayer who is denied the 
                American Opportunity Tax Credit under this 
                section for any taxable year as a result of the 
                deficiency procedures under subchapter B of 
                chapter 63, no American Opportunity Tax Credit 
                shall be allowed under this section for any 
                subsequent taxable year unless the taxpayer 
                provides such information as the Secretary may 
                require to demonstrate eligibility for such 
                credit.
  (c) Lifetime Learning Credit.--
          (1) Per taxpayer credit.--The Lifetime Learning 
        Credit for any taxpayer for any taxable year is an 
        amount equal to 20 percent of so much of the qualified 
        tuition and related expenses paid by the taxpayer 
        during the taxable year (for education furnished during 
        any academic period beginning in such taxable year) as 
        does not exceed $10,000.
          (2) Special rules for determining expenses.--
                  (A) Coordination with American Opportunity 
                Tax Credit.--The qualified tuition and related 
                expenses with respect to an individual who is 
                an eligible student for whom a American 
                Opportunity Tax Credit under subsection (a)(1) 
                is allowed for the taxable year shall not be 
                taken into account under this subsection.
                  (B) Expenses eligible for lifetime learning 
                credit.--For purposes of paragraph (1), 
                qualified tuition and related expenses shall 
                include expenses described in subsection (f)(1) 
                with respect to any course of instruction at an 
                eligible educational institution to acquire or 
                improve job skills of the individual.
  (d) Limitations based on modified adjusted gross income.--
          (1) American opportunity tax credit.--The American 
        Opportunity Tax Credit (determined without regard to 
        this paragraph) shall be reduced (but not below zero) 
        by the amount which bears the same ratio to such credit 
        (as so determined) as--
                  (A) the excess of--
                          (i) the taxpayer's modified adjusted 
                        gross income for such taxable year, 
                        over
                          (ii) $80,000 ($160,000 in the case of 
                        a joint return), bears to (B) $10,000 
                        ($20,000 in the case of a joint 
                        return).
          (2) Lifetime learning credit.--The Lifetime Learning 
        Credit (determined without regard to this paragraph) 
        shall be reduced (but not below zero) by the amount 
        which bears the same ratio to such credit (as so 
        determined) as--
                  (A) the excess of--
                          (i) the taxpayer's modified adjusted 
                        gross income for such taxable year, 
                        over
                          (ii) $40,000 ($80,000 in the case of 
                        a joint return), bears to (B) $10,000 
                        ($20,000 in the case of a joint 
                        return).
          (3) Modified adjusted gross income.--For purposes of 
        this subsection, the term ``modified adjusted gross 
        income'' means the adjusted gross income of the 
        taxpayer for the taxable year increased by any amount 
        excluded from gross income under section 911, 931, or 
        933.
  (e) Election not to have section apply.--A taxpayer may elect 
not to have this section apply with respect to the qualified 
tuition and related expenses of an individual for any taxable 
year.
  (f) Definitions.--For purposes of this section--
          (1) Qualified tuition and related expenses.--
                  (A) In general.--The term ``qualified tuition 
                and related expenses'' means tuition and fees 
                required for the enrollment or attendance of--
                          (i) the taxpayer,
                          (ii) the taxpayer's spouse, or
                          (iii) any dependent of the taxpayer 
                        [with respect to whom the taxpayer is 
                        allowed a deduction under section 151],
                at an eligible educational institution for 
                courses of instruction of such individual at 
                such institution.
                  (B) Exception for education involving sports, 
                etc.--Such term does not include expenses with 
                respect to any course or other education 
                involving sports, games, or hobbies, unless 
                such course or other education is part of the 
                individual's degree program.
                  (C) Exception for nonacademic fees.--Such 
                term does not include student activity fees, 
                athletic fees, insurance expenses, or other 
                expenses unrelated to an individual's academic 
                course of instruction.
                  (D) Required course materials taken into 
                account for American Opportunity Tax Credit.--
                For purposes of determining the American 
                Opportunity Tax Credit, subparagraph (A) shall 
                be applied by substituting ``tuition, fees, and 
                course materials'' for ``tuition and fees''.
          (2) Eligible educational institution.--The term 
        ``eligible educational institution'' means an 
        institution--
                  (A) which is described in section 481 of the 
                Higher Education Act of 1965 (20 U.S.C. 1088), 
                as in effect on the date of the enactment of 
                this section, and
                  (B) which is eligible to participate in a 
                program under title IV of such Act.
  (g) Special rules.--
          (1) Identification requirement.--
                  (A) In general.--No credit shall be allowed 
                under subsection (a) to a taxpayer with respect 
                to the qualified tuition and related expenses 
                of an individual unless the taxpayer includes 
                the name and taxpayer identification number of 
                such individual on the return of tax for the 
                taxable year.
                  (B) Additional identification requirements 
                with respect to American Opportunity Tax 
                Credit.--
                          (i) Student.--The requirements of 
                        subparagraph (A) shall not be treated 
                        as met with respect to the American 
                        Opportunity Tax Credit unless the 
                        individual's taxpayer identification 
                        number was issued on or before the due 
                        date for filing the return of tax for 
                        the taxable year.
                          (ii) Taxpayer.--No American 
                        Opportunity Tax Credit shall be allowed 
                        under this section if the taxpayer 
                        identification number of the taxpayer 
                        was issued after the due date for 
                        filing the return for the taxable year.
                          (iii) Institution.--No American 
                        Opportunity Tax Credit shall be allowed 
                        under this section unless the taxpayer 
                        includes the employer identification 
                        number of any institution to which 
                        qualified tuition and related expenses 
                        were paid with respect to the 
                        individual.
          (2) Adjustment for certain scholarships, etc..--The 
        amount of qualified tuition and related expenses 
        otherwise taken into account under subsection (a) with 
        respect to an individual for an academic period shall 
        be reduced (before the application of subsections (b), 
        (c), and (d)) by the sum of any amounts paid for the 
        benefit of such individual which are allocable to such 
        period as--
                  (A) a qualified scholarship which is 
                excludable from gross income under section 117,
                  (B) an educational assistance allowance under 
                chapter 30, 31, 32, 34, or 35 of title 38, 
                United States Code, or under chapter 1606 of 
                title 10, United States Code, and
                  (C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of 
                section 102(a)) for such individual's 
                educational expenses, or attributable to such 
                individual's enrollment at an eligible 
                educational institution, which is excludable 
                from gross income under any law of the United 
                States.
          (3) Treatment of expenses paid by dependent.--[If a 
        deduction under section 151 with respect to an 
        individual is allowed to another taxpayer] If an 
        individual is a dependent of another taxpayer for a 
        taxable year beginning in the calendar year in which 
        such individual's taxable year begins--
                  (A) no credit shall be allowed under 
                subsection (a) to such individual for such 
                individual's taxable year,
                  (B) qualified tuition and related expenses 
                paid by such individual during such 
                individual's taxable year shall be treated for 
                purposes of this section as paid by such other 
                taxpayer, and
                  (C) a statement described in paragraph (8) 
                and received by such individual shall be 
                treated as received by the taxpayer.
          (4) Treatment of certain prepayments.--If qualified 
        tuition and related expenses are paid by the taxpayer 
        during a taxable year for an academic period which 
        begins during the first 3 months following such taxable 
        year, such academic period shall be treated for 
        purposes of this section as beginning during such 
        taxable year.
          (5) Denial of double benefit.--No credit shall be 
        allowed under this section for any expense for which a 
        deduction is allowed under any other provision of this 
        chapter.
          (6) No credit for married individuals filing separate 
        returns.--If the taxpayer is a married individual 
        (within the meaning of section 7703), this section 
        shall apply only if the taxpayer and the taxpayer's 
        spouse file a joint return for the taxable year.
          (7) Nonresident aliens.--If the taxpayer is a 
        nonresident alien individual for any portion of the 
        taxable year, this section shall apply only if such 
        individual is treated as a resident alien of the United 
        States for purposes of this chapter by reason of an 
        election under subsection (g) or (h) of section 6013.
          (8) Payee statement requirement.--Except as otherwise 
        provided by the Secretary, no credit shall be allowed 
        under this section unless the taxpayer receives a 
        statement furnished under section 6050S(d) which 
        contains all of the information required by paragraph 
        (2) thereof.
  (h) Inflation adjustment.--
          (1) In general.--In the case of a taxable year 
        beginning after 2001, the $40,000 and $80,000 amounts 
        in subsection (d)(2) shall each be increased by an 
        amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2000'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
          (2) Rounding.--If any amount as adjusted under 
        paragraph (1) is not a multiple of $1,000, such amount 
        shall be rounded to the next lowest multiple of $1,000.
  (i) Portion of American Opportunity Tax Credit made 
refundable.--Forty percent of so much of the credit allowed 
under subsection (a) as is attributable to the American 
Opportunity Tax Credit (determined after application of 
subsection (d) and without regard to this paragraph and section 
26(a)) shall be treated as a credit allowable under subpart C 
(and not allowed under subsection (a)). The preceding sentence 
shall not apply to any taxpayer for any taxable year if such 
taxpayer is a child to whom subsection (g) of section 1 applies 
for such taxable year.
  (j) Regulations.--The Secretary may prescribe such 
regulations as may be necessary or appropriate to carry out 
this section, including regulations providing for a recapture 
of the credit allowed under this section in cases where there 
is a refund in a subsequent taxable year of any amount which 
was taken into account in determining the amount of such 
credit.

SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN 
                    INDIVIDUALS.

  (a) Allowance of credit.--In the case of an eligible 
individual, there shall be allowed as a credit against the tax 
imposed by this subtitle for the taxable year an amount equal 
to the applicable percentage of so much of the qualified 
retirement savings contributions of the eligible individual for 
the taxable year as do not exceed $2,000.
  (b) Applicable percentage.--For purposes of this section--
          (1) Joint returns.--In the case of a joint return, 
        the applicable percentage is--
                  (A) if the adjusted gross income of the 
                taxpayer is not over $30,000, 50 percent,
                  (B) if the adjusted gross income of the 
                taxpayer is over $30,000 but not over $32,500, 
                20 percent,
                  (C) if the adjusted gross income of the 
                taxpayer is over $32,500 but not over $50,000, 
                10 percent, and
                  (D) if the adjusted gross income of the 
                taxpayer is over $50,000, zero percent.
          (2) Other returns.--In the case of--
                  (A) a head of household, the applicable 
                percentage shall be determined under paragraph 
                (1) except that such paragraph shall be applied 
                by substituting for each dollar amount therein 
                (as adjusted under paragraph (3)) a dollar 
                amount equal to 75 percent of such dollar 
                amount, and
                  (B) any taxpayer not described in paragraph 
                (1) or subparagraph (A), the applicable 
                percentage shall be determined under paragraph 
                (1) except that such paragraph shall be applied 
                by substituting for each dollar amount therein 
                (as adjusted under paragraph (3)) a dollar 
                amount equal to 50 percent of such dollar 
                amount.
          (3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2006, each of 
        the dollar amounts in paragraph (1) shall be increased 
        by an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2005'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
        Any increase determined under the preceding sentence 
        shall be rounded to the nearest multiple of $500.
  (c) Eligible individual.--For purposes of this section--
          (1) In general.--The term ``eligible individual'' 
        means any individual if such individual has attained 
        the age of 18 as of the close of the taxable year.
          (2) Dependents and full-time students not eligible.--
        The term ``eligible individual'' shall not include--
                  (A) [any individual with respect to whom a 
                deduction under section 151 is allowed to 
                another taxpayer] any individual who is a 
                dependent of another taxpayer for a taxable 
                year beginning in the calendar year in which 
                such individual's taxable year begins, and
                  (B) any individual who is a student (as 
                defined in [section 152(f)(2)] section 
                7706(f)(2)).
  (d) Qualified retirement savings contributions.--For purposes 
of this section--
          (1) In general.--The term ``qualified retirement 
        savings contributions'' means, with respect to any 
        taxable year, the sum of--
                  (A) the amount of the qualified retirement 
                contributions (as defined in section 219(e)) 
                made by the eligible individual,
                  (B) the amount of--
                          (i) any elective deferrals (as 
                        defined in section 402(g)(3)) of such 
                        individual, and
                          (ii) any elective deferral of 
                        compensation by such individual under 
                        an eligible deferred compensation plan 
                        (as defined in section 457(b)) of an 
                        eligible employer described in section 
                        457(e)(1)(A),
                  (C) the amount of voluntary employee 
                contributions by such individual to any 
                qualified retirement plan (as defined in 
                section 4974(c)), and
                  (D) the amount of contributions [made before 
                January 1, 2026,] by such individual to the 
                ABLE account (within the meaning of section 
                529A) of which such individual is the 
                designated beneficiary.
          (2) Reduction for certain distributions.--
                  (A) In general.--The qualified retirement 
                savings contributions determined under 
                paragraph (1) shall be reduced (but not below 
                zero) by the aggregate distributions received 
                by the individual during the testing period 
                from any entity of a type to which 
                contributions under paragraph (1) may be made. 
                The preceding sentence shall not apply to the 
                portion of any distribution which is not 
                includible in gross income by reason of a 
                trustee-to-trustee transfer or a rollover 
                distribution.
                  (B) Testing period.--For purposes of 
                subparagraph (A), the testing period, with 
                respect to a taxable year, is the period which 
                includes--
                          (i) such taxable year,
                          (ii) the 2 preceding taxable years, 
                        and
                          (iii) the period after such taxable 
                        year and before the due date (including 
                        extensions) for filing the return of 
                        tax for such taxable year.
                  (C) Excepted distributions.--There shall not 
                be taken into account under subparagraph (A)--
                          (i) any distribution referred to in 
                        section 72(p), 401(k)(8), 401(m)(6), 
                        402(g)(2), 404(k), or 408(d)(4), and
                          (ii) any distribution to which 
                        section 408A(d)(3) applies.
                  (D) Treatment of distributions received by 
                spouse of individual.--For purposes of 
                determining distributions received by an 
                individual under subparagraph (A) for any 
                taxable year, any distribution received by the 
                spouse of such individual shall be treated as 
                received by such individual if such individual 
                and spouse file a joint return for such taxable 
                year and for the taxable year during which the 
                spouse receives the distribution.
  (e) Adjusted gross income.--For purposes of this section, 
adjusted gross income shall be determined without regard to 
sections 911, 931, and 933.
  (f) Investment in the contract.--Notwithstanding any other 
provision of law, a qualified retirement savings contribution 
shall not fail to be included in determining the investment in 
the contract for purposes of section 72 by reason of the credit 
under this section.

           *       *       *       *       *       *       *

Subpart C--Refundable Credits

           *       *       *       *       *       *       *

SEC. 32. EARNED INCOME.

  (a) Allowance of credit.--
          (1) In general.--In the case of an eligible 
        individual, there shall be allowed as a credit against 
        the tax imposed by this subtitle for the taxable year 
        an amount equal to the credit percentage of so much of 
        the taxpayer's earned income for the taxable year as 
        does not exceed the earned income amount.
          (2) Limitation.--The amount of the credit allowable 
        to a taxpayer under paragraph (1) for any taxable year 
        shall not exceed the excess (if any) of--
                  (A) the credit percentage of the earned 
                income amount, over
                  (B) the phaseout percentage of so much of the 
                adjusted gross income (or, if greater, the 
                earned income) of the taxpayer for the taxable 
                year as exceeds the phaseout amount.
  (b) Percentages and amounts.--For purposes of subsection 
(a)--
          (1) Percentages.--The credit percentage and the 
        phaseout percentage shall be determined as follows:

 
------------------------------------------------------------------------
   In the case of an
  eligible individual     The credit percentage        The phaseout
         with:                     is:                percentage is:
------------------------------------------------------------------------
1 qualifying child       34                       15.98
2 qualifying children    40                       21.06
3 or more qualifying     45                       21.06
 children
No qualifying children   7.65                     7.65
------------------------------------------------------------------------

          (2) Amounts.--
                  (A) In general.--Subject to subparagraph (B), 
                the earned income amount and the phaseout 
                amount shall be determined as follows:

 
------------------------------------------------------------------------
    In the case of an        The earned income      The phaseout amount
eligible individual with:        amount is:                 is:
------------------------------------------------------------------------
1 qualifying child         $6,330                 $11,610
2 or more qualifying       $8,890                 $11,610
 children
No qualifying children     $4,220                 $ 5,280
------------------------------------------------------------------------

                  (B) Joint returns.--In the case of a joint 
                return filed by an eligible individual and such 
                individual's spouse, the phaseout amount 
                determined under subparagraph (A) shall be 
                increased by $5,000.
  (c) Definitions and special rules.--For purposes of this 
section--
          (1) Eligible individual.--
                  (A) In general.--The term ``eligible 
                individual'' means--
                          (i) any individual who has a 
                        qualifying child for the taxable year, 
                        or
                          (ii) any other individual who does 
                        not have a qualifying child for the 
                        taxable year, if--
                                  (I) such individual's 
                                principal place of abode is in 
                                the United States for more than 
                                one-half of such taxable year,
                                  (II) such individual (or, if 
                                the individual is married, 
                                either the individual or the 
                                individual's spouse) has 
                                attained age 25 but not 
                                attained age 65 before the 
                                close of the taxable year, and
                                  (III) such individual is not 
                                [a dependent for whom a 
                                deduction is allowable under 
                                section 151 to another 
                                taxpayer] a dependent of 
                                another taxpayer for any 
                                taxable year beginning in the 
                                same calendar year as such 
                                taxable year.
                For purposes of the preceding sentence, marital 
                status shall be determined under section 7703.
                  (B) Qualifying child ineligible.--If an 
                individual is the qualifying child of a 
                taxpayer for any taxable year of such taxpayer 
                beginning in a calendar year, such individual 
                shall not be treated as an eligible individual 
                for any taxable year of such individual 
                beginning in such calendar year.
                  (C) Exception for individual claiming 
                benefits under section 911.--The term 
                ``eligible individual'' does not include any 
                individual who claims the benefits of section 
                911 (relating to citizens or residents living 
                abroad) for the taxable year.
                  (D) Limitation on eligibility of nonresident 
                aliens.--The term ``eligible individual'' shall 
                not include any individual who is a nonresident 
                alien individual for any portion of the taxable 
                year unless such individual is treated for such 
                taxable year as a resident of the United States 
                for purposes of this chapter by reason of an 
                election under subsection (g) or (h) of section 
                6013.
                  (E) Identification number requirement.--No 
                credit shall be allowed under this section to 
                an eligible individual who does not include on 
                the return of tax for the taxable year--
                          (i) such individual's taxpayer 
                        identification number, and
                          (ii) if the individual is married 
                        (within the meaning of section 
                        7703),the taxpayer identification 
                        number of such individual's spouse.
                  (G) Individuals who do not include TIN, etc., 
                of any qualifying child.--No credit shall be 
                allowed under this section to any eligible 
                individual who has one or more qualifying 
                children if no qualifying child of such 
                individual is taken into account under 
                subsection (b) by reason of paragraph (3)(D).
          (2) Earned income.--
                  (A) The term ``earned income'' means--
                          (i) wages, salaries, tips, and other 
                        employee compensation, but only if such 
                        amounts are includible in gross income 
                        for the taxable year, plus
                          (ii) the amount of the taxpayer's net 
                        earnings from self-employment for the 
                        taxable year (within the meaning of 
                        section 1402(a)), but such net earnings 
                        shall be determined with regard to the 
                        deduction allowed to the taxpayer by 
                        section 164(f).
                  (B) For purposes of subparagraph (A)--
                          (i) the earned income of an 
                        individual shall be computed without 
                        regard to any community property laws,
                          (ii) no amount received as a pension 
                        or annuity shall be taken into account,
                          (iii) no amount to which section 
                        871(a) applies (relating to income of 
                        nonresident alien individuals not 
                        connected with United States business) 
                        shall be taken into account,
                          (iv) no amount received for services 
                        provided by an individual while the 
                        individual is an inmate at a penal 
                        institution shall be taken into 
                        account,
                          (v) no amount described in 
                        subparagraph (A) received for service 
                        performed in work activities as defined 
                        in paragraph (4) or (7) of section 
                        407(d) of the Social Security Act to 
                        which the taxpayer is assigned under 
                        any State program under part A of title 
                        IV of such Act shall be taken into 
                        account, but only to the extent such 
                        amount is subsidized under such State 
                        program, and
                          (vi) a taxpayer may elect to treat 
                        amounts excluded from gross income by 
                        reason of section 112 as earned income.
          (3) Qualifying child.--
                  (A) In general.--The term ``qualifying 
                child'' means a qualifying child of the 
                taxpayer (as defined in [section 152(c)] 
                section 7706(c), determined without regard to 
                paragraph (1)(D) thereof and [section 152(e)] 
                section 7706(e)).
                  (B) Married individual.--The term 
                ``qualifying child'' shall not include an 
                individual who is married as of the close of 
                the taxpayer's taxable year [unless the 
                taxpayer is entitled to a deduction under 
                section 151 for such taxable year with respect 
                to such individual (or would be so entitled but 
                for section 152(e)] if such individual is not 
                treated as a dependent of such taxpayer for 
                such taxable year by reason of section 
                7706(b)(2) (determined without regard to 
                section 7706(e))).
                  (C) Place of abode.--For purposes of 
                subparagraph (A), the requirements of [section 
                152(c)(1)(B)] section 7706(c)(1)(B) shall be 
                met only if the principal place of abode is in 
                the United States.
                  (D) Identification requirements.--
                          (i) In general.--A qualifying child 
                        shall not be taken into account under 
                        subsection (b) unless the taxpayer 
                        includes the name, age, and TIN of the 
                        qualifying child on the return of tax 
                        for the taxable year.
                          (ii) Other methods.--The Secretary 
                        may prescribe other methods for 
                        providing the information described in 
                        clause (i).
          (4) Treatment of military personnel stationed outside 
        the United States.--For purposes of paragraphs 
        (1)(A)(ii)(I) and (3)(C), the principal place of abode 
        of a member of the Armed Forces of the United States 
        shall be treated as in the United States during any 
        period during which such member is stationed outside 
        the United States while serving on extended active duty 
        with the Armed Forces of the United States. For 
        purposes of the preceding sentence, the term ``extended 
        active duty'' means any period of active duty pursuant 
        to a call or order to such duty for a period in excess 
        of 90 days or for an indefinite period.
  (d) Married individuals.--In the case of an individual who is 
married (within the meaning of section 7703), this section 
shall apply only if a joint return is filed for the taxable 
year under section 6013.
  (e) Taxable year must be full taxable year.--Except in the 
case of a taxable year closed by reason of the death of the 
taxpayer, no credit shall be allowable under this section in 
the case of a taxable year covering a period of less than 12 
months.
  (f) Amount of credit to be determined under tables.--
          (1) In general.--The amount of the credit allowed by 
        this section shall be determined under tables 
        prescribed by the Secretary.
          (2) Requirements for tables.--The tables prescribed 
        under paragraph (1) shall reflect the provisions of 
        subsections (a) and (b) and shall have income brackets 
        of not greater than $50 each--
                  (A) for earned income between $0 and the 
                amount of earned income at which the credit is 
                phased out under subsection (b), and
                  (B) for adjusted gross income between the 
                dollar amount at which the phaseout begins 
                under subsection (b) and the amount of adjusted 
                gross income at which the credit is phased out 
                under subsection (b).
  (i) Denial of credit for individuals having excessive 
investment income.--
          (1) In general.--No credit shall be allowed under 
        subsection (a) for the taxable year if the aggregate 
        amount of disqualified income of the taxpayer for the 
        taxable year exceeds $2,200.
          (2) Disqualified income.--For purposes of paragraph 
        (1), the term ``disqualified income'' means--
                  (A) interest or dividends to the extent 
                includible in gross income for the taxable 
                year,
                  (B) interest received or accrued during the 
                taxable year which is exempt from tax imposed 
                by this chapter,
                  (C) the excess (if any) of--
                          (i) gross income from rents or 
                        royalties not derived in the ordinary 
                        course of a trade or business, over
                          (ii) the sum of--
                                  (I) the deductions (other 
                                than interest) which are 
                                clearly and directly allocable 
                                to such gross income, plus
                                  (II) interest deductions 
                                properly allocable to such 
                                gross income,
                  (D) the capital gain net income (as defined 
                in section 1222) of the taxpayer for such 
                taxable year, and
                  (E) the excess (if any) of--
                          (i) the aggregate income from all 
                        passive activities for the taxable year 
                        (determined without regard to any 
                        amount included in earned income under 
                        subsection (c)(2) or described in a 
                        preceding subparagraph), over
                          (ii) the aggregate losses from all 
                        passive activities for the taxable year 
                        (as so determined).
                For purposes of subparagraph (E), the term 
                ``passive activity'' has the meaning given such 
                term by section 469.
  (j) Inflation adjustments.--
          (1) In general.--In the case of any taxable year 
        beginning after 2015, each of the dollar amounts in 
        subsections (b)(2) and (i)(1) shall be increased by an 
        amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting in subparagraph (A)(ii) thereof--
                          (i) in the case of amounts in 
                        subsections (b)(2)(A) and (i)(1), 
                        "calendar year 1995" for "calendar year 
                        2016, and
                          (ii) in the case of the $5,000 amount 
                        in subsection (b)(2)(B), ``calendar 
                        year 2008'' for ``calendar year 2016''.
          (2) Rounding.--
                  (A) In general.--If any dollar amount in 
                subsection (b)(2)(A) (after being increased 
                under subparagraph (B) thereof), after being 
                increased under paragraph (1), is not a 
                multiple of $10, such dollar amount shall be 
                rounded to the nearest multiple of $10.
                  (B) Disqualified income threshold amount.--If 
                the dollar amount in subsection (i)(1), after 
                being increased under paragraph (1), is not a 
                multiple of $50, such amount shall be rounded 
                to the next lowest multiple of $50.
  (k) Restrictions on taxpayers who improperly claimed credit 
in prior year.--
          (1) Taxpayers making prior fraudulent or reckless 
        claims.--
                  (A) In general.--No credit shall be allowed 
                under this section for any taxable year in the 
                disallowance period.
                  (B) Disallowance period.--For purposes of 
                paragraph (1), the disallowance period is--
                          (i) the period of 10 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to fraud, 
                        and
                          (ii) the period of 2 taxable years 
                        after the most recent taxable year for 
                        which there was a final determination 
                        that the taxpayer's claim of credit 
                        under this section was due to reckless 
                        or intentional disregard of rules and 
                        regulations (but not due to fraud).
          (2) Taxpayers making improper prior claims.--In the 
        case of a taxpayer who is denied credit under this 
        section for any taxable year as a result of the 
        deficiency procedures under subchapter B of chapter 63, 
        no credit shall be allowed under this section for any 
        subsequent taxable year unless the taxpayer provides 
        such information as the Secretary may require to 
        demonstrate eligibility for such credit.
  (l) Coordination with certain means-tested programs.--For 
purposes of--
          (1) the United States Housing Act of 1937,
          (2) title V of the Housing Act of 1949,
          (3) section 101 of the Housing and Urban Development 
        Act of 1965,
          (4) sections 221(d)(3), 235, and 236 of the National 
        Housing Act, and
          (5) the Food and Nutrition Act of 2008, any refund 
        made to an individual (or the spouse of an individual) 
        by reason of this section shall not be treated as 
        income (and shall not be taken into account in 
        determining resources for the month of its receipt and 
        the following month).
  (m) Identification numbers.--Solely for purposes of 
subsections (c)(1)(E) and (c)(3)(D), a taxpayer identification 
number means a social security number issued to an individual 
by the Social Security Administration (other than a social 
security number issued pursuant to clause (II) (or that portion 
of clause (III) that relates to clause (II)) of section 
205(c)(2)(B)(i) of the Social Security Act) on or before the 
due date for filing the return for the taxable year.

           *       *       *       *       *       *       *

SEC. 35. HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS.

  (a) In general.--In the case of an individual, there shall be 
allowed as a credit against the tax imposed by subtitle A an 
amount equal to 72.5 percent of the amount paid by the taxpayer 
for coverage of the taxpayer and qualifying family members 
under qualified health insurance for eligible coverage months 
beginning in the taxable year.
  (b) Eligible coverage month.--For purposes of this section--
          (1) In general.--The term ``eligible coverage month'' 
        means any month if--
                  (A) as of the first day of such month, the 
                taxpayer--
                          (i) is an eligible individual,
                          (ii) is covered by qualified health 
                        insurance, the premium for which is 
                        paid by the taxpayer,
                          (iii) does not have other specified 
                        coverage, and
                          (iv) is not imprisoned under Federal, 
                        State, or local authority, and
                  (B) such month begins more than 90 days after 
                the date of the enactment of the Trade Act of 
                2002, and before January 1, 2020.
          (2) Joint returns.--In the case of a joint return, 
        the requirements of paragraph (1)(A) shall be treated 
        as met with respect to any month if at least 1 spouse 
        satisfies such requirements.
  (c) Eligible individual.--For purposes of this section--
          (1) In general.--The term ``eligible individual'' 
        means--
                  (A) an eligible TAA recipient,
                  (B) an eligible alternative TAA recipient, 
                and
                  (C) an eligible PBGC pension recipient.
          (2) Eligible TAA recipient.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``eligible TAA 
                recipient'' means, with respect to any month, 
                any individual who is receiving for any day of 
                such month a trade readjustment allowance under 
                chapter 2 of title II of the Trade Act of 1974 
                or who would be eligible to receive such 
                allowance if section 231 of such Act were 
                applied without regard to subsection (a)(3)(B) 
                of such section. An individual shall continue 
                to be treated as an eligible TAA recipient 
                during the first month that such individual 
                would otherwise cease to be an eligible TAA 
                recipient by reason of the preceding sentence.
                  (B) Special rule.--In the case of any 
                eligible coverage month beginning after the 
                date of the enactment of this paragraph, the 
                term ``eligible TAA recipient'' means, with 
                respect to any month, any individual who--
                          (i) is receiving for any day of such 
                        month a trade readjustment allowance 
                        under chapter 2 of title II of the 
                        Trade Act of 1974,
                          (ii) would be eligible to receive 
                        such allowance except that such 
                        individual is in a break in training 
                        provided under a training program 
                        approved under section 236 of such Act 
                        that exceeds the period specified in 
                        section 233(e) of such Act, but is 
                        within the period for receiving such 
                        allowances provided under section 
                        233(a) of such Act, or
                          (iii) is receiving unemployment 
                        compensation (as defined in section 
                        85(b)) for any day of such month and 
                        who would be eligible to receive such 
                        allowance for such month if section 231 
                        of such Act were applied without regard 
                        to subsections (a)(3)(B) and (a)(5) 
                        thereof.
                An individual shall continue to be treated as 
                an eligible TAA recipient during the first 
                month that such individual would otherwise 
                cease to be an eligible TAA recipient by reason 
                of the preceding sentence.
          (3) Eligible alternative TAA recipient.--The term 
        ``eligible alternative TAA recipient'' means, with 
        respect to any month, any individual who--
                  (A) is a worker described in section 
                246(a)(3)(B) of the Trade Act of 1974 who is 
                participating in the program established under 
                section 246(a)(1) of such Act, and
                  (B) is receiving a benefit for such month 
                under section 246(a)(2) of such Act.
        An individual shall continue to be treated as an 
        eligible alternative TAA recipient during the first 
        month that such individual would otherwise cease to be 
        an eligible alternative TAA recipient by reason of the 
        preceding sentence.
          (4) Eligible PBGC pension recipient.--The term 
        ``eligible PBGC pension recipient'' means, with respect 
        to any month, any individual who--
                  (A) has attained age 55 as of the first day 
                of such month, and
                  (B) is receiving a benefit for such month any 
                portion of which is paid by the Pension Benefit 
                Guaranty Corporation under title IV of the 
                Employee Retirement Income Security Act of 
                1974.
  (d) Qualifying family member.--For purposes of this section--
          (1) In general.--The term ``qualifying family 
        member'' means--
                  (A) the taxpayer's spouse, and
                  (B) any dependent of the taxpayer [with 
                respect to whom the taxpayer is entitled to a 
                deduction under section 151(c)] if the taxpayer 
                included such person's TIN on the return of tax 
                for the taxable year.
        Such term does not include any individual who has other 
        specified coverage.
          (2) Special dependency test in case of divorced 
        parents, etc..--If [section 152(e)] section 7706(e) 
        applies to any child with respect to any calendar year, 
        in the case of any taxable year beginning in such 
        calendar year, such child shall be treated as described 
        in paragraph (1)(B) with respect to the custodial 
        parent (as defined in [section 152(e)(4)(A)] section 
        7706(e)(4)(A)) and not with respect to the noncustodial 
        parent.
  (e) Qualified health insurance.--For purposes of this 
section--
          (1) In general.--The term ``qualified health 
        insurance'' means any of the following:
                  (A) Coverage under a COBRA continuation 
                provision (as defined in section 9832(d)(1)).
                  (B) State-based continuation coverage 
                provided by the State under a State law that 
                requires such coverage.
                  (C) Coverage offered through a qualified 
                State high risk pool (as defined in section 
                2744(c)(2) of the Public Health Service Act).
                  (D) Coverage under a health insurance program 
                offered for State employees.
                  (E) Coverage under a State-based health 
                insurance program that is comparable to the 
                health insurance program offered for State 
                employees.
                  (F) Coverage through an arrangement entered 
                into by a State and--
                          (i) a group health plan (including 
                        such a plan which is a multiemployer 
                        plan as defined in section 3(37) of the 
                        Employee Retirement Income Security Act 
                        of 1974),
                          (ii) an issuer of health insurance 
                        coverage,
                          (iii) an administrator, or
                          (iv) an employer.
                  (G) Coverage offered through a State 
                arrangement with a private sector health care 
                coverage purchasing pool.
                  (H) Coverage under a State-operated health 
                plan that does not receive any Federal 
                financial participation.
                  (I) Coverage under a group health plan that 
                is available through the employment of the 
                eligible individual's spouse.
                  (J) In the case of any eligible individual 
                and such individual's qualifying family 
                members, coverage under individual health 
                insurance (other than coverage enrolled in 
                through an Exchange established under the 
                Patient Protection and Affordable Care Act). 
                For purposes of this subparagraph, the term 
                ``individual health insurance'' means any 
                insurance which constitutes medical care 
                offered to individuals other than in connection 
                with a group health plan and does not include 
                Federal- or State-based health insurance 
                coverage.
                  (K) Coverage under an employee benefit plan 
                funded by a voluntary employees' beneficiary 
                association (as defined in section 501(c)(9)) 
                established pursuant to an order of a 
                bankruptcy court, or by agreement with an 
                authorized representative, as provided in 
                section 1114 of title 11, United States Code.
          (2) Requirements for State-based coverage.--
                  (A) In general.--The term ``qualified health 
                insurance'' does not include any coverage 
                described in subparagraphs (B) through (H) of 
                paragraph (1) unless the State involved has 
                elected to have such coverage treated as 
                qualified health insurance under this section 
                and such coverage meets the following 
                requirements:
                          (i) Guaranteed issue.--Each 
                        qualifying individual is guaranteed 
                        enrollment if the individual pays the 
                        premium for enrollment or provides a 
                        qualified health insurance costs credit 
                        eligibility certificate described in 
                        section 7527 and pays the remainder of 
                        such premium.
                          (ii) No imposition of preexisting 
                        condition exclusion.--No pre-existing 
                        condition limitations are imposed with 
                        respect to any qualifying individual.
                          (iii) Nondiscriminatory premium.--The 
                        total premium (as determined without 
                        regard to any subsidies) with respect 
                        to a qualifying individual may not be 
                        greater than the total premium (as so 
                        determined) for a similarly situated 
                        individual who is not a qualifying 
                        individual.
                          (iv) Same benefits.--Benefits under 
                        the coverage are the same as (or 
                        substantially similar to) the benefits 
                        provided to similarly situated 
                        individuals who are not qualifying 
                        individuals.
                  (B) Qualifying individual.--For purposes of 
                this paragraph, the term ``qualifying 
                individual'' means--
                          (i) an eligible individual for whom, 
                        as of the date on which the individual 
                        seeks to enroll in the coverage 
                        described in subparagraphs (B) through 
                        (H) of paragraph (1), the aggregate of 
                        the periods of creditable coverage (as 
                        defined in section 9801(c)) is 3 months 
                        or longer and who, with respect to any 
                        month, meets the requirements of 
                        clauses (iii) and (iv) of subsection 
                        (b)(1)(A); and
                          (ii) the qualifying family members of 
                        such eligible individual.
          (3) Exception.--The term ``qualified health 
        insurance'' shall not include--
                  (A) a flexible spending or similar 
                arrangement, and
                  (B) any insurance if substantially all of its 
                coverage is of excepted benefits described in 
                section 9832(c).
  (f) Other specified coverage.--For purposes of this section, 
an individual has other specified coverage for any month if, as 
of the first day of such month--
          (1) Subsidized coverage.--
                  (A) In general.--Such individual is covered 
                under any insurance which constitutes medical 
                care (except insurance substantially all of the 
                coverage of which is of excepted benefits 
                described in section 9832(c)) under any health 
                plan maintained by any employer (or former 
                employer) of the taxpayer or the taxpayer's 
                spouse and at least 50 percent of the cost of 
                such coverage (determined under section 4980B) 
                is paid or incurred by the employer.
                  (B) Eligible alternative TAA recipients.--In 
                the case of an eligible alternative TAA 
                recipient, such individual is either--
                          (i) eligible for coverage under any 
                        qualified health insurance (other than 
                        insurance described in subparagraph 
                        (A), (B), or (F) of subsection (e)(1)) 
                        under which at least 50 percent of the 
                        cost of coverage (determined under 
                        section 4980B(f)(4)) is paid or 
                        incurred by an employer (or former 
                        employer) of the taxpayer or the 
                        taxpayer's spouse, or
                          (ii) covered under any such qualified 
                        health insurance under which any 
                        portion of the cost of coverage (as so 
                        determined) is paid or incurred by an 
                        employer (or former employer) of the 
                        taxpayer or the taxpayer's spouse.
                  (C) Treatment of cafeteria plans.--For 
                purposes of subparagraphs (A) and (B), the cost 
                of coverage shall be treated as paid or 
                incurred by an employer to the extent the 
                coverage is in lieu of a right to receive cash 
                or other qualified benefits under a cafeteria 
                plan (as defined in section 125(d)).
          (2) Coverage under medicare, medicaid, or SCHIP.--
        Such individual--
                  (A) is entitled to benefits under part A of 
                title XVIII of the Social Security Act or is 
                enrolled under part B of such title, or
                  (B) is enrolled in the program under title 
                XIX or XXI of such Act (other than under 
                section 1928 of such Act).
          (3) Certain other coverage.--Such individual--
                  (A) is enrolled in a health benefits plan 
                under chapter 89 of title 5, United States 
                Code, or
                  (B) is entitled to receive benefits under 
                chapter 55 of title 10, United States Code.
  (g) Special rules.--
          (1) Coordination with advance payments of credit.--
        With respect to any taxable year, the amount which 
        would (but for this subsection) be allowed as a credit 
        to the taxpayer under subsection (a) shall be reduced 
        (but not below zero) by the aggregate amount paid on 
        behalf of such taxpayer under section 7527 for months 
        beginning in such taxable year.
          (2) Coordination with other deductions.--Amounts 
        taken into account under subsection (a) shall not be 
        taken into account in determining any deduction allowed 
        under section 162(l) or 213.
          (3) Medical and health savings accounts.--Amounts 
        distributed from an Archer MSA (as defined in section 
        220(d)) or from a health savings account (as defined in 
        section 223(d)) shall not be taken into account under 
        subsection (a).
          (4) Denial of credit to dependents.--No credit shall 
        be allowed under this section to any individual with 
        respect to whom a deduction under section 151 is 
        allowable to another taxpayer for a taxable year 
        beginning in the calendar year in which such 
        individual's taxable year begins.
          (5) Both spouses eligible individuals.--The spouse of 
        the taxpayer shall not be treated as a qualifying 
        family member for purposes of subsection (a), if--
                  (A) the taxpayer is married at the close of 
                the taxable year,
                  (B) the taxpayer and the taxpayer's spouse 
                are both eligible individuals during the 
                taxable year, and
                  (C) the taxpayer files a separate return for 
                the taxable year.
          (6) Marital status; certain married individuals 
        living apart.--Rules similar to the rules of paragraphs 
        (3) and (4) of section 21(e) shall apply for purposes 
        of this section.
          (7) Insurance which covers other individuals.--For 
        purposes of this section, rules similar to the rules of 
        section 213(d)(6) shall apply with respect to any 
        contract for qualified health insurance under which 
        amounts are payable for coverage of an individual other 
        than the taxpayer and qualifying family members.
          (8) Treatment of payments.--For purposes of this 
        section--
                  (A) Payments by Secretary.--Payments made by 
                the Secretary on behalf of any individual under 
                section 7527 (relating to advance payment of 
                credit for health insurance costs of eligible 
                individuals) shall be treated as having been 
                made by the taxpayer on the first day of the 
                month for which such payment was made.
                  (B) Payments by taxpayer.--Payments made by 
                the taxpayer for eligible coverage months shall 
                be treated as having been made by the taxpayer 
                on the first day of the month for which such 
                payment was made.
          (9) COBRA premium assistance.--In the case of an 
        assistance eligible individual who receives premium 
        reduction for COBRA continuation coverage under section 
        3001(a) of title III of division B of the American 
        Recovery and Reinvestment Act of 2009 for any month 
        during the taxable year, such individual shall not be 
        treated as an eligible individual, a certified 
        individual, or a qualifying family member for purposes 
        of this section or section 7527 with respect to such 
        month.
          (10) Continued qualification of family members after 
        certain events.--
                  (A) Medicare eligibility.--In the case of any 
                month which would be an eligible coverage month 
                with respect to an eligible individual but for 
                subsection (f)(2)(A), such month shall be 
                treated as an eligible coverage month with 
                respect to such eligible individual solely for 
                purposes of determining the amount of the 
                credit under this section with respect to any 
                qualifying family members of such individual 
                (and any advance payment of such credit under 
                section 7527). This subparagraph shall only 
                apply with respect to the first 24 months after 
                such eligible individual is first entitled to 
                the benefits described in subsection (f)(2)(A).
                  (B) Divorce.--In the case of the finalization 
                of a divorce between an eligible individual and 
                such individual's spouse, such spouse shall be 
                treated as an eligible individual for purposes 
                of this section and section 7527 for a period 
                of 24 months beginning with the date of such 
                finalization, except that the only qualifying 
                family members who may be taken into account 
                with respect to such spouse are those 
                individuals who were qualifying family members 
                immediately before such finalization.
                  (C) Death.--In the case of the death of an 
                eligible individual--
                          (i) any spouse of such individual 
                        (determined at the time of such death) 
                        shall be treated as an eligible 
                        individual for purposes of this section 
                        and section 7527 for a period of 24 
                        months beginning with the date of such 
                        death, except that the only qualifying 
                        family members who may be taken into 
                        account with respect to such spouse are 
                        those individuals who were qualifying 
                        family members immediately before such 
                        death, and
                          (ii) any individual who was a 
                        qualifying family member of the 
                        decedent immediately before such death 
                        (or, in the case of an individual to 
                        whom paragraph (4) applies, the 
                        taxpayer to whom the deduction under 
                        section 151 is allowable) shall be 
                        treated as an eligible individual for 
                        purposes of this section and section 
                        7527 for a period of 24 months 
                        beginning with the date of such death, 
                        except that in determining the amount 
                        of such credit only such qualifying 
                        family member may be taken into 
                        account.
          (11) Election.--
                  (A) In general.--This section shall not apply 
                to any taxpayer for any eligible coverage month 
                unless such taxpayer elects the application of 
                this section for such month.
                  (B) Timing and applicability of election.--
                Except as the Secretary may provide--
                          (i) an election to have this section 
                        apply for any eligible coverage month 
                        in a taxable year shall be made not 
                        later than the due date (including 
                        extensions) for the return of tax for 
                        the taxable year; and
                          (ii) any election for this section to 
                        apply for an eligible coverage month 
                        shall apply for all subsequent eligible 
                        coverage months in the taxable year 
                        and, once made, shall be irrevocable 
                        with respect to such months.
          (12) Coordination with premium tax credit.--
                  (A) In general.--An eligible coverage month 
                to which the election under paragraph (11) 
                applies shall not be treated as a coverage 
                month (as defined in section 36B(c)(2)) for 
                purposes of section 36B with respect to the 
                taxpayer.
                  (B) Coordination with advance payments of 
                premium tax credit.--In the case of a taxpayer 
                who makes the election under paragraph (11) 
                with respect to any eligible coverage month in 
                a taxable year or on behalf of whom any advance 
                payment is made under section 7527 with respect 
                to any month in such taxable year--
                          (i) the tax imposed by this chapter 
                        for the taxable year shall be increased 
                        by the excess, if any, of--
                                  (I) the sum of any advance 
                                payments made on behalf of the 
                                taxpayer under section 1412 of 
                                the Patient Protection and 
                                Affordable Care Act and section 
                                7527 for months during such 
                                taxable year, over
                                  (II) the sum of the credits 
                                allowed under this section 
                                (determined without regard to 
                                paragraph (1)) and section 36B 
                                (determined without regard to 
                                subsection (f)(1) thereof) for 
                                such taxable year; and
                          (ii) section 36B(f)(2) shall not 
                        apply with respect to such taxpayer for 
                        such taxable year, except that if such 
                        taxpayer received any advance payments 
                        under section 7527 for any month in 
                        such taxable year and is later allowed 
                        a credit under section 36B for such 
                        taxable year, then section 36B(f)(2)(B) 
                        shall be applied by substituting the 
                        amount determined under clause (i) for 
                        the amount determined under section 
                        36B(f)(2)(A).
          (13) Regulations.--The Secretary may prescribe such 
        regulations and other guidance as may be necessary or 
        appropriate to carry out this section, section 6050T, 
        and section 7527.

           *       *       *       *       *       *       *

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

  (a) In general.--In the case of an applicable taxpayer, there 
shall be allowed as a credit against the tax imposed by this 
subtitle for any taxable year an amount equal to the premium 
assistance credit amount of the taxpayer for the taxable year.
  (b) Premium assistance credit amount.--For purposes of this 
section--
          (1) In general.--The term ``premium assistance credit 
        amount'' means, with respect to any taxable year, the 
        sum of the premium assistance amounts determined under 
        paragraph (2) with respect to all coverage months of 
        the taxpayer occurring during the taxable year.
          (2) Premium assistance amount.--The premium 
        assistance amount determined under this subsection with 
        respect to any coverage month is the amount equal to 
        the lesser of--
                  (A) the monthly premiums for such month for 1 
                or more qualified health plans offered in the 
                individual market within a State which cover 
                the taxpayer, the taxpayer's spouse, or any 
                dependent (as defined in [section 152] section 
                7706) of the taxpayer and which were enrolled 
                in through an Exchange established by the State 
                under 1311 of the Patient Protection and 
                Affordable Care Act, or
                  (B) the excess (if any) of--
                          (i) the adjusted monthly premium for 
                        such month for the applicable second 
                        lowest cost silver plan with respect to 
                        the taxpayer, over
                          (ii) an amount equal to 1/12 of the 
                        product of the applicable percentage 
                        and the taxpayer's household income for 
                        the taxable year.
          (3) Other terms and rules relating to premium 
        assistance amounts.--For purposes of paragraph (2)--
                  (A) Applicable percentage.--
                          (i) In general.--Except as provided 
                        in clause (ii), the applicable 
                        percentage for any taxable year shall 
                        be the percentage such that the 
                        applicable percentage for any taxpayer 
                        whose household income is within an 
                        income tier specified in the following 
                        table shall increase, on a sliding 
                        scale in a linear manner, from the 
                        initial premium percentage to the final 
                        premium percentage specified in such 
                        table for such income tier:

 
------------------------------------------------------------------------
     In the case of
    household income
(expressed as a percent    The initial premium       The final premium
of poverty line) within      percentage is--          percentage is--
  the following income
         tier:
------------------------------------------------------------------------
Up to 133%               2.0%                     2.0%
133% up to 150%          3.0%                     4.0%
150% up to 200%          4.0%                     6.3%
200% up to 250%          6.3%                     8.05%
250% up to 300%          8.05%                    9.5%
300% up to 400%          9.5%                     9.5%
------------------------------------------------------------------------

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

 
------------------------------------------------------------------------
 If the household income (expressed
 as a percent of poverty line) is:     The applicable dollar amount is:
------------------------------------------------------------------------
Less than 200%                       $600
At least 200% but less than 300%     $1,500
At least 300% but less than 400%     $2,500
------------------------------------------------------------------------

                          (ii) Indexing of amount.--In the case 
                        of any calendar year beginning after 
                        2014, each of the dollar amounts in the 
                        table contained under clause (i) shall 
                        be increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year, determined by 
                                substituting ``calendar year 
                                2013'' for ``calendar year 
                                2016'' in subparagraph (A)(ii) 
                                thereof.
                        If the amount of any increase under 
                        clause (i) is not a multiple of $50, 
                        such increase shall be rounded to the 
                        next lowest multiple of $50.
          (3) Information requirement.--Each Exchange (or any 
        person carrying out 1 or more responsibilities of an 
        Exchange under section 1311(f)(3) or 1321(c) of the 
        Patient Protection and Affordable Care Act) shall 
        provide the following information to the Secretary and 
        to the taxpayer with respect to any health plan 
        provided through the Exchange:
                  (A) The level of coverage described in 
                section 1302(d) of the Patient Protection and 
                Affordable Care Act and the period such 
                coverage was in effect.
                  (B) The total premium for the coverage 
                without regard to the credit under this section 
                or cost-sharing reductions under section 1402 
                of such Act.
                  (C) The aggregate amount of any advance 
                payment of such credit or reductions under 
                section 1412 of such Act.
                  (D) The name, address, and TIN of the primary 
                insured and the name and TIN of each other 
                individual obtaining coverage under the policy.
                  (E) Any information provided to the Exchange, 
                including any change of circumstances, 
                necessary to determine eligibility for, and the 
                amount of, such credit.
                  (F) Information necessary to determine 
                whether a taxpayer has received excess advance 
                payments.
  (g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this section, including regulations which provide for--
          (1) the coordination of the credit allowed under this 
        section with the program for advance payment of the 
        credit under section 1412 of the Patient Protection and 
        Affordable Care Act, and
          (2) the application of subsection (f) where the 
        filing status of the taxpayer for a taxable year is 
        different from such status used for determining the 
        advance payment of the credit.

           *       *       *       *       *       *       *

Subpart D--Business Related Credits

           *       *       *       *       *       *       *

SEC. 42. LOW-INCOME HOUSING CREDIT.

  (a) In general.--For purposes of section 38, the amount of 
the low-income housing credit determined under this section for 
any taxable year in the credit period shall be an amount equal 
to--
          (1) the applicable percentage of
          (2) the qualified basis of each qualified low-income 
        building.
  (b) Applicable percentage: 70 percent present value credit 
for certain new buildings; 30 percent present value credit for 
certain other buildings.--
          (1) Determination of applicable percentage.--For 
        purposes of this section--
                  (A) In general.--The term ``applicable 
                percentage'' means, with respect to any 
                building, the appropriate percentage prescribed 
                by the Secretary for the earlier of--
                          (i) the month in which such building 
                        is placed in service, or
                          (ii) at the election of the 
                        taxpayer--
                                  (I) the month in which the 
                                taxpayer and the housing credit 
                                agency enter into an agreement 
                                with respect to such building 
                                (which is binding on such 
                                agency, the taxpayer, and all 
                                successors in interest) as to 
                                the housing credit dollar 
                                amount to be allocated to such 
                                building, or
                                  (II) in the case of any 
                                building to which subsection 
                                (h)(4)(B) applies, the month in 
                                which the tax-exempt 
                                obligations are issued.
                A month may be elected under clause (ii) only 
                if the election is made not later than the 5th 
                day after the close of such month. Such an 
                election, once made, shall be irrevocable.
                  (B) Method of prescribing percentages.--The 
                percentages prescribed by the Secretary for any 
                month shall be percentages which will yield 
                over a 10-year period amounts of credit under 
                subsection (a) which have a present value equal 
                to--
                          (i) 70 percent of the qualified basis 
                        of a new building which is not 
                        federally subsidized for the taxable 
                        year, and
                          (ii) 30 percent of the qualified 
                        basis of a building not described in 
                        clause (i).
                  (C) Method of discounting.--The present value 
                under subparagraph (B) shall be determined--
                          (i) as of the last day of the 1st 
                        year of the 10-year period referred to 
                        in subparagraph (B),
                          (ii) by using a discount rate equal 
                        to 72 percent of the average of the 
                        annual Federal mid-term rate and the 
                        annual Federal long-term rate 
                        applicable under section 1274(d)(1) to 
                        the month applicable under clause (i) 
                        or (ii) of subparagraph (A) and 
                        compounded annually, and
                          (iii) by assuming that the credit 
                        allowable under this section for any 
                        year is received on the last day of 
                        such year.
          (2) Minimum credit rate for non-federally subsidized 
        new buildings.--In the case of any new building--
                  (A) which is placed in service by the 
                taxpayer after the date of the enactment of 
                this paragraph, and
                  (B) which is not federally subsidized for the 
                taxable year,
        the applicable percentage shall not be less than 9 
        percent.
          (3) Cross references.--
                  (A) For treatment of certain rehabilitation 
                expenditures as separate new buildings, see 
                subsection (e).
                  (B) For determination of applicable 
                percentage for increases in qualified basis 
                after the 1st year of the credit period, see 
                subsection (f)(3).
                  (C) For authority of housing credit agency to 
                limit applicable percentage and qualified basis 
                which may be taken into account under this 
                section with respect to any building, see 
                subsection (h)(7).
  (c) Qualified basis; qualified low-income building.--For 
purposes of this section--
          (1) Qualified basis.--
                  (A) Determination.--The qualified basis of 
                any qualified low-income building for any 
                taxable year is an amount equal to--
                          (i) the applicable fraction 
                        (determined as of the close of such 
                        taxable year) of
                          (ii) the eligible basis of such 
                        building (determined under subsection 
                        (d)(5)).
                  (B) Applicable fraction.--For purposes of 
                subparagraph (A), the term ``applicable 
                fraction'' means the smaller of the unit 
                fraction or the floor space fraction.
                  (C) Unit fraction.--For purposes of 
                subparagraph (B), the term ``unit fraction'' 
                means the fraction--
                          (i) the numerator of which is the 
                        number of low-income units in the 
                        building, and
                          (ii) the denominator of which is the 
                        number of residential rental units 
                        (whether or not occupied) in such 
                        building.
                  (D) Floor space fraction.--For purposes of 
                subparagraph (B), the term ``floor space 
                fraction'' means the fraction--
                          (i) the numerator of which is the 
                        total floor space of the low-income 
                        units in such building, and
                          (ii) the denominator of which is the 
                        total floor space of the residential 
                        rental units (whether or not occupied) 
                        in such building.
                  (E) Qualified basis to include portion of 
                building used to provide supportive services 
                for homeless.--In the case of a qualified low-
                income building described in subsection 
                (i)(3)(B)(iii), the qualified basis of such 
                building for any taxable year shall be 
                increased by the lesser of--
                          (i) so much of the eligible basis of 
                        such building as is used throughout the 
                        year to provide supportive services 
                        designed to assist tenants in locating 
                        and retaining permanent housing, or
                          (ii) 20 percent of the qualified 
                        basis of such building (determined 
                        without regard to this subparagraph).
          (2) Qualified low-income building.--The term 
        ``qualified low-income building'' means any building--
                  (A) which is part of a qualified low-income 
                housing project at all times during the 
                period--
                          (i) beginning on the 1st day in the 
                        compliance period on which such 
                        building is part of such a project, and
                          (ii) ending on the last day of the 
                        compliance period with respect to such 
                        building, and
                  (B) to which the amendments made by section 
                201(a) of the Tax Reform Act of 1986 apply.
  (d) Eligible basis.--For purposes of this section--
          (1) New buildings.--The eligible basis of a new 
        building is its adjusted basis as of the close of the 
        1st taxable year of the credit period.
          (2) Existing buildings.--
                  (A) In general.--The eligible basis of an 
                existing building is--
                          (i) in the case of a building which 
                        meets the requirements of subparagraph 
                        (B), its adjusted basis as of the close 
                        of the 1st taxable year of the credit 
                        period, and
                          (ii) zero in any other case.
                  (B) Requirements.--A building meets the 
                requirements of this subparagraph if--
                          (i) the building is acquired by 
                        purchase (as defined in section 
                        179(d)(2)),
                          (ii) there is a period of at least 10 
                        years between the date of its 
                        acquisition by the taxpayer and the 
                        date the building was last placed in 
                        service,
                          (iii) the building was not previously 
                        placed in service by the taxpayer or by 
                        any person who was a related person 
                        with respect to the taxpayer as of the 
                        time previously placed in service, and
                          (iv) except as provided in subsection 
                        (f)(5), a credit is allowable under 
                        subsection (a) by reason of subsection 
                        (e) with respect to the building.
                  (C) Adjusted basis.--For purposes of 
                subparagraph (A), the adjusted basis of any 
                building shall not include so much of the basis 
                of such building as is determined by reference 
                to the basis of other property held at any time 
                by the person acquiring the building.
                  (D) Special rules for subparagraph (B)
                          (i) Special rules for certain 
                        transfers.--For purposes of determining 
                        under subparagraph (B)(ii) when a 
                        building was last placed in service, 
                        there shall not be taken into account 
                        any placement in service--
                                  (I) in connection with the 
                                acquisition of the building in 
                                a transaction in which the 
                                basis of the building in the 
                                hands of the person acquiring 
                                it is determined in whole or in 
                                part by reference to the 
                                adjusted basis of such building 
                                in the hands of the person from 
                                whom acquired,
                                  (II) by a person whose basis 
                                in such building is determined 
                                under section 1014(a) (relating 
                                to property acquired from a 
                                decedent),
                                  (III) by any governmental 
                                unit or qualified nonprofit 
                                organization (as defined in 
                                subsection (h)(5)) if the 
                                requirements of subparagraph 
                                (B)(ii) are met with respect to 
                                the placement in service by 
                                such unit or organization and 
                                all the income from such 
                                property is exempt from Federal 
                                income taxation,
                                  (IV) by any person who 
                                acquired such building by 
                                foreclosure (or by instrument 
                                in lieu of foreclosure) of any 
                                purchase-money security 
                                interest held by such person if 
                                the requirements of 
                                subparagraph (B)(ii) are met 
                                with respect to the placement 
                                in service by such person and 
                                such building is resold within 
                                12 months after the date such 
                                building is placed in service 
                                by such person after such 
                                foreclosure, or
                                  (V) of a single-family 
                                residence by any individual who 
                                owned and used such residence 
                                for no other purpose than as 
                                his principal residence.
                          (ii) Related person.--For purposes of 
                        subparagraph (B)(iii), a person 
                        (hereinafter in this subclause referred 
                        to as the ``related person'') is 
                        related to any person if the related 
                        person bears a relationship to such 
                        person specified in section 267(b) or 
                        707(b)(1), or the related person and 
                        such person are engaged in trades or 
                        businesses under common control (within 
                        the meaning of subsections (a) and (b) 
                        of section 52).
          (3) Eligible basis reduced where disproportionate 
        standards for units.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the eligible basis of any 
                building shall be reduced by an amount equal to 
                the portion of the adjusted basis of the 
                building which is attributable to residential 
                rental units in the building which are not low-
                income units and which are above the average 
                quality standard of the low-income units in the 
                building.
                  (B) Exception where taxpayer elects to 
                exclude excess costs.--
                          (i) In general.--Subparagraph (A) 
                        shall not apply with respect to a 
                        residential rental unit in a building 
                        which is not a low-income unit if--
                                  (I) the excess described in 
                                clause (ii) with respect to 
                                such unit is not greater than 
                                15 percent of the cost 
                                described in clause (ii)(II), 
                                and
                                  (II) the taxpayer elects to 
                                exclude from the eligible basis 
                                of such building the excess 
                                described in clause (ii) with 
                                respect to such unit.
                          (ii) Excess.--The excess described in 
                        this clause with respect to any unit is 
                        the excess of--
                                  (I) the cost of such unit, 
                                over
                                  (II) the amount which would 
                                be the cost of such unit if the 
                                average cost per square foot of 
                                low-income units in the 
                                building were substituted for 
                                the cost per square foot of 
                                such unit.
                        The Secretary may by regulation provide 
                        for the determination of the excess 
                        under this clause on a basis other than 
                        square foot costs.
          (4) Special rules relating to determination of 
        adjusted basis.--For purposes of this subsection--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), the adjusted basis 
                of any building shall be determined without 
                regard to the adjusted basis of any property 
                which is not residential rental property.
                  (B) Basis of property in common areas, etc., 
                included.--The adjusted basis of any building 
                shall be determined by taking into account the 
                adjusted basis of property (of a character 
                subject to the allowance for depreciation) used 
                in common areas or provided as comparable 
                amenities to all residential rental units in 
                such building.
                  (C) Inclusion of basis of property used to 
                provide services for certain nontenants.--
                          (i) In general.--The adjusted basis 
                        of any building located in a qualified 
                        census tract (as defined in paragraph 
                        (5)(B)(ii)) shall be determined by 
                        taking into account the adjusted basis 
                        of property (of a character subject to 
                        the allowance for depreciation and not 
                        otherwise taken into account) used 
                        throughout the taxable year in 
                        providing any community service 
                        facility.
                          (ii) Limitation.--The increase in the 
                        adjusted basis of any building which is 
                        taken into account by reason of clause 
                        (i) shall not exceed the sum of--
                                  (I) 25 percent of so much of 
                                the eligible basis of the 
                                qualified low-income housing 
                                project of which it is a part 
                                as does not exceed $15,000,000, 
                                plus
                                  (II) 10 percent of so much of 
                                the eligible basis of such 
                                project as is not taken into 
                                account under subclause (I).
                        For purposes of the preceding sentence, 
                        all community service facilities which 
                        are part of the same qualified low-
                        income housing project shall be treated 
                        as one facility.
                          (iii) Community service facility.--
                        For purposes of this subparagraph, the 
                        term ``community service facility'' 
                        means any facility designed to serve 
                        primarily individuals whose income is 
                        60 percent or less of area median 
                        income (within the meaning of 
                        subsection (g)(1)(B)).
                  (D) No reduction for depreciation.--The 
                adjusted basis of any building shall be 
                determined without regard to paragraphs (2) and 
                (3) of section 1016(a).
          (5) Special rules for determining eligible basis.--
                  (A) Federal grants not taken into account in 
                determining eligible basis.--The eligible basis 
                of a building shall not include any costs 
                financed with the proceeds of a federally 
                funded grant.
                  (B) Increase in credit for buildings in high 
                cost areas.--
                          (i) In general.--In the case of any 
                        building located in a qualified census 
                        tract or difficult development area 
                        which is designated for purposes of 
                        this subparagraph--
                                  (I) in the case of a new 
                                building, the eligible basis of 
                                such building shall be 130 
                                percent of such basis 
                                determined without regard to 
                                this subparagraph, and
                                  (II) in the case of an 
                                existing building, the 
                                rehabilitation expenditures 
                                taken into account under 
                                subsection (e) shall be 130 
                                percent of such expenditures 
                                determined without regard to 
                                this subparagraph.
                          (ii) Qualified census tract.--
                                  (I) In general.--The term 
                                ``qualified census tract'' 
                                means any census tract which is 
                                designated by the Secretary of 
                                Housing and Urban Development 
                                and, for the most recent year 
                                for which census data are 
                                available on household income 
                                in such tract, either in which 
                                50 percent or more of the 
                                households have an income which 
                                is less than 60 percent of the 
                                area median gross income for 
                                such year or which has a 
                                poverty rate of at least 25 
                                percent. If the Secretary of 
                                Housing and Urban Development 
                                determines that sufficient data 
                                for any period are not 
                                available to apply this clause 
                                on the basis of census tracts, 
                                such Secretary shall apply this 
                                clause for such period on the 
                                basis of enumeration districts.
                                  (II) Limit on MSA's 
                                designated.--The portion of a 
                                metropolitan statistical area 
                                which may be designated for 
                                purposes of this subparagraph 
                                shall not exceed an area having 
                                20 percent of the population of 
                                such metropolitan statistical 
                                area.
                                  (III) Determination of 
                                areas.--For purposes of this 
                                clause, each metropolitan 
                                statistical area shall be 
                                treated as a separate area and 
                                all nonmetropolitan areas in a 
                                State shall be treated as 1 
                                area.
                          (iii) Difficult development areas.--
                                  (I) In general.--The term 
                                ``difficult development areas'' 
                                means any area designated by 
                                the Secretary of Housing and 
                                Urban Development as an area 
                                which has high construction, 
                                land, and utility costs 
                                relative to area median gross 
                                income.
                                  (II) Limit on areas 
                                designated.--The portions of 
                                metropolitan statistical areas 
                                which may be designated for 
                                purposes of this subparagraph 
                                shall not exceed an aggregate 
                                area having 20 percent of the 
                                population of such metropolitan 
                                statistical areas. A comparable 
                                rule shall apply to 
                                nonmetropolitan areas.
                          (iv) Special rules and definitions.--
                        For purposes of this subparagraph--
                                  (I) population shall be 
                                determined on the basis of the 
                                most recent decennial census 
                                for which data are available,
                                  (II) area median gross income 
                                shall be determined in 
                                accordance with subsection 
                                (g)(4),
                                  (III) the term ``metropolitan 
                                statistical area'' has the same 
                                meaning as when used in section 
                                143(k)(2)(B), and
                                  (IV) the term 
                                ``nonmetropolitan area'' means 
                                any county (or portion thereof) 
                                which is not within a 
                                metropolitan statistical area.
                          (v) Buildings designated by State 
                        housing credit agency.--Any building 
                        which is designated by the State 
                        housing credit agency as requiring the 
                        increase in credit under this 
                        subparagraph in order for such building 
                        to be financially feasible as part of a 
                        qualified low-income housing project 
                        shall be treated for purposes of this 
                        subparagraph as located in a difficult 
                        development area which is designated 
                        for purposes of this subparagraph. The 
                        preceding sentence shall not apply to 
                        any building if paragraph (1) of 
                        subsection (h) does not apply to any 
                        portion of the eligible basis of such 
                        building by reason of paragraph (4) of 
                        such subsection.
          (6) Credit allowable for certain buildings acquired 
        during 10-year period described in paragraph (2)(B)(ii)
                  (A) In general.--Paragraph (2)(B)(ii) shall 
                not apply to any federally- or State-assisted 
                building.
                  (B) Buildings acquired from insured 
                depository institutions in default.--On 
                application by the taxpayer, the Secretary may 
                waive paragraph (2)(B)(ii) with respect to any 
                building acquired from an insured depository 
                institution in default (as defined in section 3 
                of the Federal Deposit Insurance Act) or from a 
                receiver or conservator of such an institution.
                  (C) Federally- or State-assisted building.--
                For purposes of this paragraph--
                          (i) Federally-assisted building.--The 
                        term ``federally-assisted building'' 
                        means any building which is 
                        substantially assisted, financed, or 
                        operated under section 8 of the United 
                        States Housing Act of 1937, section 
                        221(d)(3), 221(d)(4), or 236 of the 
                        National Housing Act, section 515 of 
                        the Housing Act of 1949, or any other 
                        housing program administered by the 
                        Department of Housing and Urban 
                        Development or by the Rural Housing 
                        Service of the Department of 
                        Agriculture.
                          (ii) State-assisted building.--The 
                        term ``State- assisted building'' means 
                        any building which is substantially 
                        assisted, financed, or operated under 
                        any State law similar in purposes to 
                        any of the laws referred to in clause 
                        (i).
          (7) Acquisition of building before end of prior 
        compliance period.--
                  (A) In general.--Under regulations prescribed 
                by the Secretary, in the case of a building 
                described in subparagraph (B) (or interest 
                therein) which is acquired by the taxpayer--
                          (i) paragraph (2)(B) shall not apply, 
                        but
                          (ii) the credit allowable by reason 
                        of subsection (a) to the taxpayer for 
                        any period after such acquisition shall 
                        be equal to the amount of credit which 
                        would have been allowable under 
                        subsection (a) for such period to the 
                        prior owner referred to in subparagraph 
                        (B) had such owner not disposed of the 
                        building.
                  (B) Description of building.--A building is 
                described in this subparagraph if--
                          (i) a credit was allowed by reason of 
                        subsection (a) to any prior owner of 
                        such building, and
                          (ii) the taxpayer acquired such 
                        building before the end of the 
                        compliance period for such building 
                        with respect to such prior owner 
                        (determined without regard to any 
                        disposition by such prior owner).
  (e) Rehabilitation expenditures treated as separate new 
building.--
          (1) In general.--Rehabilitation expenditures paid or 
        incurred by the taxpayer with respect to any building 
        shall be treated for purposes of this section as a 
        separate new building.
          (2) Rehabilitation expenditures.--For purposes of 
        paragraph (1)--
                  (A) In general.--The term ``rehabilitation 
                expenditures'' means amounts chargeable to 
                capital account and incurred for property (or 
                additions or improvements to property) of a 
                character subject to the allowance for 
                depreciation in connection with the 
                rehabilitation of a building.
                  (B) Cost of acquisition, etc., not 
                included.--Such term does not include the cost 
                of acquiring any building (or interest therein) 
                or any amount not permitted to be taken into 
                account under paragraph (3) or (4) of 
                subsection (d).
          (3) Minimum expenditures to qualify.--
                  (A) In general.--Paragraph (1) shall apply to 
                rehabilitation expenditures with respect to any 
                building only if--
                          (i) the expenditures are allocable to 
                        1 or more low-income units or 
                        substantially benefit such units, and
                          (ii) the amount of such expenditures 
                        during any 24-month period meets the 
                        requirements of whichever of the 
                        following subclauses requires the 
                        greater amount of such expenditures:
                                  (I) The requirement of this 
                                subclause is met if such amount 
                                is not less than 20 percent of 
                                the adjusted basis of the 
                                building (determined as of the 
                                1st day of such period and 
                                without regard to paragraphs 
                                (2) and (3) of section 
                                1016(a)).
                                  (II) The requirement of this 
                                subclause is met if the 
                                qualified basis attributable to 
                                such amount, when divided by 
                                the number of low-income units 
                                in the building, is $6,000 or 
                                more.
                  (B) Exception from 10 percent 
                rehabilitation.--In the case of a building 
                acquired by the taxpayer from a governmental 
                unit, at the election of the taxpayer, 
                subparagraph (A)(ii)(I) shall not apply and the 
                credit under this section for such 
                rehabilitation expenditures shall be determined 
                using the percentage applicable under 
                subsection (b)(2)(B)(ii).
                  (C) Date of determination.--The determination 
                under subparagraph (A) shall be made as of the 
                close of the 1st taxable year in the credit 
                period with respect to such expenditures.
                  (D) Inflation adjustment.--In the case of any 
                expenditures which are treated under paragraph 
                (4) as placed in service during any calendar 
                year after 2009, the $6,000 amount in 
                subparagraph (A)(ii)(II) shall be increased by 
                an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        ``calendar year 2008'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                Any increase under the preceding sentence which 
                is not a multiple of $100 shall be rounded to 
                the nearest multiple of $100.
          (4) Special rules.--For purposes of applying this 
        section with respect to expenditures which are treated 
        as a separate building by reason of this subsection--
                  (A) such expenditures shall be treated as 
                placed in service at the close of the 24-month 
                period referred to in paragraph (3)(A), and
                  (B) the applicable fraction under subsection 
                (c)(1) shall be the applicable fraction for the 
                building (without regard to paragraph (1)) with 
                respect to which the expenditures were 
                incurred.
        Nothing in subsection (d)(2) shall prevent a credit 
        from being allowed by reason of this subsection.
          (5) No double counting.--Rehabilitation expenditures 
        may, at the election of the taxpayer, be taken into 
        account under this subsection or subsection 
        (d)(2)(A)(i) but not under both such subsections.
          (6) Regulations to apply subsection with respect to 
        group of units in building.--The Secretary may 
        prescribe regulations, consistent with the purposes of 
        this subsection, treating a group of units with respect 
        to which rehabilitation expenditures are incurred as a 
        separate new building.
  (f) Definition and special rules relating to credit period.--
          (1) Credit period defined.--For purposes of this 
        section, the term ``credit period'' means, with respect 
        to any building, the period of 10 taxable years 
        beginning with--
                  (A) the taxable year in which the building is 
                placed in service, or
                  (B) at the election of the taxpayer, the 
                succeeding taxable year,
        but only if the building is a qualified low-income 
        building as of the close of the 1st year of such 
        period. The election under subparagraph (B), once made, 
        shall be irrevocable.
          (2) Special rule for 1st year of credit period.--
                  (A) In general.--The credit allowable under 
                subsection (a) with respect to any building for 
                the 1st taxable year of the credit period shall 
                be determined by substituting for the 
                applicable fraction under subsection (c)(1) the 
                fraction--
                          (i) the numerator of which is the sum 
                        of the applicable fractions determined 
                        under subsection (c)(1) as of the close 
                        of each full month of such year during 
                        which such building was in service, and
                          (ii) the denominator of which is 12.
                  (B) Disallowed 1st year credit allowed in 
                11th year.--Any reduction by reason of 
                subparagraph (A) in the credit allowable 
                (without regard to subparagraph (A)) for the 
                1st taxable year of the credit period shall be 
                allowable under subsection (a) for the 1st 
                taxable year following the credit period.
          (3) Determination of applicable percentage with 
        respect to increases in qualified basis after 1st year 
        of credit period.--
                  (A) In general.--In the case of any building 
                which was a qualified low-income building as of 
                the close of the 1st year of the credit period, 
                if--
                          (i) as of the close of any taxable 
                        year in the compliance period (after 
                        the 1st year of the credit period) the 
                        qualified basis of such building 
                        exceeds
                          (ii) the qualified basis of such 
                        building as of the close of the 1st 
                        year of the credit period,
                the applicable percentage which shall apply 
                under subsection (a) for the taxable year to 
                such excess shall be the percentage equal to 2/
                3 of the applicable percentage which (after the 
                application of subsection (h)) would but for 
                this paragraph apply to such basis.
                  (B) 1st year computation applies.--A rule 
                similar to the rule of paragraph (2)(A) shall 
                apply to any increase in qualified basis to 
                which subparagraph (A) applies for the 1st year 
                of such increase.
          (4) Dispositions of property.--If a building (or an 
        interest therein) is disposed of during any year for 
        which credit is allowable under subsection (a), such 
        credit shall be allocated between the parties on the 
        basis of the number of days during such year the 
        building (or interest) was held by each. In any such 
        case, proper adjustments shall be made in the 
        application of subsection (j).
          (5) Credit period for existing buildings not to begin 
        before rehabilitation credit allowed.--
                  (A) In general.--The credit period for an 
                existing building shall not begin before the 
                1st taxable year of the credit period for 
                rehabilitation expenditures with respect to the 
                building.
                  (B) Acquisition credit allowed for certain 
                buildings not allowed a rehabilitation 
                credit.--
                          (i) In general.--In the case of a 
                        building described in clause (ii)--
                                  (I) subsection (d)(2)(B)(iv) 
                                shall not apply, and
                                  (II) the credit period for 
                                such building shall not begin 
                                before the taxable year which 
                                would be the 1st taxable year 
                                of the credit period for 
                                rehabilitation expenditures 
                                with respect to the building 
                                under the modifications 
                                described in clause (ii)(II).
                          (ii) Building described.--A building 
                        is described in this clause if--
                                  (I) a waiver is granted under 
                                subsection (d)(6)(B) with 
                                respect to the acquisition of 
                                the building, and
                                  (II) a credit would be 
                                allowed for rehabilitation 
                                expenditures with respect to 
                                such building if subsection 
                                (e)(3)(A)(ii)(I) did not apply 
                                and if the dollar amount in 
                                effect under subsection 
                                (e)(3)(A)(ii)(II) were two-
                                thirds of such amount.
  (g) Qualified low-income housing project.--For purposes of 
this section--
          (1) In general.--The term ``qualified low-income 
        housing project'' means any project for residential 
        rental property if the project meets the requirements 
        of subparagraph (A), (B), or (C) whichever is elected 
        by the taxpayer:
                  (A) 20-50 test.--The project meets the 
                requirements of this subparagraph if 20 percent 
                or more of the residential units in such 
                project are both rent-restricted and occupied 
                by individuals whose income is 50 percent or 
                less of area median gross income.
                  (B) 40-60 test.--The project meets the 
                requirements of this subparagraph if 40 percent 
                or more of the residential units in such 
                project are both rent-restricted and occupied 
                by individuals whose income is 60 percent or 
                less of area median gross income.
                  (C) Average income test.--
                          (i) In general.--The project meets 
                        the minimum requirements of this 
                        subparagraph if 40 percent or more (25 
                        percent or more in the case of a 
                        project described in section 142(d)(6)) 
                        of the residential units in such 
                        project are both rent-restricted and 
                        occupied by individuals whose income 
                        does not exceed the imputed income 
                        limitation designated by the taxpayer 
                        with respect to the respective unit.
                          (ii) Special rules relating to income 
                        limitation.--For purposes of clause 
                        (i)--
                                  (I) Designation.--The 
                                taxpayer shall designate the 
                                imputed income limitation of 
                                each unit taken into account 
                                under such clause.
                                  (II) Average test.--The 
                                average of the imputed income 
                                limitations designated under 
                                subclause (I) shall not exceed 
                                60 percent of area median gross 
                                income.
                                  (III) 10-percent 
                                increments.--The designated 
                                imputed income limitation of 
                                any unit under subclause (I) 
                                shall be 20 percent, 30 
                                percent, 40 percent, 50 
                                percent, 60 percent, 70 
                                percent, or 80 percent of area 
                                median gross income.
                Any election under this paragraph, once made, 
                shall be irrevocable. For purposes of this 
                paragraph, any property shall not be treated as 
                failing to be residential rental property 
                merely because part of the building in which 
                such property is located is used for purposes 
                other than residential rental purposes.
          (2) Rent-restricted units.--
                  (A) In general.--For purposes of paragraph 
                (1), a residential unit is rent-restricted if 
                the gross rent with respect to such unit does 
                not exceed 30 percent of the imputed income 
                limitation applicable to such unit. For 
                purposes of the preceding sentence, the amount 
                of the income limitation under paragraph (1) 
                applicable for any period shall not be less 
                than such limitation applicable for the 
                earliest period the building (which contains 
                the unit) was included in the determination of 
                whether the project is a qualified low-income 
                housing project.
                  (B) Gross rent.--For purposes of subparagraph 
                (A), gross rent--
                          (i) does not include any payment 
                        under section 8 of the United States 
                        Housing Act of 1937 or any comparable 
                        rental assistance program (with respect 
                        to such unit or occupants thereof),
                          (ii) includes any utility allowance 
                        determined by the Secretary after 
                        taking into account such determinations 
                        under section 8 of the United States 
                        Housing Act of 1937,
                          (iii) does not include any fee for a 
                        supportive service which is paid to the 
                        owner of the unit (on the basis of the 
                        low-income status of the tenant of the 
                        unit) by any governmental program of 
                        assistance (or by an organization 
                        described in section 501(c)(3) and 
                        exempt from tax under section 501(a)) 
                        if such program (or organization) 
                        provides assistance for rent and the 
                        amount of assistance provided for rent 
                        is not separable from the amount of 
                        assistance provided for supportive 
                        services, and
                          (iv) does not include any rental 
                        payment to the owner of the unit to the 
                        extent such owner pays an equivalent 
                        amount to the Farmers' Home 
                        Administration under section 515 of the 
                        Housing Act of 1949.
                For purposes of clause (iii), the term 
                ``supportive service'' means any service 
                provided under a planned program of services 
                designed to enable residents of a residential 
                rental property to remain independent and avoid 
                placement in a hospital, nursing home, or 
                intermediate care facility for the mentally or 
                physically handicapped. In the case of a 
                single-room occupancy unit or a building 
                described in subsection (i)(3)(B)(iii), such 
                term includes any service provided to assist 
                tenants in locating and retaining permanent 
                housing.
                  (C) Imputed income limitation applicable to 
                unit.--For purposes of this paragraph, the 
                imputed income limitation applicable to a unit 
                is the income limitation which would apply 
                under paragraph (1) to individuals occupying 
                the unit if the number of individuals occupying 
                the unit were as follows:
                          (i) In the case of a unit which does 
                        not have a separate bedroom, 1 
                        individual.
                          (ii) In the case of a unit which has 
                        1 or more separate bedrooms, 1.5 
                        individuals for each separate bedroom.
                In the case of a project with respect to which 
                a credit is allowable by reason of this section 
                and for which financing is provided by a bond 
                described in section 142(a)(7), the imputed 
                income limitation shall apply in lieu of the 
                otherwise applicable income limitation for 
                purposes of applying section 142(d)(4)(B)(ii).
                  (D) Treatment of units occupied by 
                individuals whose incomes rise above limit.--
                          (i) In general.--Except as provided 
                        in clauses (ii), (iii), and (iv), 
                        notwithstanding an increase in the 
                        income of the occupants of a low-income 
                        unit above the income limitation 
                        applicable under paragraph (1), such 
                        unit shall continue to be treated as a 
                        low-income unit if the income of such 
                        occupants initially met such income 
                        limitation and such unit continues to 
                        be rent-restricted.
                          (ii) Rental of next available unit in 
                        case of 20-50 or 40-60 test.--In the 
                        case of a project with respect to which 
                        the taxpayer elects the requirements of 
                        subparagraph (A) or (B) of paragraph 
                        (1), if the income of the occupants of 
                        the unit increases above 140 percent of 
                        the income limitation applicable under 
                        paragraph (1), clause (i) shall cease 
                        to apply to such unit if any 
                        residential rental unit in the building 
                        (of a size comparable to, or smaller 
                        than, such unit) is occupied by a new 
                        resident whose income exceeds such 
                        income limitation.
                          (iii) Rental of next available unit 
                        in case of average income test
                          In the case of a project with respect 
                        to which the taxpayer elects the 
                        requirements of subparagraph (C) of 
                        paragraph (1), if the income of the 
                        occupants of the unit increases above 
                        140 percent of the greater of--
                                  (I) 60 percent of area median 
                                gross income, or
                                  (II) the imputed income 
                                limitation designated with 
                                respect to the unit under 
                                paragraph (1)(C)(ii)(I),
                        clause (i) shall cease to apply to any 
                        such unit if any residential rental 
                        unit in the building (of a size 
                        comparable to, or smaller than, such 
                        unit) is occupied by a new resident 
                        whose income exceeds the limitation 
                        described in clause (v).
                          (iv) Deep rent skewed projects.--In 
                        the case of a project described in 
                        section 142(d)(4)(B), clause (ii) or 
                        (iii), whichever is applicable, shall 
                        be applied by substituting ``170 
                        percent'' for ``140 percent'', and--
                                  (I) in the case of clause 
                                (ii), by substituting ``any 
                                low-income unit in the building 
                                is occupied by a new resident 
                                whose income exceeds 40 percent 
                                of area median gross income'' 
                                for ``any residential rental 
                                unit'' and all that follows in 
                                such clause, and
                                  (II) in the case of clause 
                                (iii), by substituting ``any 
                                low-income unit in the building 
                                is occupied by a new resident 
                                whose income exceeds the lesser 
                                of 40 percent of area median 
                                gross income or the imputed 
                                income limitation designated 
                                with respect to such unit under 
                                paragraph (1)(C)(ii)(I)'' for 
                                ``any residential rental unit'' 
                                and all that follows in such 
                                clause.
                          (v) Limitation described.--For 
                        purposes of clause (iii), the 
                        limitation described in this clause 
                        with respect to any unit is--
                                  (I) the imputed income 
                                limitation designated with 
                                respect to such unit under 
                                paragraph (1)(C)(ii)(I), in the 
                                case of a unit which was taken 
                                into account as a low-income 
                                unit prior to becoming vacant, 
                                and
                                  (II) the imputed income 
                                limitation which would have to 
                                be designated with respect to 
                                such unit under such paragraph 
                                in order for the project to 
                                continue to meet the 
                                requirements of paragraph 
                                (1)(C)(ii)(II), in the case of 
                                any other unit.
                  (E) Units where Federal rental assistance is 
                reduced as tenant's income increases.--If the 
                gross rent with respect to a residential unit 
                exceeds the limitation under subparagraph (A) 
                by reason of the fact that the income of the 
                occupants thereof exceeds the income limitation 
                applicable under paragraph (1), such unit 
                shall, nevertheless, be treated as a rent-
                restricted unit for purposes of paragraph (1) 
                if--
                          (i) a Federal rental assistance 
                        payment described in subparagraph 
                        (B)(i) is made with respect to such 
                        unit or its occupants, and
                          (ii) the sum of such payment and the 
                        gross rent with respect to such unit 
                        does not exceed the sum of the amount 
                        of such payment which would be made and 
                        the gross rent which would be payable 
                        with respect to such unit if--
                                  (I) the income of the 
                                occupants thereof did not 
                                exceed the income limitation 
                                applicable under paragraph (1), 
                                and
                                  (II) such units were rent-
                                restricted within the meaning 
                                of subparagraph (A).
                The preceding sentence shall apply to any unit 
                only if the result described in clause (ii) is 
                required by Federal statute as of the date of 
                the enactment of this subparagraph and as of 
                the date the Federal rental assistance payment 
                is made.
          (3) Date for meeting requirements.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, a building shall be treated 
                as a qualified low-income building only if the 
                project (of which such building is a part) 
                meets the requirements of paragraph (1) not 
                later than the close of the 1st year of the 
                credit period for such building.
                  (B) Buildings which rely on later buildings 
                for qualification.--
                          (i) In general.--In determining 
                        whether a building (hereinafter in this 
                        subparagraph referred to as the ``prior 
                        building'') is a qualified low-income 
                        building, the taxpayer may take into 
                        account 1 or more additional buildings 
                        placed in service during the 12-month 
                        period described in subparagraph (A) 
                        with respect to the prior building only 
                        if the taxpayer elects to apply clause 
                        (ii) with respect to each additional 
                        building taken into account.
                          (ii) Treatment of elected 
                        buildings.--In the case of a building 
                        which the taxpayer elects to take into 
                        account under clause (i), the period 
                        under subparagraph (A) for such 
                        building shall end at the close of the 
                        12-month period applicable to the prior 
                        building.
                          (iii) Date prior building is treated 
                        as placed in service.--For purposes of 
                        determining the credit period and the 
                        compliance period for the prior 
                        building, the prior building shall be 
                        treated for purposes of this section as 
                        placed in service on the most recent 
                        date any additional building elected by 
                        the taxpayer (with respect to such 
                        prior building) was placed in service.
                  (C) Special rule.--A building--
                          (i) other than the 1st building 
                        placed in service as part of a project, 
                        and
                          (ii) other than a building which is 
                        placed in service during the 12-month 
                        period described in subparagraph (A) 
                        with respect to a prior building which 
                        becomes a qualified low-income 
                        building,
                shall in no event be treated as a qualified 
                low-income building unless the project is a 
                qualified low-income housing project (without 
                regard to such building) on the date such 
                building is placed in service.
                  (D) Projects with more than 1 building must 
                be identified.--For purposes of this section, a 
                project shall be treated as consisting of only 
                1 building unless, before the close of the 1st 
                calendar year in the project period (as defined 
                in subsection (h)(1)(F)(ii)), each building 
                which is (or will be) part of such project is 
                identified in such form and manner as the 
                Secretary may provide.
          (4) Certain rules made applicable.--Paragraphs (2) 
        (other than subparagraph (A) thereof), (3), (4), (5), 
        (6), and (7) of section 142(d), and section 6652(j), 
        shall apply for purposes of determining whether any 
        project is a qualified low-income housing project and 
        whether any unit is a low-income unit; except that, in 
        applying such provisions for such purposes, the term 
        ``gross rent'' shall have the meaning given such term 
        by paragraph (2)(B) of this subsection.
          (5) Election to treat building after compliance 
        period as not part of a project.--For purposes of this 
        section, the taxpayer may elect to treat any building 
        as not part of a qualified low-income housing project 
        for any period beginning after the compliance period 
        for such building.
          (6) Special rule where de minimis equity 
        contribution.--Property shall not be treated as failing 
        to be residential rental property for purposes of this 
        section merely because the occupant of a residential 
        unit in the project pays (on a voluntary basis) to the 
        lessor a de minimis amount to be held toward the 
        purchase by such occupant of a residential unit in such 
        project if--
                  (A) all amounts so paid are refunded to the 
                occupant on the cessation of his occupancy of a 
                unit in the project, and
                  (B) the purchase of the unit is not permitted 
                until after the close of the compliance period 
                with respect to the building in which the unit 
                is located.
        Any amount paid to the lessor as described in the 
        preceding sentence shall be included in gross rent 
        under paragraph (2) for purposes of determining whether 
        the unit is rent- restricted.
          (7) Scattered site projects.--Buildings which would 
        (but for their lack of proximity) be treated as a 
        project for purposes of this section shall be so 
        treated if all of the dwelling units in each of the 
        buildings are rent-restricted (within the meaning of 
        paragraph (2)) residential rental units.
          (8) Waiver of certain de minimis errors and 
        recertifications.--On application by the taxpayer, the 
        Secretary may waive--
                  (A) any recapture under subsection (j) in the 
                case of any de minimis error in complying with 
                paragraph (1), or
                  (B) any annual recertification of tenant 
                income for purposes of this subsection, if the 
                entire building is occupied by low-income 
                tenants.
          (9) Clarification of general public use 
        requirement.--A project does not fail to meet the 
        general public use requirement solely because of 
        occupancy restrictions or preferences that favor 
        tenants--
                  (A) with special needs,
                  (B) who are members of a specified group 
                under a Federal program or State program or 
                policy that supports housing for such a 
                specified group, or
                  (C) who are involved in artistic or literary 
                activities.
  (h) Limitation on aggregate credit allowable with respect to 
projects located in a State.--
          (1) Credit may not exceed credit amount allocated to 
        building.--
                  (A) In general.--The amount of the credit 
                determined under this section for any taxable 
                year with respect to any building shall not 
                exceed the housing credit dollar amount 
                allocated to such building under this 
                subsection.
                  (B) Time for making allocation.--Except in 
                the case of an allocation which meets the 
                requirements of subparagraph (C), (D), (E), or 
                (F), an allocation shall be taken into account 
                under subparagraph (A) only if it is made not 
                later than the close of the calendar year in 
                which the building is placed in service.
                  (C) Exception where binding commitment.--An 
                allocation meets the requirements of this 
                subparagraph if there is a binding commitment 
                (not later than the close of the calendar year 
                in which the building is placed in service) by 
                the housing credit agency to allocate a 
                specified housing credit dollar amount to such 
                building beginning in a specified later taxable 
                year.
                  (D) Exception where increase in qualified 
                basis.--
                          (i) In general.--An allocation meets 
                        the requirements of this subparagraph 
                        if such allocation is made not later 
                        than the close of the calendar year in 
                        which ends the taxable year to which it 
                        will 1st apply but only to the extent 
                        the amount of such allocation does not 
                        exceed the limitation under clause 
                        (ii).
                          (ii) Limitation.--The limitation 
                        under this clause is the amount of 
                        credit allowable under this section 
                        (without regard to this subsection) for 
                        a taxable year with respect to an 
                        increase in the qualified basis of the 
                        building equal to the excess of--
                                  (I) the qualified basis of 
                                such building as of the close 
                                of the 1st taxable year to 
                                which such allocation will 
                                apply, over
                                  (II) the qualified basis of 
                                such building as of the close 
                                of the 1st taxable year to 
                                which the most recent prior 
                                housing credit allocation with 
                                respect to such building 
                                applied.
                          (iii) Housing credit dollar amount 
                        reduced by full allocation.--
                        Notwithstanding clause (i), the full 
                        amount of the allocation shall be taken 
                        into account under paragraph (2).
                  (E) Exception where 10 percent of cost 
                incurred.--
                          (i) In general.--An allocation meets 
                        the requirements of this subparagraph 
                        if such allocation is made with respect 
                        to a qualified building which is placed 
                        in service not later than the close of 
                        the second calendar year following the 
                        calendar year in which the allocation 
                        is made.
                          (ii) Qualified building.--For 
                        purposes of clause (i), the term 
                        ``qualified building'' means any 
                        building which is part of a project if 
                        the taxpayer's basis in such project 
                        (as of the date which is 1 year after 
                        the date that the allocation was made) 
                        is more than 10 percent of the 
                        taxpayer's reasonably expected basis in 
                        such project (as of the close of the 
                        second calendar year referred to in 
                        clause (i)). Such term does not include 
                        any existing building unless a credit 
                        is allowable under subsection (e) for 
                        rehabilitation expenditures paid or 
                        incurred by the taxpayer with respect 
                        to such building for a taxable year 
                        ending during the second calendar year 
                        referred to in clause (i) or the prior 
                        taxable year.
                  (F) Allocation of credit on a project 
                basis.--
                          (i) In general.--In the case of a 
                        project which includes (or will 
                        include) more than 1 building, an 
                        allocation meets the requirements of 
                        this subparagraph if--
                                  (I) the allocation is made to 
                                the project for a calendar year 
                                during the project period,
                                  (II) the allocation only 
                                applies to buildings placed in 
                                service during or after the 
                                calendar year for which the 
                                allocation is made, and
                                  (III) the portion of such 
                                allocation which is allocated 
                                to any building in such project 
                                is specified not later than the 
                                close of the calendar year in 
                                which the building is placed in 
                                service.
                          (ii) Project period.--For purposes of 
                        clause (i), the term ``project period'' 
                        means the period--
                                  (I) beginning with the 1st 
                                calendar year for which an 
                                allocation may be made for the 
                                1st building placed in service 
                                as part of such project, and
                                  (II) ending with the calendar 
                                year the last building is 
                                placed in service as part of 
                                such project.
          (2) Allocated credit amount to apply to all taxable 
        years ending during or after credit allocation year.--
        Any housing credit dollar amount allocated to any 
        building for any calendar year--
                  (A) shall apply to such building for all 
                taxable years in the compliance period ending 
                during or after such calendar year, and
                  (B) shall reduce the aggregate housing credit 
                dollar amount of the allocating agency only for 
                such calendar year.
          (3) Housing credit dollar amount for agencies.--
                  (A) In general.--The aggregate housing credit 
                dollar amount which a housing credit agency may 
                allocate for any calendar year is the portion 
                of the State housing credit ceiling allocated 
                under this paragraph for such calendar year to 
                such agency.
                  (B) State ceiling initially allocated to 
                State housing credit agencies.--Except as 
                provided in subparagraphs (D) and (E), the 
                State housing credit ceiling for each calendar 
                year shall be allocated to the housing credit 
                agency of such State. If there is more than 1 
                housing credit agency of a State, all such 
                agencies shall be treated as a single agency.
                  (C) State housing credit ceiling.--The State 
                housing credit ceiling applicable to any State 
                for any calendar year shall be an amount equal 
                to the sum of--
                          (i) the unused State housing credit 
                        ceiling (if any) of such State for the 
                        preceding calendar year,
                          (ii) the greater of--
                                  (I) $1.75 multiplied by the 
                                State population, or
                                  (II) $2,000,000,
                          (iii) the amount of State housing 
                        credit ceiling returned in the calendar 
                        year, plus
                          (iv) the amount (if any) allocated 
                        under subparagraph (D) to such State by 
                        the Secretary.
                For purposes of clause (i), the unused State 
                housing credit ceiling for any calendar year is 
                the excess (if any) of the sum of the amounts 
                described in clauses (ii) through (iv) over the 
                aggregate housing credit dollar amount 
                allocated for such year. For purposes of clause 
                (iii), the amount of State housing credit 
                ceiling returned in the calendar year equals 
                the housing credit dollar amount previously 
                allocated within the State to any project which 
                fails to meet the 10 percent test under 
                paragraph (1)(E)(ii) on a date after the close 
                of the calendar year in which the allocation 
                was made or which does not become a qualified 
                low-income housing project within the period 
                required by this section or the terms of the 
                allocation or to any project with respect to 
                which an allocation is cancelled by mutual 
                consent of the housing credit agency and the 
                allocation recipient.
                  (D) Unused housing credit carryovers 
                allocated among certain States.--
                          (i) In general.--The unused housing 
                        credit carryover of a State for any 
                        calendar year shall be assigned to the 
                        Secretary for allocation among 
                        qualified States for the succeeding 
                        calendar year.
                          (ii) Unused housing credit 
                        carryover.--For purposes of this 
                        subparagraph, the unused housing credit 
                        carryover of a State for any calendar 
                        year is the excess (if any) of--
                                  (I) the unused State housing 
                                credit ceiling for the year 
                                preceding such year, over
                                  (II) the aggregate housing 
                                credit dollar amount allocated 
                                for such year.
                          (iii) Formula for allocation of 
                        unused housing credit carryovers among 
                        qualified States.--The amount allocated 
                        under this subparagraph to a qualified 
                        State for any calendar year shall be 
                        the amount determined by the Secretary 
                        to bear the same ratio to the aggregate 
                        unused housing credit carryovers of all 
                        States for the preceding calendar year 
                        as such State's population for the 
                        calendar year bears to the population 
                        of all qualified States for the 
                        calendar year. For purposes of the 
                        preceding sentence, population shall be 
                        determined in accordance with section 
                        146(j).
                          (iv) Qualified State.--For purposes 
                        of this subparagraph, the term 
                        ``qualified State'' means, with respect 
                        to a calendar year, any State--
                                  (I) which allocated its 
                                entire State housing credit 
                                ceiling for the preceding 
                                calendar year, and
                                  (II) for which a request is 
                                made (not later than May 1 of 
                                the calendar year) to receive 
                                an allocation under clause 
                                (iii).
                  (E) Special rule for States with 
                constitutional home rule cities.--For purposes 
                of this subsection--
                          (i) In general.--The aggregate 
                        housing credit dollar amount for any 
                        constitutional home rule city for any 
                        calendar year shall be an amount which 
                        bears the same ratio to the State 
                        housing credit ceiling for such 
                        calendar year as--
                                  (I) the population of such 
                                city, bears to
                                  (II) the population of the 
                                entire State.
                          (ii) Coordination with other 
                        allocations.--In the case of any State 
                        which contains 1 or more constitutional 
                        home rule cities, for purposes of 
                        applying this paragraph with respect to 
                        housing credit agencies in such State 
                        other than constitutional home rule 
                        cities, the State housing credit 
                        ceiling for any calendar year shall be 
                        reduced by the aggregate housing credit 
                        dollar amounts determined for such year 
                        for all constitutional home rule cities 
                        in such State.
                          (iii) Constitutional home rule 
                        city.--For purposes of this paragraph, 
                        the term ``constitutional home rule 
                        city'' has the meaning given such term 
                        by section 146(d)(3)(C).
                  (F) State may provide for different 
                allocation.--Rules similar to the rules of 
                section 146(e) (other than paragraph (2)(B) 
                thereof) shall apply for purposes of this 
                paragraph.
                  (G) Population.--For purposes of this 
                paragraph, population shall be determined in 
                accordance with section 146(j).
                  (H) Cost-of-living adjustment.--
                          (i) In general.--In the case of a 
                        calendar year after 2002, the 
                        $2,000,000 and $1.75 amounts in 
                        subparagraph (C) shall each be 
                        increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for such 
                                calendar year by substituting 
                                ``calendar year 2001'' for 
                                ``calendar year 2016'' in 
                                subparagraph (A)(ii) thereof.
                          (ii) Rounding.--
                                  (I) In the case of the 
                                $2,000,000 amount, any increase 
                                under clause (i) which is not a 
                                multiple of $5,000 shall be 
                                rounded to the next lowest 
                                multiple of $5,000.
                                  (II) In the case of the $1.75 
                                amount, any increase under 
                                clause (i) which is not a 
                                multiple of 5 cents shall be 
                                rounded to the next lowest 
                                multiple of 5 cents.
                  (I) Increase in State housing credit ceiling 
                for 2018, 2019, 2020, and 2021.--In the case of 
                calendar years 2018, 2019, 2020, and 2021, each 
                of the dollar amounts in effect under clauses 
                (I) and (II) of subparagraph (C)(ii) for any 
                calendar year (after any increase under 
                subparagraph (H)) shall be increased by 
                multiplying such dollar amount by 1.125.
          (4) Credit for buildings financed by tax-exempt bonds 
        subject to volume cap not taken into account.--
                  (A) In general.--Paragraph (1) shall not 
                apply to the portion of any credit allowable 
                under subsection (a) which is attributable to 
                eligible basis financed by any obligation the 
                interest on which is exempt from tax under 
                section 103 if--
                          (i) such obligation is taken into 
                        account under section 146, and
                          (ii) principal payments on such 
                        financing are applied within a 
                        reasonable period to redeem obligations 
                        the proceeds of which were used to 
                        provide such financing or such 
                        financing is refunded as described in 
                        section 146(i)(6).
                  (B) Special rule where 50 percent or more of 
                building is financed with tax-exempt bonds 
                subject to volume cap.--For purposes of 
                subparagraph (A), if 50 percent or more of the 
                aggregate basis of any building and the land on 
                which the building is located is financed by 
                any obligation described in subparagraph (A), 
                paragraph (1) shall not apply to any portion of 
                the credit allowable under subsection (a) with 
                respect to such building.
          (5) Portion of State ceiling set-aside for certain 
        projects involving qualified nonprofit organizations.--
                  (A) In general.--Not more than 90 percent of 
                the State housing credit ceiling for any State 
                for any calendar year shall be allocated to 
                projects other than qualified low-income 
                housing projects described in subparagraph (B).
                  (B) Projects involving qualified nonprofit 
                organizations.--For purposes of subparagraph 
                (A), a qualified low-income housing project is 
                described in this subparagraph if a qualified 
                nonprofit organization is to own an interest in 
                the project (directly or through a partnership) 
                and materially participate (within the meaning 
                of section 469(h)) in the development and 
                operation of the project throughout the 
                compliance period.
                  (C) Qualified nonprofit organization.--For 
                purposes of this paragraph, the term 
                ``qualified nonprofit organization'' means any 
                organization if--
                          (i) such organization is described in 
                        paragraph (3) or (4) of section 501(c) 
                        and is exempt from tax under section 
                        501(a),
                          (ii) such organization is determined 
                        by the State housing credit agency not 
                        to be affiliated with or controlled by 
                        a for-profit organization, and
                          (iii) 1 of the exempt purposes of 
                        such organization includes the 
                        fostering of low-income housing.
                  (D) Treatment of certain subsidiaries.--
                          (i) In general.--For purposes of this 
                        paragraph, a qualified nonprofit 
                        organization shall be treated as 
                        satisfying the ownership and material 
                        participation test of subparagraph (B) 
                        if any qualified corporation in which 
                        such organization holds stock satisfies 
                        such test.
                          (ii) Qualified corporation.--For 
                        purposes of clause (i), the term 
                        ``qualified corporation'' means any 
                        corporation if 100 percent of the stock 
                        of such corporation is held by 1 or 
                        more qualified nonprofit organizations 
                        at all times during the period such 
                        corporation is in existence.
                  (E) State may not override set-aside.--
                Nothing in subparagraph (F) of paragraph (3) 
                shall be construed to permit a State not to 
                comply with subparagraph (A) of this paragraph.
          (6) Buildings eligible for credit only if minimum 
        long-term commitment to low-income housing.--
                  (A) In general.--No credit shall be allowed 
                by reason of this section with respect to any 
                building for the taxable year unless an 
                extended low-income housing commitment is in 
                effect as of the end of such taxable year.
                  (B) Extended low-income housing commitment.--
                For purposes of this paragraph, the term 
                ``extended low-income housing commitment'' 
                means any agreement between the taxpayer and 
                the housing credit agency--
                          (i) which requires that the 
                        applicable fraction (as defined in 
                        subsection (c)(1)) for the building for 
                        each taxable year in the extended use 
                        period will not be less than the 
                        applicable fraction specified in such 
                        agreement and which prohibits the 
                        actions described in subclauses (I) and 
                        (II) of subparagraph (E)(ii),
                          (ii) which allows individuals who 
                        meet the income limitation applicable 
                        to the building under subsection (g) 
                        (whether prospective, present, or 
                        former occupants of the building) the 
                        right to enforce in any State court the 
                        requirement and prohibitions of clause 
                        (i),
                          (iii) which prohibits the disposition 
                        to any person of any portion of the 
                        building to which such agreement 
                        applies unless all of the building to 
                        which such agreement applies is 
                        disposed of to such person,
                          (iv) which prohibits the refusal to 
                        lease to a holder of a voucher or 
                        certificate of eligibility under 
                        section 8 of the United States Housing 
                        Act of 1937 because of the status of 
                        the prospective tenant as such a 
                        holder,
                          (v) which is binding on all 
                        successors of the taxpayer, and
                          (vi) which, with respect to the 
                        property, is recorded pursuant to State 
                        law as a restrictive covenant.
                  (C) Allocation of credit may not exceed 
                amount necessary to support commitment.--
                          (i) In general.--The housing credit 
                        dollar amount allocated to any building 
                        may not exceed the amount necessary to 
                        support the applicable fraction 
                        specified in the extended low-income 
                        housing commitment for such building, 
                        including any increase in such fraction 
                        pursuant to the application of 
                        subsection (f)(3) if such increase is 
                        reflected in an amended low-income 
                        housing commitment.
                          (ii) Buildings financed by tax-exempt 
                        bonds.--If paragraph (4) applies to any 
                        building the amount of credit allowed 
                        in any taxable year may not exceed the 
                        amount necessary to support the 
                        applicable fraction specified in the 
                        extended low-income housing commitment 
                        for such building. Such commitment may 
                        be amended to increase such fraction.
                  (D) Extended use period.--For purposes of 
                this paragraph, the term ``extended use 
                period'' means the period--
                          (i) beginning on the 1st day in the 
                        compliance period on which such 
                        building is part of a qualified low-
                        income housing project, and
                          (ii) ending on the later of--
                                  (I) the date specified by 
                                such agency in such agreement, 
                                or
                                  (II) the date which is 15 
                                years after the close of the 
                                compliance period.
                  (E) Exceptions if foreclosure or if no buyer 
                willing to maintain low-income status.--
                          (i) In general.--The extended use 
                        period for any building shall 
                        terminate--
                                  (I) on the date the building 
                                is acquired by foreclosure (or 
                                instrument in lieu of 
                                foreclosure) unless the 
                                Secretary determines that such 
                                acquisition is part of an 
                                arrangement with the taxpayer a 
                                purpose of which is to 
                                terminate such period, or
                                  (II) on the last day of the 
                                period specified in 
                                subparagraph (I) if the housing 
                                credit agency is unable to 
                                present during such period a 
                                qualified contract for the 
                                acquisition of the low-income 
                                portion of the building by any 
                                person who will continue to 
                                operate such portion as a 
                                qualified low-income building.
                        Subclause (II) shall not apply to the 
                        extent more stringent requirements are 
                        provided in the agreement or in State 
                        law.
                          (ii) Eviction, etc. of existing low-
                        income tenants not permitted.--The 
                        termination of an extended use period 
                        under clause (i) shall not be construed 
                        to permit before the close of the 3-
                        year period following such 
                        termination--
                                  (I) the eviction or the 
                                termination of tenancy (other 
                                than for good cause) of an 
                                existing tenant of any low-
                                income unit, or
                                  (II) any increase in the 
                                gross rent with respect to such 
                                unit not otherwise permitted 
                                under this section.
                  (F) Qualified contract.--For purposes of 
                subparagraph (E), the term ``qualified 
                contract'' means a bona fide contract to 
                acquire (within a reasonable period after the 
                contract is entered into) the nonlow-income 
                portion of the building for fair market value 
                and the low-income portion of the building for 
                an amount not less than the applicable fraction 
                (specified in the extended low-income housing 
                commitment) of--
                          (i) the sum of--
                                  (I) the outstanding 
                                indebtedness secured by, or 
                                with respect to, the building,
                                  (II) the adjusted investor 
                                equity in the building, plus
                                  (III) other capital 
                                contributions not reflected in 
                                the amounts described in 
                                subclause (I) or (II), reduced 
                                by (ii) cash distributions from 
                                (or available for distribution 
                                from) the project.
                The Secretary shall prescribe such regulations 
                as may be necessary or appropriate to carry out 
                this paragraph, including regulations to 
                prevent the manipulation of the amount 
                determined under the preceding sentence.
                  (G) Adjusted investor equity.--
                          (i) In general.--For purposes of 
                        subparagraph (E), the term ``adjusted 
                        investor equity'' means, with respect 
                        to any calendar year, the aggregate 
                        amount of cash taxpayers invested with 
                        respect to the project increased by the 
                        amount equal to--
                                  (I) such amount, multiplied 
                                by
                                  (II) the cost-of-living 
                                adjustment for such calendar 
                                year, determined under section 
                                1(f)(3) by substituting the 
                                base calendar year for 
                                ``calendar year 2016'' in 
                                subparagraph (A)(ii) thereof.
                        An amount shall be taken into account 
                        as an investment in the project only to 
                        the extent there was an obligation to 
                        invest such amount as of the beginning 
                        of the credit period and to the extent 
                        such amount is reflected in the 
                        adjusted basis of the project.
                          (ii) Cost-of-living increases in 
                        excess of 5 percent not taken into 
                        account.--Under regulations prescribed 
                        by the Secretary, if the C-CPI-U for 
                        any calendar year (as defined in 
                        section 1(f)(6)) exceeds the C-CPI-U 
                        for the preceding calendar year by more 
                        than 5 percent, the C-CPI-U for the 
                        base calendar year shall be increased 
                        such that such excess shall never be 
                        taken into account under clause (i). In 
                        the case of a base calendar year before 
                        2017, the C-CPI-U for such year shall 
                        be determined by multiplying the CPI 
                        for such year by the amount determined 
                        under section 1(f)(3)(B).
                          (iii) Base calendar year.--For 
                        purposes of this subparagraph, the term 
                        ``base calendar year'' means the 
                        calendar year with or within which the 
                        1st taxable year of the credit period 
                        ends.
                  (H) Low-income portion.--For purposes of this 
                paragraph, the low-income portion of a building 
                is the portion of such building equal to the 
                applicable fraction specified in the extended 
                low-income housing commitment for the building.
                  (I) Period for finding buyer.--The period 
                referred to in this subparagraph is the 1-year 
                period beginning on the date (after the 14th 
                year of the compliance period) the taxpayer 
                submits a written request to the housing credit 
                agency to find a person to acquire the 
                taxpayer's interest in the low-income portion 
                of the building.
                  (J) Effect of noncompliance.--If, during a 
                taxable year, there is a determination that an 
                extended low-income housing agreement was not 
                in effect as of the beginning of such year, 
                such determination shall not apply to any 
                period before such year and subparagraph (A) 
                shall be applied without regard to such 
                determination if the failure is corrected 
                within 1 year from the date of the 
                determination.
                  (K) Projects which consist of more than 1 
                building.--The application of this paragraph to 
                projects which consist of more than 1 building 
                shall be made under regulations prescribed by 
                the Secretary.
          (7) Special rules.--
                  (A) Building must be located within 
                jurisdiction of credit agency.--A housing 
                credit agency may allocate its aggregate 
                housing credit dollar amount only to buildings 
                located in the jurisdiction of the governmental 
                unit of which such agency is a part.
                  (B) Agency allocations in excess of limit.--
                If the aggregate housing credit dollar amounts 
                allocated by a housing credit agency for any 
                calendar year exceed the portion of the State 
                housing credit ceiling allocated to such agency 
                for such calendar year, the housing credit 
                dollar amounts so allocated shall be reduced 
                (to the extent of such excess) for buildings in 
                the reverse of the order in which the 
                allocations of such amounts were made.
                  (C) Credit reduced if allocated credit dollar 
                amount is less than credit which would be 
                allowable without regard to placed in service 
                convention, etc.
                          (i) In general.--The amount of the 
                        credit determined under this section 
                        with respect to any building shall not 
                        exceed the clause (ii) percentage of 
                        the amount of the credit which would 
                        (but for this subparagraph) be 
                        determined under this section with 
                        respect to such building.
                          (ii) Determination of percentage.--
                        For purposes of clause (i), the clause 
                        (ii) percentage with respect to any 
                        building is the percentage which--
                                  (I) the housing credit dollar 
                                amount allocated to such 
                                building bears to
                                  (II) the credit amount 
                                determined in accordance with 
                                clause (iii).
                          (iii) Determination of credit 
                        amount.--The credit amount determined 
                        in accordance with this clause is the 
                        amount of the credit which would (but 
                        for this subparagraph) be determined 
                        under this section with respect to the 
                        building if--
                                  (I) this section were applied 
                                without regard to paragraphs 
                                (2)(A) and (3)(B) of subsection 
                                (f), and
                                  (II) subsection (f)(3)(A) 
                                were applied without regard to 
                                ``the percentage equal to 2/3 
                                of''.
                  (D) Housing credit agency to specify 
                applicable percentage and maximum qualified 
                basis.--In allocating a housing credit dollar 
                amount to any building, the housing credit 
                agency shall specify the applicable percentage 
                and the maximum qualified basis which may be 
                taken into account under this section with 
                respect to such building. The applicable 
                percentage and maximum qualified basis so 
                specified shall not exceed the applicable 
                percentage and qualified basis determined under 
                this section without regard to this subsection.
          (8) Other definitions.--For purposes of this 
        subsection--
                  (A) Housing credit agency.--The term 
                ``housing credit agency'' means any agency 
                authorized to carry out this subsection.
                  (B) Possessions treated as States.--The term 
                ``State'' includes a possession of the United 
                States.
  (i) Definitions and special rules.--For purposes of this 
section--
          (1) Compliance period.--The term ``compliance 
        period'' means, with respect to any building, the 
        period of 15 taxable years beginning with the 1st 
        taxable year of the credit period with respect thereto.
          (2) Determination of whether building is federally 
        subsidized.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, for purposes of subsection 
                (b)(1), a new building shall be treated as 
                federally subsidized for any taxable year if, 
                at any time during such taxable year or any 
                prior taxable year, there is or was outstanding 
                any obligation the interest on which is exempt 
                from tax under section 103 the proceeds of 
                which are or were used (directly or indirectly) 
                with respect to such building or the operation 
                thereof.
                  (B) Election to reduce eligible basis by 
                proceeds of obligations.--A tax-exempt 
                obligation shall not be taken into account 
                under subparagraph (A) if the taxpayer elects 
                to exclude from the eligible basis of the 
                building for purposes of subsection (d) the 
                proceeds of such obligation.
                  (C) Special rule for subsidized construction 
                financing.--Subparagraph (A) shall not apply to 
                any tax-exempt obligation used to provide 
                construction financing for any building if--
                          (i) such obligation (when issued) 
                        identified the building for which the 
                        proceeds of such obligation would be 
                        used, and
                          (ii) such obligation is redeemed 
                        before such building is placed in 
                        service.
          (3) Low-income unit.--
                  (A) In general.--The term ``low-income unit'' 
                means any unit in a building if--
                          (i) such unit is rent-restricted (as 
                        defined in subsection (g)(2)), and
                          (ii) the individuals occupying such 
                        unit meet the income limitation 
                        applicable under subsection (g)(1) to 
                        the project of which such building is a 
                        part.
                  (B) Exceptions.--
                          (i) In general.--A unit shall not be 
                        treated as a low-income unit unless the 
                        unit is suitable for occupancy and used 
                        other than on a transient basis.
                          (ii) Suitability for occupancy.--For 
                        purposes of clause (i), the suitability 
                        of a unit for occupancy shall be 
                        determined under regulations prescribed 
                        by the Secretary taking into account 
                        local health, safety, and building 
                        codes.
                          (iii) Transitional housing for 
                        homeless.--For purposes of clause (i), 
                        a unit shall be considered to be used 
                        other than on a transient basis if the 
                        unit contains sleeping accommodations 
                        and kitchen and bathroom facilities and 
                        is located in a building--
                                  (I) which is used exclusively 
                                to facilitate the transition of 
                                homeless individuals (within 
                                the meaning of section 103 of 
                                the McKinney-Vento Homeless 
                                Assistance Act (42 U.S.C. 
                                11302), as in effect on the 
                                date of the enactment of this 
                                clause) to independent living 
                                within 24 months, and
                                  (II) in which a governmental 
                                entity or qualified nonprofit 
                                organization (as defined in 
                                subsection (h)(5)) provides 
                                such individuals with temporary 
                                housing and supportive services 
                                designed to assist such 
                                individuals in locating and 
                                retaining permanent housing.
                          (iv) Single-room occupancy units.--
                        For purposes of clause (i), a single-
                        room occupancy unit shall not be 
                        treated as used on a transient basis 
                        merely because it is rented on a month-
                        by-month basis.
                  (C) Special rule for buildings having 4 or 
                fewer units.--In the case of any building which 
                has 4 or fewer residential rental units, no 
                unit in such building shall be treated as a 
                low-income unit if the units in such building 
                are owned by--
                          (i) any individual who occupies a 
                        residential unit in such building, or
                          (ii) any person who is related (as 
                        defined in subsection (d)(2)(D)(iii)) 
                        to such individual.
                  (D) Certain students not to disqualify 
                unit.--A unit shall not fail to be treated as a 
                low-income unit merely because it is occupied--
                          (i) by an individual who is--
                                  (I) a student and receiving 
                                assistance under title IV of 
                                the Social Security Act,
                                  (II) a student who was 
                                previously under the care and 
                                placement responsibility of the 
                                State agency responsible for 
                                administering a plan under part 
                                B or part E of title IV of the 
                                Social Security Act, or
                                  (III) enrolled in a job 
                                training program receiving 
                                assistance under the Job 
                                Training Partnership Act or 
                                under other similar Federal, 
                                State, or local laws, or
                          (ii) entirely by full-time students 
                        if such students are--
                                  (I) single parents and their 
                                children and such parents are 
                                not dependents (as defined in 
                                [section 152] section 7706, 
                                determined without regard to 
                                subsections (b)(1), (b)(2), and 
                                (d)(1)(B) thereof) of another 
                                individual and such children 
                                are not dependents (as so 
                                defined) of another individual 
                                other than a parent of such 
                                children, or
                                  (II) married and file a joint 
                                return.
                  (E) Owner-occupied buildings having 4 or 
                fewer units eligible for credit where 
                development plan.--
                          (i) In general.--Subparagraph (C) 
                        shall not apply to the acquisition or 
                        rehabilitation of a building pursuant 
                        to a development plan of action 
                        sponsored by a State or local 
                        government or a qualified nonprofit 
                        organization (as defined in subsection 
                        (h)(5)(C)).
                          (ii) Limitation on credit.--In the 
                        case of a building to which clause (i) 
                        applies, the applicable fraction shall 
                        not exceed 80 percent of the unit 
                        fraction.
                          (iii) Certain unrented units treated 
                        as owner-occupied.--In the case of a 
                        building to which clause (i) applies, 
                        any unit which is not rented for 90 
                        days or more shall be treated as 
                        occupied by the owner of the building 
                        as of the 1st day it is not rented.
          (4) New building.--The term ``new building'' means a 
        building the original use of which begins with the 
        taxpayer.
          (5) Existing building.--The term ``existing 
        building'' means any building which is not a new 
        building.
          (6) Application to estates and trusts.--In the case 
        of an estate or trust, the amount of the credit 
        determined under subsection (a) and any increase in tax 
        under subsection (j) shall be apportioned between the 
        estate or trust and the beneficiaries on the basis of 
        the income of the estate or trust allocable to each.
          (7) Impact of tenant's right of 1st refusal to 
        acquire property.--
                  (A) In general.--No Federal income tax 
                benefit shall fail to be allowable to the 
                taxpayer with respect to any qualified low-
                income building merely by reason of a right of 
                1st refusal held by the tenants (in cooperative 
                form or otherwise) or resident management 
                corporation of such building or by a qualified 
                nonprofit organization (as defined in 
                subsection (h)(5)(C)) or government agency to 
                purchase the property after the close of the 
                compliance period for a price which is not less 
                than the minimum purchase price determined 
                under subparagraph (B).
                  (B) Minimum purchase price.--For purposes of 
                subparagraph (A), the minimum purchase price 
                under this subparagraph is an amount equal to 
                the sum of--
                          (i) the principal amount of 
                        outstanding indebtedness secured by the 
                        building (other than indebtedness 
                        incurred within the 5-year period 
                        ending on the date of the sale to the 
                        tenants), and
                          (ii) all Federal, State, and local 
                        taxes attributable to such sale.
                Except in the case of Federal income taxes, 
                there shall not be taken into account under 
                clause (ii) any additional tax attributable to 
                the application of clause (ii).
          (8) Treatment of rural projects.--For purposes of 
        this section, in the case of any project for 
        residential rental property located in a rural area (as 
        defined in section 520 of the Housing Act of 1949), any 
        income limitation measured by reference to area median 
        gross income shall be measured by reference to the 
        greater of area median gross income or national non-
        metropolitan median income. The preceding sentence 
        shall not apply with respect to any building if 
        paragraph (1) of section 42(h) does not apply by reason 
        of paragraph (4) thereof to any portion of the credit 
        determined under this section with respect to such 
        building.
          (9) Coordination with low-income housing grants.--
                  (A) Reduction in State housing credit ceiling 
                for low-income housing grants received in 
                2009.--For purposes of this section, the 
                amounts described in clauses (i) through (iv) 
                of subsection (h)(3)(C) with respect to any 
                State for 2009 shall each be reduced by so much 
                of such amount as is taken into account in 
                determining the amount of any grant to such 
                State under section 1602 of the American 
                Recovery and Reinvestment Tax Act of 2009.
                  (B) Special rule for basis.--Basis of a 
                qualified low-income building shall not be 
                reduced by the amount of any grant described in 
                subparagraph (A).
  (j) Recapture of credit.--
          (1) In general.--If--
                  (A) as of the close of any taxable year in 
                the compliance period, the amount of the 
                qualified basis of any building with respect to 
                the taxpayer is less than
                  (B) the amount of such basis as of the close 
                of the preceding taxable year,
        then the taxpayer's tax under this chapter for the 
        taxable year shall be increased by the credit recapture 
        amount.
          (2) Credit recapture amount.--For purposes of 
        paragraph (1), the credit recapture amount is an amount 
        equal to the sum of--
                  (A) the aggregate decrease in the credits 
                allowed to the taxpayer under section 38 for 
                all prior taxable years which would have 
                resulted if the accelerated portion of the 
                credit allowable by reason of this section were 
                not allowed for all prior taxable years with 
                respect to the excess of the amount described 
                in paragraph (1)(B) over the amount described 
                in paragraph (1)(A), plus
                  (B) interest at the overpayment rate 
                established under section 6621 on the amount 
                determined under subparagraph (A) for each 
                prior taxable year for the period beginning on 
                the due date for filing the return for the 
                prior taxable year involved.
        No deduction shall be allowed under this chapter for 
        interest described in subparagraph (B).
          (3) Accelerated portion of credit.--For purposes of 
        paragraph (2), the accelerated portion of the credit 
        for the prior taxable years with respect to any amount 
        of basis is the excess of--
                  (A) the aggregate credit allowed by reason of 
                this section (without regard to this 
                subsection) for such years with respect to such 
                basis, over
                  (B) the aggregate credit which would be 
                allowable by reason of this section for such 
                years with respect to such basis if the 
                aggregate credit which would (but for this 
                subsection) have been allowable for the entire 
                compliance period were allowable ratably over 
                15 years.
          (4) Special rules.--
                  (A) Tax benefit rule.--The tax for the 
                taxable year shall be increased under paragraph 
                (1) only with respect to credits allowed by 
                reason of this section which were used to 
                reduce tax liability. In the case of credits 
                not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 
                shall be appropriately adjusted.
                  (B) Only basis for which credit allowed taken 
                into account.--Qualified basis shall be taken 
                into account under paragraph (1)(B) only to the 
                extent such basis was taken into account in 
                determining the credit under subsection (a) for 
                the preceding taxable year referred to in such 
                paragraph.
                  (C) No recapture of additional credit 
                allowable by reason of subsection (f)(3).--
                Paragraph (1) shall apply to a decrease in 
                qualified basis only to the extent such 
                decrease exceeds the amount of qualified basis 
                with respect to which a credit was allowable 
                for the taxable year referred to in paragraph 
                (1)(B) by reason of subsection (f)(3).
                  (D) No credits against tax.--Any increase in 
                tax under this subsection shall not be treated 
                as a tax imposed by this chapter for purposes 
                of determining the amount of any credit under 
                this chapter.
                  (E) No recapture by reason of casualty 
                loss.--The increase in tax under this 
                subsection shall not apply to a reduction in 
                qualified basis by reason of a casualty loss to 
                the extent such loss is restored by 
                reconstruction or replacement within a 
                reasonable period established by the Secretary.
                  (F) No recapture where de minimis changes in 
                floor space.--The Secretary may provide that 
                the increase in tax under this subsection shall 
                not apply with respect to any building if--
                          (i) such increase results from a de 
                        minimis change in the floor space 
                        fraction under subsection (c)(1), and
                          (ii) the building is a qualified low-
                        income building after such change.
          (5) Certain partnerships treated as the taxpayer.--
                  (A) In general.--For purposes of applying 
                this subsection to a partnership to which this 
                paragraph applies--
                          (i) such partnership shall be treated 
                        as the taxpayer to which the credit 
                        allowable under subsection (a) was 
                        allowed,
                          (ii) the amount of such credit 
                        allowed shall be treated as the amount 
                        which would have been allowed to the 
                        partnership were such credit allowable 
                        to such partnership,
                          (iii) paragraph (4)(A) shall not 
                        apply, and
                          (iv) the amount of the increase in 
                        tax under this subsection for any 
                        taxable year shall be allocated among 
                        the partners of such partnership in the 
                        same manner as such partnership's 
                        taxable income for such year is 
                        allocated among such partners.
                  (B) Partnerships to which paragraph 
                applies.--This paragraph shall apply to any 
                partnership which has 35 or more partners 
                unless the partnership elects not to have this 
                paragraph apply.
                  (C) Special rules.--
                          (i) Husband and wife treated as 1 
                        partner.--For purposes of subparagraph 
                        (B)(i), a husband and wife (and their 
                        estates) shall be treated as 1 partner.
                          (ii) Election irrevocable.--Any 
                        election under subparagraph (B), once 
                        made, shall be irrevocable.
          (6) No recapture on disposition of building which 
        continues in qualified use.--
                  (A) In general.--The increase in tax under 
                this subsection shall not apply solely by 
                reason of the disposition of a building (or an 
                interest therein) if it is reasonably expected 
                that such building will continue to be operated 
                as a qualified low-income building for the 
                remaining compliance period with respect to 
                such building.
                  (B) Statute of limitations.--If a building 
                (or an interest therein) is disposed of during 
                any taxable year and there is any reduction in 
                the qualified basis of such building which 
                results in an increase in tax under this 
                subsection for such taxable or any subsequent 
                taxable year, then--
                          (i) the statutory period for the 
                        assessment of any deficiency with 
                        respect to such increase in tax shall 
                        not expire before the expiration of 3 
                        years from the date the Secretary is 
                        notified by the taxpayer (in such 
                        manner as the Secretary may prescribe) 
                        of such reduction in qualified basis, 
                        and
                          (ii) such deficiency may be assessed 
                        before the expiration of such 3-year 
                        period notwithstanding the provisions 
                        of any other law or rule of law which 
                        would otherwise prevent such 
                        assessment.
  (k) Application of at-risk rules.--For purposes of this 
section--
          (1) In general.--Except as otherwise provided in this 
        subsection, rules similar to the rules of section 
        49(a)(1) (other than subparagraphs (D)(ii)(II) and 
        (D)(iv)(I) thereof), section 49(a)(2), and section 
        49(b)(1) shall apply in determining the qualified basis 
        of any building in the same manner as such sections 
        apply in determining the credit base of property.
          (2) Special rules for determining qualified person.--
        For purposes of paragraph (1)--
                  (A) In general.--If the requirements of 
                subparagraphs (B), (C), and (D) are met with 
                respect to any financing borrowed from a 
                qualified nonprofit organization (as defined in 
                subsection (h)(5)), the determination of 
                whether such financing is qualified commercial 
                financing with respect to any qualified low-
                income building shall be made without regard to 
                whether such organization--
                          (i) is actively and regularly engaged 
                        in the business of lending money, or
                          (ii) is a person described in section 
                        49(a)(1)(D)(iv)(II).
                  (B) Financing secured by property.--The 
                requirements of this subparagraph are met with 
                respect to any financing if such financing is 
                secured by the qualified low-income building, 
                except that this subparagraph shall not apply 
                in the case of a federally assisted building 
                described in subsection (d)(6)(C) if--
                          (i) a security interest in such 
                        building is not permitted by a Federal 
                        agency holding or insuring the mortgage 
                        secured by such building, and
                          (ii) the proceeds from the financing 
                        (if any) are applied to acquire or 
                        improve such building.
                  (C) Portion of building attributable to 
                financing.--The requirements of this 
                subparagraph are met with respect to any 
                financing for any taxable year in the 
                compliance period if, as of the close of such 
                taxable year, not more than 60 percent of the 
                eligible basis of the qualified low-income 
                building is attributable to such financing 
                (reduced by the principal and interest of any 
                governmental financing which is part of a wrap-
                around mortgage involving such financing).
                  (D) Repayment of principal and interest.--The 
                requirements of this subparagraph are met with 
                respect to any financing if such financing is 
                fully repaid on or before the earliest of--
                          (i) the date on which such financing 
                        matures,
                          (ii) the 90th day after the close of 
                        the compliance period with respect to 
                        the qualified low-income building, or
                          (iii) the date of its refinancing or 
                        the sale of the building to which such 
                        financing relates.
                In the case of a qualified nonprofit 
                organization which is not described in section 
                49(a)(1)(D)(iv)(II) with respect to a building, 
                clause (ii) of this subparagraph shall be 
                applied as if the date described therein were 
                the 90th day after the earlier of the date the 
                building ceases to be a qualified low-income 
                building or the date which is 15 years after 
                the close of a compliance period with respect 
                thereto.
          (3) Present value of financing.--If the rate of 
        interest on any financing described in paragraph (2)(A) 
        is less than the rate which is 1 percentage point below 
        the applicable Federal rate as of the time such 
        financing is incurred, then the qualified basis (to 
        which such financing relates) of the qualified low-
        income building shall be the present value of the 
        amount of such financing, using as the discount rate 
        such applicable Federal rate. For purposes of the 
        preceding sentence, the rate of interest on any 
        financing shall be determined by treating interest to 
        the extent of government subsidies as not payable.
          (4) Failure to fully repay.--
                  (A) In general.--To the extent that the 
                requirements of paragraph (2)(D) are not met, 
                then the taxpayer's tax under this chapter for 
                the taxable year in which such failure occurs 
                shall be increased by an amount equal to the 
                applicable portion of the credit under this 
                section with respect to such building, 
                increased by an amount of interest for the 
                period--
                          (i) beginning with the due date for 
                        the filing of the return of tax imposed 
                        by chapter 1 for the 1st taxable year 
                        for which such credit was allowable, 
                        and
                          (ii) ending with the due date for the 
                        taxable year in which such failure 
                        occurs,
                determined by using the underpayment rate and 
                method under section 6621.
                  (B) Applicable portion.--For purposes of 
                subparagraph (A), the term ``applicable 
                portion'' means the aggregate decrease in the 
                credits allowed to a taxpayer under section 38 
                for all prior taxable years which would have 
                resulted if the eligible basis of the building 
                were reduced by the amount of financing which 
                does not meet requirements of paragraph (2)(D).
                  (C) Certain rules to apply.--Rules similar to 
                the rules of subparagraphs (A) and (D) of 
                subsection (j)(4) shall apply for purposes of 
                this subsection.
  (l) Certifications and other reports to Secretary.--
          (1) Certification with respect to 1st year of credit 
        period.--Following the close of the 1st taxable year in 
        the credit period with respect to any qualified low-
        income building, the taxpayer shall certify to the 
        Secretary (at such time and in such form and in such 
        manner as the Secretary prescribes)--
                  (A) the taxable year, and calendar year, in 
                which such building was placed in service,
                  (B) the adjusted basis and eligible basis of 
                such building as of the close of the 1st year 
                of the credit period,
                  (C) the maximum applicable percentage and 
                qualified basis permitted to be taken into 
                account by the appropriate housing credit 
                agency under subsection (h),
                  (D) the election made under subsection (g) 
                with respect to the qualified low-income 
                housing project of which such building is a 
                part, and
                  (E) such other information as the Secretary 
                may require.
        In the case of a failure to make the certification 
        required by the preceding sentence on the date 
        prescribed therefor, unless it is shown that such 
        failure is due to reasonable cause and not to willful 
        neglect, no credit shall be allowable by reason of 
        subsection (a) with respect to such building for any 
        taxable year ending before such certification is made.
          (2) Annual reports to the Secretary.--The Secretary 
        may require taxpayers to submit an information return 
        (at such time and in such form and manner as the 
        Secretary prescribes) for each taxable year setting 
        forth--
                  (A) the qualified basis for the taxable year 
                of each qualified low-income building of the 
                taxpayer,
                  (B) the information described in paragraph 
                (1)(C) for the taxable year, and
                  (C) such other information as the Secretary 
                may require.
        The penalty under section 6652(j) shall apply to any 
        failure to submit the return required by the Secretary 
        under the preceding sentence on the date prescribed 
        therefor.
          (3) Annual reports from housing credit agencies.--
        Each agency which allocates any housing credit amount 
        to any building for any calendar year shall submit to 
        the Secretary (at such time and in such manner as the 
        Secretary shall prescribe) an annual report 
        specifying--
                  (A) the amount of housing credit amount 
                allocated to each building for such year,
                  (B) sufficient information to identify each 
                such building and the taxpayer with respect 
                thereto, and
                  (C) such other information as the Secretary 
                may require.
        The penalty under section 6652(j) shall apply to any 
        failure to submit the report required by the preceding 
        sentence on the date prescribed therefor.
  (m) Responsibilities of housing credit agencies.--
          (1) Plans for allocation of credit among projects.--
                  (A) In general.--Notwithstanding any other 
                provision of this section, the housing credit 
                dollar amount with respect to any building 
                shall be zero unless--
                          (i) such amount was allocated 
                        pursuant to a qualified allocation plan 
                        of the housing credit agency which is 
                        approved by the governmental unit (in 
                        accordance with rules similar to the 
                        rules of section 147(f)(2) (other than 
                        subparagraph (B)(ii) thereof)) of which 
                        such agency is a part,
                          (ii) such agency notifies the chief 
                        executive officer (or the equivalent) 
                        of the local jurisdiction within which 
                        the building is located of such project 
                        and provides such individual a 
                        reasonable opportunity to comment on 
                        the project,
                          (iii) a comprehensive market study of 
                        the housing needs of low-income 
                        individuals in the area to be served by 
                        the project is conducted before the 
                        credit allocation is made and at the 
                        developer's expense by a disinterested 
                        party who is approved by such agency, 
                        and
                          (iv) a written explanation is 
                        available to the general public for any 
                        allocation of a housing credit dollar 
                        amount which is not made in accordance 
                        with established priorities and 
                        selection criteria of the housing 
                        credit agency.
                  (B) Qualified allocation plan.--For purposes 
                of this paragraph, the term ``qualified 
                allocation plan'' means any plan--
                          (i) which sets forth selection 
                        criteria to be used to determine 
                        housing priorities of the housing 
                        credit agency which are appropriate to 
                        local conditions,
                          (ii) which also gives preference in 
                        allocating housing credit dollar 
                        amounts among selected projects to--
                                  (I) projects serving the 
                                lowest income tenants,
                                  (II) projects obligated to 
                                serve qualified tenants for the 
                                longest periods, and
                                  (III) projects which are 
                                located in qualified census 
                                tracts (as defined in 
                                subsection (d)(5)(B)(ii)) and 
                                the development of which 
                                contributes to a concerted 
                                community revitalization plan, 
                                and
                          (iii) which provides a procedure that 
                        the agency (or an agent or other 
                        private contractor of such agency) will 
                        follow in monitoring for noncompliance 
                        with the provisions of this section and 
                        in notifying the Internal Revenue 
                        Service of such noncompliance which 
                        such agency becomes aware of and in 
                        monitoring for noncompliance with 
                        habitability standards through regular 
                        site visits.
                  (C) Certain selection criteria must be 
                used.--The selection criteria set forth in a 
                qualified allocation plan must include
                          (i) project location,
                          (ii) housing needs characteristics,
                          (iii) project characteristics, 
                        including whether the project includes 
                        the use of existing housing as part of 
                        a community revitalization plan,
                          (iv) sponsor characteristics,
                          (v) tenant populations with special 
                        housing needs,
                          (vi) public housing waiting lists,
                          (vii) tenant populations of 
                        individuals with children,
                          (viii) projects intended for eventual 
                        tenant ownership,
                          (ix) the energy efficiency of the 
                        project, and
                          (x) the historic nature of the 
                        project.
                  (D) Application to bond financed projects.--
                Subsection (h)(4) shall not apply to any 
                project unless the project satisfies the 
                requirements for allocation of a housing credit 
                dollar amount under the qualified allocation 
                plan applicable to the area in which the 
                project is located.
          (2) Credit allocated to building not to exceed amount 
        necessary to assure project feasibility.--
                  (A) In general.--The housing credit dollar 
                amount allocated to a project shall not exceed 
                the amount the housing credit agency determines 
                is necessary for the financial feasibility of 
                the project and its viability as a qualified 
                low-income housing project throughout the 
                credit period.
                  (B) Agency evaluation.--In making the 
                determination under subparagraph (A), the 
                housing credit agency shall consider--
                          (i) the sources and uses of funds and 
                        the total financing planned for the 
                        project,
                          (ii) any proceeds or receipts 
                        expected to be generated by reason of 
                        tax benefits,
                          (iii) the percentage of the housing 
                        credit dollar amount used for project 
                        costs other than the cost of 
                        intermediaries, and
                          (iv) the reasonableness of the 
                        developmental and operational costs of 
                        the project.
                Clause (iii) shall not be applied so as to 
                impede the development of projects in hard-to-
                develop areas. Such a determination shall not 
                be construed to be a representation or warranty 
                as to the feasibility or viability of the 
                project.
                  (C) Determination made when credit amount 
                applied for and when building placed in 
                service.--
                          (i) In general.--A determination 
                        under subparagraph (A) shall be made as 
                        of each of the following times:
                                  (I) The application for the 
                                housing credit dollar amount.
                                  (II) The allocation of the 
                                housing credit dollar amount.
                                  (III) The date the building 
                                is placed in service.
                          (ii) Certification as to amount of 
                        other subsidies.--Prior to each 
                        determination under clause (i), the 
                        taxpayer shall certify to the housing 
                        credit agency the full extent of all 
                        Federal, State, and local subsidies 
                        which apply (or which the taxpayer 
                        expects to apply) with respect to the 
                        building.
                  (D) Application to bond financed projects.--
                Subsection (h)(4) shall not apply to any 
                project unless the governmental unit which 
                issued the bonds (or on behalf of which the 
                bonds were issued) makes a determination under 
                rules similar to the rules of subparagraphs (A) 
                and (B).
  (n) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations--
          (1) dealing with--
                  (A) projects which include more than 1 
                building or only a portion of a building,
                  (B) buildings which are placed in service in 
                portions,
          (2) providing for the application of this section to 
        short taxable years,
          (3) preventing the avoidance of the rules of this 
        section, and
          (4) providing the opportunity for housing credit 
        agencies to correct administrative errors and omissions 
        with respect to allocations and record keeping within a 
        reasonable period after their discovery, taking into 
        account the availability of regulations and other 
        administrative guidance from the Secretary.

           *       *       *       *       *       *       *

SEC. 45R. EMPLOYEE HEALTH INSURANCE EXPENSES OF SMALL EMPLOYERS.

  (a) General rule.--For purposes of section 38, in the case of 
an eligible small employer, the small employer health insurance 
credit determined under this section for any taxable year in 
the credit period is the amount determined under subsection 
(b).
  (b) Health insurance credit amount.--Subject to subsection 
(c), the amount determined under this subsection with respect 
to any eligible small employer is equal to 50 percent (35 
percent in the case of a tax-exempt eligible small employer) of 
the lesser of--
          (1) the aggregate amount of nonelective contributions 
        the employer made on behalf of its employees during the 
        taxable year under the arrangement described in 
        subsection (d)(4) for premiums for qualified health 
        plans offered by the employer to its employees through 
        an Exchange, or
          (2) the aggregate amount of nonelective contributions 
        which the employer would have made during the taxable 
        year under the arrangement if each employee taken into 
        account under paragraph (1) had enrolled in a qualified 
        health plan which had a premium equal to the average 
        premium (as determined by the Secretary of Health and 
        Human Services) for the small group market in the 
        rating area in which the employee enrolls for coverage.
  (c) Phaseout of credit amount based on number of employees 
and average wages.--The amount of the credit determined under 
subsection (b) without regard to this subsection shall be 
reduced (but not below zero) by the sum of the following 
amounts:
          (1) Such amount multiplied by a fraction the 
        numerator of which is the total number of full-time 
        equivalent employees of the employer in excess of 10 
        and the denominator of which is 15.
          (2) Such amount multiplied by a fraction the 
        numerator of which is the average annual wages of the 
        employer in excess of the dollar amount in effect under 
        subsection (d)(3)(B) and the denominator of which is 
        such dollar amount.
  (d) Eligible small employer.--For purposes of this section--
          (1) In general.--The term ``eligible small employer'' 
        means, with respect to any taxable year, an employer--
                  (A) which has no more than 25 full-time 
                equivalent employees for the taxable year,
                  (B) the average annual wages of which do not 
                exceed an amount equal to twice the dollar 
                amount in effect under paragraph (3)(B) for the 
                taxable year, and
                  (C) which has in effect an arrangement 
                described in paragraph (4).
          (2) Full-time equivalent employees.--
                  (A) In general.--The term ``full-time 
                equivalent employees'' means a number of 
                employees equal to the number determined by 
                dividing--
                          (i) the total number of hours of 
                        service for which wages were paid by 
                        the employer to employees during the 
                        taxable year, by
                          (ii) 2,080.
                Such number shall be rounded to the next lowest 
                whole number if not otherwise a whole number.
                  (B) Excess hours not counted.--If an employee 
                works in excess of 2,080 hours of service 
                during any taxable year, such excess shall not 
                be taken into account under subparagraph (A).
                  (C) Hours of service.--The Secretary, in 
                consultation with the Secretary of Labor, shall 
                prescribe such regulations, rules, and guidance 
                as may be necessary to determine the hours of 
                service of an employee, including rules for the 
                application of this paragraph to employees who 
                are not compensated on an hourly basis.
          (3) Average annual wages.--
                  (A) In general.--The average annual wages of 
                an eligible small employer for any taxable year 
                is the amount determined by dividing--
                          (i) the aggregate amount of wages 
                        which were paid by the employer to 
                        employees during the taxable year, by
                          (ii) the number of full-time 
                        equivalent employees of the employee 
                        determined under paragraph (2) for the 
                        taxable year.
                Such amount shall be rounded to the next lowest 
                multiple of $1,000 if not otherwise such a 
                multiple.
                  (B) Dollar amount.--For purposes of paragraph 
                (1)(B) and subsection (c)(2)--
                          (i) 2010, 2011, 2012, and 2013.--The 
                        dollar amount in effect under this 
                        paragraph for taxable years beginning 
                        in 2010, 2011, 2012, or 2013 is 
                        $25,000.
                          (ii) Subsequent years.--In the case 
                        of a taxable year beginning in a 
                        calendar year after 2013, the dollar 
                        amount in effect under this paragraph 
                        shall be equal to $25,000, multiplied 
                        by the cost-of-living adjustment under 
                        section 1(f)(3) for the calendar year, 
                        determined by substituting ``calendar 
                        year 2012'' for ``calendar year 2016'' 
                        in subparagraph (A)(ii) thereof.
          (4) Contribution arrangement.--An arrangement is 
        described in this paragraph if it requires an eligible 
        small employer to make a nonelective contribution on 
        behalf of each employee who enrolls in a qualified 
        health plan offered to employees by the employer 
        through an exchange in an amount equal to a uniform 
        percentage (not less than 50 percent) of the premium 
        cost of the qualified health plan.
          (5) Seasonal worker hours and wages not counted.--For 
        purposes of this subsection--
                  (A) In general.--The number of hours of 
                service worked by, and wages paid to, a 
                seasonal worker of an employer shall not be 
                taken into account in determining the full-time 
                equivalent employees and average annual wages 
                of the employer unless the worker works for the 
                employer on more than 120 days during the 
                taxable year.
                  (B) Definition of seasonal worker.--The term 
                ``seasonal worker'' means a worker who performs 
                labor or services on a seasonal basis as 
                defined by the Secretary of Labor, including 
                workers covered by section 500.20(s)(1) of 
                title 29, Code of Federal Regulations and 
                retail workers employed exclusively during 
                holiday seasons.
  (e) Other rules and definitions.--For purposes of this 
section--
          (1) Employee.--
                  (A) Certain employees excluded.--The term 
                ``employee'' shall not include--
                          (i) an employee within the meaning of 
                        section 401(c)(1),
                          (ii) any 2-percent shareholder (as 
                        defined in section 1372(b)) of an 
                        eligible small business which is an S 
                        corporation,
                          (iii) any 5-percent owner (as defined 
                        in section 416(i)(1)(B)(i)) of an 
                        eligible small business, or
                          (iv) any individual who bears any of 
                        the relationships described in 
                        subparagraphs (A) through (G) of 
                        [section 152(d)(2)] section 7706(d)(2) 
                        to, or is a dependent described in 
                        [section 152(d)(2)(H)] section 
                        7706(d)(2)(H) of, an individual 
                        described in clause (i), (ii), or 
                        (iii).
                  (B) Leased employees.--The term ``employee'' 
                shall include a leased employee within the 
                meaning of section 414(n).
          (2) Credit period.--The term ``credit period'' means, 
        with respect to any eligible small employer, the 2-
        consecutive-taxable year period beginning with the 1st 
        taxable year in which the employer (or any predecessor) 
        offers 1 or more qualified health plans to its 
        employees through an Exchange.
          (3) Nonelective contribution.--The term ``nonelective 
        contribution'' means an employer contribution other 
        than an employer contribution pursuant to a salary 
        reduction arrangement.
          (4) Wages.--The term ``wages'' has the meaning given 
        such term by section 3121(a) (determined without regard 
        to any dollar limitation contained in such section).
          (5) Aggregation and other rules made applicable.--
                  (A) Aggregation rules.--All employers treated 
                as a single employer under subsection (b), (c), 
                (m), or (o) of section 414 shall be treated as 
                a single employer for purposes of this section.
                  (B) Other rules.--Rules similar to the rules 
                of subsections (c), (d), and (e) of section 52 
                shall apply.
  (f) Credit made available to tax-exempt eligible small 
employers.--
          (1) In general.--In the case of a tax-exempt eligible 
        small employer, there shall be treated as a credit 
        allowable under subpart C (and not allowable under this 
        subpart) the lesser of--
                  (A) the amount of the credit determined under 
                this section with respect to such employer, or
                  (B) the amount of the payroll taxes of the 
                employer during the calendar year in which the 
                taxable year begins.
          (2) Tax-exempt eligible small employer.--For purposes 
        of this section, the term ``tax-exempt eligible small 
        employer'' means an eligible small employer which is 
        any organization described in section 501(c) which is 
        exempt from taxation under section 501(a).
          (3) Payroll taxes.--For purposes of this subsection--
                  (A) In general.--The term ``payroll taxes'' 
                means--
                          (i) amounts required to be withheld 
                        from the employees of the tax-exempt 
                        eligible small employer under section 
                        3401(a),
                          (ii) amounts required to be withheld 
                        from such employees under section 
                        3101(b), and
                          (iii) amounts of the taxes imposed on 
                        the tax-exempt eligible small employer 
                        under section 3111(b).
                  (B) Special rule.--A rule similar to the rule 
                of section 24(d)(2)(C) shall apply for purposes 
                of subparagraph (A).
  (g) Application of section for calendar years 2010, 2011, 
2012, and 2013.--In the case of any taxable year beginning in 
2010, 2011, 2012, or 2013, the following modifications to this 
section shall apply in determining the amount of the credit 
under subsection (a):
          (1) No credit period required.--The credit shall be 
        determined without regard to whether the taxable year 
        is in a credit period and for purposes of applying this 
        section to taxable years beginning after 2013, no 
        credit period shall be treated as beginning with a 
        taxable year beginning before 2014.
          (2) Amount of credit.--The amount of the credit 
        determined under subsection (b) shall be determined--
                  (A) by substituting ``35 percent (25 percent 
                in the case of a tax-exempt eligible small 
                employer)'' for ``50 percent (35 percent in the 
                case of a tax-exempt eligible small 
                employer)'',
                  (B) by reference to an eligible small 
                employer's nonelective contributions for 
                premiums paid for health insurance coverage 
                (within the meaning of section 9832(b)(1)) of 
                an employee, and
                  (C) by substituting for the average premium 
                determined under subsection (b)(2) the amount 
                the Secretary of Health and Human Services 
                determines is the average premium for the small 
                group market in the State in which the employer 
                is offering health insurance coverage (or for 
                such area within the State as is specified by 
                the Secretary).
          (3) Contribution arrangement.--An arrangement shall 
        not fail to meet the requirements of subsection (d)(4) 
        solely because it provides for the offering of 
        insurance outside of an Exchange.
  (h) Insurance definitions.--Any term used in this section 
which is also used in the Public Health Service Act or subtitle 
A of title I of the Patient Protection and Affordable Care Act 
shall have the meaning given such term by such Act or subtitle.
  (i) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this section, including regulations to prevent the avoidance of 
the 2-year limit on the credit period through the use of 
successor entities and the avoidance of the limitations under 
subsection (c) through the use of multiple entities.

           *       *       *       *       *       *       *

Subpart F--Rules for Computing Work Opportunity Credit

           *       *       *       *       *       *       *

SEC. 51. AMOUNT OF CREDIT.

  (a) Determination of amount.--For purposes of section 38, the 
amount of the work opportunity credit determined under this 
section for the taxable year shall be equal to 40 percent of 
the qualified first-year wages for such year.
  (b) Qualified wages defined.--For purposes of this subpart--
          (1) In general.--The term ``qualified wages'' means 
        the wages paid or incurred by the employer during the 
        taxable year to individuals who are members of a 
        targeted group.
          (2) Qualified first-year wages.--The term ``qualified 
        first-year wages'' means, with respect to any 
        individual, qualified wages attributable to service 
        rendered during the 1-year period beginning with the 
        day the individual begins work for the employer.
          (3) Limitation on wages per year taken into 
        account.--The amount of the qualified first-year wages 
        which may be taken into account with respect to any 
        individual shall not exceed $6,000 per year ($12,000 
        per year in the case of any individual who is a 
        qualified veteran by reason of subsection 
        (d)(3)(A)(ii)(I), $14,000 per year in the case of any 
        individual who is a qualified veteran by reason of 
        subsection (d)(3)(A)(iv), and $24,000 per year in the 
        case of any individual who is a qualified veteran by 
        reason of subsection (d)(3)(A)(ii)(II)).
  (c) Wages defined.--For purposes of this subpart--
          (1) In general.--Except as otherwise provided in this 
        subsection and subsection (h)(2), the term ``wages'' 
        has the meaning given to such term by subsection (b) of 
        section 3306 (determined without regard to any dollar 
        limitation contained in such section).
          (2) On-the-job training and work supplementation 
        payments.--
                  (A) Exclusion for employers receiving on-the-
                job training payments.--The term ``wages'' 
                shall not include any amounts paid or incurred 
                by an employer for any period to any individual 
                for whom the employer receives federally funded 
                payments for on-the-job training of such 
                individual for such period.
                  (B) Reduction for work supplementation 
                payments to employers.--The amount of wages 
                which would (but for this subparagraph) be 
                qualified wages under this section for an 
                employer with respect to an individual for a 
                taxable year shall be reduced by an amount 
                equal to the amount of the payments made to 
                such employer (however utilized by such 
                employer) with respect to such individual for 
                such taxable year under a program established 
                under section 482(e) of the Social Security 
                Act.
          (3) Payments for services during labor disputes.--
        If--
                  (A) the principal place of employment of an 
                individual with the employer is at a plant or 
                facility, and
                  (B) there is a strike or lockout involving 
                employees at such plant or facility,
        the term ``wages'' shall not include any amount paid or 
        incurred by the employer to such individual for 
        services which are the same as, or substantially 
        similar to, those services performed by employees 
        participating in, or affected by, the strike or lockout 
        during the period of such strike or lockout.
          (4) Termination.--The term ``wages'' shall not 
        include any amount paid or incurred to an individual 
        who begins work for the employer after December 31, 
        2019.
          (5) Coordination with payroll tax forgiveness.--The 
        term ``wages'' shall not include any amount paid or 
        incurred to a qualified individual (as defined in 
        section 3111(d)(3)) during the 1-year period beginning 
        on the hiring date of such individual by a qualified 
        employer (as defined in section 3111(d)) unless such 
        qualified employer makes an election not to have 
        section 3111(d) apply.
  (d) Members of targeted groups.--For purposes of this 
subpart--
          (1) In general.--An individual is a member of a 
        targeted group if such individual is--
                  (A) a qualified IV-A recipient,
                  (B) a qualified veteran,
                  (C) a qualified ex-felon,
                  (D) a designated community resident,
                  (E) a vocational rehabilitation referral,
                  (F) a qualified summer youth employee,
                  (G) a qualified supplemental nutrition 
                assistance program benefits recipient,
                  (H) a qualified SSI recipient,
                  (I) a long-term family assistance recipient, 
                or
                  (J) a qualified long-term unemployment 
                recipient.
          (2) Qualified IV-A recipient.--
                  (A) In general.--The term ``qualified IV-A 
                recipient'' means any individual who is 
                certified by the designated local agency as 
                being a member of a family receiving assistance 
                under a IV-A program for any 9 months during 
                the 18-month period ending on the hiring date.
                  (B) IV-A program.--For purposes of this 
                paragraph, the term ``IV-A program'' means any 
                program providing assistance under a State 
                program funded under part A of title IV of the 
                Social Security Act and any successor of such 
                program.
          (3) Qualified veteran.--
                  (A) In general.--The term ``qualified 
                veteran'' means any veteran who is certified by 
                the designated local agency as--
                          (i) being a member of a family 
                        receiving assistance under a 
                        supplemental nutrition assistance 
                        program under the Food and Nutrition 
                        Act of 2008 for at least a 3-month 
                        period ending during the 12-month 
                        period ending on the hiring date,
                          (ii) entitled to compensation for a 
                        service-connected disability, and--
                                  (I) having a hiring date 
                                which is not more that 1 year 
                                after having been discharged or 
                                released from active duty in 
                                the Armed Forces of the United 
                                States, or
                                  (II) having aggregate periods 
                                of unemployment during the 1-
                                year period ending on the 
                                hiring date which equal or 
                                exceed 6 months,
                          (iii) having aggregate periods of 
                        unemployment during the 1-year period 
                        ending on the hiring date which equal 
                        or exceed 4 weeks (but less than 6 
                        months), or
                          (iv) having aggregate periods of 
                        unemployment during the 1-year period 
                        ending on the hiring date which equal 
                        or exceed 6 months.
                  (B) Veteran.--For purposes of subparagraph 
                (A), the term ``veteran'' means any individual 
                who is certified by the designated local agency 
                as--
                          (i)
                                  (I) having served on active 
                                duty (other than active duty 
                                for training) in the Armed 
                                Forces of the United States for 
                                a period of more than 180 days, 
                                or
                                  (II) having been discharged 
                                or released from active duty in 
                                the Armed Forces of the United 
                                States for a service-connected 
                                disability, and
                          (ii) not having any day during the 
                        60-day period ending on the hiring date 
                        which was a day of extended active duty 
                        in the Armed Forces of the United 
                        States.
                For purposes of clause (ii), the term 
                ``extended active duty'' means a period of more 
                than 90 days during which the individual was on 
                active duty (other than active duty for 
                training).
                  (C) Other definitions.--For purposes of 
                subparagraph (A), the terms ``compensation'' 
                and ``service-connected'' have the meanings 
                given such terms under section 101 of title 38, 
                United States Code.
          (4) Qualified ex-felon.--The term ``qualified ex-
        felon'' means any individual who is certified by the 
        designated local agency--
                  (A) as having been convicted of a felony 
                under any statute of the United States or any 
                State, and
                  (B) as having a hiring date which is not more 
                than 1 year after the last date on which such 
                individual was so convicted or was released 
                from prison.
          (5) Designated community residents.--
                  (A) In general.--The term ``designated 
                community resident'' means any individual who 
                is certified by the designated local agency--
                          (i) as having attained age 18 but not 
                        age 40 on the hiring date, and
                          (ii) as having his principal place of 
                        abode within an empowerment zone, 
                        enterprise community, renewal 
                        community, or rural renewal county.
                  (B) Individual must continue to reside in 
                zone, community, or county.--In the case of a 
                designated community resident, the term 
                ``qualified wages'' shall not include wages 
                paid or incurred for services performed while 
                the individual's principal place of abode is 
                outside an empowerment zone, enterprise 
                community, renewal community, or rural renewal 
                county.
                  (C) Rural renewal county.--For purposes of 
                this paragraph, the term ``rural renewal 
                county'' means any county which--
                          (i) is outside a metropolitan 
                        statistical area (defined as such by 
                        the Office of Management and Budget), 
                        and
                          (ii) during the 5-year periods 1990 
                        through 1994 and 1995 through 1999 had 
                        a net population loss.
          (6) Vocational rehabilitation referral.--The term 
        ``vocational rehabilitation referral'' means any 
        individual who is certified by the designated local 
        agency as--
                  (A) having a physical or mental disability 
                which, for such individual, constitutes or 
                results in a substantial handicap to 
                employment, and
                  (B) having been referred to the employer upon 
                completion of (or while receiving) 
                rehabilitative services pursuant to--
                          (i) an individualized written plan 
                        for employment under a State plan for 
                        vocational rehabilitation services 
                        approved under the Rehabilitation Act 
                        of 1973,
                          (ii) a program of vocational 
                        rehabilitation carried out under 
                        chapter 31 of title 38, United States 
                        Code, or
                          (iii) an individual work plan 
                        developed and implemented by an 
                        employment network pursuant to 
                        subsection (g) of section 1148 of the 
                        Social Security Act with respect to 
                        which the requirements of such 
                        subsection are met.
          (7) Qualified summer youth employee.--
                  (A) In general.--The term ``qualified summer 
                youth employee'' means any individual--
                          (i) who performs services for the 
                        employer between May 1 and September 
                        15,
                          (ii) who is certified by the 
                        designated local agency as having 
                        attained age 16 but not 18 on the 
                        hiring date (or if later, on May 1 of 
                        the calendar year involved),
                          (iii) who has not been an employee of 
                        the employer during any period prior to 
                        the 90-day period described in 
                        subparagraph (B)(i), and
                          (iv) who is certified by the 
                        designated local agency as having his 
                        principal place of abode within an 
                        empowerment zone, enterprise community, 
                        or renewal community.
                  (B) Special rules for determining amount of 
                credit.--For purposes of applying this subpart 
                to wages paid or incurred to any qualified 
                summer youth employee--
                          (i) subsection (b)(2) shall be 
                        applied by substituting ``any 90-day 
                        period between May 1 and September 15'' 
                        for ``the 1-year period beginning with 
                        the day the individual begins work for 
                        the employer'', and
                          (ii) subsection (b)(3) shall be 
                        applied by substituting ``$3,000'' for 
                        ``$6,000''.
                The preceding sentence shall not apply to an 
                individual who, with respect to the same 
                employer, is certified as a member of another 
                targeted group after such individual has been a 
                qualified summer youth employee.
                  (C) Youth must continue to reside in zone or 
                community.--Paragraph (5)(B) shall apply for 
                purposes of subparagraph (A)(iv).
          (8) Qualified supplemental nutrition assistance 
        program benefits recipient.--
                  (A) In general.--The term ``qualified 
                supplemental nutrition assistance program 
                benefits recipient'' means any individual who 
                is certified by the designated local agency--
                          (i) as having attained age 18 but not 
                        age 40 on the hiring date, and
                          (ii) as being a member of a family--
                                  (I) receiving assistance 
                                under a supplemental nutrition 
                                assistance program under the 
                                Food and Nutrition Act of 2008 
                                for the 6-month period ending 
                                on the hiring date, or
                                  (II) receiving such 
                                assistance for at least 3 
                                months of the 5-month period 
                                ending on the hiring date, in 
                                the case of a member of a 
                                family who ceases to be 
                                eligible for such assistance 
                                under section 6(o) of the Food 
                                and Nutrition Act of 2008.
                  (B) Participation information.--
                Notwithstanding any other provision of law, the 
                Secretary of the Treasury and the Secretary of 
                Agriculture shall enter into an agreement to 
                provide information to designated local 
                agencies with respect to participation in the 
                supplemental nutrition assistance program.
          (9) Qualified SSI recipient.--The term ``qualified 
        SSI recipient'' means any individual who is certified 
        by the designated local agency as receiving 
        supplemental security income benefits under title XVI 
        of the Social Security Act (including supplemental 
        security income benefits of the type described in 
        section 1616 of such Act or section 212 of Public Law 
        93-66) for any month ending within the 60-day period 
        ending on the hiring date.
          (10) Long-term family assistance recipient.--The term 
        ``long-term family assistance recipient'' means any 
        individual who is certified by the designated local 
        agency--
                  (A) as being a member of a family receiving 
                assistance under a IV-A program (as defined in 
                paragraph (2)(B)) for at least the 18-month 
                period ending on the hiring date,
                  (B)(i) as being a member of a family 
                receiving such assistance for 18 months 
                beginning after August 5, 1997, and
                  (ii) as having a hiring date which is not 
                more than 2 years after the end of the earliest 
                such 18-month period, or
                  (C)(i) as being a member of a family which 
                ceased to be eligible for such assistance by 
                reason of any limitation imposed by Federal or 
                State law on the maximum period such assistance 
                is payable to a family, and
                  (ii) as having a hiring date which is not 
                more than 2 years after the date of such 
                cessation.
          (11) Hiring date.--The term ``hiring date'' means the 
        day the individual is hired by the employer.
          (12) Designated local agency.--The term ``designated 
        local agency'' means a State employment security agency 
        established in accordance with the Act of June 6, 1933, 
        as amended (29 U.S.C. 49-49n).
          (13) Special rules for certifications.--
                  (A) In general.--An individual shall not be 
                treated as a member of a targeted group 
                unless--
                          (i) on or before the day on which 
                        such individual begins work for the 
                        employer, the employer has received a 
                        certification from a designated local 
                        agency that such individual is a member 
                        of a targeted group, or
                          (ii)(I) on or before the day the 
                        individual is offered employment with 
                        the employer, a pre-screening notice is 
                        completed by the employer with respect 
                        to such individual, and
                          (II) not later than the 28th day 
                        after the individual begins work for 
                        the employer, the employer submits such 
                        notice, signed by the employer and the 
                        individual under penalties of perjury, 
                        to the designated local agency as part 
                        of a written request for such a 
                        certification from such agency.
        For purposes of this paragraph, the term ``pre-
        screening notice'' means a document (in such form as 
        the Secretary shall prescribe) which contains 
        information provided by the individual on the basis of 
        which the employer believes that the individual is a 
        member of a targeted group.
                  (B) Incorrect certifications.--If--
                          (i) an individual has been certified 
                        by a designated local agency as a 
                        member of a targeted group, and
                          (ii) such certification is incorrect 
                        because it was based on false 
                        information provided by such 
                        individual, the certification shall be 
                        revoked and wages paid by the employer 
                        after the date on which notice of 
                        revocation is received by the employer 
                        shall not be treated as qualified 
                        wages.
                  (C) Explanation of denial of request.--If a 
                designated local agency denies a request for 
                certification of membership in a targeted 
                group, such agency shall provide to the person 
                making such request a written explanation of 
                the reasons for such denial.
                  (D) Credit for unemployed veterans.--
                          (i) In general.--Notwithstanding 
                        subparagraph (A), for purposes of 
                        paragraph (3)(A)--
                                  (I) a veteran will be treated 
                                as certified by the designated 
                                local agency as having 
                                aggregate periods of 
                                unemployment meeting the 
                                requirements of clause (ii)(II) 
                                or (iv) of such paragraph 
                                (whichever is applicable) if 
                                such veteran is certified by 
                                such agency as being in receipt 
                                of unemployment compensation 
                                under State or Federal law for 
                                not less than 6 months during 
                                the 1-year period ending on the 
                                hiring date, and
                                  (II) a veteran will be 
                                treated as certified by the 
                                designated local agency as 
                                having aggregate periods of 
                                unemployment meeting the 
                                requirements of clause (iii) of 
                                such paragraph if such veteran 
                                is certified by such agency as 
                                being in receipt of 
                                unemployment compensation under 
                                State or Federal law for not 
                                less than 4 weeks (but less 
                                than 6 months) during the 1-
                                year period ending on the 
                                hiring date.
                          (ii) Regulatory authority.--The 
                        Secretary may provide alternative 
                        methods for certification of a veteran 
                        as a qualified veteran described in 
                        clause (ii)(II), (iii), or (iv) of 
                        paragraph (3)(A), at the Secretary's 
                        discretion.
          (14) Credit allowed for unemployed veterans and 
        disconnected youth hired in 2009 or 2010.--
                  (A) In general.--Any unemployed veteran or 
                disconnected youth who begins work for the 
                employer during 2009 or 2010 shall be treated 
                as a member of a targeted group for purposes of 
                this subpart.
                  (B) Definitions.--For purposes of this 
                paragraph--
                          (i) Unemployed veteran.--The term 
                        ``unemployed veteran'' means any 
                        veteran (as defined in paragraph 
                        (3)(B), determined without regard to 
                        clause (ii) thereof) who is certified 
                        by the designated local agency as--
                                  (I) having been discharged or 
                                released from active duty in 
                                the Armed Forces at any time 
                                during the 5-year period ending 
                                on the hiring date, and
                                  (II) being in receipt of 
                                unemployment compensation under 
                                State or Federal law for not 
                                less than 4 weeks during the 1-
                                year period ending on the 
                                hiring date.
                          (ii) Disconnected youth.--The term 
                        ``disconnected youth'' means any 
                        individual who is certified by the 
                        designated local agency--
                                  (I) as having attained age 16 
                                but not age 25 on the hiring 
                                date,
                                  (II) as not regularly 
                                attending any secondary, 
                                technical, or post-secondary 
                                school during the 6-month 
                                period preceding the hiring 
                                date,
                                  (III) as not regularly 
                                employed during such 6- month 
                                period, and
                                  (IV) as not readily 
                                employable by reason of lacking 
                                a sufficient number of basic 
                                skills.
          (15) Qualified long-term unemployment recipient.--The 
        term ``qualified long-term unemployment recipient'' 
        means any individual who is certified by the designated 
        local agency as being in a period of unemployment 
        which--
                  (A) is not less than 27 consecutive weeks, 
                and
                  (B) includes a period in which the individual 
                was receiving unemployment compensation under 
                State or Federal law.
  (e) Credit for second-year wages for employment of long-term 
family assistance recipients.--
          (1) In general.--With respect to the employment of a 
        long- term family assistance recipient--
                  (A) the amount of the work opportunity credit 
                determined under this section for the taxable 
                year shall include 50 percent of the qualified 
                second-year wages for such year, and
                  (B) in lieu of applying subsection (b)(3), 
                the amount of the qualified first-year wages, 
                and the amount of qualified second-year wages, 
                which may be taken into account with respect to 
                such a recipient shall not exceed $10,000 per 
                year.
          (2) Qualified second-year wages.--For purposes of 
        this subsection, the term ``qualified second-year 
        wages'' means qualified wages--
                  (A) which are paid to a long-term family 
                assistance recipient, and
                  (B) which are attributable to service 
                rendered during the 1-year period beginning on 
                the day after the last day of the 1-year period 
                with respect to such recipient determined under 
                subsection (b)(2).
          (3) Special rules for agricultural and railway 
        labor.--If such recipient is an employee to whom 
        subparagraph (A) or (B) of subsection (h)(1) applies, 
        rules similar to the rules of such subparagraphs shall 
        apply except that--
                  (A) such subparagraph (A) shall be applied by 
                substituting ``$10,000'' for ``$6,000'', and
                  (B) such subparagraph (B) shall be applied by 
                substituting ``$833.33'' for ``$500''.
  (f) Remuneration must be for trade or business employment.--
          (1) In general.--For purposes of this subpart, 
        remuneration paid by an employer to an employee during 
        any taxable year shall be taken into account only if 
        more than one-half of the remuneration so paid is for 
        services performed in a trade or business of the 
        employer.
          (2) Special rule for certain determination.--Any 
        determination as to whether paragraph (1), or 
        subparagraph (A) or (B) of subsection (h)(1), applies 
        with respect to any employee for any taxable year shall 
        be made without regard to subsections (a) and (b) of 
        section 52.
  (g) United States Employment Service to notify employers of 
availability of credit.--The United States Employment Service, 
in consultation with the Internal Revenue Service, shall take 
such steps as may be necessary or appropriate to keep employers 
apprised of the availability of the work opportunity credit 
determined under this subpart.
  (h) Special rules for agricultural labor and railway labor.--
For purposes of this subpart--
          (1) Unemployment insurance wages.--
                  (A) Agricultural labor.--If the services 
                performed by any employee for an employer 
                during more than one-half of any pay period 
                (within the meaning of section 3306(d)) taken 
                into account with respect to any year 
                constitute agricultural labor (within the 
                meaning of section 3306(k)), the term 
                ``unemployment insurance wages'' means, with 
                respect to the remuneration paid by the 
                employer to such employee for such year, an 
                amount equal to so much of such remuneration as 
                constitutes ``wages'' within the meaning of 
                section 3121(a), except that the contribution 
                and benefit base for each calendar year shall 
                be deemed to be $6,000.
                  (B) Railway labor.--If more than one-half of 
                remuneration paid by an employer to an employee 
                during any year is remuneration for service 
                described in section 3306(c)(9), the term 
                ``unemployment insurance wages'' means, with 
                respect to such employee for such year, an 
                amount equal to so much of the remuneration 
                paid to such employee during such year which 
                would be subject to contributions under section 
                8(a) of the Railroad Unemployment Insurance Act 
                (45 USC Sec. 358(a)) if the maximum amount 
                subject to such contributions were $500 per 
                month.
          (2) Wages.--In any case to which subparagraph (A) or 
        (B) of paragraph (1) applies, the term ``wages'' means 
        unemployment insurance wages (determined without regard 
        to any dollar limitation).
  (i) Certain individuals ineligible.--
          (1) Related individuals.--No wages shall be taken 
        into account under subsection (a) with respect to an 
        individual who--
                  (A) bears any of the relationships described 
                in subparagraphs (A) through (G) of [section 
                152(d)(2)] section 7706(d)(2) to the taxpayer, 
                or, if the taxpayer is a corporation, to an 
                individual who owns, directly or indirectly, 
                more than 50 percent in value of the 
                outstanding stock of the corporation, or, if 
                the taxpayer is an entity other than a 
                corporation, to any individual who owns, 
                directly or indirectly, more than 50 percent of 
                the capital and profits interests in the entity 
                (determined with the application of section 
                267(c)),
                  (B) if the taxpayer is an estate or trust, is 
                a grantor, beneficiary, or fiduciary of the 
                estate or trust, or is an individual who bears 
                any of the relationships described in 
                subparagraphs (A) through (G) of [section 
                152(d)(2)] section 7706(d)(2) to a grantor, 
                beneficiary, or fiduciary of the estate or 
                trust, or
                  (C) is a dependent (described in [section 
                152(d)(2)(H)] section 7706(d)(2)(H)) of the 
                taxpayer, or, if the taxpayer is a corporation, 
                of an individual described in subparagraph (A), 
                or, if the taxpayer is an estate or trust, of a 
                grantor, beneficiary, or fiduciary of the 
                estate or trust.
          (2) Nonqualifying rehires.--No wages shall be taken 
        into account under subsection (a) with respect to any 
        individual if, prior to the hiring date of such 
        individual, such individual had been employed by the 
        employer at any time.
          (3) Individuals not meeting minimum employment 
        period.--
                  (A) Reduction of credit for individuals 
                performing fewer than 400 hours of service.--In 
                the case of an individual who has performed at 
                least 120 hours, but less than 400 hours, of 
                service for the employer, subsection (a) shall 
                be applied by substituting ``25 percent'' for 
                ``40 percent''.
                  (B) Denial of credit for individuals 
                performing fewer than 120 hours of service.--No 
                wages shall be taken into account under 
                subsection (a) with respect to any individual 
                unless such individual has performed at least 
                120 hours of service for the employer.
  (j) Election to have work opportunity credit not apply.--
          (1) In general.--A taxpayer may elect to have this 
        section not apply for any taxable year.
          (2) Time for making election.--An election under 
        paragraph (1) for any taxable year may be made (or 
        revoked) at any time before the expiration of the 3-
        year period beginning on the last date prescribed by 
        law for filing the return for such taxable year 
        (determined without regard to extensions)
          (3) Manner of making election.--An election under 
        paragraph (1) (or revocation thereof) shall be made in 
        such manner as the Secretary may by regulations 
        prescribe.
  (k) Treatment of successor employers; treatment of employees 
performing services for other persons.--
          (1) Treatment of successor employers.--Under 
        regulations prescribed by the Secretary, in the case of 
        a successor employer referred to in section 3306(b)(1), 
        the determination of the amount of the credit under 
        this section with respect to wages paid by such 
        successor employer shall be made in the same manner as 
        if such wages were paid by the predecessor employer 
        referred to in such section.
          (2) Treatment of employees performing services for 
        other persons.--No credit shall be determined under 
        this section with respect to remuneration paid by an 
        employer to an employee for services performed by such 
        employee for another person unless the amount 
        reasonably expected to be received by the employer for 
        such services from such other person exceeds the 
        remuneration paid by the employer to such employee for 
        such services.

           *       *       *       *       *       *       *

PART VI--ALTERNATIVE MINIMUM TAX

           *       *       *       *       *       *       *

SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED.

  (a) General rule.--In the case of a taxpayer other than a 
corporation, there is hereby imposed (in addition to any other 
tax imposed by this subtitle) a tax equal to the excess (if 
any) of--
          (1) the tentative minimum tax for the taxable year, 
        over
          (2) the regular tax for the taxable year.
  (b) Tentative minimum tax.--For purposes of this part--
          (1) Amount of tentative tax.--
                  (A) In general.--The tentative minimum tax 
                for the taxable year is the sum of--
                          (i) 26 percent of so much of the 
                        taxable excess as does not exceed 
                        $175,000, plus
                          (ii) 28 percent of so much of the 
                        taxable excess as exceeds $175,000.
                The amount determined under the preceding 
                sentence shall be reduced by the alternative 
                minimum tax foreign tax credit for the taxable 
                year.
                  (B) Taxable excess.--For purposes of this 
                subsection, the term ``taxable excess'' means 
                so much of the alternative minimum taxable 
                income for the taxable year as exceeds the 
                exemption amount.
                  (C) Married individual filing separate 
                return.--In the case of a married individual 
                filing a separate return, subparagraph (A) 
                shall be applied by substituting 50 percent of 
                the dollar amount otherwise applicable under 
                clause (i) and clause (ii) thereof. For 
                purposes of the preceding sentence, marital 
                status shall be determined under section 7703.
          (2) Alternative minimum taxable income.--The term 
        ``alternative minimum taxable income'' means the 
        taxable income of the taxpayer for the taxable year--
                  (A) determined with the adjustments provided 
                in section 56 and section 58, and
                  (B) increased by the amount of the items of 
                tax preference described in section 57.
        If a taxpayer is subject to the regular tax, such 
        taxpayer shall be subject to the tax imposed by this 
        section (and, if the regular tax is determined by 
        reference to an amount other than taxable income, such 
        amount shall be treated as the taxable income of such 
        taxpayer for purposes of the preceding sentence).
          (3) Maximum rate of tax on net capital gain of 
        noncorporate taxpayers.--The amount determined under 
        the first sentence of paragraph (1)(A) shall not exceed 
        the sum of--
                  (A) the amount determined under such first 
                sentence computed at the rates and in the same 
                manner as if this paragraph had not been 
                enacted on the taxable excess reduced by the 
                lesser of--
                          (i) the net capital gain; or
                          (ii) the sum of--
                                  (I) the adjusted net capital 
                                gain, plus
                                  (II) the unrecaptured section 
                                1250 gain, plus
                  (B) 0 percent of so much of the adjusted net 
                capital gain (or, if less, taxable excess) as 
                does not exceed an amount equal to the excess 
                described in section 1(h)(1)(B), plus
                  (C) 15 percent of the lesser of--
                          (i) so much of the adjusted net 
                        capital gain (or, if less, taxable 
                        excess) as exceeds the amount on which 
                        tax is determined under subparagraph 
                        (B), or
                          (ii) the excess described in section 
                        1(h)(1)(C)(ii), plus
                  (D) 20 percent of the adjusted net capital 
                gain (or, if less, taxable excess) in excess of 
                the sum of the amounts on which tax is 
                determined under subparagraphs (B) and (C), 
                plus
                  (E) 25 percent of the amount of taxable 
                excess in excess of the sum of the amounts on 
                which tax is determined under the preceding 
                subparagraphs of this paragraph.
        Terms used in this paragraph which are also used in 
        section 1(h) shall have the respective meanings given 
        such terms by section 1(h) but computed with the 
        adjustments under this part.
  (c) Regular tax.--
          (1) In general.--For purposes of this section, the 
        term ``regular tax'' means the regular tax liability 
        for the taxable year (as defined in section 26(b)) 
        reduced by the foreign tax credit allowable under 
        section 27(a). Such term shall not include any increase 
        in tax under section 45(e)(11)(C), 49(b) or 50(a) or 
        subsection (j) or (k) of section 42.
          (2) Coordination with income averaging for farmers 
        and fishermen.--Solely for purposes of this section, 
        section 1301 (relating to averaging of farm and fishing 
        income) shall not apply in computing the regular tax 
        liability.
          (3) Cross references.--For provisions providing that 
        certain credits are not allowable against the tax 
        imposed by this section, see sections 30C(d)(2) and 
        38(c).
  (d) Exemption amount.--For purposes of this section--
          (1) Exemption amount for taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation, the term ``exemption amount'' means--
                  (A) [$78,750] $109,400 in the case of--
                          (i) a joint return, or
                          (ii) a surviving spouse,
                  (B) [$50,600] $70,300 in the case of an 
                individual who--
                          (i) is not a married individual, and
                          (ii) is not a surviving spouse,
                  (C) 50 percent of the dollar amount 
                applicable under subparagraph (A) in the case 
                of a married individual who files a separate 
                return, and
                  (D) $22,500 in the case of an estate or 
                trust.
        For purposes of this paragraph, the term ``surviving 
        spouse'' has the meaning given to such term by section 
        2(a), and marital status shall be determined under 
        section 7703.
          (2) Phase-out of exemption amount.--The exemption 
        amount of any taxpayer shall be reduced (but not below 
        zero) by an amount equal to 25 percent of the amount by 
        which the alternative minimum taxable income of the 
        taxpayer exceeds--
                  (A) [$150,000] $1,000,000 in the case of a 
                taxpayer described in paragraph (1)(A),
                  [(B) $112,500 in the case of a taxpayer 
                described in paragraph (1)(B), and
                  [(C) 50 percent of the dollar amount 
                applicable under subparagraph (A) in the case 
                of a taxpayer described in subparagraph (C) or 
                (D) of paragraph (1).]
                  (B) 50 percent of the dollar amount 
                applicable under subparagraph (A) in the case 
                of a taxpayer described in paragraph (1)(B) or 
                (1)(C), and
                  (C) $75,000 in the case of a taxpayer 
                described in paragraph (1)(D).
        In the case of a taxpayer described in paragraph 
        (1)(C), alternative minimum taxable income shall be 
        increased by the lesser of (i) 25 percent of the excess 
        of alternative minimum taxable income (determined 
        without regard to this sentence) over the minimum 
        amount of such income (as so determined) for which the 
        exemption amount under paragraph (1)(C) is zero, or 
        (ii) such exemption amount (determined without regard 
        to this paragraph).
          [(3) Inflation adjustment.--
                  [(A) In general.--In the case of any taxable 
                year beginning in a calendar year after 2012, 
                the amounts described in subparagraph (B) shall 
                each be increased by an amount equal to--
                          [(i) such dollar amount, multiplied 
                        by
                          [(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2011'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                  [(B) Amounts described.--The amounts 
                described in this subparagraph are--
                          [(i) each of the dollar amounts 
                        contained in subsection (b)(1)(A),
                          [(ii) each of the dollar amounts 
                        contained in subparagraphs (A), (B), 
                        and (D) of paragraph (1), and
                          [(iii) each of the dollar amounts in 
                        subparagraphs (A) and (B) of paragraph 
                        (2).
                  [(C) Rounding.--Any increased amount 
                determined under subparagraph (A) shall be 
                rounded to the nearest multiple of $100.
          [(4) Special rule for taxable years beginning after 
        2017 and before 2026.--
                  [(A) In general.--In the case of any taxable 
                year beginning after December 31, 2017, and 
                before January 1, 2026--
                          [(i) paragraph (1) shall be applied--
                                  [(I) by substituting 
                                ``$109,400'' for ``$78,750'' in 
                                subparagraph (A), and
                                  [(II) by substituting 
                                ``$70,300'' for ``$50,600'' in 
                                subparagraph (B), and
                          [(ii) paragraph (2) shall be 
                        applied--
                                  [(I) by substituting 
                                ``$1,000,000'' for ``$150,000'' 
                                in subparagraph (A),
                                  [(II) by substituting ``50 
                                percent of the dollar amount 
                                applicable under subparagraph 
                                (A)'' for ``$112,500'' in 
                                subparagraph (B), and
                                  [(III) in the case of a 
                                taxpayer described in paragraph 
                                (1)(D), without regard to the 
                                substitution under subclause 
                                (I).
                  [(B) Inflation adjustment.--
                          [(i) In general.--In the case of any 
                        taxable year beginning in a calendar 
                        year after 2018, the amounts described 
                        in clause (ii) shall each be increased 
                        by an amount equal to--
                                  [(I) such dollar amount, 
                                multiplied by
                                  [(II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting ``calendar year 
                                2017'' for ``calendar year 
                                2016'' in subparagraph (A)(ii) 
                                thereof.
                          [(ii) Amounts described.--The amounts 
                        described in this clause are the 
                        $109,400 amount in subparagraph 
                        (A)(i)(I), the $70,300 amount in 
                        subparagraph (A)(i)(II), and the 
                        $1,000,000 amount in subparagraph 
                        (A)(ii)(I).
                          [(iii) Rounding.--Any increased 
                        amount determined under clause (i) 
                        shall be rounded to the nearest 
                        multiple of $100.
                          [(iv) Coordination with current 
                        adjustments.--In the case of any 
                        taxable year to which subparagraph (A) 
                        applies, no adjustment shall be made 
                        under paragraph (3) to any of the 
                        numbers which are substituted under 
                        subparagraph (A) and adjusted under 
                        this subparagraph.]
          (3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2018, each 
        dollar amount described in clause (i) or (ii) of 
        subparagraph (B) shall be increased by an amount equal 
        to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting--
                          (i) in the case of a dollar amount 
                        contained in paragraph (1)(D) or (2)(C) 
                        or in subsection (b)(1)(A), ``calendar 
                        year 2011'' for ``calendar year 2016'' 
                        in subparagraph (A)(ii) thereof, and
                          (ii) in the case of a dollar amount 
                        contained in paragraph (1)(A), (1)(B), 
                        or (2)(A), ``calendar year 2017'' for 
                        ``calendar year 2016'' in subparagraph 
                        (A)(ii) thereof.
        Any increased amount determined under this paragraph 
        shall be rounded to the nearest multiple of $100 ($50 
        in the case of the dollar amount contained in paragraph 
        (2)(C)).

SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.

  (a) Adjustments applicable to all taxpayers.--In determining 
the amount of the alternative minimum taxable income for any 
taxable year the following treatment shall apply (in lieu of 
the treatment applicable for purposes of computing the regular 
tax):
          (1) Depreciation.--
                  (A) In general.--
                          (i) Property other than certain 
                        personal property.--Except as provided 
                        in clause (ii), the depreciation 
                        deduction allowable under section 167 
                        with respect to any tangible property 
                        placed in service after December 31, 
                        1986, shall be determined under the 
                        alternative system of section 168(g). 
                        In the case of property placed in 
                        service after December 31, 1998, the 
                        preceding sentence shall not apply but 
                        clause (ii) shall continue to apply.
                          (ii) 150-percent declining balance 
                        method for certain property.--The 
                        method of depreciation used shall be--
                                  (I) the 150 percent declining 
                                balance method,
                                  (II) switching to the 
                                straight line method for the 
                                1st taxable year for which 
                                using the straight line method 
                                with respect to the adjusted 
                                basis as of the beginning of 
                                the year will yield a higher 
                                allowance.
                        The preceding sentence shall not apply 
                        to any section 1250 property (as 
                        defined in section 1250(c)) (and the 
                        straight line method shall be used for 
                        such section 1250 property)or to any 
                        other property if the depreciation 
                        deduction determined under section 168 
                        with respect to such other property for 
                        purposes of the regular tax is 
                        determined by using the straight line 
                        method.
                  (B) Exception for certain property.--This 
                paragraph shall not apply to property described 
                in paragraph (1), (2), (3), or (4) of section 
                168(f), or in section 168(e)(3)(C)(iv).
                  (C) Coordination with transitional rules.--
                          (i) In general.--This paragraph shall 
                        not apply to property placed in service 
                        after December 31, 1986, to which the 
                        amendments made by section 201 of the 
                        Tax Reform Act of 1986 do not apply by 
                        reason of section 203, 204, or 251(d) 
                        of such Act.
                          (ii) Treatment of certain property 
                        placed in service before 1987.--This 
                        paragraph shall apply to any property 
                        to which the amendments made by section 
                        201 of the Tax Reform Act of 1986 apply 
                        by reason of an election under section 
                        203(a)(1)(B) of such Act without regard 
                        to the requirement of subparagraph (A) 
                        that the property be placed in service 
                        after December 31, 1986.
                  (D) Normalization rules.--With respect to 
                public utility property described in section 
                168(i)(10), the Secretary shall prescribe the 
                requirements of a normalization method of 
                accounting for this section.
          (2) Mining exploration and development costs.--
                  (A) In general.--With respect to each mine or 
                other natural deposit (other than an oil, gas, 
                or geothermal well) of the taxpayer, the amount 
                allowable as a deduction under section 616(a) 
                or 617(a) (determined without regard to section 
                291(b)) in computing the regular tax for costs 
                paid or incurred after December 31, 1986, shall 
                be capitalized and amortized ratably over the 
                10-year period beginning with the taxable year 
                in which the expenditures were made.
                  (B) Loss allowed.--If a loss is sustained 
                with respect to any property described in 
                subparagraph (A), a deduction shall be allowed 
                for the expenditures described in subparagraph 
                (A) for the taxable year in which such loss is 
                sustained in an amount equal to the lesser of--
                          (i) the amount allowable under 
                        section 165(a) for the expenditures if 
                        they had remained capitalized, or
                          (ii) the amount of such expenditures 
                        which have not previously been 
                        amortized under subparagraph (A).
          (3) Treatment of certain long-term contracts.--In the 
        case of any long-term contract entered into by the 
        taxpayer on or after March 1, 1986, the taxable income 
        from such contract shall be determined under the 
        percentage of completion method of accounting (as 
        modified by section 460(b)). For purposes of the 
        preceding sentence, in the case of a contract described 
        in section 460(e)(1), the percentage of the contract 
        completed shall be determined under section 460(b)(1) 
        by using the simplified procedures for allocation of 
        costs prescribed under section 460(b)(3). The first 
        sentence of this paragraph shall not apply to any home 
        construction contract (as defined in section 
        460(e)(6)).
          (4) Alternative tax net operating loss deduction.--
        The alternative tax net operating loss deduction shall 
        be allowed in lieu of the net operating loss deduction 
        allowed under section 172.
          (5) Pollution control facilities.--In the case of any 
        certified pollution control facility placed in service 
        after December 31, 1986, the deduction allowable under 
        section 169 (without regard to section 291) shall be 
        determined under the alternative system of section 
        168(g). In the case of such a facility placed in 
        service after December 31, 1998, such deduction shall 
        be determined under section 168 using the straight line 
        method.
          (6) Adjusted basis.--The adjusted basis of any 
        property to which paragraph (1) or (5) applies (or with 
        respect to which there are any expenditures to which 
        paragraph (2) or subsection (b)(2) applies) shall be 
        determined on the basis of the treatment prescribed in 
        paragraph (1), (2), or (5), or subsection (b)(2), 
        whichever applies.
          (7) Section 87 not applicable.--Section 87 (relating 
        to alcohol fuel credit) shall not apply.
  (b) Adjustments applicable to individuals.--In determining 
the amount of the alternative minimum taxable income of any 
taxpayer (other than a corporation), the following treatment 
shall apply (in lieu of the treatment applicable for purposes 
of computing the regular tax):
          (1) Limitation on deductions.--
                  [(A) In general.--No deduction shall be 
                allowed--
                          [(i) for any miscellaneous itemized 
                        deduction (as defined in section 
                        67(b)), or
                          [(ii) for any taxes described in 
                        paragraph (1), (2), or (3) of section 
                        164(a) or clause (ii) of section 
                        164(b)(5)(A).
                Clause (ii) shall not apply to any amount 
                allowable in computing adjusted gross income.
                  [(B) Medical expenses.--In determining the 
                amount allowable as a deduction under section 
                213, subsection (a) of section 213 shall be 
                applied without regard to subsection (f) of 
                such section. This subparagraph shall not apply 
                to taxable years beginning after December 31, 
                2016, and ending before January 1, 2019]
                  (A) Certain taxes.--No deduction (other than 
                a deduction allowable in computing adjusted 
                gross income) shall be allowed for any taxes 
                described in paragraph (1), (2), or (3) of 
                section 164(a) or clause (ii) of section 
                164(b)(5)(A).
                  [(C)] (B) Interest.--In determining the 
                amount allowable as a deduction for interest, 
                subsections (d) and (h) of section 163 shall 
                apply, except that--
                          (i) in lieu of the exception under 
                        section 163(h)(2)(D), the term 
                        ``personal interest'' shall not include 
                        any qualified housing interest (as 
                        defined in subsection (e)),
                          (ii) interest on any specified 
                        private activity bond (and any amount 
                        treated as interest on a specified 
                        private activity bond under section 
                        57(a)(5)(B)), and any deduction 
                        referred to in section 57(a)(5)(A), 
                        shall be treated as includible in gross 
                        income (or as deductible) for purposes 
                        of applying section 163(d),
                          (iii) in lieu of the exception under 
                        section 163(d)(3)(B)(i), the term 
                        ``investment interest'' shall not 
                        include any qualified housing interest 
                        (as defined in subsection (e)), and
                          (iv) the adjustments of this section 
                        and sections 57 and 58 shall apply in 
                        determining net investment income under 
                        section 163(d).
                  [(D)] (C) Treatment of certain recoveries.--
                No recovery of any tax to which [subparagraph 
                (A)(ii)] subparagraph (A) applied shall be 
                included in gross income for purposes of 
                determining alternative minimum taxable income.
                  [(E)] (D) Standard deduction [and deduction 
                for personal exemptions] not allowed.--The 
                standard deduction under section 63(c)[, the 
                deduction for personal exemptions under section 
                151,] and the deduction under section 642(b) 
                shall not be allowed.
                  [(F) Section 68 not applicable.--Section 68 
                shall not apply.]
          (2) Circulation and research and experimental 
        expenditures.--
                  (A) In general.--The amount allowable as a 
                deduction under section 173 or 174(a) in 
                computing the regular tax for amounts paid or 
                incurred after December 31, 1986, shall be 
                capitalized and--
                          (i) in the case of circulation 
                        expenditures described in section 173, 
                        shall be amortized ratably over the 3-
                        year period beginning with the taxable 
                        year in which the expenditures were 
                        made, or
                          (ii) in the case of research and 
                        experimental expenditures described in 
                        section 174(a), shall be amortized 
                        ratably over the 10-year period 
                        beginning with the taxable year in 
                        which the expenditures were made.
                  (B) Loss allowed.--If a loss is sustained 
                with respect to any property described in 
                subparagraph (A), a deduction shall be allowed 
                for the expenditures described in subparagraph 
                (A) for the taxable year in which such loss is 
                sustained in an amount equal to the lesser of--
                          (i) the amount allowable under 
                        section 165(a) for the expenditures if 
                        they had remained capitalized, or
                          (ii) the amount of such expenditures 
                        which have not previously been 
                        amortized under subparagraph (A).
                  (C) Exception for certain research and 
                experimental expenditures.--If the taxpayer 
                materially participates (within the meaning of 
                section 469(h)) in an activity, this paragraph 
                shall not apply to any amount allowable as a 
                deduction under section 174(a) for expenditures 
                paid or incurred in connection with such 
                activity.
          (3) Treatment of incentive stock options.--Section 
        421 shall not apply to the transfer of stock acquired 
        pursuant to the exercise of an incentive stock option 
        (as defined in section 422). Section 422(c)(2) shall 
        apply in any case where the disposition and the 
        inclusion for purposes of this part are within the same 
        taxable year and such section shall not apply in any 
        other case. The adjusted basis of any stock so acquired 
        shall be determined on the basis of the treatment 
        prescribed by this paragraph.
  (d) Alternative tax net operating loss deduction defined.--
          (1) In general.--For purposes of subsection (a)(4), 
        the term ``alternative tax net operating loss 
        deduction'' means the net operating loss deduction 
        allowable for the taxable year under section 172, 
        except that--
                  (A) the amount of such deduction shall not 
                exceed the sum of--
                          (i) the lesser of--
                                  (I) the amount of such 
                                deduction attributable to net 
                                operating losses (other than 
                                the deduction described in 
                                clause (ii)(I)), or
                                  (II) 90 percent of 
                                alternative minimum taxable 
                                income determined without 
                                regard to such deduction and 
                                the deduction under section 
                                199, plus
                          (ii) the lesser of--
                                  (I) the amount of such 
                                deduction attributable to an 
                                applicable net operating loss 
                                with respect to which an 
                                election is made under section 
                                172(b)(1)(H) (as in effect 
                                before its repeal by the Tax 
                                Increase Prevention Act of 
                                2014), or
                                  (II) alternative minimum 
                                taxable income determined 
                                without regard to such 
                                deduction and the deduction 
                                under section 199 reduced by 
                                the amount determined under 
                                clause (i), and
                  (B) in determining the amount of such 
                deduction--
                          (i) the net operating loss (within 
                        the meaning of section 172(c)) for any 
                        loss year shall be adjusted as provided 
                        in paragraph (2), and
                          (ii) appropriate adjustments in the 
                        application of section 172(b)(2) shall 
                        be made to take into account the 
                        limitation of subparagraph (A).
          (2) Adjustments to net operating loss computation.--
                  (A) Post-1986 loss years.--In the case of a 
                loss year beginning after December 31, 1986, 
                the net operating loss for such year under 
                section 172(c) shall--
                          (i) be determined with the 
                        adjustments provided in this section 
                        and section 58, and
                          (ii) be reduced by the items of tax 
                        preference determined under section 57 
                        for such year.
                An item of tax preference shall be taken into 
                account under clause (ii) only to the extent 
                such item increased the amount of the net 
                operating loss for the taxable year under 
                section 172(c).
                  (B) Pre-1987 years.--In the case of loss 
                years beginning before January 1, 1987, the 
                amount of the net operating loss which may be 
                carried over to taxable years beginning after 
                December 31, 1986, for purposes of paragraph 
                (2), shall be equal to the amount which may be 
                carried from the loss year to the first taxable 
                year of the taxpayer beginning after December 
                31, 1986.
  (e) Qualified housing interest.--For purposes of this part--
          (1) In general.--The term ``qualified housing 
        interest'' means interest which is qualified residence 
        interest (as defined in section 163(h)(3)) and is paid 
        or accrued during the taxable year on indebtedness 
        which is incurred in acquiring, constructing, or 
        substantially improving any property which--
                  (A) is the principal residence (within the 
                meaning of section 121) of the taxpayer at the 
                time such interest accrues, or
                  (B) is a qualified dwelling which is a 
                qualified residence (within the meaning of 
                section 163(h)(4)).
        Such term also includes interest on any indebtedness 
        resulting from the refinancing of indebtedness meeting 
        the requirements of the preceding sentence; but only to 
        the extent that the amount of the indebtedness 
        resulting from such refinancing does not exceed the 
        amount of the refinanced indebtedness immediately 
        before the refinancing.
          (2) Qualified dwelling.--The term ``qualified 
        dwelling'' means any--
                  (A) house,
                  (B) apartment,
                  (C) condominium, or
                  (D) mobile home not used on a transient basis 
                (within the meaning of section 
                7701(a)(19)(C)(v)),
        including all structures or other property appurtenant 
        thereto.
          (3) Special rule for indebtedness incurred before 
        July 1, 1982.--The term ``qualified housing interest'' 
        includes interest which is qualified residence interest 
        (as defined in section 163(h)(3)) and is paid or 
        accrued on indebtedness which--
                  (A) was incurred by the taxpayer before July 
                1, 1982, and
                  (B) is secured by property which, at the time 
                such indebtedness was incurred, was--
                          (i) the principal residence (within 
                        the meaning of section 121) of the 
                        taxpayer, or
                          (ii) a qualified dwelling used by the 
                        taxpayer (or any member of his family 
                        (within the meaning of section 
                        267(c)(4))).

           *       *       *       *       *       *       *

SEC. 58. DENIAL OF CERTAIN LOSSES.

  (a) Denial of farm loss.--
          (1) In general.--For purposes of computing the amount 
        of the alternative minimum taxable income for any 
        taxable year of a taxpayer other than a corporation--
                  (A) Disallowance of farm loss.--No loss of 
                the taxpayer for such taxable year from any tax 
                shelter farm activity shall be allowed.
                  (B) Deduction in succeeding taxable year.--
                Any loss from a tax shelter farm activity 
                disallowed under subparagraph (A) shall be 
                treated as a deduction allocable to such 
                activity in the 1st succeeding taxable year.
          (2) Tax shelter farm activity.--For purposes of this 
        subsection, the term ``tax shelter farm activity'' 
        means--
                  (A) any farming syndicate as defined in 
                section [461(k)] 461(j), and
                  (B) any other activity consisting of farming 
                which is a passive activity (within the meaning 
                of section 469(c)).
          (3) Determination of loss.--In determining the amount 
        of the loss from any tax shelter farm activity, the 
        adjustments of sections 56 and 57 shall apply.
  (b) Disallowance of passive activity loss.--In computing the 
alternative minimum taxable income of the taxpayer for any 
taxable year, section 469 shall apply, except that in applying 
section 469 -
          (1) the adjustments of sections 56 and 57 shall 
        apply, and
          (2) in lieu of applying section 469(j)(7), the 
        passive activity loss of a taxpayer shall be computed 
        without regard to qualified housing interest (as 
        defined in section 56(e)).
  (c) Special rules.--For purposes of this section--
          (1) Special rule for insolvent taxpayers.--
                  (A) In general.--The amount of losses to 
                which subsection (a) or (b) applies shall be 
                reduced by the amount (if any) by which the 
                taxpayer is insolvent as of the close of the 
                taxable year.
                  (B) Insolvent.--For purposes of this 
                paragraph, the term ``insolvent'' means the 
                excess of liabilities over the fair market 
                value of assets.
          (2) Loss allowed for year of disposition of farm 
        shelter activity.--If the taxpayer disposes of his 
        entire interest in any tax shelter farm activity during 
        any taxable year, the amount of the loss attributable 
        to such activity (determined after carryovers under 
        subsection (a)(1)(B)) shall (to the extent otherwise 
        allowable) be allowed for such taxable year in 
        computing alternative minimum taxable income and not 
        treated as a loss from a tax shelter farm activity.

           *       *       *       *       *       *       *

              Subchapter B--Computation of Taxable Income

PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE 
          INCOME, ETC
     * * * * * * *
[PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS

           *       *       *       *       *       *       *

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

Sec. 61. Gross income defined.
     * * * * * * *
[Sec. 67. 2-percent floor on miscellaneous itemized deductions.]
Sec. 67. Denial of miscellaneous itemized deductions.
[Sec. 68. Overall limitation on itemized deductions.]

           *       *       *       *       *       *       *

SEC. 62. ADJUSTED GROSS INCOME DEFINED.

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

SEC. 63. TAXABLE INCOME DEFINED.

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

           *       *       *       *       *       *       *

SEC. 67. [2-PERCENT FLOOR ON]  DENIAL OF MISCELLANEOUS ITEMIZED 
                    DEDUCTIONS.

  [(a) General rule.--In the case of an individual, the 
miscellaneous itemized deductions for any taxable year shall be 
allowed only to the extent that the aggregate of such 
deductions exceeds 2 percent of adjusted gross income.]
  (a) In General.--In the case of an individual, miscellaneous 
itemized deductions shall not be allowed.
  (b) Miscellaneous itemized deductions.--For purposes of this 
section, the term ``miscellaneous itemized deductions'' means 
the itemized deductions other than--
          (1) the deduction under section 163 (relating to 
        interest),
          (2) the deduction under section 164 (relating to 
        taxes),
          (3) the deduction under section 165(a) for casualty 
        or theft losses described in paragraph (2) or (3) of 
        section 165(c) or for losses described in section 
        165(d),
          (4) the deductions under section 170 (relating to 
        charitable, etc., contributions and gifts) and section 
        642(c) (relating to deduction for amounts paid or 
        permanently set aside for a charitable purpose),
          (5) the deduction under section 213 (relating to 
        medical, dental, etc., expenses),
          (6) any deduction allowable for impairment-related 
        work expenses,
          (7) the deduction under section 691(c) (relating to 
        deduction for estate tax in case of income in respect 
        of the decedent),
          (8) any deduction allowable in connection with 
        personal property used in a short sale,
          (9) the deduction under section 1341 (relating to 
        computation of tax where taxpayer restores substantial 
        amount held under claim of right),
          (10) the deduction under section 72(b)(3) (relating 
        to deduction where annuity payments cease before 
        investment recovered),
          (11) the deduction under section 171 (relating to 
        deduction for amortizable bond premium), and
          (12) the deduction under section 216 (relating to 
        deductions in connection with cooperative housing 
        corporations).
  (c) Disallowance of indirect deduction through pass-thru 
entity.--
          (1) In general.--The Secretary shall prescribe 
        regulations which prohibit the indirect deduction 
        through pass-thru entities of amounts which are not 
        allowable as a deduction if paid or incurred directly 
        by an individual and which contain such reporting 
        requirements as may be necessary to carry out the 
        purposes of this subsection.
          (2) Treatment of publicly offered regulated 
        investment companies.--
                  (A) In general.--Paragraph (1) shall not 
                apply with respect to any publicly offered 
                regulated investment company.
                  (B) Publicly offered regulated investment 
                companies.--For purposes of this subsection--
                          (i) In general.--The term ``publicly 
                        offered regulated investment company'' 
                        means a regulated investment company 
                        the shares of which are--
                                  (I) continuously offered 
                                pursuant to a public offering 
                                (within the meaning of section 
                                4 of the Securities Act of 
                                1933, as amended (15 U.S.C. 77a 
                                to 77aa)),
                                  (II) regularly traded on an 
                                established securities market, 
                                or
                                  (III) held by or for no fewer 
                                than 500 persons at all times 
                                during the taxable year.
                          (ii) Secretary may reduce 500 person 
                        requirement.--The Secretary may by 
                        regulation decrease the minimum 
                        shareholder requirement of clause 
                        (i)(III) in the case of regulated 
                        investment companies which experience a 
                        loss of shareholders through net 
                        redemptions of their shares.
          (3) Treatment of certain other entities.--Paragraph 
        (1) shall not apply--
                  (A) with respect to cooperatives and real 
                estate investment trusts, and
                  (B) except as provided in regulations, with 
                respect to estates and trusts.
  (d) Impairment-related work expenses.--For purposes of this 
section, the term ``impairment-related work expenses'' means 
expenses--
          (1) of a handicapped individual (as defined in 
        section 190(b)(3)) for attendant care services at the 
        individual's place of employment and other expenses in 
        connection with such place of employment which are 
        necessary for such individual to be able to work, and
          (2) with respect to which a deduction is allowable 
        under section 162 (determined without regard to this 
        section).
  [(e) Determination of adjusted gross income in case of 
estates and trusts.--For purposes of this section, the adjusted 
gross income of an estate or trust shall be computed in the 
same manner as in the case of an individual, except that--
          [(1) the deductions for costs which are paid or 
        incurred in connection with the administration of the 
        estate or trust and which would not have been incurred 
        if the property were not held in such trust or estate, 
        and
          [(2) the deductions allowable under sections 642(b), 
        651, and 661, shall be treated as
allowable in arriving at adjusted gross income. Under 
regulations, appropriate adjustments shall be made in the 
application of part I of subchapter J of this chapter to take 
into account the provisions of this section.]
  (f) Coordination with other limitation.--This section shall 
be applied before the application of the dollar limitation of 
the second sentence of section 162(a) (relating to trade or 
business expenses).
  [(g) Suspension for taxable years 2018 through 2025.--
Notwithstanding subsection (a), no miscellaneous itemized 
deduction shall be allowed for any taxable year beginning after 
December 31, 2017, and before January 1, 2026.]

[SEC. 68. OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

  [(a) General rule.--In the case of an individual whose 
adjusted gross income exceeds the applicable amount, the amount 
of the itemized deductions otherwise allowable for the taxable 
year shall be reduced by the lesser of--
          [(1) 3 percent of the excess of adjusted gross income 
        over the applicable amount, or
          [(2) 80 percent of the amount of the itemized 
        deductions otherwise allowable for such taxable year.
  [(b) Applicable amount.--
          [(1) In general.--For purposes of this section, the 
        term ``applicable amount'' means--
                  [(A) $300,000 in the case of a joint return 
                or a surviving spouse (as defined in section 
                2(a)),
                  [(B) $275,000 in the case of a head of 
                household (as defined in section 2(b)),
                  [(C) $250,000 in the case of an individual 
                who is not married and who is not a surviving 
                spouse or head of household, and
                  [(D) \1/2\ the amount applicable under 
                subparagraph (A) (after adjustment, if any, 
                under paragraph (2)) in the case of a married 
                individual filing a separate return.
        For purposes of this paragraph, marital status shall be 
        determined under section 7703.
          [(2) Inflation adjustment.--In the case of any 
        taxable year beginning in calendar years after 2013, 
        each of the dollar amounts under subparagraphs (A), 
        (B), and (C) of paragraph (1) shall be increased by an 
        amount equal to--
                  [(A) such dollar amount, multiplied by
                  [(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, except that 
                section 1(f)(3)(A)(ii) shall be applied by 
                substituting ``2012'' for ``2016''.
        If any amount after adjustment under the preceding 
        sentence is not a multiple of $50, such amount shall be 
        rounded to the next lowest multiple of $50.
  [(c) Exception for certain itemized deductions.--For purposes 
of this section, the term ``itemized deductions'' does not 
include--
          [(1) the deduction under section 213 (relating to 
        medical, etc. expenses),
          [(2) any deduction for investment interest (as 
        defined in section 163(d)), and
          [(3) the deduction under section 165(a) for casualty 
        or theft losses described in paragraph (2) or (3) of 
        section 165(c) or for losses described in section 
        165(d).
  [(d) Coordination with other limitations.--This section shall 
be applied after the application of any other limitation on the 
allowance of any itemized deduction.
  [(e) Exception for estates and trusts.--This section shall 
not apply to any estate or trust.
  [(f) Section not to apply.--This section shall not apply to 
any taxable year beginning after December 31, 2017, and before 
January 1, 2026.]

PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME

           *       *       *       *       *       *       *

SEC. 72. ANNUITIES; CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE 
                    CONTRACTS.

  (a) General rules for annuities.--
          (1) Income inclusion.--Except as otherwise provided 
        in this chapter, gross income includes any amount 
        received as an annuity (whether for a period certain or 
        during one or more lives) under an annuity, endowment, 
        or life insurance contract.
          (2) Partial annuitization.--If any amount is received 
        as an annuity for a period of 10 years or more or 
        during one or more lives under any portion of an 
        annuity, endowment, or life insurance contract--
                  (A) such portion shall be treated as a 
                separate contract for purposes of this section,
                  (B) for purposes of applying subsections (b), 
                (c), and (e), the investment in the contract 
                shall be allocated pro rata between each 
                portion of the contract from which amounts are 
                received as an annuity and the portion of the 
                contract from which amounts are not received as 
                an annuity, and
                  (C) a separate annuity starting date under 
                subsection (c)(4) shall be determined with 
                respect to each portion of the contract from 
                which amounts are received as an annuity.
  (b) Exclusion ratio.--
          (1) In general.--Gross income does not include that 
        part of any amount received as an annuity under an 
        annuity, endowment, or life insurance contract which 
        bears the same ratio to such amount as the investment 
        in the contract (as of the annuity starting date) bears 
        to the expected return under the contract (as of such 
        date).
          (2) Exclusion limited to investment.--The portion of 
        any amount received as an annuity which is excluded 
        from gross income under paragraph (1) shall not exceed 
        the unrecovered investment in the contract immediately 
        before the receipt of such amount.
          (3) Deduction where annuity payments cease before 
        entire investment recovered.--
                  (A) In general.--If--
                          (i) after the annuity starting date, 
                        payments as an annuity under the 
                        contract cease by reason of the death 
                        of an annuitant, and
                          (ii) as of the date of such 
                        cessation, there is unrecovered 
                        investment in the contract,
                the amount of such unrecovered investment (in 
                excess of any amount specified in subsection 
                (e)(5) which was not included in gross income) 
                shall be allowed as a deduction to the 
                annuitant for his last taxable year.
                  (B) Payments to other persons.--In the case 
                of any contract which provides for payments 
                meeting the requirements of subparagraphs (B) 
                and (C) of subsection (c)(2), the deduction 
                under subparagraph (A) shall be allowed to the 
                person entitled to such payments for the 
                taxable year in which such payments are 
                received.
                  (C) Net operating loss deductions provided.--
                For purposes of section 172, a deduction 
                allowed under this paragraph shall be treated 
                as if it were attributable to a trade or 
                business of the taxpayer.
          (4) Unrecovered investment.--For purposes of this 
        subsection, the unrecovered investment in the contract 
        as of any date is--
                  (A) the investment in the contract 
                (determined without regard to subsection 
                (c)(2)) as of the annuity starting date, 
                reduced by
                  (B) the aggregate amount received under the 
                contract on or after such annuity starting date 
                and before the date as of which the 
                determination is being made, to the extent such 
                amount was excludable from gross income under 
                this subtitle.
  (c) Definitions.--
          (1) Investment in the contract.--For purposes of 
        subsection (b), the investment in the contract as of 
        the annuity starting date is--
                  (A) the aggregate amount of premiums or other 
                consideration paid for the contract, minus
                  (B) the aggregate amount received under the 
                contract before such date, to the extent that 
                such amount was excludable from gross income 
                under this subtitle or prior income tax laws.
          (2) Adjustment in investment where there is refund 
        feature.--If--
                  (A) the expected return under the contract 
                depends in whole or in part on the life 
                expectancy of one or more individuals;
                  (B) the contract provides for payments to be 
                made to a beneficiary (or to the estate of an 
                annuitant) on or after the death of the 
                annuitant or annuitants; and
                  (C) such payments are in the nature of a 
                refund of the consideration paid,
        then the value (computed without discount for interest) 
        of such payments on the annuity starting date shall be 
        subtracted from the amount determined under paragraph 
        (1). Such value shall be computed in accordance with 
        actuarial tables prescribed by the Secretary. For 
        purposes of this paragraph and of subsection (e)(2)(A), 
        the term ``refund of the consideration paid'' includes 
        amounts payable after the death of an annuitant by 
        reason of a provision in the contract for a life 
        annuity with minimum period of payments certain, but 
        (if part of the consideration was contributed by an 
        employer) does not include that part of any payment to 
        a beneficiary (or to the estate of the annuitant) which 
        is not attributable to the consideration paid by the 
        employee for the contract as determined under paragraph 
        (1)(A).
          (3) Expected return.--For purposes of subsection (b), 
        the expected return under the contract shall be 
        determined as follows:
                  (A) Life expectancy.--If the expected return 
                under the contract, for the period on and after 
                the annuity starting date, depends in whole or 
                in part on the life expectancy of one or more 
                individuals, the expected return shall be 
                computed with reference to actuarial tables 
                prescribed by the Secretary.
                  (B) Installment payments.--If subparagraph 
                (A) does not apply, the expected return is the 
                aggregate of the amounts receivable under the 
                contract as an annuity.
          (4) Annuity starting date.--For purposes of this 
        section, the annuity starting date in the case of any 
        contract is the first day of the first period for which 
        an amount is received as an annuity under the contract.
  (d) Special rules for qualified employer retirement plans.--
          (1) Simplified method of taxing annuity payments.--
                  (A) In general.--In the case of any amount 
                received as an annuity under a qualified 
                employer retirement plan--
                          (i) subsection (b) shall not apply, 
                        and
                          (ii) the investment in the contract 
                        shall be recovered as provided in this 
                        paragraph.
                  (B) Method of recovering investment in 
                contract.--
                          (i) In general.--Gross income shall 
                        not include so much of any monthly 
                        annuity payment under a qualified 
                        employer retirement plan as does not 
                        exceed the amount obtained by 
                        dividing--
                                  (I) the investment in the 
                                contract (as of the annuity 
                                starting date), by
                                  (II) the number of 
                                anticipated payments determined 
                                under the table contained in 
                                clause (iii) (or, in the case 
                                of a contract to which 
                                subsection (c)(3)(B) applies, 
                                the number of monthly annuity 
                                payments under such contract).
                          (ii) Certain rules made applicable.--
                        Rules similar to the rules of 
                        paragraphs (2) and (3) of subsection 
                        (b) shall apply for purposes of this 
                        paragraph.
                          (iii) Number of anticipated 
                        payments.--If the annuity is payable 
                        over the life of a single individual, 
                        the number of anticipated payments 
                        shall be determined as follows:

 
------------------------------------------------------------------------
If the age of the annuitant on the   The number of anticipated payments
     annuity starting date is:                       is:
------------------------------------------------------------------------
Not more than 55...............     360
More than 55 but not more than 60   310
More than 60 but not more than 65   260
More than 65 but not more than 70   210
More than 70...................     160.
------------------------------------------------------------------------

                          (iv) Number of anticipated payments 
                        where more than one life.--If the 
                        annuity is payable over the lives of 
                        more than 1 individual, the number of 
                        anticipated payments shall be 
                        determined as follows:

 
------------------------------------------------------------------------
  If the combined ages of annuitants
                 are:                            The number is:
------------------------------------------------------------------------
Not more than 110                      410
 ................................
More than 110 but not more than 120    360
 ..............
More than 120 but not more than 130    310
 ..............
More than 130 but not more than 140    260
 ..............
More than 140                          210.
 ....................................
------------------------------------------------------------------------

                  (C) Adjustment for refund feature not 
                applicable.--For purposes of this paragraph, 
                investment in the contract shall be determined 
                under subsection (c)(1) without regard to 
                subsection (c)(2).
                  (D) Special rule where lump sum paid in 
                connection with commencement of annuity 
                payments.--If, in connection with the 
                commencement of annuity payments under any 
                qualified employer retirement plan, the 
                taxpayer receives a lump-sum payment--
                          (i) such payment shall be taxable 
                        under subsection (e) as if received 
                        before the annuity starting date, and
                          (ii) the investment in the contract 
                        for purposes of this paragraph shall be 
                        determined as if such payment had been 
                        so received.
                  (E) Exception.--This paragraph shall not 
                apply in any case where the primary annuitant 
                has attained age 75 on the annuity starting 
                date unless there are fewer than 5 years of 
                guaranteed payments under the annuity.
                  (F) Adjustment where annuity payments not on 
                monthly basis.--In any case where the annuity 
                payments are not made on a monthly basis, 
                appropriate adjustments in the application of 
                this paragraph shall be made to take into 
                account the period on the basis of which such 
                payments are made.
                  (G) Qualified employer retirement plan.--For 
                purposes of this paragraph, the term 
                ``qualified employer retirement plan'' means 
                any plan or contract described in paragraph 
                (1), (2), or (3) of section 4974(c).
          (2) Treatment of employee contributions under defined 
        contribution plans.--For purposes of this section, 
        employee contributions (and any income allocable 
        thereto) under a defined contribution plan may be 
        treated as a separate contract.
  (e) Amounts not received as annuities.--
          (1) Application of subsection.--
                  (A) In general.--This subsection shall apply 
                to any amount which--
                          (i) is received under an annuity, 
                        endowment, or life insurance contract, 
                        and
                          (ii) is not received as an annuity, 
                        if no provision of this subtitle (other 
                        than this subsection) applies with 
                        respect to such amount.
                  (B) Dividends.--For purposes of this section, 
                any amount received which is in the nature of a 
                dividend or similar distribution shall be 
                treated as an amount not received as an 
                annuity.
          (2) General rule.--Any amount to which this 
        subsection applies--
                  (A) if received on or after the annuity 
                starting date, shall be included in gross 
                income, or
                  (B) if received before the annuity starting 
                date--
                          (i) shall be included in gross income 
                        to the extent allocable to income on 
                        the contract, and
                          (ii) shall not be included in gross 
                        income to the extent allocable to the 
                        investment in the contract.
          (3) Allocation of amounts to income and investment.--
        For purposes of paragraph (2)(B)--
                  (A) Allocation to income.--Any amount to 
                which this subsection applies shall be treated 
                as allocable to income on the contract to the 
                extent that such amount does not exceed the 
                excess (if any) of--
                          (i) the cash value of the contract 
                        (determined without regard to any 
                        surrender charge) immediately before 
                        the amount is received, over
                          (ii) the investment in the contract 
                        at such time.
                  (B) Allocation to investment.--Any amount to 
                which this subsection applies shall be treated 
                as allocable to investment in the contract to 
                the extent that such amount is not allocated to 
                income under subparagraph (A).
          (4) Special rules for application of paragraph 
        (2)(B).--For purposes of paragraph (2)(B)--
                  (A) Loans treated as distributions.--If, 
                during any taxable year, an individual--
                          (i) receives (directly or indirectly) 
                        any amount as a loan under any contract 
                        to which this subsection applies, or
                          (ii) assigns or pledges (or agrees to 
                        assign or pledge) any portion of the 
                        value of any such contract,
                such amount or portion shall be treated as 
                received under the contract as an amount not 
                received as an annuity. The preceding sentence 
                shall not apply for purposes of determining 
                investment in the contract, except that the 
                investment in the contract shall be increased 
                by any amount included in gross income by 
                reason of the amount treated as received under 
                the preceding sentence.
                  (B) Treatment of policyholder dividends.--Any 
                amount described in paragraph (1)(B) shall not 
                be included in gross income under paragraph 
                (2)(B)(i) to the extent such amount is retained 
                by the insurer as a premium or other 
                consideration paid for the contract.
                  (C) Treatment of transfers without adequate 
                consideration.--
                          (i) In general.--If an individual who 
                        holds an annuity contract transfers it 
                        without full and adequate 
                        consideration, such individual shall be 
                        treated as receiving an amount equal to 
                        the excess of--
                                  (I) the cash surrender value 
                                of such contract at the time of 
                                transfer, over
                                  (II) the investment in such 
                                contract at such time,
                        under the contract as an amount not 
                        received as an annuity.
                          (ii) Exception for certain transfers 
                        between spouses or former spouses.--
                        Clause (i) shall not apply to any 
                        transfer to which section 1041(a) 
                        (relating to transfers of property 
                        between spouses or incident to divorce) 
                        applies.
                          (iii) Adjustment to investment in 
                        contract of transferee.--If under 
                        clause (i) an amount is included in the 
                        gross income of the transferor of an 
                        annuity contract, the investment in the 
                        contract of the transferee in such 
                        contract shall be increased by the 
                        amount so included.
          (5) Retention of existing rules in certain cases.--
                  (A) In general.--In any case to which this 
                paragraph applies--
                          (i) paragraphs (2)(B) and (4)(A) 
                        shall not apply, and
                          (ii) if paragraph (2)(A) does not 
                        apply, the amount shall be included in 
                        gross income, but only to the extent it 
                        exceeds the investment in the contract.
                  (B) Existing contracts.--This paragraph shall 
                apply to contracts entered into before August 
                14, 1982. Any amount allocable to investment in 
                the contract after August 13, 1982, shall be 
                treated as from a contract entered into after 
                such date.
                  (C) Certain life insurance and endowment 
                contracts.--Except as provided in paragraph 
                (10) and except to the extent prescribed by the 
                Secretary by regulations, this paragraph shall 
                apply to any amount not received as an annuity 
                which is received under a life insurance or 
                endowment contract.
                  (D) Contracts under qualified plans.--Except 
                as provided in paragraph (8), this paragraph 
                shall apply to any amount received--
                          (i) from a trust described in section 
                        401(a)which is exempt from tax under 
                        section 501(a),
                          (ii) from a contract--
                                  (I) purchased by a trust 
                                described in clause (i),
                                  (II) purchased as part of a 
                                plan described in section 
                                403(a),
                                  (III) described in section 
                                403(b), or
                                  (IV) provided for employees 
                                of a life insurance company 
                                under a plan described in 
                                section 818(a)(3), or
                          (iii) from an individual retirement 
                        account or an individual retirement 
                        annuity.
                Any dividend described in section 404(k) which 
                is received by a participant or beneficiary 
                shall, for purposes of this subparagraph, be 
                treated as paid under a separate contract to 
                which clause (ii)(I) applies.
                  (E) Full refunds, surrenders, redemptions, 
                and maturities.--This paragraph shall apply 
                to--
                          (i) any amount received, whether in a 
                        single sum or otherwise, under a 
                        contract in full discharge of the 
                        obligation under the contract which is 
                        in the nature of a refund of the 
                        consideration paid for the contract, 
                        and
                          (ii) any amount received under a 
                        contract on its complete surrender, 
                        redemption, or maturity.
                In the case of any amount to which the 
                preceding sentence applies, the rule of 
                paragraph (2)(A) shall not apply.
          (6) Investment in the contract.--For purposes of this 
        subsection, the investment in the contract as of any 
        date is--
                  (A) the aggregate amount of premiums or other 
                consideration paid for the contract before such 
                date, minus
                  (B) the aggregate amount received under the 
                contract before such date, to the extent that 
                such amount was excludable from gross income 
                under this subtitle or prior income tax laws.
          (8) Extension of paragraph (2)(b) to qualified plans
                  (A) In general.--Notwithstanding any other 
                provision of this subsection, in the case of 
                any amount received before the annuity starting 
                date from a trust or contract described in 
                paragraph (5)(D), paragraph (2)(B) shall apply 
                to such amounts.
                  (B) Allocation of amount received.--For 
                purposes of paragraph (2)(B), the amount 
                allocated to the investment in the contract 
                shall be the portion of the amount described in 
                subparagraph (A) which bears the same ratio to 
                such amount as the investment in the contract 
                bears to the account balance. The determination 
                under the preceding sentence shall be made as 
                of the time of the distribution or at such 
                other time as the Secretary may prescribe.
                  (C) Treatment of forfeitable rights.--If an 
                employee does not have a nonforfeitable right 
                to any amount under any trust or contract to 
                which subparagraph (A) applies, such amount 
                shall not be treated as part of the account 
                balance.
                  (D) Investment in the contract before 1987.--
                In the case of a plan which on May 5, 1986, 
                permitted withdrawal of any employee 
                contributions before separation from service, 
                subparagraph (A) shall apply only to the extent 
                that amounts received before the annuity 
                starting date (when increased by amounts 
                previously received under the contract after 
                December 31, 1986) exceed the investment in the 
                contract as of December 31, 1986.
          (9) Extension of paragraph (2)(b) to qualified 
        tuition programs and Coverdell education savings 
        accounts.--Notwithstanding any other provision of this 
        subsection, paragraph (2)(B) shall apply to amounts 
        received under a qualified tuition program (as defined 
        in section 529(b)) or under a Coverdell education 
        savings account (as defined in section 530(b)). The 
        rule of paragraph (8)(B) shall apply for purposes of 
        this paragraph.
          (10) Treatment of modified endowment contracts.--
                  (A) In general.--Notwithstanding paragraph 
                (5)(C), in the case of any modified endowment 
                contract (as defined in section 7702A)--
                          (i) paragraphs (2)(B) and (4)(A) 
                        shall apply, and
                          (ii) in applying paragraph (4)(A), 
                        ``any person'' shall be substituted for 
                        ``an individual''.
                  (B) Treatment of certain burial contracts.--
                Notwithstanding subparagraph (A), paragraph 
                (4)(A) shall not apply to any assignment (or 
                pledge) of a modified endowment contract if 
                such assignment (or pledge) is solely to cover 
                the payment of expenses referred to in section 
                7702(e)(2)(C)(iii) and if the maximum death 
                benefit under such contract does not exceed 
                $25,000.
          (11) Special rules for certain combination contracts 
        providing long-term care insurance.--Notwithstanding 
        paragraphs (2), (5)(C), and (10), in the case of any 
        charge against the cash value of an annuity contract or 
        the cash surrender value of a life insurance contract 
        made as payment for coverage under a qualified long-
        term care insurance contract which is part of or a 
        rider on such annuity or life insurance contract--
                  (A) the investment in the contract shall be 
                reduced (but not below zero) by such charge, 
                and
                  (B) such charge shall not be includible in 
                gross income.
          (12) Anti-abuse rules.--
                  (A) In general.--For purposes of determining 
                the amount includible in gross income under 
                this subsection--
                          (i) all modified endowment contracts 
                        issued by the same company to the same 
                        policyholder during any calendar year 
                        shall be treated as 1 modified 
                        endowment contract, and
                          (ii) all annuity contracts issued by 
                        the same company to the same 
                        policyholder during any calendar year 
                        shall be treated as 1 annuity contract.
                The preceding sentence shall not apply to any 
                contract described in paragraph (5)(D).
                  (B) Regulatory authority.--The Secretary may 
                by regulations prescribe such additional rules 
                as may be necessary or appropriate to prevent 
                avoidance of the purposes of this subsection 
                through serial purchases of contracts or 
                otherwise.
  (f) Special rules for computing employees' contributions.--In 
computing, for purposes of subsection (c)(1)(A), the aggregate 
amount of premiums or other consideration paid for the 
contract, and for purposes of subsection (e)(6), the aggregate 
premiums or other consideration paid, amounts contributed by 
the employer shall be included, but only to the extent that--
          (1) such amounts were includible in the gross income 
        of the employee under this subtitle or prior income tax 
        laws; or
          (2) if such amounts had been paid directly to the 
        employee at the time they were contributed, they would 
        not have been includible in the gross income of the 
        employee under the law applicable at the time of such 
        contribution.
Paragraph (2) shall not apply to amounts which were contributed 
by the employer after December 31, 1962, and which would not 
have been includible in the gross income of the employee by 
reason of the application of section 911 if such amounts had 
been paid directly to the employee at the time of contribution. 
The preceding sentence shall not apply to amounts which were 
contributed by the employer, as determined under regulations 
prescribed by the Secretary, to provide pension or annuity 
credits, to the extent such credits are attributable to 
services performed before January 1, 1963, and are provided 
pursuant to pension or annuity plan provisions in existence on 
March 12, 1962, and on that date applicable to such services, 
or to the extent such credits are attributable to services 
performed as a foreign missionary (within the meaning of 
section 403(b)(2)(D)(iii), as in effect before the enactment of 
the Economic Growth and Tax Relief Reconciliation Act of 2001).
  (g) Rules for transferee where transfer was for value.--Where 
any contract (or any interest therein) is transferred (by 
assignment or otherwise) for a valuable consideration, to the 
extent that the contract (or interest therein) does not, in the 
hands of the transferee, have a basis which is determined by 
reference to the basis in the hands of the transferor, then--
          (1) for purposes of this section, only the actual 
        value of such consideration, plus the amount of the 
        premiums and other consideration paid by the transferee 
        after the transfer, shall be taken into account in 
        computing the aggregate amount of the premiums or other 
        consideration paid for the contract;
          (2) for purposes of subsection (c)(1)(B), there shall 
        be taken into account only the aggregate amount 
        received under the contract by the transferee before 
        the annuity starting date, to the extent that such 
        amount was excludable from gross income under this 
        subtitle or prior income tax laws; and
          (3) the annuity starting date is the first day of the 
        first period for which the transferee received an 
        amount under the contract as an annuity.
For purposes of this subsection, the term ``transferee'' 
includes a beneficiary of, or the estate of, the transferee.
  (h) Option to receive annuity in lieu of lump sum.--If--
          (1) a contract provides for payment of a lump sum in 
        full discharge of an obligation under the contract, 
        subject to an option to receive an annuity in lieu of 
        such lump sum;
          (2) the option is exercised within 60 days after the 
        day on which such lump sum first became payable; and
          (3) part or all of such lump sum would (but for this 
        subsection) be includible in gross income by reason of 
        subsection (e)(1), then, for purposes of this subtitle, 
        no part of such lump sum shall be considered as 
        includible in gross income at the time such lump sum 
        first became payable.
  (j) Interest.--Notwithstanding any other provision of this 
section, if any amount is held under an agreement to pay 
interest thereon, the interest payments shall be included in 
gross income.
  (l) Face-amount certificates.--For purposes of this section, 
the term ``endowment contract'' includes a face-amount 
certificate, as defined in section 2(a)(15) of the Investment 
Company Act of 1940 (15 U.S.C., sec. 80a-2), issued after 
December 31, 1954.
  (m) Special rules applicable to employee annuities and 
distributions under employee plans.--
          (2) Computation of consideration paid by the 
        employee.--In computing--
                  (A) the aggregate amount of premiums or other 
                consideration paid for the contract for 
                purposes of subsection (c)(1)(A) (relating to 
                the investment in the contract), and
                  (B) the aggregate premiums or other 
                consideration paid for purposes of subsection 
                (e)(6) (relating to certain amounts not 
                received as an annuity),
        any amount allowed as a deduction with respect to the 
        contract under section 404 which was paid while the 
        employee was an employee within the meaning of section 
        401(c)(1) shall be treated as consideration contributed 
        by the employer, and there shall not be taken into 
        account any portion of the premiums or other 
        consideration for the contract paid while the employee 
        was an owner-employee which is properly allocable (as 
        determined under regulations prescribed by the 
        Secretary) to the cost of life, accident, health, or 
        other insurance.
          (3) Life insurance contracts.--
                  (A) This paragraph shall apply to any life 
                insurance contract--
                          (i) purchased as a part of a plan 
                        described in section 403(a), or
                          (ii) purchased by a trust described 
                        in section 401(a) which is exempt from 
                        tax under section 501(a) if the 
                        proceeds of such contract are payable 
                        directly or indirectly to a participant 
                        in such trust or to a beneficiary of 
                        such participant.
                  (B) Any contribution to a plan described in 
                subparagraph (A)(i) or a trust described in 
                subparagraph (A)(ii) which is allowed as a 
                deduction under section 404, and any income of 
                a trust described in subparagraph (A)(ii), 
                which is determined in accordance with 
                regulations prescribed by the Secretary to have 
                been applied to purchase the life insurance 
                protection under a contract described in 
                subparagraph (A), is includible in the gross 
                income of the participant for the taxable year 
                when so applied.
                  (C) In the case of the death of an individual 
                insured under a contract described in 
                subparagraph (A), an amount equal to the cash 
                surrender value of the contract immediately 
                before the death of the insured shall be 
                treated as a payment under such plan or a 
                distribution by such trust, and the excess of 
                the amount payable by reason of the death of 
                the insured over such cash surrender value 
                shall not be includible in gross income under 
                this section and shall be treated as provided 
                in section 101.
          (5) Penalties applicable to certain amounts received 
        by 5-percent owners (A) This paragraph applies to 
        amounts which are received from a qualified trust 
        described in section 401(a) or under a plan described 
        in section 403(a) at any time by an individual who is, 
        or has been, a 5-percent owner, or by a successor of 
        such an individual, but only to the extent such amounts 
        are determined, under regulations prescribed by the 
        Secretary, to exceed the benefits provided for such 
        individual under the plan formula.
                  (B) If a person receives an amount to which 
                this paragraph applies, his tax under this 
                chapter for the taxable year in which such 
                amount is received shall be increased by an 
                amount equal to 10 percent of the portion of 
                the amount so received which is includible in 
                his gross income for such taxable year.
                  (C) For purposes of this paragraph, the term 
                ``5-percent owner'' means any individual who, 
                at any time during the 5 plan years preceding 
                the plan year ending in the taxable year in 
                which the amount is received, is a 5-percent 
                owner (as defined in section 416(i)(1)(B)).
          (6) Owner-employee defined.--For purposes of this 
        subsection, the term ``owner-employee'' has the meaning 
        assigned to it by section 401(c)(3) and includes an 
        individual for whose benefit an individual retirement 
        account or annuity described in section 408(a) or (b) 
        is maintained. For purposes of the preceding sentence, 
        the term ``owner-employee'' shall include an employee 
        within the meaning of section 401(c)(1).
          (7) Meaning of disabled.--For purposes of this 
        section, an individual shall be considered to be 
        disabled if he is unable to engage in any substantial 
        gainful activity by reason of any medically 
        determinable physical or mental impairment which can be 
        expected to result in death or to be of long-continued 
        and indefinite duration. An individual shall not be 
        considered to be disabled unless he furnishes proof of 
        the existence thereof in such form and manner as the 
        Secretary may require.
          (10) Determination of investment in the contract in 
        the case of qualified domestic relations orders.--Under 
        regulations prescribed by the Secretary, in the case of 
        a distribution or payment made to an alternate payee 
        who is the spouse or former spouse of the participant 
        pursuant to a qualified domestic relations order (as 
        defined in section 414(p)), the investment in the 
        contract as of the date prescribed in such regulations 
        shall be allocated on a pro rata basis between the 
        present value of such distribution or payment and the 
        present value of all other benefits payable with 
        respect to the participant to which such order relates.
  (n) Annuities under retired serviceman's family protection 
plan or survivor benefit plan.--Subsection (b) shall not apply 
in the case of amounts received after December 31, 1965, as an 
annuity under chapter 73 of title 10 of the United States Code, 
but all such amounts shall be excluded from gross income until 
there has been so excluded (under section 122(b)(1) or this 
section, including amounts excluded before January 1, 1966) an 
amount equal to the consideration for the contract (as defined 
by section 122(b)(2)), plus any amount treated pursuant to 
section 101 (b)(2)(D) (as in effect on the day before the date 
of the enactment of the Small Business Job Protection Act of 
1996) as additional consideration paid by the employee. 
Thereafter all amounts so received shall be included in gross 
income.
  (o) Special rules for distributions from qualified plans to 
which employee made deductible contributions.--
          (1) Treatment of contributions.--For purposes of this 
        section and sections 402 and 403, notwithstanding 
        section 414(h), any deductible employee contribution 
        made to a qualified employer plan or government plan 
        shall be treated as an amount contributed by the 
        employer which is not includible in the gross income of 
        the employee.
          (3) Amounts constructively received.--
                  (A) In general.--For purposes of this 
                subsection, rules similar to the rules provided 
                by subsection (p) (other than the exception 
                contained in paragraph (2) thereof) shall 
                apply.
                  (B) Purchase of life insurance.--To the 
                extent any amount of accumulated deductible 
                employee contributions of an employee are 
                applied to the purchase of life insurance 
                contracts, such amount shall be treated as 
                distributed to the employee in the year so 
                applied.
          (4) Special rule for treatment of rollover amounts.--
        For purposes of sections 402(c), 403(a)(4), 403(b)(8), 
        408(d)(3), and 457(e)(16), the Secretary shall 
        prescribe regulations providing for such allocations of 
        amounts attributable to accumulated deductible employee 
        contributions, and for such other rules, as may be 
        necessary to insure that such accumulated deductible 
        employee contributions do not become eligible for 
        additional tax benefits (or freed from limitations) 
        through the use of rollovers.
          (5) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Deductible employee contributions.--The 
                term ``deductible employee contributions'' 
                means any qualified voluntary employee 
                contribution (as defined in section 219(e)(2)) 
                made after December 31, 1981, in a taxable year 
                beginning after such date and made for a 
                taxable year beginning before January 1, 1987, 
                and allowable as a deduction under section 
                219(a) for such taxable year.
                  (B) Accumulated deductible employee 
                contributions.--The term ``accumulated 
                deductible employee contributions'' means the 
                deductible employee contributions--
                          (i) increased by the amount of income 
                        and gain allocable to such 
                        contributions, and
                          (ii) reduced by the sum of the amount 
                        of loss and expense allocable to such 
                        contributions and the amounts 
                        distributed with respect to the 
                        employee which are attributable to such 
                        contributions (or income or gain 
                        allocable to such contributions).
                  (C) Qualified employer plan.--The term 
                ``qualified employer plan'' has the meaning 
                given to such term by subsection (p)(3)(A)(i).
                  (D) Government plan.--The term ``government 
                plan'' has the meaning given such term by 
                subsection (p)(3)(B).
          (6) Ordering rules.--Unless the plan specifies 
        otherwise, any distribution from such plan shall not be 
        treated as being made from the accumulated deductible 
        employee contributions, until all other amounts to the 
        credit of the employee have been distributed.
  (p) Loans treated as distributions.--For purposes of this 
section--
          (1) Treatment as distributions.--
                  (A) Loans.--If during any taxable year a 
                participant or beneficiary receives (directly 
                or indirectly) any amount as a loan from a 
                qualified employer plan, such amount shall be 
                treated as having been received by such 
                individual as a distribution under such plan.
                  (B) Assignments or pledges.--If during any 
                taxable year a participant or beneficiary 
                assigns (or agrees to assign) or pledges (or 
                agrees to pledge) any portion of his interest 
                in a qualified employer plan, such portion 
                shall be treated as having been received by 
                such individual as a loan from such plan.
          (2) Exception for certain loans.--
                  (A) General rule.--Paragraph (1) shall not 
                apply to any loan to the extent that such loan 
                (when added to the outstanding balance of all 
                other loans from such plan whether made on, 
                before, or after August 13, 1982), does not 
                exceed the lesser of--
                          (i) $50,000, reduced by the excess 
                        (if any) of--
                                  (I) the highest outstanding 
                                balance of loans from the plan 
                                during the 1-year period ending 
                                on the day before the date on 
                                which such loan was made, over
                                  (II) the outstanding balance 
                                of loans from the plan on the 
                                date on which such loan was 
                                made, or
                          (ii) the greater of (I) one-half of 
                        the present value of the nonforfeitable 
                        accrued benefit of the employee under 
                        the plan, or (II) $10,000.
                For purposes of clause (ii), the present value 
                of the nonforfeitable accrued benefit shall be 
                determined without regard to any accumulated 
                deductible employee contributions (as defined 
                in subsection (o)(5)(B)).
                  (B) Requirement that loan be repayable within 
                5 years.--
                          (i) In general.--Subparagraph (A) 
                        shall not apply to any loan unless such 
                        loan, by its terms, is required to be 
                        repaid within 5 years.
                          (ii) Exception for home loans.--
                        Clause (i) shall not apply to any loan 
                        used to acquire any dwelling unit which 
                        within a reasonable time is to be used 
                        (determined at the time the loan is 
                        made) as the principal residence of the 
                        participant.
                  (C) Requirement of level amortization.--
                Except as provided in regulations, this 
                paragraph shall not apply to any loan unless 
                substantially level amortization of such loan 
                (with payments not less frequently than 
                quarterly) is required over the term of the 
                loan.
                  (D) Related employers and related plans.--For 
                purposes of this paragraph--
                          (i) the rules of subsections (b), 
                        (c), and (m) of section 414 shall 
                        apply, and
                          (ii) all plans of an employer 
                        (determined after the application of 
                        such subsections) shall be treated as 1 
                        plan.
          (3) Denial of interest deductions in certain cases.--
                  (A) In general.--No deduction otherwise 
                allowable under this chapter shall be allowed 
                under this chapter for any interest paid or 
                accrued on any loan to which paragraph (1) does 
                not apply by reason of paragraph (2) during the 
                period described in subparagraph (B).
                  (B) Period to which subparagraph (A) 
                applies.--For purposes of subparagraph (A), the 
                period described in this subparagraph is the 
                period--
                          (i) on or after the 1st day on which 
                        the individual to whom the loan is made 
                        is a key employee (as defined in 
                        section 416(i)), or
                          (ii) such loan is secured by amounts 
                        attributable to elective deferrals 
                        described in subparagraph (A) or (C) of 
                        section 402(g)(3).
          (4) Qualified employer plan, etc..--For purposes of 
        this subsection--
                  (A) Qualified employer plan.--
                          (i) In general.--The term ``qualified 
                        employer plan'' means--
                                  (I) a plan described in 
                                section 401(a) which includes a 
                                trust exempt from tax under 
                                section 501(a),
                                  (II) an annuity plan 
                                described in section 403(a), 
                                and
                                  (III) a plan under which 
                                amounts are contributed by an 
                                individual's employer for an 
                                annuity contract described in 
                                section 403(b).
                          (ii) Special rule.--The term 
                        ``qualified employer plan'' shall 
                        include any plan which was (or was 
                        determined to be) a qualified employer 
                        plan or a government plan.
                  (B) Government plan.--The term ``government 
                plan'' means any plan, whether or not 
                qualified, established and maintained for its 
                employees by the United States, by a State or 
                political subdivision thereof, or by an agency 
                or instrumentality of any of the foregoing.
          (5) Special rules for loans, etc., from certain 
        contracts.--For purposes of this subsection, any amount 
        received as a loan under a contract purchased under a 
        qualified employer plan (and any assignment or pledge 
        with respect to such a contract) shall be treated as a 
        loan under such employer plan.
  (q) 10-percent penalty for premature distributions from 
annuity contracts.--
          (1) Imposition of penalty.--If any taxpayer receives 
        any amount under an annuity contract, the taxpayer's 
        tax under this chapter for the taxable year in which 
        such amount is received shall be increased by an amount 
        equal to 10 percent of the portion of such amount which 
        is includible in gross income.
          (2) Subsection not to apply to certain 
        distributions.--Paragraph 1 shall not apply to any 
        distribution--
                  (A) made on or after the date on which the 
                taxpayer attains age 59 1/2,
                  (B) made on or after the death of the holder 
                (or, where the holder is not an individual, the 
                death of the primary annuitant (as defined in 
                subsection (s)(6)(B))),
                  (C) attributable to the taxpayer's becoming 
                disabled within the meaning of subsection 
                (m)(7),
                  (D) which is a part of a series of 
                substantially equal periodic payments (not less 
                frequently than annually) made for the life (or 
                life expectancy) of the taxpayer or the joint 
                lives (or joint life expectancies) of such 
                taxpayer and his designated beneficiary,
                  (E) from a plan, contract, account, trust, or 
                annuity described in subsection (e)(5)(D),
                  (F) allocable to investment in the contract 
                before August 14, 1982, or
                  (G) under a qualified funding asset (within 
                the meaning of section 130(d), but without 
                regard to whether there is a qualified 
                assignment),
                  (H) to which subsection (t) applies (without 
                regard to paragraph (2) thereof),
                  (I) under an immediate annuity contract 
                (within the meaning of section 72(u)(4)), or
                  (J) which is purchased by an employer upon 
                the termination of a plan described in section 
                401(a) or 403(a) and which is held by the 
                employer until such time as the employee 
                separates from service.
          (3) Change in substantially equal payments.--If--
                  (A) paragraph (1) does not apply to a 
                distribution by reason of paragraph (2)(D), and
                  (B) the series of payments under such 
                paragraph are subsequently modified (other than 
                by reason of death or disability)--
                          (i) before the close of the 5-year 
                        period beginning on the date of the 
                        first payment and after the taxpayer 
                        attains age 59 1/2, or
                          (ii) before the taxpayer attains age 
                        59 1/2, the taxpayer's tax for the 1st 
                        taxable year in which such modification 
                        occurs shall be increased by an amount, 
                        determined under regulations, equal to 
                        the tax which (but for paragraph 
                        (2)(D)) would have been imposed, plus 
                        interest for the deferral period 
                        (within the meaning of subsection 
                        (t)(4)(B)).
  (r) Certain railroad retirement benefits treated as received 
under employer plans.--
          (1) In general.--Notwithstanding any other provision 
        of law, any benefit provided under the Railroad 
        Retirement Act of 1974 (other than a tier 1 railroad 
        retirement benefit) shall be treated for purposes of 
        this title as a benefit provided under an employer plan 
        which meets the requirements of section 401(a).
          (2) Tier 2 taxes treated as contributions.--
                  (A) In general.--For purposes of paragraph 
                (1)--
                          (i) the tier 2 portion of the tax 
                        imposed by section 3201 (relating to 
                        tax on employees) shall be treated as 
                        an employee contribution,
                          (ii) the tier 2 portion of the tax 
                        imposed by section 3211 (relating to 
                        tax on employee representatives) shall 
                        be treated as an employee contribution, 
                        and
                          (iii) the tier 2 portion of the tax 
                        imposed by section 3221 (relating to 
                        tax on employers) shall be treated as 
                        an employer contribution.
                  (B) Tier 2 portion.--For purposes of 
                subparagraph (A)--
                          (i) After 1984.--With respect to 
                        compensation paid after 1984, the tier 
                        2 portion shall be the taxes imposed by 
                        sections 3201(b), 3211(b), and 3221(b).
                          (ii) After September 30, 1981, and 
                        before 1985.--With respect to 
                        compensation paid before 1985 for 
                        services rendered after September 30, 
                        1981, the tier 2 portion shall be--
                                  (I) so much of the tax 
                                imposed by section 3201 as is 
                                determined at the 2 percent 
                                rate, and
                                  (II) so much of the taxes 
                                imposed by sections 3211 and 
                                3221 as is determined at the 
                                11.75 percent rate.
                With respect to compensation paid for services 
                rendered after December 31, 1983, and before 
                1985, subclause (I) shall be applied by 
                substituting ``2.75 percent'' for ``2 
                percent'', and subclause (II) shall be applied 
                by substituting ``12.75 percent'' for ``11.75 
                percent''.
                          (iii) Before October 1, 1981.--With 
                        respect to compensation paid for 
                        services rendered during any period 
                        before October 1, 1981, the tier 2 
                        portion shall be the excess (if any) 
                        of--
                                  (I) the tax imposed for such 
                                period by section 3201, 3211, 
                                or 3221, as the case may be 
                                (other than any tax imposed 
                                with respect to man-hours), 
                                over
                                  (II) the tax which would have 
                                been imposed by such section 
                                for such period had the rates 
                                of the comparable taxes imposed 
                                by chapter 21 for such period 
                                applied under such section.
                  (C) Contributions not allocable to 
                supplemental annuity or windfall benefits.--For 
                purposes of paragraph (1), no amount treated as 
                an employee contribution under this paragraph 
                shall be allocated to--
                          (i) any supplemental annuity paid 
                        under section 2(b) of the Railroad 
                        Retirement Act of 1974, or
                          (ii) any benefit paid under section 
                        3(h), 4(e), or 4(h) of such Act.
          (3) Tier 1 railroad retirement benefit.--For purposes 
        of paragraph (1), the term ``tier 1 railroad retirement 
        benefit'' has the meaning given such term by section 
        86(d)(4).
  (s) Required distributions where holder dies before entire 
interest is distributed.--
          (1) In general.--A contract shall not be treated as 
        an annuity contract for purposes of this title unless 
        it provides that--
                  (A) if any holder of such contract dies on or 
                after the annuity starting date and before the 
                entire interest in such contract has been 
                distributed, the remaining portion of such 
                interest will be distributed at least as 
                rapidly as under the method of distributions 
                being used as of the date of his death, and
                  (B) if any holder of such contract dies 
                before the annuity starting date, the entire 
                interest in such contract will be distributed 
                within 5 years after the death of such holder.
          (2) Exception for certain amounts payable over life 
        of beneficiary.--If--
                  (A) any portion of the holder's interest is 
                payable to (or for the benefit of) a designated 
                beneficiary,
                  (B) such portion will be distributed (in 
                accordance with regulations) over the life of 
                such designated beneficiary (or over a period 
                not extending beyond the life expectancy of 
                such beneficiary), and
                  (C) such distributions begin not later than 1 
                year after the date of the holder's death or 
                such later date as the Secretary may by 
                regulations prescribe,
        then for purposes of paragraph (1), the portion 
        referred to in subparagraph (A) shall be treated as 
        distributed on the day on which such distributions 
        begin.
          (3) Special rule where surviving spouse 
        beneficiary.--If the designated beneficiary referred to 
        in paragraph (2)(A) is the surviving spouse of the 
        holder of the contract, paragraphs (1) and (2) shall be 
        applied by treating such spouse as the holder of such 
        contract.
          (4) Designated beneficiary.--For purposes of this 
        subsection, the term ``designated beneficiary'' means 
        any individual designated a beneficiary by the holder 
        of the contract.
          (5) Exception for certain annuity contracts.--This 
        subsection shall not apply to any annuity contract--
                  (A) which is provided--
                          (i) under a plan described in section 
                        401(a) which includes a trust exempt 
                        from tax under section 501, or
                          (ii) under a plan described in 
                        section 403(a),
                  (B) which is described in section 403(b),
                  (C) which is an individual retirement annuity 
                or provided under an individual retirement 
                account or annuity, or
                  (D) which is a qualified funding asset (as 
                defined in section 130(d), but without regard 
                to whether there is a qualified assignment).
          (6) Special rule where holder is corporation or other 
        non-individual.--
                  (A) In general.--For purposes of this 
                subsection, if the holder of the contract is 
                not an individual, the primary annuitant shall 
                be treated as the holder of the contract.
                  (B) Primary annuitant.--For purposes of 
                subparagraph (A), the term ``primary 
                annuitant'' means the individual, the events in 
                the life of whom are of primary importance in 
                affecting the timing or amount of the payout 
                under the contract.
          (7) Treatment of changes in primary annuitant where 
        holder of contract is not an individual.--For purposes 
        of this subsection, in the case of a holder of an 
        annuity contract which is not an individual, if there 
        is a change in a primary annuitant (as defined in 
        paragraph (6)(B)), such change shall be treated as the 
        death of the holder.
  (t) 10-percent additional tax on early distributions from 
qualified retirement plans.--
          (1) Imposition of additional tax.--If any taxpayer 
        receives any amount from a qualified retirement plan 
        (as defined in section 4974(c)), the taxpayer's tax 
        under this chapter for the taxable year in which such 
        amount is received shall be increased by an amount 
        equal to 10 percent of the portion of such amount which 
        is includible in gross income.
          (2) Subsection not to apply to certain 
        distributions.--Except as provided in paragraphs (3) 
        and (4), paragraph (1) shall not apply to any of the 
        following distributions:
                  (A) In general.--Distributions which are--
                          (i) made on or after the date on 
                        which the employee attains age 59 1/2,
                          (ii) made to a beneficiary (or to the 
                        estate of the employee) on or after the 
                        death of the employee,
                          (iii) attributable to the employee's 
                        being disabled within the meaning of 
                        subsection (m)(7),
                          (iv) part of a series of 
                        substantially equal periodic payments 
                        (not less frequently than annually) 
                        made for the life (or life expectancy) 
                        of the employee or the joint lives (or 
                        joint life expectancies) of such 
                        employee and his designated 
                        beneficiary,
                          (v) made to an employee after 
                        separation from service after 
                        attainment of age 55,
                          (vi) dividends paid with respect to 
                        stock of a corporation which are 
                        described in section 404(k),
                          (vii) made on account of a levy under 
                        section 6331 on the qualified 
                        retirement plan, or
                          (viii) payments under a phased 
                        retirement annuity under section 
                        8366a(a)(5) or 8412a(a)(5) of title 5, 
                        United States Code, or a composite 
                        retirement annuity under section 
                        8366a(a)(1) or 8412a(a)(1) of such 
                        title.
                  (B) Medical expenses.--Distributions made to 
                the employee (other than distributions 
                described in subparagraph (A), (C), or (D)) to 
                the extent such distributions do not exceed the 
                amount allowable as a deduction under section 
                213 to the employee for amounts paid during the 
                taxable year for medical care (determined 
                without regard to whether the employee itemizes 
                deductions for such taxable year).
                  (C) Payments to alternate payees pursuant to 
                qualified domestic relations orders.--Any 
                distribution to an alternate payee pursuant to 
                a qualified domestic relations order (within 
                the meaning of section 414(p)(1)).
                  (D) Distributions to unemployed individuals 
                for health insurance premiums.--
                          (i) In general.--Distributions from 
                        an individual retirement plan to an 
                        individual after separation from 
                        employment--
                                  (I) if such individual has 
                                received unemployment 
                                compensation for 12 consecutive 
                                weeks under any Federal or 
                                State unemployment compensation 
                                law by reason of such 
                                separation,
                                  (II) if such distributions 
                                are made during any taxable 
                                year during which such 
                                unemployment compensation is 
                                paid or the succeeding taxable 
                                year, and
                                  (III) to the extent such 
                                distributions do not exceed the 
                                amount paid during the taxable 
                                year for insurance described in 
                                section 213(d)(1)(D) with 
                                respect to the individual and 
                                the individual's spouse and 
                                dependents (as defined in 
                                [section 152] section 7706, 
                                determined without regard to 
                                subsections (b)(1), (b)(2), and 
                                (d)(1)(B) thereof).
                          (ii) Distributions after 
                        reemployment.--Clause (i) shall not 
                        apply to any distribution made after 
                        the individual has been employed for at 
                        least 60 days after the separation from 
                        employment to which clause (i) applies.
                          (iii) Self-employed individuals.--To 
                        the extent provided in regulations, a 
                        self-employed individual shall be 
                        treated as meeting the requirements of 
                        clause (i)(I) if, under Federal or 
                        State law, the individual would have 
                        received unemployment compensation but 
                        for the fact the individual was self- 
                        employed.
                  (E) Distributions from individual retirement 
                plans for higher education expenses.--
                Distributions to an individual from an 
                individual retirement plan to the extent such 
                distributions do not exceed the qualified 
                higher education expenses (as defined in 
                paragraph (7)) of the taxpayer for the taxable 
                year. Distributions shall not be taken into 
                account under the preceding sentence if such 
                distributions are described in subparagraph 
                (A), (C), or (D) or to the extent paragraph (1) 
                does not apply to such distributions by reason 
                of subparagraph (B).
                  (F) Distributions from certain plans for 
                first home purchases.--Distributions to an 
                individual from an individual retirement plan 
                which are qualified first-time homebuyer 
                distributions (as defined in paragraph (8)). 
                Distributions shall not be taken into account 
                under the preceding sentence if such 
                distributions are described in subparagraph 
                (A), (C), (D), or (E) or to the extent 
                paragraph (1) does not apply to such 
                distributions by reason of subparagraph (B).
                  (G) Distributions from retirement plans to 
                individuals called to active duty.--
                          (i) In general.--Any qualified 
                        reservist distribution.
                          (ii) Amount distributed may be 
                        repaid.--Any individual who receives a 
                        qualified reservist distribution may, 
                        at any time during the 2-year period 
                        beginning on the day after the end of 
                        the active duty period, make one or 
                        more contributions to an individual 
                        retirement plan of such individual in 
                        an aggregate amount not to exceed the 
                        amount of such distribution. The dollar 
                        limitations otherwise applicable to 
                        contributions to individual retirement 
                        plans shall not apply to any 
                        contribution made pursuant to the 
                        preceding sentence. No deduction shall 
                        be allowed for any contribution 
                        pursuant to this clause.
                          (iii) Qualified reservist 
                        distribution.--For purposes of this 
                        subparagraph, the term ``qualified 
                        reservist distribution'' means any 
                        distribution to an individual if--
                                  (I) such distribution is from 
                                an individual retirement plan, 
                                or from amounts attributable to 
                                employer contributions made 
                                pursuant to elective deferrals 
                                described in subparagraph (A) 
                                or (C) of section 402(g)(3) or 
                                section 501(c)(18)(D)(iii),
                                  (II) such individual was (by 
                                reason of being a member of a 
                                reserve component (as defined 
                                in section 101 of title 37, 
                                United States Code)) ordered or 
                                called to active duty for a 
                                period in excess of 179 days or 
                                for an indefinite period, and
                                  (III) such distribution is 
                                made during the period 
                                beginning on the date of such 
                                order or call and ending at the 
                                close of the active duty 
                                period.
                          (iv) Application of subparagraph.--
                        This subparagraph applies to 
                        individuals ordered or called to active 
                        duty after September 11, 2001. In no 
                        event shall the 2-year period referred 
                        to in clause (ii) end before the date 
                        which is 2 years after the date of the 
                        enactment of this subparagraph.
          (3) Limitations.--
                  (A) Certain exceptions not to apply to 
                individual retirement plans.--Subparagraphs 
                (A)(v) and (C) of paragraph (2) shall not apply 
                to distributions from an individual retirement 
                plan.
                  (B) Periodic payments under qualified plans 
                must begin after separation.--Paragraph 
                (2)(A)(iv) shall not apply to any amount paid 
                from a trust described in section 401(a) which 
                is exempt from tax under section 501(a) or from 
                a contract described in section 72(e)(5)(D)(ii) 
                unless the series of payments begins after the 
                employee separates from service.
          (4) Change in substantially equal payments.--
                  (A) In general.--If--
                          (i) paragraph (1) does not apply to a 
                        distribution by reason of paragraph 
                        (2)(A)(iv), and
                          (ii) the series of payments under 
                        such paragraph are subsequently 
                        modified (other than by reason of death 
                        or disability or a distribution to 
                        which paragraph (10) applies)--
                                  (I) before the close of the 
                                5-year period beginning with 
                                the date of the first payment 
                                and after the employee attains 
                                age 59 1/2, or
                                  (II) before the employee 
                                attains age 59 1/2, the 
                                taxpayer's tax for the 1st 
                                taxable year in which such 
                                modification occurs shall be 
                                increased by an amount, 
                                determined under regulations, 
                                equal to the tax which (but for 
                                paragraph (2)(A)(iv)) would 
                                have been imposed, plus 
                                interest for the deferral 
                                period.
                  (B) Deferral period.--For purposes of this 
                paragraph, the term ``deferral period'' means 
                the period beginning with the taxable year in 
                which (without regard to paragraph (2)(A)(iv)) 
                the distribution would have been includible in 
                gross income and ending with the taxable year 
                in which the modification described in 
                subparagraph (A) occurs.
          (5) Employee.--For purposes of this subsection, the 
        term ``employee'' includes any participant, and in the 
        case of an individual retirement plan, the individual 
        for whose benefit such plan was established.
          (6) Special rules for simple retirement accounts.--In 
        the case of any amount received from a simple 
        retirement account (within the meaning of section 
        408(p)) during the 2-year period beginning on the date 
        such individual first participated in any qualified 
        salary reduction arrangement maintained by the 
        individual's employer under section 408(p)(2), 
        paragraph (1) shall be applied by substituting ``25 
        percent'' for ``10 percent''.
          (7) Qualified higher education expenses.--For 
        purposes of paragraph (2)(E)--
                  (A) In general.--The term ``qualified higher 
                education expenses'' means qualified higher 
                education expenses (as defined in section 
                529(e)(3)) for education furnished to--
                          (i) the taxpayer,
                          (ii) the taxpayer's spouse, or
                          (iii) any child (as defined in 
                        [section 152(f)(1)] section 7706(f)(1)) 
                        or grandchild of the taxpayer or the 
                        taxpayer's spouse,
                at an eligible educational institution (as 
                defined in section 529(e)(5)).
                  (B) Coordination with other benefits.--The 
                amount of qualified higher education expenses 
                for any taxable year shall be reduced as 
                provided in section 25A(g)(2).
          (8) Qualified first-time homebuyer distributions.--
        For purposes of paragraph (2)(F)--
                  (A) In general.--The term ``qualified first-
                time homebuyer distribution'' means any payment 
                or distribution received by an individual to 
                the extent such payment or distribution is used 
                by the individual before the close of the 120th 
                day after the day on which such payment or 
                distribution is received to pay qualified 
                acquisition costs with respect to a principal 
                residence of a first-time homebuyer who is such 
                individual, the spouse of such individual, or 
                any child, grandchild, or ancestor of such 
                individual or the individual's spouse.
                  (B) Lifetime dollar limitation.--The 
                aggregate amount of payments or distributions 
                received by an individual which may be treated 
                as qualified first-time homebuyer distributions 
                for any taxable year shall not exceed the 
                excess (if any) of--
                          (i) $10,000, over
                          (ii) the aggregate amounts treated as 
                        qualified first-time homebuyer 
                        distributions with respect to such 
                        individual for all prior taxable years.
                  (C) Qualified acquisition costs.--For 
                purposes of this paragraph, the term 
                ``qualified acquisition costs'' means the costs 
                of acquiring, constructing, or reconstructing a 
                residence. Such term includes any usual or 
                reasonable settlement, financing, or other 
                closing costs.
                  (D) First-time homebuyer; other 
                definitions.--For purposes of this paragraph--
                          (i) First-time homebuyer.--The term 
                        ``first-time homebuyer'' means any 
                        individual if--
                                  (I) such individual (and if 
                                married, such individual's 
                                spouse) had no present 
                                ownership interest in a 
                                principal residence during the 
                                2-year period ending on the 
                                date of acquisition of the 
                                principal residence to which 
                                this paragraph applies, and
                                  (II) subsection (h) or (k) of 
                                section 1034 (as in effect on 
                                the day before the date of the 
                                enactment of this paragraph) 
                                did not suspend the running of 
                                any period of time specified in 
                                section 1034 (as so in effect) 
                                with respect to such individual 
                                on the day before the date the 
                                distribution is applied 
                                pursuant to subparagraph (A).
                          (ii) Principal residence.--The term 
                        ``principal residence'' has the same 
                        meaning as when used in section 121.
                          (iii) Date of acquisition.--The term 
                        ``date of acquisition'' means the 
                        date--
                                  (I) on which a binding 
                                contract to acquire the 
                                principal residence to which 
                                subparagraph (A) applies is 
                                entered into, or
                                  (II) on which construction or 
                                reconstruction of such a 
                                principal residence is 
                                commenced.
                  (E) Special rule where delay in 
                acquisition.--If any distribution from any 
                individual retirement plan fails to meet the 
                requirements of subparagraph (A) solely by 
                reason of a delay or cancellation of the 
                purchase or construction of the residence, the 
                amount of the distribution may be contributed 
                to an individual retirement plan as provided in 
                section 408(d)(3)(A)(i) (determined by 
                substituting ``120th day'' for ``60th day'' in 
                such section), except that--
                          (i) section 408(d)(3)(B) shall not be 
                        applied to such contribution, and
                          (ii) such amount shall not be taken 
                        into account in determining whether 
                        section 408(d)(3)(B) applies to any 
                        other amount.
          (9) Special rule for rollovers to section 457 
        plans.--For purposes of this subsection, a distribution 
        from an eligible deferred compensation plan (as defined 
        in section 457(b)) of an eligible employer described in 
        section 457(e)(1)(A) shall be treated as a distribution 
        from a qualified retirement plan described in 
        4974(c)(1) to the extent that such distribution is 
        attributable to an amount transferred to an eligible 
        deferred compensation plan from a qualified retirement 
        plan (as defined in section 4974(c)).
          (10) Distributions to qualified public safety 
        employees in governmental plans.--
                  (A) In general.--In the case of a 
                distribution to a qualified public safety 
                employee from a governmental plan (within the 
                meaning of section 414(d)), paragraph (2)(A)(v) 
                shall be applied by substituting ``age 50'' for 
                ``age 55''.
                  (B) Qualified public safety employee.--For 
                purposes of this paragraph, the term 
                ``qualified public safety employee'' means--
                          (i) any employee of a State or 
                        political subdivision of a State who 
                        provides police protection, 
                        firefighting services, or emergency 
                        medical services for any area within 
                        the jurisdiction of such State or 
                        political subdivision, or
                          (ii) any Federal law enforcement 
                        officer described in section 8331(20) 
                        or 8401(17) of title 5, United States 
                        Code, any Federal customs and border 
                        protection officer described in section 
                        8331(31) or 8401(36) of such title, any 
                        Federal firefighter described in 
                        section 8331(21) or 8401(14) of such 
                        title, any air traffic controller 
                        described in 8331(30) or 8401(35) of 
                        such title, any nuclear materials 
                        courier described in section 8331(27) 
                        or 8401(33) of such title, any member 
                        of the United States Capitol Police, 
                        any member of the Supreme Court Police, 
                        or any diplomatic security special 
                        agent of the Department of State.
  (u) Treatment of annuity contracts not held by natural 
persons.--
          (1) In general.--If any annuity contract is held by a 
        person who is not a natural person--
                  (A) such contract shall not be treated as an 
                annuity contract for purposes of this subtitle 
                (other than subchapter L), and
                  (B) the income on the contract for any 
                taxable year of the policyholder shall be 
                treated as ordinary income received or accrued 
                by the owner during such taxable year.
        For purposes of this paragraph, holding by a trust or 
        other entity as an agent for a natural person shall not 
        be taken into account.
          (2) Income on the contract.--
                  (A) In general.--For purposes of paragraph 
                (1), the term ``income on the contract'' means, 
                with respect to any taxable year of the 
                policyholder, the excess of--
                          (i) the sum of the net surrender 
                        value of the contract as of the close 
                        of the taxable year plus all 
                        distributions under the contract 
                        received during the taxable year or any 
                        prior taxable year, reduced by
                          (ii) the sum of the amount of net 
                        premiums under the contract for the 
                        taxable year and prior taxable years 
                        and amounts includible in gross income 
                        for prior taxable years with respect to 
                        such contract under this subsection.
                Where necessary to prevent the avoidance of 
                this subsection, the Secretary may substitute 
                ``fair market value of the contract'' for ``net 
                surrender value of the contract'' each place it 
                appears in the preceding sentence.
                  (B) Net premiums.--For purposes of this 
                paragraph, the term ``net premiums'' means the 
                amount of premiums paid under the contract 
                reduced by any policyholder dividends.
          (3) Exceptions.--This subsection shall not apply to 
        any annuity contract which--
                  (A) is acquired by the estate of a decedent 
                by reason of the death of the decedent,
                  (B) is held under a plan described in section 
                401(a) or 403(a), under a program described in 
                section 403(b), or under an individual 
                retirement plan,
                  (C) is a qualified funding asset (as defined 
                in section 130(d), but without regard to 
                whether there is a qualified assignment),
                  (D) is purchased by an employer upon the 
                termination of a plan described in section 
                401(a) or 403(a) and is held by the employer 
                until all amounts under such contract are 
                distributed to the employee for whom such 
                contract was purchased or the employee's 
                beneficiary, or
                  (E) is an immediate annuity.
          (4) Immediate annuity.--For purposes of this 
        subsection, the term ``immediate annuity'' means an 
        annuity--
                  (A) which is purchased with a single premium 
                or annuity consideration,
                  (B) the annuity starting date (as defined in 
                subsection (c)(4)) of which commences no later 
                than 1 year from the date of the purchase of 
                the annuity, and
                  (C) which provides for a series of 
                substantially equal periodic payments (to be 
                made not less frequently than annually) during 
                the annuity period.
  (v) 10-percent additional tax for taxable distributions from 
modified endowment contracts.--
          (1) Imposition of additional tax.--If any taxpayer 
        receives any amount under a modified endowment contract 
        (as defined in section 7702A), the taxpayer's tax under 
        this chapter for the taxable year in which such amount 
        is received shall be increased by an amount equal to 10 
        percent of the portion of such amount which is 
        includible in gross income.
          (2) Subsection not to apply to certain 
        distributions.--Paragraph (1) shall not apply to any 
        distribution--
                  (A) made on or after the date on which the 
                taxpayer attains age 59 1/2,
                  (B) which is attributable to the taxpayer's 
                becoming disabled (within the meaning of 
                subsection (m)(7)), or
                  (C) which is part of a series of 
                substantially equal periodic payments (not less 
                frequently than annually) made for the life (or 
                life expectancy) of the taxpayer or the joint 
                lives (or joint life expectancies) of such 
                taxpayer and his beneficiary.
  (w) Application of basis rules to nonresident aliens.--
          (1) In general.--Notwithstanding any other provision 
        of this section, for purposes of determining the 
        portion of any distribution which is includible in 
        gross income of a distributee who is a citizen or 
        resident of the United States, the investment in the 
        contract shall not include any applicable nontaxable 
        contributions or applicable nontaxable earnings.
          (2) Applicable nontaxable contribution.--For purposes 
        of this subsection, the term ``applicable nontaxable 
        contribution'' means any employer or employee 
        contribution--
                  (A) which was made with respect to 
                compensation--
                          (i) for labor or personal services 
                        performed by an employee who, at the 
                        time the labor or services were 
                        performed, was a nonresident alien for 
                        purposes of the laws of the United 
                        States in effect at such time, and
                          (ii) which is treated as from sources 
                        without the United States, and
                  (B) which was not subject to income tax (and 
                would have been subject to income tax if paid 
                as cash compensation when the services were 
                rendered) under the laws of the United States 
                or any foreign country.
          (3) Applicable nontaxable earnings.--For purposes of 
        this subsection, the term ``applicable nontaxable 
        earnings'' means earnings--
                  (A) which are paid or accrued with respect to 
                any employer or employee contribution which was 
                made with respect to compensation for labor or 
                personal services performed by an employee,
                  (B) with respect to which the employee was at 
                the time the earnings were paid or accrued a 
                nonresident alien for purposes of the laws of 
                the United States, and
                  (C) which were not subject to income tax 
                under the laws of the United States or any 
                foreign country.
          (4) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        provisions of this subsection, including regulations 
        treating contributions and earnings as not subject to 
        tax under the laws of any foreign country where 
        appropriate to carry out the purposes of this 
        subsection.
  (x) Cross reference.--For limitation on adjustments to basis 
of annuity contracts sold, see section 1021.

           *       *       *       *       *       *       *

PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

           *       *       *       *       *       *       *

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

  (a) Amounts attributable to employer contributions.--Except 
as otherwise provided in this section, amounts received by an 
employee through accident or health insurance for personal 
injuries or sickness shall be included in gross income to the 
extent such amounts (1) are attributable to contributions by 
the employer which were not includible in the gross income of 
the employee, or (2) are paid by the employer.
  (b) Amounts expended for medical care.--Except in the case of 
amounts attributable to (and not in excess of) deductions 
allowed under section 213 (relating to medical, etc., expenses) 
for any prior taxable year, gross income does not include 
amounts referred to in subsection (a) if such amounts are paid, 
directly or indirectly, to the taxpayer to reimburse the 
taxpayer for expenses incurred by him for the medical care (as 
defined in section 213(d)) of the taxpayer, his spouse, his 
dependents ([as defined in section 152] as defined in section 
7706, determined without regard to subsections (b)(1), (b)(2), 
and (d)(1)(B) thereof), and any child (as defined in [section 
152(f)(1)] section 7706(f)(1)) of the taxpayer who as of the 
end of the taxable year has not attained age 27. Any child to 
whom [section 152(e)] section 7706(e) applies shall be treated 
as a dependent of both parents for purposes of this subsection.
  (c) Payments unrelated to absence from work.--Gross income 
does not include amounts referred to in subsection (a) to the 
extent such amounts--
          (1) constitute payment for the permanent loss or loss 
        of use of a member or function of the body, or the 
        permanent disfigurement, of the taxpayer, his spouse, 
        or a dependent (as defined in [section 152] section 
        7706, determined without regard to subsections (b)(1), 
        (b)(2), and (d)(1)(B) thereof), and
          (2) are computed with reference to the nature of the 
        injury without regard to the period the employee is 
        absent from work.
  (e) Accident and health plans.--For purposes of this section 
and section 104--
          (1) amounts received under an accident or health plan 
        for employees, and
          (2) amounts received from a sickness and disability 
        fund for employees maintained under the law of a State 
        or the District of Columbia,
shall be treated as amounts received through accident or health 
insurance.
  (f) Rules for application of section 213.--For purposes of 
section 213(a) (relating to medical, dental, etc., expenses) 
amounts excluded from gross income under subsection (c) shall 
not be considered as compensation (by insurance or otherwise) 
for expenses paid for medical care.
  (g) Self-employed individual not considered an employee.--For 
purposes of this section, the term ``employee'' does not 
include an individual who is an employee within the meaning of 
section 401(c)(1) (relating to self-employed individuals).
  (h) Amount paid to highly compensated individuals under a 
discriminatory self-insured medical expense reimbursement 
plan.--
          (1) In general.--In the case of amounts paid to a 
        highly compensated individual under a self-insured 
        medical reimbursement plan which does not satisfy the 
        requirements of paragraph (2) for a plan year, 
        subsection (b) shall not apply to such amounts to the 
        extent they constitute an excess reimbursement of such 
        highly compensated individual.
          (2) Prohibition of discrimination.--A self-insured 
        medical reimbursement plan satisfies the requirements 
        of this paragraph only if--
                  (A) the plan does not discriminate in favor 
                of highly compensated individuals as to 
                eligibility to participate; and
                  (B) the benefits provided under the plan do 
                not discriminate in favor of participants who 
                are highly compensated individuals.
          (3) Nondiscriminatory eligibility classifications.--
                  (A) In general.--A self-insured medical 
                reimbursement plan does not satisfy the 
                requirements of subparagraph (A) of paragraph 
                (2) unless such plan benefits--
                          (i) 70 percent or more of all 
                        employees, or 80 percent or more of all 
                        the employees who are eligible to 
                        benefit under the plan if 70 percent or 
                        more of all employees are eligible to 
                        benefit under the plan; or
                          (ii) such employees as qualify under 
                        a classification set up by the employer 
                        and found by the Secretary not to be 
                        discriminatory in favor of highly 
                        compensated individuals.
                  (B) Exclusion of certain employees.--For 
                purposes of subparagraph (A), there may be 
                excluded from consideration--
                          (i) employees who have not completed 
                        3 years of service;
                          (ii) employees who have not attained 
                        age 25;
                          (iii) part-time or seasonal 
                        employees;
                          (iv) employees not included in the 
                        plan who are included in a unit of 
                        employees covered by an agreement 
                        between employee representatives and 
                        one or more employers which the 
                        Secretary finds to be a collective 
                        bargaining agreement, if accident and 
                        health benefits were the subject of 
                        good faith bargaining between such 
                        employee representatives and such 
                        employer or employers; and
                          (v) employees who are nonresident 
                        aliens and who receive no earned income 
                        (within the meaning of section 
                        911(d)(2)) from the employer which 
                        constitutes income from sources within 
                        the United States (within the meaning 
                        of section 861(a)(3)).
          (4) Nondiscriminatory benefits.--A self-insured 
        medical reimbursement plan does not meet the 
        requirements of subparagraph (B) of paragraph (2) 
        unless all benefits provided for participants who are 
        highly compensated individuals are provided for all 
        other participants.
          (5) Highly compensated individual defined.--For 
        purposes of this subsection, the term ``highly 
        compensated individual'' means an individual who is--
                  (A) one of the 5 highest paid officers,
                  (B) a shareholder who owns (with the 
                application of section 318) more than 10 
                percent in value of the stock of the employer, 
                or
                  (C) among the highest paid 25 percent of all 
                employees (other than employees described in 
                paragraph (3)(B) who are not participants).
          (6) Self-insured medical reimbursement plan.--The 
        term ``self-insured medical reimbursement plan'' means 
        a plan of an employer to reimburse employees for 
        expenses referred to in subsection (b) for which 
        reimbursement is not provided under a policy of 
        accident and health insurance.
          (7) Excess reimbursement of highly compensated 
        individual.--For purposes of this section, the excess 
        reimbursement of a highly compensated individual which 
        is attributable to a self-insured medical reimbursement 
        plan is--
                  (A) in the case of a benefit available to 
                highly compensated individuals but not to all 
                other participants (or which otherwise fails to 
                satisfy the requirements of paragraph (2)(B)), 
                the amount reimbursed under the plan to the 
                employee with respect to such benefit, and
                  (B) in the case of benefits (other than 
                benefits described in subparagraph (A)) paid to 
                a highly compensated individual by a plan which 
                fails to satisfy the requirements of paragraph 
                (2), the total amount reimbursed to the highly 
                compensated individual for the plan year 
                multiplied by a fraction--
                          (i) the numerator of which is the 
                        total amount reimbursed to all 
                        participants who are highly compensated 
                        individuals under the plan for the plan 
                        year, and
                          (ii) the denominator of which is the 
                        total amount reimbursed to all 
                        employees under the plan for such plan 
                        year.
        In determining the fraction under subparagraph (B), 
        there shall not be taken into account any reimbursement 
        which is attributable to a benefit described in 
        subparagraph (A).
          (8) Certain controlled groups, etc..--All employees 
        who are treated as employed by a single employer under 
        subsection (b), (c), or (m) of section 414 shall be 
        treated as employed by a single employer for purposes 
        of this section.
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        provisions of this section.
          (10) Time of inclusion.--Any amount paid for a plan 
        year that is included in income by reason of this 
        subsection shall be treated as received or accrued in 
        the taxable year of the participant in which the plan 
        year ends.
  (i) Sick pay under Railroad Unemployment Insurance Act.--
Notwithstanding any other provision of law, gross income 
includes benefits paid under section 2(a) of the Railroad 
Unemployment Insurance Act for days of sickness; except to the 
extent such sickness (as determined in accordance with 
standards prescribed by the Railroad Retirement Board) is the 
result of on-the-job injury.
  (j) Special rule for certain governmental plans.--
          (1) In general.--For purposes of subsection (b), 
        amounts paid (directly or indirectly) to a qualified 
        taxpayer from an accident or health plan described in 
        paragraph (2) shall not fail to be excluded from gross 
        income solely because such plan, on or before January 
        1, 2008, provides for reimbursements of health care 
        expenses of a deceased employee's beneficiary (other 
        than an individual described in paragraph (3)(B)).
          (2) Plan described.--An accident or health plan is 
        described in this paragraph if such plan is funded by a 
        medical trust that is established in connection with a 
        public retirement system or established by or on behalf 
        of a State or political subdivision thereof and that--
                  (A) has been authorized by a State 
                legislature, or
                  (B) has received a favorable ruling from the 
                Internal Revenue Service that the trust's 
                income is not includible in gross income under 
                section 115 or 501(c)(9).
          (3) Qualified taxpayer.--For purposes of paragraph 
        (1), with respect to an accident or health plan 
        described in paragraph (2), the term ``qualified 
        taxpayer'' means a taxpayer who is--
                  (A) an employee, or
                  (B) the spouse, dependent (as defined for 
                purposes of subsection (b)), or child (as 
                defined for purposes of such subsection) of an 
                employee.

           *       *       *       *       *       *       *

SEC. 108. INCOME FROM DISCHARGE OF INDEBTEDNESS.

  (a) Exclusion from gross income.--
          (1) In general.--Gross income does not include any 
        amount which (but for this subsection) would be 
        includible in gross income by reason of the discharge 
        (in whole or in part) of indebtedness of the taxpayer 
        if--
                  (A) the discharge occurs in a title 11 case,
                  (B) the discharge occurs when the taxpayer is 
                insolvent,
                  (C) the indebtedness discharged is qualified 
                farm indebtedness,
                  (D) in the case of a taxpayer other than a C 
                corporation, the indebtedness discharged is 
                qualified real property business indebtedness, 
                or
                  (E) the indebtedness discharged is qualified 
                principal residence indebtedness which is 
                discharged--
                          (i) before January 1, 2018, or ii) 
                        subject to an arrangement that is 
                        entered into and evidenced in writing 
                        before January 1, 2018.
          (2) Coordination of exclusions.--
                  (A) Title 11 exclusion takes precedence.--
                Subparagraphs (B), (C), (D), and (E) of 
                paragraph (1) shall not apply to a discharge 
                which occurs in a title 11 case.
                  (B) Insolvency exclusion takes precedence 
                over qualified farm exclusion and qualified 
                real property business exclusion.--
                Subparagraphs (C) and (D) of paragraph (1) 
                shall not apply to a discharge to the extent 
                the taxpayer is insolvent.
                  (C) Principal residence exclusion takes 
                precedence over insolvency exclusion unless 
                elected otherwise.--Paragraph (1)(B) shall not 
                apply to a discharge to which paragraph (1)(E) 
                applies unless the taxpayer elects to apply 
                paragraph (1)(B) in lieu of paragraph (1)(E).
          (3) Insolvency exclusion limited to amount of 
        insolvency.--In the case of a discharge to which 
        paragraph (1)(B) applies, the amount excluded under 
        paragraph (1)(B) shall not exceed the amount by which 
        the taxpayer is insolvent.
  (b) Reduction of tax attributes.--
          (1) In general.--The amount excluded from gross 
        income under subparagraph (A), (B), or (C) of 
        subsection (a)(1) shall be applied to reduce the tax 
        attributes of the taxpayer as provided in paragraph 
        (2).
          (2) Tax attributes affected; order of reduction.--
        Except as provided in paragraph (5), the reduction 
        referred to in paragraph (1) shall be made in the 
        following tax attributes in the following order:
                  (A) NOL.--Any net operating loss for the 
                taxable year of the discharge, and any net 
                operating loss carryover to such taxable year.
                  (B) General business credit.--Any carryover 
                to or from the taxable year of a discharge of 
                an amount for purposes for determining the 
                amount allowable as a credit under section 38 
                (relating to general business credit).
                  (C) Minimum tax credit.--The amount of the 
                minimum tax credit available under section 
                53(b) as of the beginning of the taxable year 
                immediately following the taxable year of the 
                discharge.
                  (D) Capital loss carryovers.--Any net capital 
                loss for the taxable year of the discharge, and 
                any capital loss carryover to such taxable year 
                under section 1212.
                  (E) Basis reduction.--
                          (i) In general.--The basis of the 
                        property of the taxpayer.
                          (ii) Cross reference.--For provisions 
                        for making the reduction described in 
                        clause (i), see section 1017.
                  (F) Passive activity loss and credit 
                carryovers.--Any passive activity loss or 
                credit carryover of the taxpayer under section 
                469(b) from the taxable year of the discharge.
                  (G) Foreign tax credit carryovers.--Any 
                carryover to or from the taxable year of the 
                discharge for purposes of determining the 
                amount of the credit allowable under section 
                27.
          (3) Amount of reduction.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the reductions described in 
                paragraph (2) shall be one dollar for each 
                dollar excluded by subsection (a).
                  (B) Credit carryover reduction.--The 
                reductions described in subparagraphs (B), (C), 
                and (G) shall be 33 1/3 cents for each dollar 
                excluded by subsection (a). The reduction 
                described in subparagraph (F) in any passive 
                activity credit carryover shall be 33 1/3 cents 
                for each dollar excluded by subsection (a).
          (4) Ordering rules.--
                  (A) Reductions made after determination of 
                tax for year.--The reductions described in 
                paragraph (2) shall be made after the 
                determination of the tax imposed by this 
                chapter for the taxable year of the discharge.
                  (B) Reductions under subparagraph (A) or (D) 
                of paragraph (2).--The reductions described in 
                subparagraph (A) or (D) of paragraph (2) (as 
                the case may be) shall be made first in the 
                loss for the taxable year of the discharge and 
                then in the carryovers to such taxable year in 
                the order of the taxable years from which each 
                such carryover arose.
                  (C) Reductions under subparagraphs (B) and 
                (G) of paragraph (2).--The reductions described 
                in subparagraphs (B) and (G) of paragraph (2) 
                shall be made in the order in which carryovers 
                are taken into account under this chapter for 
                the taxable year of the discharge.
          (5) Election to apply reduction first against 
        depreciable property.--
                  (A) In general.--The taxpayer may elect to 
                apply any portion of the reduction referred to 
                in paragraph (1) to the reduction under section 
                1017 of the basis of the depreciable property 
                of the taxpayer.
                  (B) Limitation.--The amount to which an 
                election under subparagraph (A) applies shall 
                not exceed the aggregate adjusted bases of the 
                depreciable property held by the taxpayer as of 
                the beginning of the taxable year following the 
                taxable year in which the discharge occurs.
                  (C) Other tax attributes not reduced.--
                Paragraph (2) shall not apply to any amount to 
                which an election under this paragraph applies.
  (c) Treatment of discharge of qualified real property 
business indebtedness.--
          (1) Basis reduction.--
                  (A) In general.--The amount excluded from 
                gross income under subparagraph (D) of 
                subsection (a)(1) shall be applied to reduce 
                the basis of the depreciable real property of 
                the taxpayer.
                  (B) Cross reference.--For provisions making 
                the reduction described in subparagraph (A), 
                see section 1017.
          (2) Limitations.--
                  (A) Indebtedness in excess of value.--The 
                amount excluded under subparagraph (D) of 
                subsection (a)(1) with respect to any qualified 
                real property business indebtedness shall not 
                exceed the excess (if any) of--
                          (i) the outstanding principal amount 
                        of such indebtedness (immediately 
                        before the discharge), over
                          (ii) the fair market value of the 
                        real property described in paragraph 
                        (3)(A) (as of such time), reduced by 
                        the outstanding principal amount of any 
                        other qualified real property business 
                        indebtedness secured by such property 
                        (as of such time).
                  (B) Overall limitation.--The amount excluded 
                under subparagraph (D) of subsection (a)(1) 
                shall not exceed the aggregate adjusted bases 
                of depreciable real property (determined after 
                any reductions under subsections (b) and (g)) 
                held by the taxpayer immediately before the 
                discharge (other than depreciable real property 
                acquired in contemplation of such discharge).
          (3) Qualified real property business indebtedness.--
        The term ``qualified real property business 
        indebtedness'' means indebtedness which--
                  (A) was incurred or assumed by the taxpayer 
                in connection with real property used in a 
                trade or business and is secured by such real 
                property,
                  (B) was incurred or assumed before January 1, 
                1993, or if incurred or assumed on or after 
                such date, is qualified acquisition 
                indebtedness, and
                  (C) with respect to which such taxpayer makes 
                an election to have this paragraph apply.
        Such term shall not include qualified farm 
        indebtedness. Indebtedness under subparagraph (B) shall 
        include indebtedness resulting from the refinancing of 
        indebtedness under subparagraph (B) (or this sentence), 
        but only to the extent it does not exceed the amount of 
        the indebtedness being refinanced.
          (4) Qualified acquisition indebtedness.--For purposes 
        of paragraph (3)(B), the term ``qualified acquisition 
        indebtedness'' means, with respect to any real property 
        described in paragraph (3)(A), indebtedness incurred or 
        assumed to acquire, construct, reconstruct, or 
        substantially improve such property.
          (5) Regulations.--The Secretary shall issue such 
        regulations as are necessary to carry out this 
        subsection, including regulations preventing the abuse 
        of this subsection through cross-collateralization or 
        other means.
  (d) Meaning of terms; special rules relating to certain 
provisions.--
          (1) Indebtedness of taxpayer.--For purposes of this 
        section, the term ``indebtedness of the taxpayer'' 
        means any indebtedness--
                  (A) for which the taxpayer is liable, or
                  (B) subject to which the taxpayer holds 
                property.
          (2) Title 11 case.--For purposes of this section, the 
        term ``title 11 case'' means a case under title 11 of 
        the United States Code (relating to bankruptcy), but 
        only if the taxpayer is under the jurisdiction of the 
        court in such case and the discharge of indebtedness is 
        granted by the court or is pursuant to a plan approved 
        by the court.
          (3) Insolvent.--For purposes of this section, the 
        term ``insolvent'' means the excess of liabilities over 
        the fair market value of assets. With respect to any 
        discharge, whether or not the taxpayer is insolvent, 
        and the amount by which the taxpayer is insolvent, 
        shall be determined on the basis of the taxpayer's 
        assets and liabilities immediately before the 
        discharge.
          (4) Repealed. Pub. L. 99-514, title VIII, Sec. 
        822(b)(3)(A), Oct. 22, 1986, 100 Stat. 2373
          (5) Depreciable property.--The term ``depreciable 
        property'' has the same meaning as when used in section 
        1017.
          (6) Certain provisions to be applied at partner 
        level.--In the case of a partnership, subsections (a), 
        (b), (c), and (g) shall be applied at the partner 
        level.
          (7) Special rules for S corporation.--
                  (A) Certain provisions to be applied at 
                corporate level.--In the case of an S 
                corporation, subsections (a), (b), (c), and (g) 
                shall be applied at the corporate level, 
                including by not taking into account under 
                section 1366(a) any amount excluded under 
                subsection (a) of this section.
                  (B) Reduction in carryover of disallowed 
                losses and deductions.--In the case of an S 
                corporation, for purposes of subparagraph (A) 
                of subsection (b)(2), any loss or deduction 
                which is disallowed for the taxable year of the 
                discharge under section 1366(d)(1) shall be 
                treated as a net operating loss for such 
                taxable year. The preceding sentence shall not 
                apply to any discharge to the extent that 
                subsection (a)(1)(D) applies to such discharge.
                  (C) Coordination with basis adjustments under 
                section 1367(b)(2).--For purposes of subsection 
                (e)(6), a shareholder's adjusted basis in 
                indebtedness of an S corporation shall be 
                determined without regard to any adjustments 
                made under section 1367(b)(2).
          (8) Reductions of tax attributes in title 11 cases of 
        individuals to be made by estate.--In any case under 
        chapter 7 or 11 of title 11 of the United States Code 
        to which section 1398 applies, for purposes of 
        paragraphs (1) and (5) of subsection (b) the estate 
        (and not the individual) shall be treated as the 
        taxpayer. The preceding sentence shall not apply for 
        purposes of applying section 1017 to property 
        transferred by the estate to the individual.
          (9) Time for making election, etc..--
                  (A) Time.--An election under paragraph (5) of 
                subsection (b) or under paragraph (3)(C) of 
                subsection (c) shall be made on the taxpayer's 
                return for the taxable year in which the 
                discharge occurs or at such other time as may 
                be permitted in regulations prescribed by the 
                Secretary.
                  (B) Revocation only with consent.--An 
                election referred to in subparagraph (A), once 
                made, may be revoked only with the consent of 
                the Secretary.
                  (C) Manner.--An election referred to in 
                subparagraph (A) shall be made in such manner 
                as the Secretary may by regulations prescribe.
          (10) Cross reference.--For provision that no 
        reduction is to be made in the basis of exempt property 
        of an individual debtor, see section 1017(c)(1).
  (e) General rules for discharge of indebtedness (including 
discharges not in title 11 cases or insolvency).--For purposes 
of this title--
          (1) No other insolvency exception.--Except as 
        otherwise provided in this section, there shall be no 
        insolvency exception from the general rule that gross 
        income includes income from the discharge of 
        indebtedness.
          (2) Income not realized to extent of lost 
        deductions.--No income shall be realized from the 
        discharge of indebtedness to the extent that payment of 
        the liability would have given rise to a deduction.
          (3) Adjustments for unamortized premium and 
        discount.--The amount taken into account with respect 
        to any discharge shall be properly adjusted for 
        unamortized premium and unamortized discount with 
        respect to the indebtedness discharged.
          (4) Acquisition of indebtedness by person related to 
        debtor.--
                  (A) Treated as acquisition by debtor.--For 
                purposes of determining income of the debtor 
                from discharge of indebtedness, to the extent 
                provided in regulations prescribed by the 
                Secretary, the acquisition of outstanding 
                indebtedness by a person bearing a relationship 
                to the debtor specified in section 267(b) or 
                707(b)(1) from a person who does not bear such 
                a relationship to the debtor shall be treated 
                as the acquisition of such indebtedness by the 
                debtor. Such regulations shall provide for such 
                adjustments in the treatment of any subsequent 
                transactions involving the indebtedness as may 
                be appropriate by reason of the application of 
                the preceding sentence.
                  (B) Members of family.--For purposes of this 
                paragraph, sections 267(b) and 707(b)(1) shall 
                be applied as if section 267(c)(4) provided 
                that the family of an individual consists of 
                the individual's spouse, the individual's 
                children, grandchildren, and parents, and any 
                spouse of the individual's children or 
                grandchildren.
                  (C) Entities under common control treated as 
                related.--For purposes of this paragraph, two 
                entities which are treated as a single employer 
                under subsection (b) or (c) of section 414 
                shall be treated as bearing a relationship to 
                each other which is described in section 
                267(b).
          (5) Purchase-money debt reduction for solvent debtor 
        treated as price reduction.--If--
                  (A) the debt of a purchaser of property to 
                the seller of such property which arose out of 
                the purchase of such property is reduced,
                  (B) such reduction does not occur--
                          (i) in a title 11 case, or
                          (ii) when the purchaser is insolvent, 
                        and
                  (C) but for this paragraph, such reduction 
                would be treated as income to the purchaser 
                from the discharge of indebtedness,
        then such reduction shall be treated as a purchase 
        price adjustment.
          (6) Indebtedness contributed to capital.--Except as 
        provided in regulations, for purposes of determining 
        income of the debtor from discharge of indebtedness, if 
        a debtor corporation acquires its indebtedness from a 
        shareholder as a contribution to capital--
                  (A) section 118 shall not apply, but
                  (B) such corporation shall be treated as 
                having satisfied the indebtedness with an 
                amount of money equal to the shareholder's 
                adjusted basis in the indebtedness.
          (7) Recapture of gain on subsequent sale of stock.--
                  (A) In general.--If a creditor acquires stock 
                of a debtor corporation in satisfaction of such 
                corporation's indebtedness, for purposes of 
                section 1245--
                          (i) such stock (and any other 
                        property the basis of which is 
                        determined in whole or in part by 
                        reference to the adjusted basis of such 
                        stock) shall be treated as section 1245 
                        property,
                          (ii) the aggregate amount allowed to 
                        the creditor--
                                  (I) as deductions under 
                                subsection (a) or (b) of 
                                section 166 (by reason of the 
                                worthlessness or partial 
                                worthlessness of the 
                                indebtedness), or
                                  (II) as an ordinary loss on 
                                the exchange, shall be treated 
                                as an amount allowed as a 
                                deduction for depreciation, and
                          (iii) an exchange of such stock 
                        qualifying under section 354(a), 
                        355(a), or 356(a) shall be treated as 
                        an exchange to which section 1245(b)(3) 
                        applies.
                The amount determined under clause (ii) shall 
                be reduced by the amount (if any) included in 
                the creditor's gross income on the exchange.
                  (B) Special rule for cash basis taxpayers.--
                In the case of any creditor who computes his 
                taxable income under the cash receipts and 
                disbursements method, proper adjustment shall 
                be made in the amount taken into account under 
                clause (ii) of subparagraph (A) for any amount 
                which was not included in the creditor's gross 
                income but which would have been included in 
                such gross income if such indebtedness had been 
                satisfied in full.
                  (C) Stock of parent corporation.--For 
                purposes of this paragraph, stock of a 
                corporation in control (within the meaning of 
                section 368(c)) of the debtor corporation shall 
                be treated as stock of the debtor corporation.
                  (D) Treatment of successor corporation.--For 
                purposes of this paragraph, the term ``debtor 
                corporation'' includes a successor corporation.
                  (E) Partnership rule.--Under regulations 
                prescribed by the Secretary, rules similar to 
                the rules of the foregoing subparagraphs of 
                this paragraph shall apply with respect to the 
                indebtedness of a partnership.
          (8) Indebtedness satisfied by corporate stock or 
        partnership interest.--For purposes of determining 
        income of a debtor from discharge of indebtedness, if--
                  (A) a debtor corporation transfers stock, or
                  (B) a debtor partnership transfers a capital 
                or profits interest in such partnership,
        to a creditor in satisfaction of its recourse or 
        nonrecourse indebtedness, such corporation or 
        partnership shall be treated as having satisfied the 
        indebtedness with an amount of money equal to the fair 
        market value of the stock or interest. In the case of 
        any partnership, any discharge of indebtedness income 
        recognized under this paragraph shall be included in 
        the distributive shares of taxpayers which were the 
        partners in the partnership immediately before such 
        discharge.
          (9) Discharge of indebtedness income not taken into 
        account in determining whether entity meets REIT 
        qualifications.--Any amount included in gross income by 
        reason of the discharge of indebtedness shall not be 
        taken into account for purposes of paragraphs (2) and 
        (3) of section 856(c).
          (10) Indebtedness satisfied by issuance of debt 
        instrument.--
                  (A) In general.--For purposes of determining 
                income of a debtor from discharge of 
                indebtedness, if a debtor issues a debt 
                instrument in satisfaction of indebtedness, 
                such debtor shall be treated as having 
                satisfied the indebtedness with an amount of 
                money equal to the issue price of such debt 
                instrument.
                  (B) Issue price.--For purposes of 
                subparagraph (A), the issue price of any debt 
                instrument shall be determined under sections 
                1273 and 1274. For purposes of the preceding 
                sentence, section 1273(b)(4) shall be applied 
                by reducing the stated redemption price of any 
                instrument by the portion of such stated 
                redemption price which is treated as interest 
                for purposes of this chapter.
  (f) Student loans.--
          (1) In general.--In the case of an individual, gross 
        income does not include any amount which (but for this 
        subsection) would be includible in gross income by 
        reason of the discharge (in whole or in part) of any 
        student loan if such discharge was pursuant to a 
        provision of such loan under which all or part of the 
        indebtedness of the individual would be discharged if 
        the individual worked for a certain period of time in 
        certain professions for any of a broad class of 
        employers.
          (2) Student loan.--For purposes of this subsection, 
        the term ``student loan'' means any loan to an 
        individual to assist the individual in attending an 
        educational organization described in section 
        170(b)(1)(A)(ii) made by--
                  (A) the United States, or an instrumentality 
                or agency thereof,
                  (B) a State, territory, or possession of the 
                United States, or the District of Columbia, or 
                any political subdivision thereof,
                  (C) a public benefit corporation--
                          (i) which is exempt from taxation 
                        under section 501(c)(3),
                          (ii) which has assumed control over a 
                        State, county, or municipal hospital, 
                        and
                          (iii) whose employees have been 
                        deemed to be public employees under 
                        State law, or
                  (D) any educational organization described in 
                section 170(b)(1)(A)(ii) if such loan is made--
                          (i) pursuant to an agreement with any 
                        entity described in subparagraph (A), 
                        (B), or (C) under which the funds from 
                        which the loan was made were provided 
                        to such educational organization, or
                          (ii) pursuant to a program of such 
                        educational organization which is 
                        designed to encourage its students to 
                        serve in occupations with unmet needs 
                        or in areas with unmet needs and under 
                        which the services provided by the 
                        students (or former students) are for 
                        or under the direction of a 
                        governmental unit or an organization 
                        described in section 501(c)(3) and 
                        exempt from tax under section 501(a).
        The term ``student loan'' includes any loan made by an 
        educational organization described in section 
        170(b)(1)(A)(ii) or by an organization exempt from tax 
        under section 501(a) to refinance a loan to an 
        individual to assist the individual in attending any 
        such educational organization but only if the 
        refinancing loan is pursuant to a program of the 
        refinancing organization which is designed as described 
        in subparagraph (D)(ii).
          (3) Exception for discharges on account of services 
        performed for certain lenders.--Paragraph (1) shall not 
        apply to the discharge of a loan made by an 
        organization described in paragraph (2)(D) if the 
        discharge is on account of services performed for 
        either such organization.
          (4) Payments under National Health Service Corps loan 
        repayment program and certain state loan repayment 
        programs.--In the case of an individual, gross income 
        shall not include any amount received under section 
        338B(g) of the Public Health Service Act, under a State 
        program described in section 338I of such Act, or under 
        any other State loan repayment or loan forgiveness 
        program that is intended to provide for the increased 
        availability of health care services in underserved or 
        health professional shortage areas (as determined by 
        such State).
          (5) Discharges on account of death or disability.--
                  (A) In general.--In the case of an 
                individual, gross income does not include any 
                amount which (but for this subsection) would be 
                includible in gross income for such taxable 
                year by reasons of the discharge (in whole or 
                in part) of any loan described in subparagraph 
                (B) [after December 31, 2017, and before 
                January 1, 2026], if such discharge was--
                          (i) pursuant to subsection (a) or (d) 
                        of section 437 of the Higher Education 
                        Act of 1965 or the parallel benefit 
                        under part D of title IV of such Act 
                        (relating to the repayment of loan 
                        liability),
                          (ii) pursuant to section 464(c)(1)(F) 
                        of such Act, or
                          (iii) otherwise discharged on account 
                        of the death or total and permanent 
                        disability of the student.
                  (B) Loans described.--A loan is described in 
                this subparagraph if such loan is--
                          (i) a student loan (as defined in 
                        paragraph (2)), or
                          (ii) a private education loan (as 
                        defined in section 140(7) of the 
                        Consumer Credit Protection Act (15 
                        U.S.C. 1650(7))).
  (g) Special rules for discharge of qualified farm 
indebtedness.--
          (1) Discharge must be by qualified person.--
                  (A) In general.--Subparagraph (C) of 
                subsection (a)(1) shall apply only if the 
                discharge is by a qualified person.
                  (B) Qualified person.--For purposes of 
                subparagraph (A), the term ``qualified person'' 
                has the meaning given to such term by section 
                49(a)(1)(D)(iv); except that such term shall 
                include any Federal, State, or local government 
                or agency or instrumentality thereof.
          (2) Qualified farm indebtedness.--For purposes of 
        this section, indebtedness of a taxpayer shall be 
        treated as qualified farm indebtedness if--
                  (A) such indebtedness was incurred directly 
                in connection with the operation by the 
                taxpayer of the trade or business of farming, 
                and
                  (B) 50 percent or more of the aggregate gross 
                receipts of the taxpayer for the 3 taxable 
                years preceding the taxable year in which the 
                discharge of such indebtedness occurs is 
                attributable to the trade or business of 
                farming.
          (3) Amount excluded cannot exceed sum of tax 
        attributes and business and investment assets.--
                  (A) In general.--The amount excluded under 
                subparagraph (C) of subsection (a)(1) shall not 
                exceed the sum of--
                          (i) the adjusted tax attributes of 
                        the taxpayer, and
                          (ii) the aggregate adjusted bases of 
                        qualified property held by the taxpayer 
                        as of the beginning of the taxable year 
                        following the taxable year in which the 
                        discharge occurs.
                  (B) Adjusted tax attributes.--For purposes of 
                subparagraph (A), the term ``adjusted tax 
                attributes'' means the sum of the tax 
                attributes described in subparagraphs (A), (B), 
                (C), (D), (F), and (G) of subsection (b)(2) 
                determined by taking into account $3 for each 
                $1 of the attributes described in subparagraphs 
                (B), (C), and (G) of subsection (b)(2) and the 
                attribute described in subparagraph (F) of 
                subsection (b)(2) to the extent attributable to 
                any passive activity credit carryover.
                  (C) Qualified property.--For purposes of this 
                paragraph, the term ``qualified property'' 
                means any property which is used or is held for 
                use in a trade or business or for the 
                production of income.
                  (D) Coordination with insolvency exclusion.--
                For purposes of this paragraph, the adjusted 
                basis of any qualified property and the amount 
                of the adjusted tax attributes shall be 
                determined after any reduction under subsection 
                (b) by reason of amounts excluded from gross 
                income under subsection (a)(1)(B).
  (h) Special rules relating to qualified principal residence 
indebtedness.--
          (1) Basis reduction.--The amount excluded from gross 
        income by reason of subsection (a)(1)(E) shall be 
        applied to reduce (but not below zero) the basis of the 
        principal residence of the taxpayer.
          (2) Qualified principal residence indebtedness.--For 
        purposes of this section, the term ``qualified 
        principal residence indebtedness'' means acquisition 
        indebtedness (within the meaning of section 
        163(h)(3)(B), applied by substituting ``$2,000,000 
        ($1,000,000'' for ``[$1,000,000 ($500,000] $750,000 
        ($375,000'' in clause (ii) thereof) with respect to the 
        principal residence of the taxpayer.
          (3) Exception for certain discharges not related to 
        taxpayer's financial condition.--Subsection (a)(1)(E) 
        shall not apply to the discharge of a loan if the 
        discharge is on account of services performed for the 
        lender or any other factor not directly related to a 
        decline in the value of the residence or to the 
        financial condition of the taxpayer.
          (4) Ordering rule.--If any loan is discharged, in 
        whole or in part, and only a portion of such loan is 
        qualified principal residence indebtedness, subsection 
        (a)(1)(E) shall apply only to so much of the amount 
        discharged as exceeds the amount of the loan (as 
        determined immediately before such discharge) which is 
        not qualified principal residence indebtedness.
          (5) Principal residence.--For purposes of this 
        subsection, the term ``principal residence'' has the 
        same meaning as when used in section 121.
  (i) Deferral and ratable inclusion of income arising from 
business indebtedness discharged by the reacquisition of a debt 
instrument.--
          (1) In general.--At the election of the taxpayer, 
        income from the discharge of indebtedness in connection 
        with the reacquisition after December 31, 2008, and 
        before January 1, 2011, of an applicable debt 
        instrument shall be includible in gross income ratably 
        over the 5-taxable-year period beginning with--
                  (A) in the case of a reacquisition occurring 
                in 2009, the fifth taxable year following the 
                taxable year in which the reacquisition occurs, 
                and
                  (B) in the case of a reacquisition occurring 
                in 2010, the fourth taxable year following the 
                taxable year in which the reacquisition occurs.
          (2) Deferral of deduction for original issue discount 
        in debt for debt exchanges.--
                  (A) In general.--If, as part of a 
                reacquisition to which paragraph (1) applies, 
                any debt instrument is issued for the 
                applicable debt instrument being reacquired (or 
                is treated as so issued under subsection (e)(4) 
                and the regulations thereunder) and there is 
                any original issue discount determined under 
                subpart A of part V of subchapter P of this 
                chapter with respect to the debt instrument so 
                issued--
                          (i) except as provided in clause 
                        (ii), no deduction otherwise allowable 
                        under this chapter shall be allowed to 
                        the issuer of such debt instrument with 
                        respect to the portion of such original 
                        issue discount which--
                                  (I) accrues before the 1st 
                                taxable year in the 5-taxable-
                                year period in which income 
                                from the discharge of 
                                indebtedness attributable to 
                                the reacquisition of the debt 
                                instrument is includible under 
                                paragraph (1), and
                                  (II) does not exceed the 
                                income from the discharge of 
                                indebtedness with respect to 
                                the debt instrument being 
                                reacquired, and
                          (ii) the aggregate amount of 
                        deductions disallowed under clause (i) 
                        shall be allowed as a deduction ratably 
                        over the 5-taxable-year period 
                        described in clause (i)(I).
                If the amount of the original issue discount 
                accruing before such 1st taxable year exceeds 
                the income from the discharge of indebtedness 
                with respect to the applicable debt instrument 
                being reacquired, the deductions shall be 
                disallowed in the order in which the original 
                issue discount is accrued.
                  (B) Deemed debt for debt exchanges.--For 
                purposes of subparagraph (A), if any debt 
                instrument is issued by an issuer and the 
                proceeds of such debt instrument are used 
                directly or indirectly by the issuer to 
                reacquire an applicable debt instrument of the 
                issuer, the debt instrument so issued shall be 
                treated as issued for the debt instrument being 
                reacquired. If only a portion of the proceeds 
                from a debt instrument are so used, the rules 
                of subparagraph (A) shall apply to the portion 
                of any original issue discount on the newly 
                issued debt instrument which is equal to the 
                portion of the proceeds from such instrument 
                used to reacquire the outstanding instrument.
          (3) Applicable debt instrument.--For purposes of this 
        subsection--
                  (A) Applicable debt instrument.--The term 
                ``applicable debt instrument'' means any debt 
                instrument which was issued by--
                          (i) a C corporation, or
                          (ii) any other person in connection 
                        with the conduct of a trade or business 
                        by such person.
                  (B) Debt instrument.--The term ``debt 
                instrument'' means a bond, debenture, note, 
                certificate, or any other instrument or 
                contractual arrangement constituting 
                indebtedness (within the meaning of section 
                1275(a)(1)).
          (4) Reacquisition.--For purposes of this subsection--
                  (A) In general.--The term ``reacquisition'' 
                means, with respect to any applicable debt 
                instrument, any acquisition of the debt 
                instrument by--
                          (i) the debtor which issued (or is 
                        otherwise the obligor under) the debt 
                        instrument, or
                          (ii) a related person to such debtor.
                  (B) Acquisition.--The term ``acquisition'' 
                shall, with respect to any applicable debt 
                instrument, include an acquisition of the debt 
                instrument for cash, the exchange of the debt 
                instrument for another debt instrument 
                (including an exchange resulting from a 
                modification of the debt instrument), the 
                exchange of the debt instrument for corporate 
                stock or a partnership interest, and the 
                contribution of the debt instrument to capital. 
                Such term shall also include the complete 
                forgiveness of the indebtedness by the holder 
                of the debt instrument.
          (5) Other definitions and rules.--For purposes of 
        this subsection--
                  (A) Related person.--The determination of 
                whether a person is related to another person 
                shall be made in the same manner as under 
                subsection (e)(4).
                  (B) Election.--
                          (i) In general.--An election under 
                        this subsection with respect to any 
                        applicable debt instrument shall be 
                        made by including with the return of 
                        tax imposed by chapter 1 for the 
                        taxable year in which the reacquisition 
                        of the debt instrument occurs a 
                        statement which--
                                  (I) clearly identifies such 
                                instrument, and
                                  (II) includes the amount of 
                                income to which paragraph (1) 
                                applies and such other 
                                information as the Secretary 
                                may prescribe.
                          (ii) Election irrevocable.--Such 
                        election, once made, is irrevocable.
                          (iii) Pass-thru entities.--In the 
                        case of a partnership, S corporation, 
                        or other pass-thru entity, the election 
                        under this subsection shall be made by 
                        the partnership, the S corporation, or 
                        other entity involved.
                  (C) Coordination with other exclusions.--If a 
                taxpayer elects to have this subsection apply 
                to an applicable debt instrument, subparagraphs 
                (A), (B), (C), and (D) of subsection (a)(1) 
                shall not apply to the income from the 
                discharge of such indebtedness for the taxable 
                year of the election or any subsequent taxable 
                year.
                  (D) Acceleration of deferred items.--
                          (i) In general.--In the case of the 
                        death of the taxpayer, the liquidation 
                        or sale of substantially all the assets 
                        of the taxpayer (including in a title 
                        11 or similar case), the cessation of 
                        business by the taxpayer, or similar 
                        circumstances, any item of income or 
                        deduction which is deferred under this 
                        subsection (and has not previously been 
                        taken into account) shall be taken into 
                        account in the taxable year in which 
                        such event occurs (or in the case of a 
                        title 11 or similar case, the day 
                        before the petition is filed).
                          (ii) Special rule for pass-thru 
                        entities.--The rule of clause (i) shall 
                        also apply in the case of the sale or 
                        exchange or redemption of an interest 
                        in a partnership, S corporation, or 
                        other pass- thru entity by a partner, 
                        shareholder, or other person holding an 
                        ownership interest in such entity.
          (6) Special rule for partnerships.--In the case of a 
        partnership, any income deferred under this subsection 
        shall be allocated to the partners in the partnership 
        immediately before the discharge in the manner such 
        amounts would have been included in the distributive 
        shares of such partners under section 704 if such 
        income were recognized at such time. Any decrease in a 
        partner's share of partnership liabilities as a result 
        of such discharge shall not be taken into account for 
        purposes of section 752 at the time of the discharge to 
        the extent it would cause the partner to recognize gain 
        under section 731. Any decrease in partnership 
        liabilities deferred under the preceding sentence shall 
        be taken into account by such partner at the same time, 
        and to the extent remaining in the same amount, as 
        income deferred under this subsection is recognized.
          (7) Secretarial authority.--The Secretary may 
        prescribe such regulations, rules, or other guidance as 
        may be necessary or appropriate for purposes of 
        applying this subsection, including--
                  (A) extending the application of the rules of 
                paragraph (5)(D) to other circumstances where 
                appropriate,
                  (B) requiring reporting of the election (and 
                such other information as the Secretary may 
                require) on returns of tax for subsequent 
                taxable years, and
                  (C) rules for the application of this 
                subsection to partnerships, S corporations, and 
                other pass-thru entities, including for the 
                allocation of deferred deductions.

           *       *       *       *       *       *       *

SEC. 112. CERTAIN COMBAT ZONE COMPENSATION OF MEMBERS OF THE ARMED 
                    FORCES.

  (a) Enlisted personnel.--Gross income does not include 
compensation received for active service as a member below the 
grade of commissioned officer in the Armed Forces of the United 
States for any month during any part of which such member--
          (1) served in a combat zone, or
          (2) was hospitalized as a result of wounds, disease, 
        or injury incurred while serving in a combat zone; but 
        this paragraph shall not apply for any month beginning 
        more than 2 years after the date of the termination of 
        combatant activities in such zone.
With respect to service in the combat zone designated for 
purposes of the Vietnam conflict, paragraph (2) shall not apply 
to any month after January 1978.
  (b) Commissioned officers.--Gross income does not include so 
much of the compensation as does not exceed the maximum 
enlisted amount received for active service as a commissioned 
officer in the Armed Forces of the United States for any month 
during any part of which such officer--
          (1) served in a combat zone, or
          (2) was hospitalized as a result of wounds, disease, 
        or injury incurred while serving in a combat zone; but 
        this paragraph shall not apply for any month beginning 
        more than 2 years after the date of the termination of 
        combatant activities in such zone.
With respect to service in the combat zone designated for 
purposes of the Vietnam conflict, paragraph (2) shall not apply 
to any month after January 1978.
  (c) Definitions.--For purposes of this section--
          (1) The term ``commissioned officer'' does not 
        include a commissioned warrant officer.
          (2) The term ``combat zone'' [means any area] means--
                  (A) any area  which the President of the 
                United States by Executive Order designates, 
                for purposes of this section or corresponding 
                provisions of prior income tax laws, as an area 
                in which Armed Forces of the United States are 
                or have engaged in combat[.] , and
                  (B) the Sinai Peninsula of Egypt. 
          (3) Service is performed in a combat zone [only if 
        performed] only if--
                  (A) in the case of an area described in 
                paragraph (2)(A), such service is performed  on 
                or after the date designated by the President 
                by Executive Order as the date of the 
                commencing of combatant activities in such 
                zone, and on or before the date designated by 
                the President by Executive Order as the date of 
                the termination of combatant activities in such 
                zone[.] , and
                  (B) in the case of the area described in 
                paragraph (2)(B), such service is performed 
                during any period with respect to which one or 
                more members of the Armed Forces of the United 
                States are entitled to special pay under 
                section 310 of title 37, United States Code 
                (relating to special pay; duty subject to 
                hostile fire or imminent danger), for service 
                performed in such area. 
          (4) The term ``compensation'' does not include 
        pensions and retirement pay.
          (5) The term ``maximum enlisted amount'' means, for 
        any month, the sum of--
                  (A) the highest rate of basic pay payable for 
                such month to any enlisted member of the Armed 
                Forces of the United States at the highest pay 
                grade applicable to enlisted members, and
                  (B) in the case of an officer entitled to 
                special pay under section 310, or paragraph (1) 
                or (3) of section 351(a), of title 37, United 
                States Code, for such month, the amount of such 
                special pay payable to such officer for such 
                month.
  (d) Prisoners of war, etc..--
          (1) Members of the Armed Forces.--Gross income does 
        not include compensation received for active service as 
        a member of the Armed Forces of the United States for 
        any month during any part of which such member is in a 
        missing status (as defined in section 551(2) of title 
        37, United States Code) during the Vietnam conflict as 
        a result of such conflict, other than a period with 
        respect to which it is officially determined under 
        section 552(c) of such title 37 that he is officially 
        absent from his post of duty without authority.
          (2) Civilian employees.--Gross income does not 
        include compensation received for active service as an 
        employee for any month during any part of which such 
        employee is in a missing status during the Vietnam 
        conflict as a result of such conflict. For purposes of 
        this paragraph, the terms ``active service'', 
        ``employee'', and ``missing status'' have the 
        respective meanings given to such terms by section 5561 
        of title 5 of the United States Code.
          (3) Period of conflict.--For purposes of this 
        subsection, the Vietnam conflict began February 28, 
        1961, and ends on the date designated by the President 
        by Executive order as the date of the termination of 
        combatant activities in Vietnam. For purposes of this 
        subsection, an individual is in a missing status as a 
        result of the Vietnam conflict if immediately before 
        such status began he was performing service in Vietnam 
        or was performing service in Southeast Asia in direct 
        support of military operations in Vietnam.

           *       *       *       *       *       *       *

SEC. 125. CAFETERIA PLANS.

  (a) General rule.--Except as provided in subsection (b), no 
amount shall be included in the gross income of a participant 
in a cafeteria plan solely because, under the plan, the 
participant may choose among the benefits of the plan.
  (b) Exception for highly compensated participants and key 
employees.--
          (1) Highly compensated participants.--In the case of 
        a highly compensated participant, subsection (a) shall 
        not apply to any benefit attributable to a plan year 
        for which the plan discriminates in favor of--
                  (A) highly compensated individuals as to 
                eligibility to participate, or
                  (B) highly compensated participants as to 
                contributions and benefits.
          (2) Key employees.--In the case of a key employee 
        (within the meaning of section 416(i)(1)), subsection 
        (a) shall not apply to any benefit attributable to a 
        plan for which the qualified benefits provided to key 
        employees exceed 25 percent of the aggregate of such 
        benefits provided for all employees under the plan. For 
        purposes of the preceding sentence, qualified benefits 
        shall be determined without regard to the second 
        sentence of subsection (f).
          (3) Year of inclusion.--For purposes of determining 
        the taxable year of inclusion, any benefit described in 
        paragraph (1) or (2) shall be treated as received or 
        accrued in the taxable year of the participant or key 
        employee in which the plan year ends.
  (c) Discrimination as to benefits or contributions.--For 
purposes of subparagraph (B) of subsection (b)(1), a cafeteria 
plan does not discriminate where qualified benefits and total 
benefits (or employer contributions allocable to qualified 
benefits and employer contributions for total benefits) do not 
discriminate in favor of highly compensated participants.
  (d) Cafeteria plan defined.--For purposes of this section--
          (1) In general.--The term ``cafeteria plan'' means a 
        written plan under which--
                  (A) all participants are employees, and
                  (B) the participants may choose among 2 or 
                more benefits consisting of cash and qualified 
                benefits.
          (2) Deferred compensation plans excluded.--
                  (A) In general.--The term ``cafeteria plan'' 
                does not include any plan which provides for 
                deferred compensation.
                  (B) Exception for cash and deferred 
                arrangements.--Subparagraph (A) shall not apply 
                to a profit-sharing or stock bonus plan or 
                rural cooperative plan (within the meaning of 
                section 401(k)(7)) which includes a qualified 
                cash or deferred arrangement (as defined in 
                section 401(k)(2)) to the extent of amounts 
                which a covered employee may elect to have the 
                employer pay as contributions to a trust under 
                such plan on behalf of the employee.
                  (C) Exception for certain plans maintained by 
                educational institutions.--Subparagraph (A) 
                shall not apply to a plan maintained by an 
                educational organization described in section 
                170(b)(1)(A)(ii) to the extent of amounts which 
                a covered employee may elect to have the 
                employer pay as contributions for post-
                retirement group life insurance if--
                          (i) all contributions for such 
                        insurance must be made before 
                        retirement, and
                          (ii) such life insurance does not 
                        have a cash surrender value at any 
                        time.
                For purposes of section 79, any life insurance 
                described in the preceding sentence shall be 
                treated as group-term life insurance.
                  (D) Exception for health savings accounts.--
                Subparagraph (A) shall not apply to a plan to 
                the extent of amounts which a covered employee 
                may elect to have the employer pay as 
                contributions to a health savings account 
                established on behalf of the employee.
  (e) Highly compensated participant and individual defined.--
For purposes of this section--
          (1) Highly compensated participant.--The term 
        ``highly compensated participant'' means a participant 
        who is--
                  (A) an officer,
                  (B) a shareholder owning more than 5 percent 
                of the voting power or value of all classes of 
                stock of the employer,
                  (C) highly compensated, or
                  (D) a spouse or dependent (within the meaning 
                of [section 152] section 7706, determined 
                without regard to subsections (b)(1), (b)(2), 
                and (d)(1)(B) thereof) of an individual 
                described in subparagraph (A), (B), or (C).
          (2) Highly compensated individual.--The term ``highly 
        compensated individual'' means an individual who is 
        described in subparagraph (A), (B), (C), or (D) of 
        paragraph (1).
  (f) Qualified benefits defined.--For purposes of this 
section--
          (1) In general.--The term ``qualified benefit'' means 
        any benefit which, with the application of subsection 
        (a), is not includible in the gross income of the 
        employee by reason of an express provision of this 
        chapter (other than section 106(b), 117, 127, or 132). 
        Such term includes any group term life insurance which 
        is includible in gross income only because it exceeds 
        the dollar limitation of section 79 and such term 
        includes any other benefit permitted under regulations.
          (2) Long-term care insurance not qualified.--The term 
        ``qualified benefit'' shall not include any product 
        which is advertised, marketed, or offered as long-term 
        care insurance.
          (3) Certain exchange-participating qualified health 
        plans not qualified.--
                  (A) In general.--The term ``qualified 
                benefit'' shall not include any qualified 
                health plan (as defined in section 1301(a) of 
                the Patient Protection and Affordable Care Act) 
                offered through an Exchange established under 
                section 1311 of such Act.
                  (B) Exception for exchange-eligible 
                employers.--Subparagraph (A) shall not apply 
                with respect to any employee if such employee's 
                employer is a qualified employer (as defined in 
                section 1312(f)(2) of the Patient Protection 
                and Affordable Care Act) offering the employee 
                the opportunity to enroll through such an 
                Exchange in a qualified health plan in a group 
                market.
  (g) Special rules.--
          (1) Collectively bargained plan not considered 
        discriminatory.--For purposes of this section, a plan 
        shall not be treated as discriminatory if the plan is 
        maintained under an agreement which the Secretary finds 
        to be a collective bargaining agreement between 
        employee representatives and one or more employers.
          (2) Health benefits.--For purposes of subparagraph 
        (B) of subsection (b)(1), a cafeteria plan which 
        provides health benefits shall not be treated as 
        discriminatory if--
                  (A) contributions under the plan on behalf of 
                each participant include an amount which--
                          (i) equals 100 percent of the cost of 
                        the health benefit coverage under the 
                        plan of the majority of the highly 
                        compensated participants similarly 
                        situated, or
                          (ii) equals or exceeds 75 percent of 
                        the cost of the health benefit coverage 
                        of the participant (similarly situated) 
                        having the highest cost health benefit 
                        coverage under the plan, and
                  (B) contributions or benefits under the plan 
                in excess of those described in subparagraph 
                (A) bear a uniform relationship to 
                compensation.
          (3) Certain participation eligibility rules not 
        treated as discriminatory.--For purposes of 
        subparagraph (A) of subsection (b)(1), a classification 
        shall not be treated as discriminatory if the plan--
                  (A) benefits a group of employees described 
                in section 410(b)(2)(A)(i), and
                  (B) meets the requirements of clauses (i) and 
                (ii):
                          (i) No employee is required to 
                        complete more than 3 years of 
                        employment with the employer or 
                        employers maintaining the plan as a 
                        condition of participation in the plan, 
                        and the employment requirement for each 
                        employee is the same.
                          (ii) Any employee who has satisfied 
                        the employment requirement of clause 
                        (i) and who is otherwise entitled to 
                        participate in the plan commences 
                        participation no later than the first 
                        day of the first plan year beginning 
                        after the date the employment 
                        requirement was satisfied unless the 
                        employee was separated from service 
                        before the first day of that plan year.
          (4) Certain controlled groups, etc..--All employees 
        who are treated as employed by a single employer under 
        subsection (b), (c), or (m) of section 414 shall be 
        treated as employed by a single employer for purposes 
        of this section.
  (h) Special rule for unused benefits in health flexible 
spending arrangements of individuals called to active duty.--
          (1) In general.--For purposes of this title, a plan 
        or other arrangement shall not fail to be treated as a 
        cafeteria plan or health flexible spending arrangement 
        (and shall not fail to be treated as an accident or 
        health plan) merely because such arrangement provides 
        for qualified reservist distributions.
          (2) Qualified reservist distribution.--For purposes 
        of this subsection, the term ``qualified reservist 
        distribution'' means any distribution to an individual 
        of all or a portion of the balance in the employee's 
        account under such arrangement if--
                  (A) such individual was (by reason of being a 
                member of a reserve component (as defined in 
                section 101 of title 37, United States Code)) 
                ordered or called to active duty for a period 
                in excess of 179 days or for an indefinite 
                period, and
                  (B) such distribution is made during the 
                period beginning on the date of such order or 
                call and ending on the last date that 
                reimbursements could otherwise be made under 
                such arrangement for the plan year which 
                includes the date of such order or call.
  (i) Limitation on health flexible spending arrangements.--
          (1) In general.--For purposes of this section, if a 
        benefit is provided under a cafeteria plan through 
        employer contributions to a health flexible spending 
        arrangement, such benefit shall not be treated as a 
        qualified benefit unless the cafeteria plan provides 
        that an employee may not elect for any taxable year to 
        have salary reduction contributions in excess of $2,500 
        made to such arrangement.
          (2) Adjustment for inflation.--In the case of any 
        taxable year beginning after December 31, 2013, the 
        dollar amount in paragraph (1) shall be increased by an 
        amount equal to--
                  (A) such amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which such taxable year begins by substituting 
                ``calendar year 2012'' for ``calendar year 
                2016'' in subparagraph (A)(ii) thereof.
        If any increase determined under this paragraph is not 
        a multiple of $50, such increase shall be rounded to 
        the next lowest multiple of $50.
  (j) Simple cafeteria plans for small businesses.--
          (1) In general.--An eligible employer maintaining a 
        simple cafeteria plan with respect to which the 
        requirements of this subsection are met for any year 
        shall be treated as meeting any applicable 
        nondiscrimination requirement during such year.
          (2) Simple cafeteria plan.--For purposes of this 
        subsection, the term ``simple cafeteria plan'' means a 
        cafeteria plan--
                  (A) which is established and maintained by an 
                eligible employer, and
                  (B) with respect to which the contribution 
                requirements of paragraph (3), and the 
                eligibility and participation requirements of 
                paragraph (4), are met.
          (3) Contribution requirements.--
                  (A) In general.--The requirements of this 
                paragraph are met if, under the plan the 
                employer is required, without regard to whether 
                a qualified employee makes any salary reduction 
                contribution, to make a contribution to provide 
                qualified benefits under the plan on behalf of 
                each qualified employee in an amount equal to--
                          (i) a uniform percentage (not less 
                        than 2 percent) of the employee's 
                        compensation for the plan year, or
                          (ii) an amount which is not less than 
                        the lesser of--
                                  (I) 6 percent of the 
                                employee's compensation for the 
                                plan year, or
                                  (II) twice the amount of the 
                                salary reduction contributions 
                                of each qualified employee.
                  (B) Matching contributions on behalf of 
                highly compensated and key employees.--The 
                requirements of subparagraph (A)(ii) shall not 
                be treated as met if, under the plan, the rate 
                of contributions with respect to any salary 
                reduction contribution of a highly compensated 
                or key employee at any rate of contribution is 
                greater than that with respect to an employee 
                who is not a highly compensated or key 
                employee.
                  (C) Additional contributions.--Subject to 
                subparagraph (B), nothing in this paragraph 
                shall be treated as prohibiting an employer 
                from making contributions to provide qualified 
                benefits under the plan in addition to 
                contributions required under subparagraph (A).
                  (D) Definitions.--For purposes of this 
                paragraph--
                          (i) Salary reduction contribution.--
                        The term ``salary reduction 
                        contribution'' means, with respect to a 
                        cafeteria plan, any amount which is 
                        contributed to the plan at the election 
                        of the employee and which is not 
                        includible in gross income by reason of 
                        this section.
                          (ii) Qualified employee.--The term 
                        ``qualified employee'' means, with 
                        respect to a cafeteria plan, any 
                        employee who is not a highly 
                        compensated or key employee and who is 
                        eligible to participate in the plan.
                          (iii) Highly compensated employee.--
                        The term ``highly compensated 
                        employee'' has the meaning given such 
                        term by section 414(q).
                          (iv) Key employee.--The term ``key 
                        employee'' has the meaning given such 
                        term by section 416(i).
          (4) Minimum eligibility and participation 
        requirements.--
                  (A) In general.--The requirements of this 
                paragraph shall be treated as met with respect 
                to any year if, under the plan--
                          (i) all employees who had at least 
                        1,000 hours of service for the 
                        preceding plan year are eligible to 
                        participate, and
                          (ii) each employee eligible to 
                        participate in the plan may, subject to 
                        terms and conditions applicable to all 
                        participants, elect any benefit 
                        available under the plan.
                  (B) Certain employees may be excluded.--For 
                purposes of subparagraph (A)(i), an employer 
                may elect to exclude under the plan employees--
                          (i) who have not attained the age of 
                        21 before the close of a plan year,
                          (ii) who have less than 1 year of 
                        service with the employer as of any day 
                        during the plan year,
                          (iii) who are covered under an 
                        agreement which the Secretary of Labor 
                        finds to be a collective bargaining 
                        agreement if there is evidence that the 
                        benefits covered under the cafeteria 
                        plan were the subject of good faith 
                        bargaining between employee 
                        representatives and the employer, or
                          (iv) who are described in section 
                        410(b)(3)(C) (relating to nonresident 
                        aliens working outside the United 
                        States).
                A plan may provide a shorter period of service 
                or younger age for purposes of clause (i) or 
                (ii).
          (5) Eligible employer.--For purposes of this 
        subsection--
                  (A) In general.--The term ``eligible 
                employer'' means, with respect to any year, any 
                employer if such employer employed an average 
                of 100 or fewer employees on business days 
                during either of the 2 preceding years. For 
                purposes of this subparagraph, a year may only 
                be taken into account if the employer was in 
                existence throughout the year.
                  (B) Employers not in existence during 
                preceding year.--If an employer was not in 
                existence throughout the preceding year, the 
                determination under subparagraph (A) shall be 
                based on the average number of employees that 
                it is reasonably expected such employer will 
                employ on business days in the current year.
                  (C) Growing employers retain treatment as 
                small employer.--
                          (i) In general.--If--
                                  (I) an employer was an 
                                eligible employer for any year 
                                (a ``qualified year''), and
                                  (II) such employer 
                                establishes a simple cafeteria 
                                plan for its employees for such 
                                year,
                        then, notwithstanding the fact the 
                        employer fails to meet the requirements 
                        of subparagraph (A) for any subsequent 
                        year, such employer shall be treated as 
                        an eligible employer for such 
                        subsequent year with respect to 
                        employees (whether or not employees 
                        during a qualified year) of any trade 
                        or business which was covered by the 
                        plan during any qualified year.
                          (ii) Exception.--This subparagraph 
                        shall cease to apply if the employer 
                        employs an average of 200 or more 
                        employees on business days during any 
                        year preceding any such subsequent 
                        year.
                  (D) Special rules.--
                          (i) Predecessors.--Any reference in 
                        this paragraph to an employer shall 
                        include a reference to any predecessor 
                        of such employer.
                          (ii) Aggregation rules.--All persons 
                        treated as a single employer under 
                        subsection (a) or (b) of section 52, or 
                        subsection (n) or (o) of section 414, 
                        shall be treated as one person.
          (6) Applicable nondiscrimination requirement.--For 
        purposes of this subsection, the term ``applicable 
        nondiscrimination requirement'' means any requirement 
        under subsection (b) of this section, section 79(d), 
        section 105(h), or paragraph (2), (3), (4), or (8) of 
        section 129(d).
          (7) Compensation.--The term ``compensation'' has the 
        meaning given such term by section 414(s).
  (k) Cross reference.--For reporting and recordkeeping 
requirements, see section 6039D.
  (l) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this section.

           *       *       *       *       *       *       *

SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS.

  (a) Exclusion.--
          (1) In general.--Gross income of an employee does not 
        include amounts paid or incurred by the employer for 
        dependent care assistance provided to such employee if 
        the assistance is furnished pursuant to a program which 
        is described in subsection (d).
          (2) Limitation of exclusion.--
                  (A) In general.--The amount which may be 
                excluded under paragraph (1) for dependent care 
                assistance with respect to dependent care 
                services provided during a taxable year shall 
                not exceed $5,000 ($2,500 in the case of a 
                separate return by a married individual).
                  (B) Year of inclusion.--The amount of any 
                excess under subparagraph (A) shall be included 
                in gross income in the taxable year in which 
                the dependent care services were provided (even 
                if payment of dependent care assistance for 
                such services occurs in a subsequent taxable 
                year).
                  (C) Marital status.--For purposes of this 
                paragraph, marital status shall be determined 
                under the rules of paragraphs (3) and (4) of 
                section 21(e).
  (b) Earned income limitation.--
          (1) In general.--The amount excluded from the income 
        of an employee under subsection (a) for any taxable 
        year shall not exceed--
                  (A) in the case of an employee who is not 
                married at the close of such taxable year, the 
                earned income of such employee for such taxable 
                year, or
                  (B) in the case of an employee who is married 
                at the close of such taxable year, the lesser 
                of--
                          (i) the earned income of such 
                        employee for such taxable year, or
                          (ii) the earned income of the spouse 
                        of such employee for such taxable year.
          (2) Special rule for certain spouses.--For purposes 
        of paragraph (1), the provisions of section 21(d)(2) 
        shall apply in determining the earned income of a 
        spouse who is a student or incapable of caring for 
        himself.
  (c) Payments to related individuals.--No amount paid or 
incurred during the taxable year of an employee by an employer 
in providing dependent care assistance to such employee shall 
be excluded under subsection (a) if such amount was paid or 
incurred to an individual--
          [(1) with respect to whom, for such taxable year, a 
        deduction is allowable under section 151(c) (relating 
        to personal exemptions for dependents) to such employee 
        or the spouse of such employee, or]
          (1) who is a dependent of such employee or of such 
        employee's spouse, or
          (2) who is a child of such employee (within the 
        meaning of [section 152(f)(1)] section 7706(f)(1)) 
        under the age of 19 at the close of such taxable year.
  (d) Dependent care assistance program.--
          (1) In general.--For purposes of this section a 
        dependent care assistance program is a separate written 
        plan of an employer for the exclusive benefit of his 
        employees to provide such employees with dependent care 
        assistance which meets the requirements of paragraphs 
        (2) through (8) of this subsection. If any plan would 
        qualify as a dependent care assistance program but for 
        a failure to meet the requirements of this subsection, 
        then, notwithstanding such failure, such plan shall be 
        treated as a dependent care assistance program in the 
        case of employees who are not highly compensated 
        employees.
          (2) Discrimination.--The contributions or benefits 
        provided under the plan shall not discriminate in favor 
        of employees who are highly compensated employees 
        (within the meaning of section 414(q)) or their 
        dependents.
          (3) Eligibility.--The program shall benefit employees 
        who qualify under a classification set up by the 
        employer and found by the Secretary not to be 
        discriminatory in favor of employees described in 
        paragraph (2), or their dependents.
          (4) Principal shareholders or owners.--Not more than 
        25 percent of the amounts paid or incurred by the 
        employer for dependent care assistance during the year 
        may be provided for the class of individuals who are 
        shareholders or owners (or their spouses or 
        dependents), each of whom (on any day of the year) owns 
        more than 5 percent of the stock or of the capital or 
        profits interest in the employer.
          (5) No funding required.--A program referred to in 
        paragraph (1) is not required to be funded.
          (6) Notification of eligible employees.--Reasonable 
        notification of the availability and terms of the 
        program shall be provided to eligible employees.
          (7) Statement of expenses.--The plan shall furnish to 
        an employee, on or before January 31, a written 
        statement showing the amounts paid or expenses incurred 
        by the employer in providing dependent care assistance 
        to such employee during the previous calendar year.
          (8) Benefits.--
                  (A) In general.--A plan meets the 
                requirements of this paragraph if the average 
                benefits provided to employees who are not 
                highly compensated employees under all plans of 
                the employer is at least 55 percent of the 
                average benefits provided to highly compensated 
                employees under all plans of the employer.
                  (B) Salary reduction agreements.--For 
                purposes of subparagraph (A), in the case of 
                any benefits provided through a salary 
                reduction agreement, a plan may disregard any 
                employees whose compensation is less than 
                $25,000. For purposes of this subparagraph, the 
                term ``compensation'' has the meaning given 
                such term by section 414(q)(4), except that, 
                under rules prescribed by the Secretary, an 
                employer may elect to determine compensation on 
                any other basis which does not discriminate in 
                favor of highly compensated employees.
          (9) Excluded employees.--For purposes of paragraphs 
        (3) and (8), there shall be excluded from 
        consideration--
                  (A) subject to rules similar to the rules of 
                section 410(b)(4), employees who have not 
                attained the age of 21 and completed 1 year of 
                service (as defined in section 410(a)(3)), and
                  (B) employees not included in a dependent 
                care assistance program who are included in a 
                unit of employees covered by an agreement which 
                the Secretary finds to be a collective 
                bargaining agreement between employee 
                representatives and 1 or more employees, if 
                there is evidence that dependent care benefits 
                were the subject of good faith bargaining 
                between such employee representatives and such 
                employer or employers.
  (e) Definitions and special rules.--For purposes of this 
section--
          (1) Dependent care assistance.--The term ``dependent 
        care assistance'' means the payment of, or provision 
        of, those services which if paid for by the employee 
        would be considered employment-related expenses under 
        section 21(b)(2) (relating to expenses for household 
        and dependent care services necessary for gainful 
        employment).
          (2) Earned income.--The term ``earned income'' shall 
        have the meaning given such term in section 32(c)(2), 
        but such term shall not include any amounts paid or 
        incurred by an employer for dependent care assistance 
        to an employee.
          (3) Employee.--The term ``employee'' includes, for 
        any year, an individual who is an employee within the 
        meaning of section 401(c)(1) (relating to self-employed 
        individuals).
          (4) Employer.--An individual who owns the entire 
        interest in an unincorporated trade or business shall 
        be treated as his own employer. A partnership shall be 
        treated as the employer of each partner who is an 
        employee within the meaning of paragraph (3).
          (5) Attribution rules.--
                  (A) Ownership of stock.--Ownership of stock 
                in a corporation shall be determined in 
                accordance with the rules provided under 
                subsections (d) and (e) of section 1563 
                (without regard to section 1563(e)(3)(C)).
                  (B) Interest in unincorporated trade or 
                business.--The interest of an employee in a 
                trade or business which is not incorporated 
                shall be determined in accordance with 
                regulations prescribed by the Secretary, which 
                shall be based on principles similar to the 
                principles which apply in the case of 
                subparagraph (A).
          (6) Utilization test not applicable.--A dependent 
        care assistance program shall not be held or considered 
        to fail to meet any requirements of subsection (d) 
        (other than paragraphs (4) and (8) thereof) merely 
        because of utilization rates for the different types of 
        assistance made available under the program.
          (7) Disallowance of excluded amounts as credit or 
        deduction.--No deduction or credit shall be allowed to 
        the employee under any other section of this chapter 
        for any amount excluded from the gross income of the 
        employee by reason of this section.
          (8) Treatment of onsite facilities.--In the case of 
        an onsite facility maintained by an employer, except to 
        the extent provided in regulations, the amount of 
        dependent care assistance provided to an employee 
        excluded with respect to any dependent shall be based 
        on--
                  (A) utilization of the facility by a 
                dependent of the employee, and
                  (B) the value of the services provided with 
                respect to such dependent.
          (9) Identifying information required with respect to 
        service provider.--No amount paid or incurred by an 
        employer for dependent care assistance provided to an 
        employee shall be excluded from the gross income of 
        such employee unless--
                  (A) the name, address, and taxpayer 
                identification number of the person performing 
                the services are included on the return to 
                which the exclusion relates, or
                  (B) if such person is an organization 
                described in section 501(c)(3) and exempt from 
                tax under section 501(a), the name and address 
                of such person are included on the return to 
                which the exclusion relates.
        In the case of a failure to provide the information 
        required under the preceding sentence, the preceding 
        sentence shall not apply if it is shown that the 
        taxpayer exercised due diligence in attempting to 
        provide the information so required.

           *       *       *       *       *       *       *

SEC. 132. CERTAIN FRINGE BENEFITS.

  (a) Exclusion from gross income.--Gross income shall not 
include any fringe benefit which qualifies as a--
          (1) no-additional-cost service,
          (2) qualified employee discount,
          (3) working condition fringe,
          (4) de minimis fringe,
          (5) qualified transportation fringe,
          (6) qualified moving expense reimbursement,
          (7) qualified retirement planning services, or
          (8) qualified military base realignment and closure 
        fringe.
  (b) No-additional-cost service defined.--For purposes of this 
section, the term ``no-additional-cost service'' means any 
service provided by an employer to an employee for use by such 
employee if--
          (1) such service is offered for sale to customers in 
        the ordinary course of the line of business of the 
        employer in which the employee is performing services, 
        and
          (2) the employer incurs no substantial additional 
        cost (including forgone revenue) in providing such 
        service to the employee (determined without regard to 
        any amount paid by the employee for such service).
  (c) Qualified employee discount defined.--For purposes of 
this section--
          (1) Qualified employee discount.--The term 
        ``qualified employee discount'' means any employee 
        discount with respect to qualified property or services 
        to the extent such discount does not exceed--
                  (A) in the case of property, the gross profit 
                percentage of the price at which the property 
                is being offered by the employer to customers, 
                or
                  (B) in the case of services, 20 percent of 
                the price at which the services are being 
                offered by the employer to customers.
          (2) Gross profit percentage.--
                  (A) In general.--The term ``gross profit 
                percentage'' means the percent which--
                          (i) the excess of the aggregate sales 
                        price of property sold by the employer 
                        to customers over the aggregate cost of 
                        such property to the employer, is of
                          (ii) the aggregate sale price of such 
                        property.
                  (B) Determination of gross profit 
                percentage.--Gross profit percentage shall be 
                determined on the basis of--
                          (i) all property offered to customers 
                        in the ordinary course of the line of 
                        business of the employer in which the 
                        employee is performing services (or a 
                        reasonable classification of property 
                        selected by the employer), and
                          (ii) the employer's experience during 
                        a representative period.
          (3) Employee discount defined.--The term ``employee 
        discount'' means the amount by which--
                  (A) the price at which the property or 
                services are provided by the employer to an 
                employee for use by such employee, is less than
                  (B) the price at which such property or 
                services are being offered by the employer to 
                customers.
          (4) Qualified property or services.--The term 
        ``qualified property or services'' means any property 
        (other than real property and other than personal 
        property of a kind held for investment) or services 
        which are offered for sale to customers in the ordinary 
        course of the line of business of the employer in which 
        the employee is performing services.
  (d) Working condition fringe defined.--For purposes of this 
section, the term ``working condition fringe'' means any 
property or services provided to an employee of the employer to 
the extent that, if the employee paid for such property or 
services, such payment would be allowable as a deduction under 
section 162 or 167.
  (e) De minimis fringe defined.--For purposes of this 
section--
          (1) In general.--The term ``de minimis fringe'' means 
        any property or service the value of which is (after 
        taking into account the frequency with which similar 
        fringes are provided by the employer to the employer's 
        employees) so small as to make accounting for it 
        unreasonable or administratively impracticable.
          (2) Treatment of certain eating facilities.--The 
        operation by an employer of any eating facility for 
        employees shall be treated as a de minimis fringe if--
                  (A) such facility is located on or near the 
                business premises of the employer, and
                  (B) revenue derived from such facility 
                normally equals or exceeds the direct operating 
                costs of such facility.
The preceding sentence shall apply with respect to any highly 
compensated employee only if access to the facility is 
available on substantially the same terms to each member of a 
group of employees which is defined under a reasonable 
classification set up by the employer which does not 
discriminate in favor of highly compensated employees. For 
purposes of subparagraph (B), an employee entitled under 
section 119 to exclude the value of a meal provided at such 
facility shall be treated as having paid an amount for such 
meal equal to the direct operating costs of the facility 
attributable to such meal.
  (f) Qualified transportation fringe.--
          (1) In general.--For purposes of this section, the 
        term ``qualified transportation fringe'' means any of 
        the following provided by an employer to an employee:
                  (A) Transportation in a commuter highway 
                vehicle if such transportation is in connection 
                with travel between the employee's residence 
                and place of employment.
                  (B) Any transit pass.
                  (C) Qualified parking.
                  [(D) Any qualified bicycle commuting 
                reimbursement.]
          (2) Limitation on exclusion.--The amount of the 
        fringe benefits which are provided by an employer to 
        any employee and which may be excluded from gross 
        income under subsection (a)(5) shall not exceed--
                  (A) $175 per month in the case of the 
                aggregate of the benefits described in 
                subparagraphs (A) and (B) of paragraph (1), and
                  (B) $175 per month in the case of qualified 
                parking[, and].
                  [(C) the applicable annual limitation in the 
                case of any qualified bicycle commuting 
                reimbursement.]
          (3) Cash reimbursements.--For purposes of this 
        subsection, the term ``qualified transportation 
        fringe'' includes a cash reimbursement by an employer 
        to an employee for a benefit described in paragraph 
        (1). The preceding sentence shall apply to a cash 
        reimbursement for any transit pass only if a voucher or 
        similar item which may be exchanged only for a transit 
        pass is not readily available for direct distribution 
        by the employer to the employee.
          (4) No constructive receipt.--No amount shall be 
        included in the gross income of an employee solely 
        because the employee may choose between any qualified 
        transportation fringe [(other than a qualified bicycle 
        commuting reimbursement)] and compensation which would 
        otherwise be includible in gross income of such 
        employee.
          (5) Definitions.--For purposes of this subsection--
                  (A) Transit pass.--The term ``transit pass'' 
                means any pass, token, farecard, voucher, or 
                similar item entitling a person to 
                transportation (or transportation at a reduced 
                price) if such transportation is--
                          (i) on mass transit facilities 
                        (whether or not publicly owned), or
                          (ii) provided by any person in the 
                        business of transporting persons for 
                        compensation or hire if such 
                        transportation is provided in a vehicle 
                        meeting the requirements of 
                        subparagraph (B)(i).
                  (B) Commuter highway vehicle.--The term 
                ``commuter highway vehicle'' means any highway 
                vehicle--
                          (i) the seating capacity of which is 
                        at least 6 adults (not including the 
                        driver), and
                          (ii) at least 80 percent of the 
                        mileage use of which can reasonably be 
                        expected to be--
                                  (I) for purposes of 
                                transporting employees in 
                                connection with travel between 
                                their residences and their 
                                place of employment, and
                                  (II) on trips during which 
                                the number of employees 
                                transported for such purposes 
                                is at least 1/2 of the adult 
                                seating capacity of such 
                                vehicle (not including the 
                                driver).
                  (C) Qualified parking.--The term ``qualified 
                parking'' means parking provided to an employee 
                on or near the business premises of the 
                employer or on or near a location from which 
                the employee commutes to work by transportation 
                described in subparagraph (A), in a commuter 
                highway vehicle, or by carpool. Such term shall 
                not include any parking on or near property 
                used by the employee for residential purposes.
                  (D) Transportation provided by employer.--
                Transportation referred to in paragraph (1)(A) 
                shall be considered to be provided by an 
                employer if such transportation is furnished in 
                a commuter highway vehicle operated by or for 
                the employer.
                  (E) Employee.--For purposes of this 
                subsection, the term ``employee'' does not 
                include an individual who is an employee within 
                the meaning of section 401(c)(1).
                  (F) Definitions related to bicycle commuting 
                reimbursement.--
                          (i) Qualified bicycle commuting 
                        reimbursement.--The term ``qualified 
                        bicycle commuting reimbursement'' 
                        means, with respect to any calendar 
                        year, any employer reimbursement during 
                        the 15-month period beginning with the 
                        first day of such calendar year for 
                        reasonable expenses incurred by the 
                        employee during such calendar year for 
                        the purchase of a bicycle and bicycle 
                        improvements, repair, and storage, if 
                        such bicycle is regularly used for 
                        travel between the employee's residence 
                        and place of employment.
                          (ii) Applicable annual limitation.--
                        The term ``applicable annual 
                        limitation'' means, with respect to any 
                        employee for any calendar year, the 
                        product of $20 multiplied by the number 
                        of qualified bicycle commuting months 
                        during such year.
                          (iii) Qualified bicycle commuting 
                        month.--The term ``qualified bicycle 
                        commuting month'' means, with respect 
                        to any employee, any month during which 
                        such employee--
                                  (I) regularly uses the 
                                bicycle for a substantial 
                                portion of the travel between 
                                the employee's residence and 
                                place of employment, and
                                  (II) does not receive any 
                                benefit described in 
                                subparagraph (A), (B), or (C) 
                                of paragraph (1).
          (6) Inflation adjustment.--
                  (A) In general.--In the case of any taxable 
                year beginning in a calendar year after 1999, 
                the dollar amounts contained in subparagraphs 
                (A) and (B) of paragraph (2) shall be increased 
                by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, by substituting ``calendar 
                        year 1998'' for ``calendar year 2016'' 
                        in subparagraph (A)(ii) thereof.
                In the case of any taxable year beginning in a 
                calendar year after 2002, clause (ii) shall be 
                applied by substituting ``calendar year 2001'' 
                for ``calendar year 1998'' for purposes of 
                adjusting the dollar amount contained in 
                paragraph (2)(A).
                  (B) Rounding.--If any increase determined 
                under subparagraph (A) is not a multiple of $5, 
                such increase shall be rounded to the next 
                lowest multiple of $5.
          (7) Coordination with other provisions.--For purposes 
        of this section, the terms ``working condition fringe'' 
        and ``de minimis fringe'' shall not include any 
        qualified transportation fringe (determined without 
        regard to paragraph (2)).
          [(8) Suspension of qualified bicycle commuting 
        reimbursement exclusion.--Paragraph (1)(D) shall not 
        apply to any taxable year beginning after December 31, 
        2017, and before January 1, 2026.]
  (g) Qualified moving expense reimbursement.--For purposes of 
this section--
          (1) In general.--The term ``qualified moving expense 
        reimbursement'' means any amount received (directly or 
        indirectly) [by an individual] by a qualified military 
        individual from an employer as a payment for (or a 
        reimbursement of) expenses which would be deductible as 
        moving expenses under section 217 if directly paid or 
        incurred by the individual. Such term shall not include 
        any payment for (or reimbursement of) an expense 
        actually deducted by the individual in a prior taxable 
        year.
          [(2) Suspension for taxable years 2018 through 
        2025.--Except in the case of a member of the Armed 
        Forces of the United States on active duty who moves 
        pursuant to a military order and incident to a 
        permanent change of station, subsection (a)(6) shall 
        not apply to any taxable year beginning after December 
        31, 2017, and before January 1, 2026.]
          (2) Qualified military individual.--For purposes of 
        this subsection, the term ``qualified military 
        individual'' means a member of the Armed Forces of the 
        United States on active duty who moves pursuant to a 
        military order and incident to a permanent change of 
        station.
  (h) Certain individuals treated as employees for purposes of 
subsections (a)(1) and (2).--For purposes of paragraphs (1) and 
(2) of subsection (a)--
          (1) Retired and disabled employees and surviving 
        spouse of employee treated as employee.--With respect 
        to a line of business of an employer, the term 
        ``employee'' includes--
                  (A) any individual who was formerly employed 
                by such employer in such line of business and 
                who separated from service with such employer 
                in such line of business by reason of 
                retirement or disability, and
                  (B) any widow or widower of any individual 
                who died while employed by such employer in 
                such line of business or while an employee 
                within the meaning of subparagraph (A).
          (2) Spouse and dependent children.--
                  (A) In general.--Any use by the spouse or a 
                dependent child of the employee shall be 
                treated as use by the employee.
                  (B) Dependent child.--For purposes of 
                subparagraph (A), the term ``dependent child'' 
                means any child (as defined in [section 
                152(f)(1)] section 7706(f)(1)) of the 
                employee--
                          (i) who is a dependent of the 
                        employee, or
                          (ii) both of whose parents are 
                        deceased and who has not attained age 
                        25.
                For purposes of the preceding sentence, any 
                child to whom [section 152(e)] section 7706(e) 
                applies shall be treated as the dependent of 
                both parents.
          (3) Special rule for parents in the case of air 
        transportation.--Any use of air transportation by a 
        parent of an employee (determined without regard to 
        paragraph (1)(B)) shall be treated as use by the 
        employee.
  (i) Reciprocal agreements.--For purposes of paragraph (1) of 
subsection (a), any service provided by an employer to an 
employee of another employer shall be treated as provided by 
the employer of such employee if--
          (1) such service is provided pursuant to a written 
        agreement between such employers, and
          (2) neither of such employers incurs any substantial 
        additional costs (including foregone revenue) in 
        providing such service or pursuant to such agreement.
  (j) Special rules.--
          (1) Exclusions under subsection (a)(1) and (2) apply 
        to highly compensated employees only if no 
        discrimination.--Paragraphs (1) and (2) of subsection 
        (a) shall apply with respect to any fringe benefit 
        described therein provided with respect to any highly 
        compensated employee only if such fringe benefit is 
        available on substantially the same terms to each 
        member of a group of employees which is defined under a 
        reasonable classification set up by the employer which 
        does not discriminate in favor of highly compensated 
        employees.
          (2) Special rule for leased sections of department 
        stores.--
                  (A) In general.--For purposes of paragraph 
                (2) of subsection (a), in the case of a leased 
                section of a department store--
                          (i) such section shall be treated as 
                        part of the line of business of the 
                        person operating the department store, 
                        and
                          (ii) employees in the leased section 
                        shall be treated as employees of the 
                        person operating the department store.
                  (B) Leased section of department store.--For 
                purposes of subparagraph (A), a leased section 
                of a department store is any part of a 
                department store where over-the-counter sales 
                of property are made under a lease or similar 
                arrangement where it appears to the general 
                public that individuals making such sales are 
                employed by the person operating the department 
                store.
          (3) Auto salesmen.--
                  (A) In general.--For purposes of subsection 
                (a)(3), qualified automobile demonstration use 
                shall be treated as a working condition fringe.
                  (B) Qualified automobile demonstration use.--
                For purposes of subparagraph (A), the term 
                ``qualified automobile demonstration use'' 
                means any use of an automobile by a full-time 
                automobile salesman in the sales area in which 
                the automobile dealer's sales office is located 
                if--
                          (i) such use is provided primarily to 
                        facilitate the salesman's performance 
                        of services for the employer, and
                          (ii) there are substantial 
                        restrictions on the personal use of 
                        such automobile by such salesman.
          (4) On-premises gyms and other athletic facilities.--
                  (A) In general.--Gross income shall not 
                include the value of any on-premises athletic 
                facility provided by an employer to his 
                employees.
                  (B) On-premises athletic facility.--For 
                purposes of this paragraph, the term ``on-
                premises athletic facility'' means any gym or 
                other athletic facility--
                          (i) which is located on the premises 
                        of the employer,
                          (ii) which is operated by the 
                        employer, and
                          (iii) substantially all the use of 
                        which is by employees of the employer, 
                        their spouses, and their dependent 
                        children (within the meaning of 
                        subsection (h)).
          (5) Special rule for affiliates of airlines.--
                  (A) In general.--If--
                          (i) a qualified affiliate is a member 
                        of an affiliated group another member 
                        of which operates an airline, and
                          (ii) employees of the qualified 
                        affiliate who are directly engaged in 
                        providing airline-related services are 
                        entitled to no-additional-cost service 
                        with respect to air transportation 
                        provided by such other member,
                then, for purposes of applying paragraph (1) of 
                subsection (a) to such no-additional-cost 
                service provided to such employees, such 
                qualified affiliate shall be treated as engaged 
                in the same line of business as such other 
                member.
                  (B) Qualified affiliate.--For purposes of 
                this paragraph, the term ``qualified 
                affiliate'' means any corporation which is 
                predominantly engaged in airline-related 
                services.
                  (C) Airline-related services.--For purposes 
                of this paragraph, the term ``airline-related 
                services'' means any of the following services 
                provided in connection with air transportation:
                          (i) Catering.
                          (ii) Baggage handling.
                          (iii) Ticketing and reservations.
                          (iv) Flight planning and weather 
                        analysis.
                          (v) Restaurants and gift shops 
                        located at an airport.
                          (vi) Such other similar services 
                        provided to the airline as the 
                        Secretary may prescribe.
                  (D) Affiliated group.--For purposes of this 
                paragraph, the term ``affiliated group'' has 
                the meaning given such term by section 1504(a).
          (6) Highly compensated employee.--For purposes of 
        this section, the term ``highly compensated employee'' 
        has the meaning given such term by section 414(q).
          (7) Air cargo.--For purposes of subsection (b), the 
        transportation of cargo by air and the transportation 
        of passengers by air shall be treated as the same 
        service.
          (8) Application of section to otherwise taxable 
        educational or training benefits.--Amounts paid or 
        expenses incurred by the employer for education or 
        training provided to the employee which are not 
        excludable from gross income under section 127 shall be 
        excluded from gross income under this section if (and 
        only if) such amounts or expenses are a working 
        condition fringe.
  (k) Customers not to include employees.--For purposes of this 
section (other than subsection (c)(2)), the term ``customers'' 
shall only include customers who are not employees.
  (l) Section not to apply to fringe benefits expressly 
provided for elsewhere.--This section (other than subsections 
(e) and (g)) shall not apply to any fringe benefits of a type 
the tax treatment of which is expressly provided for in any 
other section of this chapter.
  (m) Qualified retirement planning services.--
          (1) In general.--For purposes of this section, the 
        term ``qualified retirement planning services'' means 
        any retirement planning advice or information provided 
        to an employee and his spouse by an employer 
        maintaining a qualified employer plan.
          (2) Nondiscrimination rule.--Subsection (a)(7) shall 
        apply in the case of highly compensated employees only 
        if such services are available on substantially the 
        same terms to each member of the group of employees 
        normally provided education and information regarding 
        the employer's qualified employer plan.
          (3) Qualified employer plan.--For purposes of this 
        subsection, the term ``qualified employer plan'' means 
        a plan, contract, pension, or account described in 
        section 219(g)(5).
  (n) Qualified military base realignment and closure fringe.--
For purposes of this section--
          (1) In general.--The term ``qualified military base 
        realignment and closure fringe'' means 1 or more 
        payments under the authority of section 1013 of the 
        Demonstration Cities and Metropolitan Development Act 
        of 1966 (42 U.S.C. 3374) (as in effect on the date of 
        the enactment of the American Recovery and Reinvestment 
        Tax Act of 2009).
          (2) Limitation.--With respect to any property, such 
        term shall not include any payment referred to in 
        paragraph (1) to the extent that the sum of all of such 
        payments related to such property exceeds the maximum 
        amount described in subsection (c) of such section (as 
        in effect on such date).
  (o) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.

           *       *       *       *       *       *       *

SEC. 139D. INDIAN HEALTH CARE BENEFITS.

  (a) General rule.--Except as otherwise provided in this 
section, gross income does not include the value of any 
qualified Indian health care benefit.
  (b) Qualified Indian health care benefit.--For purposes of 
this section, the term ``qualified Indian health care benefit'' 
means--
          (1) any health service or benefit provided or 
        purchased, directly or indirectly, by the Indian Health 
        Service through a grant to or a contract or compact 
        with an Indian tribe or tribal organization, or through 
        a third-party program funded by the Indian Health 
        Service,
          (2) medical care provided or purchased by, or amounts 
        to reimburse for such medical care provided by, an 
        Indian tribe or tribal organization for, or to, a 
        member of an Indian tribe, including a spouse or 
        dependent of such a member,
          (3) coverage under accident or health insurance (or 
        an arrangement having the effect of accident or health 
        insurance), or an accident or health plan, provided by 
        an Indian tribe or tribal organization for medical care 
        to a member of an Indian tribe, include a spouse or 
        dependent of such a member, and
          (4) any other medical care provided by an Indian 
        tribe or tribal organization that supplements, 
        replaces, or substitutes for a program or service 
        relating to medical care provided by the Federal 
        government to Indian tribes or members of such a tribe.
  (c) Definitions.--For purposes of this section--
          (1) Indian tribe.--The term ``Indian tribe'' has the 
        meaning given such term by section 45A(c)(6).
          (2) Tribal organization.--The term ``tribal 
        organization'' has the meaning given such term by 
        section 4(l) of the Indian Self-Determination and 
        Education Assistance Act.
          (3) Medical care.--The term ``medical care'' has the 
        same meaning as when used in section 213.
          (4) Accident or health insurance; accident or health 
        plan.--The terms ``accident or health insurance'' and 
        ``accident or health plan'' have the same meaning as 
        when used in section 105.
          (5) Dependent.--The term ``dependent'' has the 
        meaning given such term by [section 152] section 7706, 
        determined without regard to subsections (b)(1), 
        (b)(2), and (d)(1)(B) thereof.
  (d) Denial of double benefit.--Subsection (a) shall not apply 
to the amount of any qualified Indian health care benefit which 
is not includible in gross income of the beneficiary of such 
benefit under any other provision of this chapter, or to the 
amount of any such benefit for which a deduction is allowed to 
such beneficiary under any other provision of this chapter.

SEC. 139E. INDIAN GENERAL WELFARE BENEFITS.

  (a) In general.--Gross income does not include the value of 
any Indian general welfare benefit.
  (b) Indian general welfare benefit.--For purposes of this 
section, the term ``Indian general welfare benefit'' includes 
any payment made or services provided to or on behalf of a 
member of an Indian tribe (or any spouse or dependent of such a 
member) pursuant to an Indian tribal government program, but 
only if--
          (1) the program is administered under specified 
        guidelines and does not discriminate in favor of 
        members of the governing body of the tribe, and
          (2) the benefits provided under such program--
                  (A) are available to any tribal member who 
                meets such guidelines,
                  (B) are for the promotion of general welfare,
                  (C) are not lavish or extravagant, and
                  (D) are not compensation for services.
  (c) Definitions and special rules.--For purposes of this 
section--
          (1) Indian tribal government.--For purposes of this 
        section, the term ``Indian tribal government'' includes 
        any agencies or instrumentalities of an Indian tribal 
        government and any Alaska Native regional or village 
        corporation, as defined in, or established pursuant to, 
        the Alaska Native Claims Settlement Act (43 U.S.C. 1601 
        et seq.).
          (2) Dependent.--The term ``dependent'' has the 
        meaning given such term by [section 152] section 7706, 
        determined without regard to subsections (b)(1), 
        (b)(2), and (d)(1)(B).
          (3) Lavish or extravagant.--The Secretary shall, in 
        consultation with the Tribal Advisory Committee (as 
        established under section 3(a) of the Tribal General 
        Welfare Exclusion Act of 2014), establish guidelines 
        for what constitutes lavish or extravagant benefits 
        with respect to Indian tribal government programs.
          (4) Establishment of tribal government program.--A 
        program shall not fail to be treated as an Indian 
        tribal government program solely by reason of the 
        program being established by tribal custom or 
        government practice.
          (5) Ceremonial activities.--Any items of cultural 
        significance, reimbursement of costs, or cash 
        honorarium for participation in cultural or ceremonial 
        activities for the transmission of tribal culture shall 
        not be treated as compensation for services.

           *       *       *       *       *       *       *

              [PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS

[SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS.

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

[SEC. 153. CROSS REFERENCES.

  [(1) For deductions of estates and trusts, in lieu of the 
exemptions under section 151, see section 642(b).
  [(2) For exemptions of nonresident aliens, see section 
873(b)(3).
  [(3) For determination of marital status, see section 7703.]

PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

           *       *       *       *       *       *       *

SEC. 162. TRADE OR BUSINESS EXPENSES.

  (a) In general.--There shall be allowed as a deduction all 
the ordinary and necessary expenses paid or incurred during the 
taxable year in carrying on any trade or business, including--
          (1) a reasonable allowance for salaries or other 
        compensation for personal services actually rendered;
          (2) traveling expenses (including amounts expended 
        for meals and lodging other than amounts which are 
        lavish or extravagant under the circumstances) while 
        away from home in the pursuit of a trade or business; 
        and
          (3) rentals or other payments required to be made as 
        a condition to the continued use or possession, for 
        purposes of the trade or business, of property to which 
        the taxpayer has not taken or is not taking title or in 
        which he has no equity.
For purposes of the preceding sentence, the place of residence 
of a Member of Congress (including any Delegate and Resident 
Commissioner) within the State, congressional district, or 
possession which he represents in Congress shall be considered 
his home, but amounts expended by such Members within each 
taxable year for living expenses shall not be deductible for 
income tax purposes. For purposes of paragraph (2), the 
taxpayer shall not be treated as being temporarily away from 
home during any period of employment if such period exceeds 1 
year. The preceding sentence shall not apply to any Federal 
employee during any period for which such employee is certified 
by the Attorney General (or the designee thereof) as traveling 
on behalf of the United States in temporary duty status to 
investigate or prosecute, or provide support services for the 
investigation or prosecution of, a Federal crime.
  (b) Charitable contributions and gifts excepted.--No 
deduction shall be allowed under subsection (a) for any 
contribution or gift which would be allowable as a deduction 
under section 170 were it not for the percentage limitations, 
the dollar limitations, or the requirements as to the time of 
payment, set forth in such section.
  (c) Illegal bribes, kickbacks, and other payments.--
          (1) Illegal payments to government officials or 
        employees.--No deduction shall be allowed under 
        subsection (a) for any payment made, directly or 
        indirectly, to an official or employee of any 
        government, or of any agency or instrumentality of any 
        government, if the payment constitutes an illegal bribe 
        or kickback or, if the payment is to an official or 
        employee of a foreign government, the payment is 
        unlawful under the Foreign Corrupt Practices Act of 
        1977. The burden of proof in respect of the issue, for 
        the purposes of this paragraph, as to whether a payment 
        constitutes an illegal bribe or kickback (or is 
        unlawful under the Foreign Corrupt Practices Act of 
        1977) shall be upon the Secretary to the same extent as 
        he bears the burden of proof under section 7454 
        (concerning the burden of proof when the issue relates 
        to fraud).
          (2) Other illegal payments.--No deduction shall be 
        allowed under subsection (a) for any payment (other 
        than a payment described in paragraph (1)) made, 
        directly or indirectly, to any person, if the payment 
        constitutes an illegal bribe, illegal kickback, or 
        other illegal payment under any law of the United 
        States, or under any law of a State (but only if such 
        State law is generally enforced), which subjects the 
        payor to a criminal penalty or the loss of license or 
        privilege to engage in a trade or business. For 
        purposes of this paragraph, a kickback includes a 
        payment in consideration of the referral of a client, 
        patient, or customer. The burden of proof in respect of 
        the issue, for purposes of this paragraph, as to 
        whether a payment constitutes an illegal bribe, illegal 
        kickback, or other illegal payment shall be upon the 
        Secretary to the same extent as he bears the burden of 
        proof under section 7454 (concerning the burden of 
        proof when the issue relates to fraud).
          (3) Kickbacks, rebates, and bribes under medicare and 
        medicaid.--No deduction shall be allowed under 
        subsection (a) for any kickback, rebate, or bribe made 
        by any provider of services, supplier, physician, or 
        other person who furnishes items or services for which 
        payment is or may be made under the Social Security 
        Act, or in whole or in part out of Federal funds under 
        a State plan approved under such Act, if such kickback, 
        rebate, or bribe is made in connection with the 
        furnishing of such items or services or the making or 
        receipt of such payments. For purposes of this 
        paragraph, a kickback includes a payment in 
        consideration of the referral of a client, patient, or 
        customer.
  (d) Capital contributions to Federal National Mortgage 
Association.--For purposes of this subtitle, whenever the 
amount of capital contributions evidenced by a share of stock 
issued pursuant to section 303(c) of the Federal National 
Mortgage Association Charter Act (12 U.S.C., sec. 1718) exceeds 
the fair market value of the stock as of the issue date of such 
stock, the initial holder of the stock shall treat the excess 
as ordinary and necessary expenses paid or incurred during the 
taxable year in carrying on a trade or business.
  (e) Denial of deduction for certain lobbying and political 
expenditures.--
          (1) In general.--No deduction shall be allowed under 
        subsection (a) for any amount paid or incurred in 
        connection with--
                  (A) influencing legislation,
                  (B) participation in, or intervention in, any 
                political campaign on behalf of (or in 
                opposition to) any candidate for public office,
                  (C) any attempt to influence the general 
                public, or segments thereof, with respect to 
                elections, legislative matters, or referendums, 
                or
                  (D) any direct communication with a covered 
                executive branch official in an attempt to 
                influence the official actions or positions of 
                such official.
          (2) Application to dues of tax-exempt 
        organizations.--No deduction shall be allowed under 
        subsection (a) for the portion of dues or other similar 
        amounts paid by the taxpayer to an organization which 
        is exempt from tax under this subtitle which the 
        organization notifies the taxpayer under section 
        6033(e)(1)(A)(ii) is allocable to expenditures to which 
        paragraph (1) applies.
          (3) Influencing legislation.--For purposes of this 
        subsection--
                  (A) In general.--The term ``influencing 
                legislation'' means any attempt to influence 
                any legislation through communication with any 
                member or employee of a legislative body, or 
                with any government official or employee who 
                may participate in the formulation of 
                legislation.
                  (B) Legislation.--The term ``legislation'' 
                has the meaning given such term by section 
                4911(e)(2).
          (4) Other special rules.--
                  (A) Exception for certain taxpayers.--In the 
                case of any taxpayer engaged in the trade or 
                business of conducting activities described in 
                paragraph (1), paragraph (1) shall not apply to 
                expenditures of the taxpayer in conducting such 
                activities directly on behalf of another person 
                (but shall apply to payments by such other 
                person to the taxpayer for conducting such 
                activities).
                  (B) De minimis exception.--
                          (i) In general.--Paragraph (1) shall 
                        not apply to any in-house expenditures 
                        for any taxable year if such 
                        expenditures do not exceed $2,000. In 
                        determining whether a taxpayer exceeds 
                        the $2,000 limit under this clause, 
                        there shall not be taken into account 
                        overhead costs otherwise allocable to 
                        activities described in paragraphs 
                        (1)(A) and (D).
                          (ii) In-house expenditures.--For 
                        purposes of clause (i), the term ``in-
                        house expenditures'' means expenditures 
                        described in paragraphs (1)(A) and (D) 
                        other than--
                                  (I) payments by the taxpayer 
                                to a person engaged in the 
                                trade or business of conducting 
                                activities described in 
                                paragraph (1) for the conduct 
                                of such activities on behalf of 
                                the taxpayer, or
                                  (II) dues or other similar 
                                amounts paid or incurred by the 
                                taxpayer which are allocable to 
                                activities described in 
                                paragraph (1).
                  (C) Expenses incurred in connection with 
                lobbying and political activities.--Any amount 
                paid or incurred for research for, or 
                preparation, planning, or coordination of, any 
                activity described in paragraph (1) shall be 
                treated as paid or incurred in connection with 
                such activity.
          (5) Covered executive branch official.--For purposes 
        of this subsection, the term ``covered executive branch 
        official'' means--
                  (A) the President,
                  (B) the Vice President,
                  (C) any officer or employee of the White 
                House Office of the Executive Office of the 
                President, and the 2 most senior level officers 
                of each of the other agencies in such Executive 
                Office, and
                  (D)(i) any individual serving in a position 
                in level I of the Executive Schedule under 
                section 5312 of title 5, United States Code, 
                (ii) any other individual designated by the 
                President as having Cabinet level status, and 
                (iii) any immediate deputy of an individual 
                described in clause (i) or (ii).
          (6) Cross reference.--For reporting requirements and 
        alternative taxes related to this subsection, see 
        section 6033(e).
  (f) Fines, penalties, and other amounts.--
          (1) In general.--Except as provided in the following 
        paragraphs of this subsection, no deduction otherwise 
        allowable shall be allowed under this chapter for any 
        amount paid or incurred (whether by suit, agreement, or 
        otherwise) to, or at the direction of, a government or 
        governmental entity in relation to the violation of any 
        law or the investigation or inquiry by such government 
        or entity into the potential violation of any law.
          (2) Exception for amounts constituting restitution or 
        paid to come into compliance with law.--
                  (A) In general.--Paragraph (1) shall not 
                apply to any amount that--
                          (i) the taxpayer establishes--
                                  (I) constitutes restitution 
                                (including remediation of 
                                property) for damage or harm 
                                which was or may be caused by 
                                the violation of any law or the 
                                potential violation of any law, 
                                or
                                  (II) is paid to come into 
                                compliance with any law which 
                                was violated or otherwise 
                                involved in the investigation 
                                or inquiry described in 
                                paragraph (1),
                          (ii) is identified as restitution or 
                        as an amount paid to come into 
                        compliance with such law, as the case 
                        may be, in the court order or 
                        settlement agreement, and
                          (iii) in the case of any amount of 
                        restitution for failure to pay any tax 
                        imposed under this title in the same 
                        manner as if such amount were such tax, 
                        would have been allowed as a deduction 
                        under this chapter if it had been 
                        timely paid.
                The identification under clause (ii) alone 
                shall not be sufficient to make the 
                establishment required under clause (i).
                  (B) Limitation.--Subparagraph (A) shall not 
                apply to any amount paid or incurred as 
                reimbursement to the government or entity for 
                the costs of any investigation or litigation.
          (3) Exception for amounts paid or incurred as the 
        result of certain court orders.--Paragraph (1) shall 
        not apply to any amount paid or incurred by reason of 
        any order of a court in a suit in which no government 
        or governmental entity is a party.
          (4) Exception for taxes due.--Paragraph (1) shall not 
        apply to any amount paid or incurred as taxes due.
          (5) Treatment of certain nongovernmental regulatory 
        entities.--For purposes of this subsection, the 
        following nongovernmental entities shall be treated as 
        governmental entities:
                  (A) Any nongovernmental entity which 
                exercises self-regulatory powers (including 
                imposing sanctions) in connection with a 
                qualified board or exchange (as defined in 
                section 1256(g)(7)).
                  (B) To the extent provided in regulations, 
                any nongovernmental entity which exercises 
                self-regulatory powers (including imposing 
                sanctions) as part of performing an essential 
                governmental function.
  (g) Treble damage payments under the antitrust laws.--If in a 
criminal proceeding a taxpayer is convicted of a violation of 
the antitrust laws, or his plea of guilty or nolo contendere to 
an indictment or information charging such a violation is 
entered or accepted in such a proceeding, no deduction shall be 
allowed under subsection (a) for two-thirds of any amount paid 
or incurred--
          (1) on any judgment for damages entered against the 
        taxpayer under section 4 of the Act entitled ``An Act 
        to supplement existing laws against unlawful restraints 
        and monopolies, and for other purposes'', approved 
        October 15, 1914 (commonly known as the Clayton Act), 
        on account of such violation or any related violation 
        of the antitrust laws which occurred prior to the date 
        of the final judgment of such conviction, or
          (2) in settlement of any action brought under such 
        section 4 on account of such violation or related 
        violation.
  (h) State legislators' travel expenses away from home.--
          (1) In general.--For purposes of subsection (a), in 
        the case of any individual who is a State legislator at 
        any time during the taxable year and who makes an 
        election under this subsection for the taxable year--
                  (A) the place of residence of such individual 
                within the legislative district which he 
                represented shall be considered his home,
                  (B) he shall be deemed to have expended for 
                living expenses (in connection with his trade 
                or business as a legislator) an amount equal to 
                the sum of the amounts determined by 
                multiplying each legislative day of such 
                individual during the taxable year by the 
                greater of--
                          (i) the amount generally allowable 
                        with respect to such day to employees 
                        of the State of which he is a 
                        legislator for per diem while away from 
                        home, to the extent such amount does 
                        not exceed 110 percent of the amount 
                        described in clause (ii) with respect 
                        to such day, or
                          (ii) the amount generally allowable 
                        with respect to such day to employees 
                        of the executive branch of the Federal 
                        Government for per diem while away from 
                        home but serving in the United States, 
                        and
                  (C) he shall be deemed to be away from home 
                in the pursuit of a trade or business on each 
                legislative day.
          (2) Legislative days.--For purposes of paragraph (1), 
        a legislative day during any taxable year for any 
        individual shall be any day during such year on which--
                  (A) the legislature was in session (including 
                any day in which the legislature was not in 
                session for a period of 4 consecutive days or 
                less), or
                  (B) the legislature was not in session but 
                the physical presence of the individual was 
                formally recorded at a meeting of a committee 
                of such legislature.
          (3) Election.--An election under this subsection for 
        any taxable year shall be made at such time and in such 
        manner as the Secretary shall by regulations prescribe.
          (4) Section not to apply to legislators who reside 
        near capitol.--This subsection shall not apply to any 
        legislator whose place of residence within the 
        legislative district which he represents is 50 or fewer 
        miles from the capitol building of the State.
  (j) Certain foreign advertising expenses.--
          (1) In general.--No deduction shall be allowed under 
        subsection (a) for any expenses of an advertisement 
        carried by a foreign broadcast undertaking and directed 
        primarily to a market in the United States. This 
        paragraph shall apply only to foreign broadcast 
        undertakings located in a country which denies a 
        similar deduction for the cost of advertising directed 
        primarily to a market in the foreign country when 
        placed with a United States broadcast undertaking.
          (2) Broadcast undertaking.--For purposes of paragraph 
        (1), the term ``broadcast undertaking'' includes (but 
        is not limited to) radio and television stations.
  (k) Stock reacquisition expenses.--
          (1) In general.--Except as provided in paragraph (2), 
        no deduction otherwise allowable shall be allowed under 
        this chapter for any amount paid or incurred by a 
        corporation in connection with the reacquisition of its 
        stock or of the stock of any related person (as defined 
        in section 465(b)(3)(C)).
          (2) Exceptions.--Paragraph (1) shall not apply to--
                  (A) Certain specific deductions.--Any--
                          (i) deduction allowable under section 
                        163 (relating to interest),
                          (ii) deduction for amounts which are 
                        properly allocable to indebtedness and 
                        amortized over the term of such 
                        indebtedness, or
                          (iii) deduction for dividends paid 
                        (within the meaning of section 561).
                  (B) Stock of certain regulated investment 
                companies.--Any amount paid or incurred in 
                connection with the redemption of any stock in 
                a regulated investment company which issues 
                only stock which is redeemable upon the demand 
                of the shareholder.
  (l) Special rules for health insurance costs of self-employed 
individuals.--
          (1) Allowance of deduction.--In the case of a 
        taxpayer who is an employee within the meaning of 
        section 401(c)(1), there shall be allowed as a 
        deduction under this section an amount equal to the 
        amount paid during the taxable year for insurance which 
        constitutes medical care for--
                  (A) the taxpayer,
                  (B) the taxpayer's spouse,
                  (C) the taxpayer's dependents, and
                  (D) any child (as defined in [section 
                152(f)(1)] section 7706(f)(1)) of the taxpayer 
                who as of the end of the taxable year has not 
                attained age 27.
          (2) Limitations.--
                  (A) Dollar amount.--No deduction shall be 
                allowed under paragraph (1) to the extent that 
                the amount of such deduction exceeds the 
                taxpayer's earned income (within the meaning of 
                section 401(c)) derived by the taxpayer from 
                the trade or business with respect to which the 
                plan providing the medical care coverage is 
                established.
                  (B) Other coverage.--Paragraph (1) shall not 
                apply to any taxpayer for any calendar month 
                for which the taxpayer is eligible to 
                participate in any subsidized health plan 
                maintained by any employer of the taxpayer or 
                of the spouse of, or any dependent, or 
                individual described in subparagraph (D) of 
                paragraph (1) with respect to, the taxpayer. 
                The preceding sentence shall be applied 
                separately with respect to--
                          (i) plans which include coverage for 
                        qualified long-term care services (as 
                        defined in section 7702B(c)) or are 
                        qualified long-term care insurance 
                        contracts (as defined in section 
                        7702B(b)), and
                          (ii) plans which do not include such 
                        coverage and are not such contracts.
                  (C) Long-term care premiums.--In the case of 
                a qualified long-term care insurance contract 
                (as defined in section 7702B(b)), only eligible 
                long-term care premiums (as defined in section 
                213(d)(10)) shall be taken into account under 
                paragraph (1).
          (3) Coordination with medical deduction.--Any amount 
        paid by a taxpayer for insurance to which paragraph (1) 
        applies shall not be taken into account in computing 
        the amount allowable to the taxpayer as a deduction 
        under section 213(a).
          (4) Deduction not allowed for self-employment tax 
        purposes.--The deduction allowable by reason of this 
        subsection shall not be taken into account in 
        determining an individual's net earnings from self-
        employment (within the meaning of section 1402(a)) for 
        purposes of chapter 2 for taxable years beginning 
        before January 1, 2010, or after December 31, 2010.
          (5) Treatment of certain S corporation 
        shareholders.--This subsection shall apply in the case 
        of any individual treated as a partner under section 
        1372(a), except that--
                  (A) for purposes of this subsection, such 
                individual's wages (as defined in section 3121) 
                from the S corporation shall be treated as such 
                individual's earned income (within the meaning 
                of section 401(c)(1)), and
                  (B) there shall be such adjustments in the 
                application of this subsection as the Secretary 
                may by regulations prescribe.
  (m) Certain excessive employee remuneration.--
          (1) In general.--In the case of any publicly held 
        corporation, no deduction shall be allowed under this 
        chapter for applicable employee remuneration with 
        respect to any covered employee to the extent that the 
        amount of such remuneration for the taxable year with 
        respect to such employee exceeds $1,000,000.
          (2) Publicly held corporation.--For purposes of this 
        subsection, the term ``publicly held corporation'' 
        means any corporation which is an issuer (as defined in 
        section 3 of the Securities Exchange Act of 1934 (15 
        U.S.C. 78c))--
                  (A) the securities of which are required to 
                be registered under section 12 of such Act (15 
                U.S.C. 78l), or
                  (B) that is required to file reports under 
                section 15(d) of such Act (15 U.S.C. 78o(d)).
          (3) Covered employee.--For purposes of this 
        subsection, the term ``covered employee'' means any 
        employee of the taxpayer if--
                  (A) such employee is the principal executive 
                officer or principal financial officer of the 
                taxpayer at any time during the taxable year, 
                or was an individual acting in such a capacity,
                  (B) the total compensation of such employee 
                for the taxable year is required to be reported 
                to shareholders under the Securities Exchange 
                Act of 1934 by reason of such employee being 
                among the 3 highest compensated officers for 
                the taxable year (other than any individual 
                described in subparagraph (A)), or
                  (C) was a covered employee of the taxpayer 
                (or any predecessor) for any preceding taxable 
                year beginning after December 31, 2016.
        Such term shall include any employee who would be 
        described in subparagraph (B) if the reporting 
        described in such subparagraph were required as so 
        described.
          (4) Applicable employee remuneration.--For purposes 
        of this subsection--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the term ``applicable 
                employee remuneration'' means, with respect to 
                any covered employee for any taxable year, the 
                aggregate amount allowable as a deduction under 
                this chapter for such taxable year (determined 
                without regard to this subsection) for 
                remuneration for services performed by such 
                employee (whether or not during the taxable 
                year).
                  (B) Exception for existing binding 
                contracts.--The term ``applicable employee 
                remuneration'' shall not include any 
                remuneration payable under a written binding 
                contract which was in effect on February 17, 
                1993, and which was not modified thereafter in 
                any material respect before such remuneration 
                is paid.
                  (C) Remuneration.--For purposes of this 
                paragraph, the term ``remuneration'' includes 
                any remuneration (including benefits) in any 
                medium other than cash, but shall not include--
                          (i) any payment referred to in so 
                        much of section 3121(a)(5) as precedes 
                        subparagraph (E) thereof, and
                          (ii) any benefit provided to or on 
                        behalf of an employee if at the time 
                        such benefit is provided it is 
                        reasonable to believe that the employee 
                        will be able to exclude such benefit 
                        from gross income under this chapter.
                For purposes of clause (i), section 3121(a)(5) 
                shall be applied without regard to section 
                3121(v)(1).
                  (D) Coordination with disallowed golden 
                parachute payments.--The dollar limitation 
                contained in paragraph (1) shall be reduced 
                (but not below zero) by the amount (if any) 
                which would have been included in the 
                applicable employee remuneration of the covered 
                employee for the taxable year but for being 
                disallowed under section 280G.
                  (E) Coordination with excise tax on specified 
                stock compensation.--The dollar limitation 
                contained in paragraph (1) with respect to any 
                covered employee shall be reduced (but not 
                below zero) by the amount of any payment (with 
                respect to such employee) of the tax imposed by 
                section 4985 directly or indirectly by the 
                expatriated corporation (as defined in such 
                section) or by any member of the expanded 
                affiliated group (as defined in such section) 
                which includes such corporation.
                  (F) Special rule for remuneration paid to 
                beneficiaries, etc..--Remuneration shall not 
                fail to be applicable employee remuneration 
                merely because it is includible in the income 
                of, or paid to, a person other than the covered 
                employee, including after the death of the 
                covered employee.
          (5) Special rule for application to employers 
        participating in the Troubled Assets Relief Program.--
                  (A) In general.--In the case of an applicable 
                employer, no deduction shall be allowed under 
                this chapter--
                          (i) in the case of executive 
                        remuneration for any applicable taxable 
                        year which is attributable to services 
                        performed by a covered executive during 
                        such applicable taxable year, to the 
                        extent that the amount of such 
                        remuneration exceeds $500,000, or
                          (ii) in the case of deferred 
                        deduction executive remuneration for 
                        any taxable year for services performed 
                        during any applicable taxable year by a 
                        covered executive, to the extent that 
                        the amount of such remuneration exceeds 
                        $500,000 reduced (but not below zero) 
                        by the sum of--
                                  (I) the executive 
                                remuneration for such 
                                applicable taxable year, plus
                                  (II) the portion of the 
                                deferred deduction executive 
                                remuneration for such services 
                                which was taken into account 
                                under this clause in a 
                                preceding taxable year.
                  (B) Applicable employer.--For purposes of 
                this paragraph--
                          (i) In general.--Except as provided 
                        in clause (ii), the term ``applicable 
                        employer'' means any employer from whom 
                        1 or more troubled assets are acquired 
                        under a program established by the 
                        Secretary under section 101(a) of the 
                        Emergency Economic Stabilization Act of 
                        2008 if the aggregate amount of the 
                        assets so acquired for all taxable 
                        years exceeds $300,000,000.
                          (ii) Disregard of certain assets sold 
                        through direct purchase.--If the only 
                        sales of troubled assets by an employer 
                        under the program described in clause 
                        (i) are through 1 or more direct 
                        purchases (within the meaning of 
                        section 113(c) of the Emergency 
                        Economic Stabilization Act of 2008), 
                        such assets shall not be taken into 
                        account under clause (i) in determining 
                        whether the employer is an applicable 
                        employer for purposes of this 
                        paragraph.
                          (iii) Aggregation rules.--Two or more 
                        persons who are treated as a single 
                        employer under subsection (b) or (c) of 
                        section 414 shall be treated as a 
                        single employer, except that in 
                        applying section 1563(a) for purposes 
                        of either such subsection, paragraphs 
                        (2) and (3) thereof shall be 
                        disregarded.
                  (C) Applicable taxable year.--For purposes of 
                this paragraph, the term ``applicable taxable 
                year'' means, with respect to any employer--
                          (i) the first taxable year of the 
                        employer--
                                  (I) which includes any 
                                portion of the period during 
                                which the authorities under 
                                section 101(a) of the Emergency 
                                Economic Stabilization Act of 
                                2008 are in effect (determined 
                                under section 120 thereof), and
                                  (II) in which the aggregate 
                                amount of troubled assets 
                                acquired from the employer 
                                during the taxable year 
                                pursuant to such authorities 
                                (other than assets to which 
                                subparagraph (B)(ii) applies), 
                                when added to the aggregate 
                                amount so acquired for all 
                                preceding taxable years, 
                                exceeds $300,000,000, and
                          (ii) any subsequent taxable year 
                        which includes any portion of such 
                        period.
                  (D) Covered executive.--For purposes of this 
                paragraph--
                          (i) In general.--The term ``covered 
                        executive'' means, with respect to any 
                        applicable taxable year, any employee--
                                  (I) who, at any time during 
                                the portion of the taxable year 
                                during which the authorities 
                                under section 101(a) of the 
                                Emergency Economic 
                                Stabilization Act of 2008 are 
                                in effect (determined under 
                                section 120 thereof), is the 
                                chief executive officer of the 
                                applicable employer or the 
                                chief financial officer of the 
                                applicable employer, or an 
                                individual acting in either 
                                such capacity, or
                                  (II) who is described in 
                                clause (ii).
                          (ii) Highest compensated employees.--
                        An employee is described in this clause 
                        if the employee is 1 of the 3 highest 
                        compensated officers of the applicable 
                        employer for the taxable year (other 
                        than an individual described in clause 
                        (i)(I)), determined--
                                  (I) on the basis of the 
                                shareholder disclosure rules 
                                for compensation under the 
                                Securities Exchange Act of 1934 
                                (without regard to whether 
                                those rules apply to the 
                                employer), and
                                  (II) by only taking into 
                                account employees employed 
                                during the portion of the 
                                taxable year described in 
                                clause (i)(I).
                          (iii) Employee remains covered 
                        executive.--If an employee is a covered 
                        executive with respect to an applicable 
                        employer for any applicable taxable 
                        year, such employee shall be treated as 
                        a covered executive with respect to 
                        such employer for all subsequent 
                        applicable taxable years and for all 
                        subsequent taxable years in which 
                        deferred deduction executive 
                        remuneration with respect to services 
                        performed in all such applicable 
                        taxable years would (but for this 
                        paragraph) be deductible.
                  (E) Executive remuneration.--For purposes of 
                this paragraph, the term ``executive 
                remuneration'' means the applicable employee 
                remuneration of the covered executive, as 
                determined under paragraph (4) without regard 
                to subparagraph (B) thereof. Such term shall 
                not include any deferred deduction executive 
                remuneration with respect to services performed 
                in a prior applicable taxable year.
                  (F) Deferred deduction executive 
                remuneration.--For purposes of this paragraph, 
                the term ``deferred deduction executive 
                remuneration'' means remuneration which would 
                be executive remuneration for services 
                performed in an applicable taxable year but for 
                the fact that the deduction under this chapter 
                (determined without regard to this paragraph) 
                for such remuneration is allowable in a 
                subsequent taxable year.
                  (G) Coordination.--Rules similar to the rules 
                of subparagraphs (D) and (E) of paragraph (4) 
                shall apply for purposes of this paragraph.
                  (H) Regulatory authority.--The Secretary may 
                prescribe such guidance, rules, or regulations 
                as are necessary to carry out the purposes of 
                this paragraph and the Emergency Economic 
                Stabilization Act of 2008, including the extent 
                to which this paragraph applies in the case of 
                any acquisition, merger, or reorganization of 
                an applicable employer.
          (6) Special rule for application to certain health 
        insurance providers.--
                  (A) In general.--No deduction shall be 
                allowed under this chapter--
                          (i) in the case of applicable 
                        individual remuneration which is for 
                        any disqualified taxable year beginning 
                        after December 31, 2012, and which is 
                        attributable to services performed by 
                        an applicable individual during such 
                        taxable year, to the extent that the 
                        amount of such remuneration exceeds 
                        $500,000, or
                          (ii) in the case of deferred 
                        deduction remuneration for any taxable 
                        year beginning after December 31, 2012, 
                        which is attributable to services 
                        performed by an applicable individual 
                        during any disqualified taxable year 
                        beginning after December 31, 2009, to 
                        the extent that the amount of such 
                        remuneration exceeds $500,000 reduced 
                        (but not below zero) by the sum of--
                                  (I) the applicable individual 
                                remuneration for such 
                                disqualified taxable year, plus
                                  (II) the portion of the 
                                deferred deduction remuneration 
                                for such services which was 
                                taken into account under this 
                                clause in a preceding taxable 
                                year (or which would have been 
                                taken into account under this 
                                clause in a preceding taxable 
                                year if this clause were 
                                applied by substituting 
                                `December 31, 2009' for 
                                `December 31, 2012' in the 
                                matter preceding subclause 
                                (I)).
                  (B) Disqualified taxable year.--For purposes 
                of this paragraph, the term ``disqualified 
                taxable year'' means, with respect to any 
                employer, any taxable year for which such 
                employer is a covered health insurance 
                provider.
                  (C) Covered health insurance provider.--For 
                purposes of this paragraph--
                          (i) In general.--The term ``covered 
                        health insurance provider'' means--
                                  (I) with respect to taxable 
                                years beginning after December 
                                31, 2009, and before January 1, 
                                2013, any employer which is a 
                                health insurance issuer (as 
                                defined in section 9832(b)(2)) 
                                and which receives premiums 
                                from providing health insurance 
                                coverage (as defined in section 
                                9832(b)(1)), and
                                  (II) with respect to taxable 
                                years beginning after December 
                                31, 2012, any employer which is 
                                a health insurance issuer (as 
                                defined in section 9832(b)(2)) 
                                and with respect to which not 
                                less than 25 percent of the 
                                gross premiums received from 
                                providing health insurance 
                                coverage (as defined in section 
                                9832(b)(1)) is from minimum 
                                essential coverage (as defined 
                                in section 5000A(f)).
                          (ii) Aggregation rules.--Two or more 
                        persons who are treated as a single 
                        employer under subsection (b), (c), 
                        (m), or (o) of section 414 shall be 
                        treated as a single employer, except 
                        that in applying section 1563(a) for 
                        purposes of any such subsection, 
                        paragraphs (2) and (3) thereof shall be 
                        disregarded.
                  (D) Applicable individual remuneration.--For 
                purposes of this paragraph, the term 
                ``applicable individual remuneration'' means, 
                with respect to any applicable individual for 
                any disqualified taxable year, the aggregate 
                amount allowable as a deduction under this 
                chapter for such taxable year (determined 
                without regard to this subsection) for 
                remuneration (as defined in paragraph (4) 
                without regard to subparagraph (B) thereof) for 
                services performed by such individual (whether 
                or not during the taxable year). Such term 
                shall not include any deferred deduction 
                remuneration with respect to services performed 
                during the disqualified taxable year.
                  (E) Deferred deduction remuneration.--For 
                purposes of this paragraph, the term ``deferred 
                deduction remuneration'' means remuneration 
                which would be applicable individual 
                remuneration for services performed in a 
                disqualified taxable year but for the fact that 
                the deduction under this chapter (determined 
                without regard to this paragraph) for such 
                remuneration is allowable in a subsequent 
                taxable year.
                  (F) Applicable individual.--For purposes of 
                this paragraph, the term ``applicable 
                individual'' means, with respect to any covered 
                health insurance provider for any disqualified 
                taxable year, any individual--
                          (i) who is an officer, director, or 
                        employee in such taxable year, or
                          (ii) who provides services for or on 
                        behalf of such covered health insurance 
                        provider during such taxable year.
                  (G) Coordination.--Rules similar to the rules 
                of subparagraphs (D) and (E) of paragraph (4) 
                shall apply for purposes of this paragraph.
                  (H) Regulatory authority.--The Secretary may 
                prescribe such guidance, rules, or regulations 
                as are necessary to carry out the purposes of 
                this paragraph.
  (n) Special rule for certain group health plans.--
          (1) In general.--No deduction shall be allowed under 
        this chapter to an employer for any amount paid or 
        incurred in connection with a group health plan if the 
        plan does not reimburse for inpatient hospital care 
        services provided in the State of New York--
                  (A) except as provided in subparagraphs (B) 
                and (C), at the same rate as licensed 
                commercial insurers are required to reimburse 
                hospitals for such services when such 
                reimbursement is not through such a plan,
                  (B) in the case of any reimbursement through 
                a health maintenance organization, at the same 
                rate as health maintenance organizations are 
                required to reimburse hospitals for such 
                services for individuals not covered by such a 
                plan (determined without regard to any 
                government-supported individuals exempt from 
                such rate), or
                  (C) in the case of any reimbursement through 
                any corporation organized under Article 43 of 
                the New York State Insurance Law, at the same 
                rate as any such corporation is required to 
                reimburse hospitals for such services for 
                individuals not covered by such a plan.
          (2) State law exception.--Paragraph (1) shall not 
        apply to any group health plan which is not required 
        under the laws of the State of New York (determined 
        without regard to this subsection or other provisions 
        of Federal law) to reimburse at the rates provided in 
        paragraph (1).
          (3) Group health plan.--For purposes of this 
        subsection, the term ``group health plan'' means a plan 
        of, or contributed to by, an employer or employee 
        organization (including a self-insured plan) to provide 
        health care (directly or otherwise) to any employee, 
        any former employee, the employer, or any other 
        individual associated or formerly associated with the 
        employer in a business relationship, or any member of 
        their family.
  (o) Treatment of certain expenses of rural mail carriers.--
          (1) General rule.--In the case of any employee of the 
        United States Postal Service who performs services 
        involving the collection and delivery of mail on a 
        rural route and who receives qualified reimbursements 
        for the expenses incurred by such employee for the use 
        of a vehicle in performing such services--
                  (A) the amount allowable as a deduction under 
                this chapter for the use of a vehicle in 
                performing such services shall be equal to the 
                amount of such qualified reimbursements; and
                  (B) such qualified reimbursements shall be 
                treated as paid under a reimbursement or other 
                expense allowance arrangement for purposes of 
                section 62(a)(2)(A) (and section 62(c) shall 
                not apply to such qualified reimbursements).
          (2) Special rule where expenses exceed 
        reimbursements.--Notwithstanding paragraph (1)(A), if 
        the expenses incurred by an employee for the use of a 
        vehicle in performing services described in paragraph 
        (1) exceed the qualified reimbursements for such 
        expenses, such excess shall be taken into account in 
        computing the miscellaneous itemized deductions of the 
        employee under section 67.
          (3) Definition of qualified reimbursements.--For 
        purposes of this subsection, the term ``qualified 
        reimbursements'' means the amounts paid by the United 
        States Postal Service to employees as an equipment 
        maintenance allowance under the 1991 collective 
        bargaining agreement between the United States Postal 
        Service and the National Rural Letter Carriers' 
        Association. Amounts paid as an equipment maintenance 
        allowance by such Postal Service under later collective 
        bargaining agreements that supersede the 1991 agreement 
        shall be considered qualified reimbursements if such 
        amounts do not exceed the amounts that would have been 
        paid under the 1991 agreement, adjusted by increasing 
        any such amount under the 1991 agreement by an amount 
        equal to--
                  (A) such amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, by substituting 
                ``calendar year 1990'' for ``calendar year 
                2016'' in subparagraph (A)(ii) thereof.
  (p) Treatment of expenses of members of reserve component of 
Armed Forces of the United States.--For purposes of subsection 
(a)(2), in the case of an individual who performs services as a 
member of a reserve component of the Armed Forces of the United 
States at any time during the taxable year, such individual 
shall be deemed to be away from home in the pursuit of a trade 
or business for any period during which such individual is away 
from home in connection with such service.
  (q) Payments related to sexual harassment and sexual abuse.--
No deduction shall be allowed under this chapter for--
          (1) any settlement or payment related to sexual 
        harassment or sexual abuse if such settlement or 
        payment is subject to a nondisclosure agreement, or
          (2) attorney's fees related to such a settlement or 
        payment.
  (r) Disallowance of FDIC premiums paid by certain large 
financial institutions.--
          (1) In general.--No deduction shall be allowed for 
        the applicable percentage of any FDIC premium paid or 
        incurred by the taxpayer.
          (2) Exception for small institutions.--Paragraph (1) 
        shall not apply to any taxpayer for any taxable year if 
        the total consolidated assets of such taxpayer 
        (determined as of the close of such taxable year) do 
        not exceed $10,000,000,000.
          (3) Applicable percentage.--For purposes of this 
        subsection, the term ``applicable percentage'' means, 
        with respect to any taxpayer for any taxable year, the 
        ratio (expressed as a percentage but not greater than 
        100 percent) which--
                  (A) the excess of--
                          (i) the total consolidated assets of 
                        such taxpayer (determined as of the 
                        close of such taxable year), over
                          (ii) $10,000,000,000, bears to (B) 
                        $40,000,000,000.
          (4) FDIC premiums.--For purposes of this subsection, 
        the term ``FDIC premium'' means any assessment imposed 
        under section 7(b) of the Federal Deposit Insurance Act 
        (12 U.S.C. 1817(b)).
          (5) Total consolidated assets.--For purposes of this 
        subsection, the term ``total consolidated assets'' has 
        the meaning given such term under section 165 of the 
        Dodd-Frank Wall Street Reform and Consumer Protection 
        Act (12 U.S.C. 5365).
          (6) Aggregation rule.--
                  (A) In general.--Members of an expanded 
                affiliated group shall be treated as a single 
                taxpayer for purposes of applying this 
                subsection.
                  (B) Expanded affiliated group.--
                          (i) In general.--For purposes of this 
                        paragraph, the term ``expanded 
                        affiliated group'' means an affiliated 
                        group as defined in section 1504(a), 
                        determined--
                                  (I) by substituting ``more 
                                than 50 percent'' for ``at 
                                least 80 percent'' each place 
                                it appears, and
                                  (II) without regard to 
                                paragraphs (2) and (3) of 
                                section 1504(b).
                          (ii) Control of non-corporate 
                        entities.--A partnership or any other 
                        entity (other than a corporation) shall 
                        be treated as a member of an expanded 
                        affiliated group if such entity is 
                        controlled (within the meaning of 
                        section 954(d)(3)) by members of such 
                        group (including any entity treated as 
                        a member of such group by reason of 
                        this clause).
  (s) Cross reference.--
          (1) For special rule relating to expenses in 
        connection with subdividing real property for sale, see 
        section 1237.
          (2) For special rule relating to the treatment of 
        payments by a transferee of a franchise, trademark, or 
        trade name, see section 1253.
          (3) For special rules relating to--
                  (A) funded welfare benefit plans, see section 
                419, and
                  (B) deferred compensation and other deferred 
                benefits, see section 404.

SEC. 163. INTEREST.

  (a) General rule.--There shall be allowed as a deduction all 
interest paid or accrued within the taxable year on 
indebtedness.
  (b) Installment purchases where interest charge is not 
separately stated.--
          (1) General rule.--If personal property or 
        educational services are purchased under a contract--
                  (A) which provides that payment of part or 
                all of the purchase price is to be made in 
                installments, and
                  (B) in which carrying charges are separately 
                stated but the interest charge cannot be 
                ascertained,
        then the payments made during the taxable year under 
        the contract shall be treated for purposes of this 
        section as if they included interest equal to 6 percent 
        of the average unpaid balance under the contract during 
        the taxable year. For purposes of the preceding 
        sentence, the average unpaid balance is the sum of the 
        unpaid balance outstanding on the first day of each 
        month beginning during the taxable year, divided by 12. 
        For purposes of this paragraph, the term ``educational 
        services'' means any service (including lodging) which 
        is purchased from an educational organization described 
        in section 170(b)(1)(A)(ii) and which is provided for a 
        student of such organization.
          (2) Limitation.--In the case of any contract to which 
        paragraph (1) applies, the amount treated as interest 
        for any taxable year shall not exceed the aggregate 
        carrying charges which are properly attributable to 
        such taxable year.
  (c) Redeemable ground rents.--For purposes of this subtitle, 
any annual or periodic rental under a redeemable ground rent 
(excluding amounts in redemption thereof) shall be treated as 
interest on an indebtedness secured by a mortgage.
  (d) Limitation on investment interest.--
          (1) In general.--In the case of a taxpayer other than 
        a corporation, the amount allowed as a deduction under 
        this chapter for investment interest for any taxable 
        year shall not exceed the net investment income of the 
        taxpayer for the taxable year.
          (2) Carryforward of disallowed interest.--The amount 
        not allowed as a deduction for any taxable year by 
        reason of paragraph (1) shall be treated as investment 
        interest paid or accrued by the taxpayer in the 
        succeeding taxable year.
          (3) Investment interest.--For purposes of this 
        subsection--
                  (A) In general.--The term ``investment 
                interest'' means any interest allowable as a 
                deduction under this chapter (determined 
                without regard to paragraph (1)) which is paid 
                or accrued on indebtedness properly allocable 
                to property held for investment.
                  (B) Exceptions.--The term ``investment 
                interest'' shall not include--
                          (i) any qualified residence interest 
                        (as defined in subsection (h)(3)), or
                          (ii) any interest which is taken into 
                        account under section 469 in computing 
                        income or loss from a passive activity 
                        of the taxpayer.
                  (C) Personal property used in short sale.--
                For purposes of this paragraph, the term 
                ``interest'' includes any amount allowable as a 
                deduction in connection with personal property 
                used in a short sale.
          (4) Net investment income.--For purposes of this 
        subsection--
                  (A) In general.--The term ``net investment 
                income'' means the excess of--
                          (i) investment income, over
                          (ii) investment expenses.
                  (B) Investment income.--The term ``investment 
                income'' means the sum of--
                          (i) gross income from property held 
                        for investment (other than any gain 
                        taken into account under clause 
                        (ii)(I)),
                          (ii) the excess (if any) of--
                                  (I) the net gain attributable 
                                to the disposition of property 
                                held for investment, over
                                  (II) the net capital gain 
                                determined by only taking into 
                                account gains and losses from 
                                dispositions of property held 
                                for investment, plus (iii) so 
                                much of the net capital gain 
                                referred to in clause (ii)(II) 
                                (or, if lesser, the net gain 
                                referred to in clause (ii)(I)) 
                                as the taxpayer elects to take 
                                into account under this clause.
                Such term shall include qualified dividend 
                income (as defined in section 1(h)(11)(B)) only 
                to the extent the taxpayer elects to treat such 
                income as investment income for purposes of 
                this subsection.
                  (C) Investment expenses.--The term 
                ``investment expenses'' means the deductions 
                allowed under this chapter (other than for 
                interest) which are directly connected with the 
                production of investment income.
                  (D) Income and expenses from passive 
                activities.--Investment income and investment 
                expenses shall not include any income or 
                expenses taken into account under section 469 
                in computing income or loss from a passive 
                activity.
          (5) Property held for investment.--For purposes of 
        this subsection--
                  (A) In general.--The term ``property held for 
                investment'' shall include--
                          (i) any property which produces 
                        income of a type described in section 
                        469(e)(1), and
                          (ii) any interest held by a taxpayer 
                        in an activity involving the conduct of 
                        a trade or business--
                                  (I) which is not a passive 
                                activity, and
                                  (II) with respect to which 
                                the taxpayer does not 
                                materially participate.
                  (B) Investment expenses.--In the case of 
                property described in subparagraph (A)(i), 
                expenses shall be allocated to such property in 
                the same manner as under section 469.
                  (C) Terms.--For purposes of this paragraph, 
                the terms ``activity'', ``passive activity'', 
                and ``materially participate'' have the 
                meanings given such terms by section 469.
  (e) Original issue discount.--
          (1) In general.--The portion of the original issue 
        discount with respect to any debt instrument which is 
        allowable as a deduction to the issuer for any taxable 
        year shall be equal to the aggregate daily portions of 
        the original issue discount for days during such 
        taxable year.
          (2) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Debt instrument.--The term ``debt 
                instrument'' has the meaning given such term by 
                section 1275(a)(1).
                  (B) Daily portions.--The daily portion of the 
                original issue discount for any day shall be 
                determined under section 1272(a) (without 
                regard to paragraph (7) thereof and without 
                regard to section 1273(a)(3)).
                  (C) Short-term obligations.--In the case of 
                an obligor of a short-term obligation (as 
                defined in section 1283(a)(1)(A)) who uses the 
                cash receipts and disbursements method of 
                accounting, the original issue discount (and 
                any other interest payable) on such obligation 
                shall be deductible only when paid.
          (3) Special rule for original issue discount on 
        obligation held by related foreign person.--
                  (A) In general.--If any debt instrument 
                having original issue discount is held by a 
                related foreign person, any portion of such 
                original issue discount shall not be allowable 
                as a deduction to the issuer until paid. The 
                preceding sentence shall not apply to the 
                extent that the original issue discount is 
                effectively connected with the conduct by such 
                foreign related person of a trade or business 
                within the United States unless such original 
                issue discount is exempt from taxation (or is 
                subject to a reduced rate of tax) pursuant to a 
                treaty obligation of the United States.
                  (B) Special rule for certain foreign 
                entities.--
                          (i) In general.--In the case of any 
                        debt instrument having original issue 
                        discount which is held by a related 
                        foreign person which is a controlled 
                        foreign corporation (as defined in 
                        section 957) or a passive foreign 
                        investment company (as defined in 
                        section 1297), a deduction shall be 
                        allowable to the issuer with respect to 
                        such original issue discount for any 
                        taxable year before the taxable year in 
                        which paid only to the extent such 
                        original issue discount is includible 
                        (determined without regard to properly 
                        allocable deductions and qualified 
                        deficits under section 952(c)(1)(B)) 
                        during such prior taxable year in the 
                        gross income of a United States person 
                        who owns (within the meaning of section 
                        958(a)) stock in such corporation.
                          (ii) Secretarial authority.--The 
                        Secretary may by regulation exempt 
                        transactions from the application of 
                        clause (i), including any transaction 
                        which is entered into by a payor in the 
                        ordinary course of a trade or business 
                        in which the payor is predominantly 
                        engaged.
                  (C) Related foreign person.--For purposes of 
                subparagraph (A), the term ``related foreign 
                person'' means any person--
                          (i) who is not a United States 
                        person, and
                          (ii) who is related (within the 
                        meaning of section 267(b)) to the 
                        issuer.
          (4) Exception.--This subsection shall not apply to 
        any debt instrument described in section 1272(a)(2)(D) 
        (relating to loans between natural persons).
          (5) Special rules for original issue discount on 
        certain high yield obligations.--
                  (A) In general.--In the case of an applicable 
                high yield discount obligation issued by a 
                corporation--
                          (i) no deduction shall be allowed 
                        under this chapter for the disqualified 
                        portion of the original issue discount 
                        on such obligation, and
                          (ii) the remainder of such original 
                        issue discount shall not be allowable 
                        as a deduction until paid.
                For purposes of this paragraph, rules similar 
                to the rules of subsection (i)(3)(B) shall 
                apply in determining the amount of the original 
                issue discount and when the original issue 
                discount is paid.
                  (B) Disqualified portion treated as stock 
                distribution for purposes of dividend received 
                deduction.--
                          (i) In general.--Solely for purposes 
                        of sections 243, 245, 246, and 246A, 
                        the dividend equivalent portion of any 
                        amount includible in gross income of a 
                        corporation under section 1272(a) in 
                        respect of an applicable high yield 
                        discount obligation shall be treated as 
                        a dividend received by such corporation 
                        from the corporation issuing such 
                        obligation.
                          (ii) Dividend equivalent portion.--
                        For purposes of clause (i), the 
                        dividend equivalent portion of any 
                        amount includible in gross income under 
                        section 1272(a) in respect of an 
                        applicable high yield discount 
                        obligation is the portion of the amount 
                        so includible--
                                  (I) which is attributable to 
                                the disqualified portion of the 
                                original issue discount on such 
                                obligation, and
                                  (II) which would have been 
                                treated as a dividend if it had 
                                been a distribution made by the 
                                issuing corporation with 
                                respect to stock in such 
                                corporation.
                  (C) Disqualified portion.--
                          (i) In general.--For purposes of this 
                        paragraph, the disqualified portion of 
                        the original issue discount on any 
                        applicable high yield discount 
                        obligation is the lesser of--
                                  (I) the amount of such 
                                original issue discount, or
                                  (II) the portion of the total 
                                return on such obligation which 
                                bears the same ratio to such 
                                total return as the 
                                disqualified yield on such 
                                obligation bears to the yield 
                                to maturity on such obligation.
                          (ii) Definitions.--For purposes of 
                        clause (i), the term ``disqualified 
                        yield'' means the excess of the yield 
                        to maturity on the obligation over the 
                        sum referred to in subsection (i)(1)(B) 
                        plus 1 percentage point, and the term 
                        ``total return'' is the amount which 
                        would have been the original issue 
                        discount on the obligation if interest 
                        described in the parenthetical in 
                        section 1273(a)(2) were included in the 
                        stated redemption price at maturity.
                  (D) Exception for S corporations.--This 
                paragraph shall not apply to any obligation 
                issued by any corporation for any period for 
                which such corporation is an S corporation.
                  (E) Effect on earnings and profits.--This 
                paragraph shall not apply for purposes of 
                determining earnings and profits; except that, 
                for purposes of determining the dividend 
                equivalent portion of any amount includible in 
                gross income under section 1272(a) in respect 
                of an applicable high yield discount 
                obligation, no reduction shall be made for any 
                amount attributable to the disqualified portion 
                of any original issue discount on such 
                obligation.
                  (F) Suspension of application of paragraph.--
                          (i) Temporary suspension.--This 
                        paragraph shall not apply to any 
                        applicable high yield discount 
                        obligation issued during the period 
                        beginning on September 1, 2008, and 
                        ending on December 31, 2009, in 
                        exchange (including an exchange 
                        resulting from a modification of the 
                        debt instrument) for an obligation 
                        which is not an applicable high yield 
                        discount obligation and the issuer (or 
                        obligor) of which is the same as the 
                        issuer (or obligor) of such applicable 
                        high yield discount obligation. The 
                        preceding sentence shall not apply to 
                        any obligation the interest on which is 
                        interest described in section 871(h)(4) 
                        (without regard to subparagraph (D) 
                        thereof) or to any obligation issued to 
                        a related person (within the meaning of 
                        section 108(e)(4)).
                          (ii) Successive application.--Any 
                        obligation to which clause (i) applies 
                        shall not be treated as an applicable 
                        high yield discount obligation for 
                        purposes of applying this subparagraph 
                        to any other obligation issued in 
                        exchange for such obligation.
                          (iii) Secretarial authority to 
                        suspend application.--The Secretary may 
                        apply this paragraph with respect to 
                        debt instruments issued in periods 
                        following the period described in 
                        clause (i) if the Secretary determines 
                        that such application is appropriate in 
                        light of distressed conditions in the 
                        debt capital markets.
                  (G) Cross reference.--For definition of 
                applicable high yield discount obligation, see 
                subsection (i).
          (6) Cross references For provision relating to 
        deduction of original issue.--discount on tax-exempt 
        obligation, see section 1288.
                  For special rules in the case of the borrower 
                under certain loans for personal use, see 
                section 1275(b).
  (f) Denial of deduction for interest on certain obligations 
not in registered form.--
          (1) In general.--Nothing in subsection (a) or in any 
        other provision of law shall be construed to provide a 
        deduction for interest on any registration-required 
        obligation unless such obligation is in registered 
        form.
          (2) Registration-required obligation.--For purposes 
        of this section--
                  (A) In general.--The term ``registration-
                required obligation'' means any obligation 
                (including any obligation issued by a 
                governmental entity) other than an obligation 
                which--
                          (i) is issued by a natural person,
                          (ii) is not of a type offered to the 
                        public, or
                          (iii) has a maturity (at issue) of 
                        not more than 1 year.
                  (B) Authority to include other obligations.--
                Clauses (ii) and (iii) of subparagraph (A) 
                shall not apply to any obligation if--
                          (i) such obligation is of a type 
                        which the Secretary has determined by 
                        regulations to be used frequently in 
                        avoiding Federal taxes, and
                          (ii) such obligation is issued after 
                        the date on which the regulations 
                        referred to in clause (i) take effect.
          (3) Book entries permitted, etc..--For purposes of 
        this subsection, rules similar to the rules of section 
        149(a)(3) shall apply, except that a dematerialized 
        book entry system or other book entry system specified 
        by the Secretary shall be treated as a book entry 
        system described in such section.
  (g) Reduction of deduction where section 25 credit taken.--
The amount of the deduction under this section for interest 
paid or accrued during any taxable year on indebtedness with 
respect to which a mortgage credit certificate has been issued 
under section 25 shall be reduced by the amount of the credit 
allowable with respect to such interest under section 25 
(determined without regard to section 26).
  (h) Disallowance of deduction for personal interest.--
          (1) In general.--In the case of a taxpayer other than 
        a corporation, no deduction shall be allowed under this 
        chapter for personal interest paid or accrued during 
        the taxable year.
          (2) Personal interest.--For purposes of this 
        subsection, the term ``personal interest'' means any 
        interest allowable as a deduction under this chapter 
        other than--
                  (A) interest paid or accrued on indebtedness 
                properly allocable to a trade or business 
                (other than the trade or business of performing 
                services as an employee),
                  (B) any investment interest (within the 
                meaning of subsection (d)),
                  (C) any interest which is taken into account 
                under section 469 in computing income or loss 
                from a passive activity of the taxpayer,
                  (D) any qualified residence interest (within 
                the meaning of paragraph (3)),
                  (E) any interest payable under section 6601 
                on any unpaid portion of the tax imposed by 
                section 2001 for the period during which an 
                extension of time for payment of such tax is in 
                effect under section 6163, and
                  (F) any interest allowable as a deduction 
                under section 221 (relating to interest on 
                educational loans).
          (3) Qualified residence interest.--For purposes of 
        this subsection--
                  (A) In general.--The term ``qualified 
                residence interest'' means any interest which 
                is paid or accrued [during the taxable year 
                on--]
                          [(i) acquisition indebtedness with 
                        respect to any qualified residence of 
                        the taxpayer, or
                          [(ii)] [home equity indebtedness with 
                        respect to any qualified residence of 
                        the taxpayer.] during the taxable year 
                        on acquisition indebtedness with 
                        respect to any qualified residence of 
                        the taxpayer.
                For purposes of the preceding sentence, the 
                determination of whether any property is a 
                qualified residence of the taxpayer shall be 
                made as of the time the interest is accrued.
                  (B) Acquisition indebtedness.--
                          (i) In general.--The term 
                        ``acquisition indebtedness'' means any 
                        indebtedness which--
                                  (I) is incurred in acquiring, 
                                constructing, or substantially 
                                improving any qualified 
                                residence of the taxpayer, and
                                  (II) is secured by such 
                                residence.
                        Such term also includes any 
                        indebtedness secured by such residence 
                        resulting from the refinancing of 
                        indebtedness meeting the requirements 
                        of the preceding sentence (or this 
                        sentence); but only to the extent the 
                        amount of the indebtedness resulting 
                        from such refinancing does not exceed 
                        the amount of the refinanced 
                        indebtedness.
                          [(ii) $1,000,000 limitation.--The 
                        aggregate amount treated as acquisition 
                        indebtedness for any period shall not 
                        exceed $1,000,000 ($500,000 in the case 
                        of a married individual filing a 
                        separate return).]
                          (ii) Limitation.--The aggregate 
                        amount treated as acquisition 
                        indebtedness for any period shall not 
                        exceed the excess (if any) of--
                                  (I) $750,00 ($375,000, in the 
                                case of a married individual 
                                filing a separate return), over
                                  (II) the sum of the aggregate 
                                outstanding pre-October 13, 
                                1987, indebtedness (as defined 
                                in subparagraph (D)) plus the 
                                aggregate outstanding pre-
                                December 15, 2017, indebtedness 
                                (as defined in subparagraph 
                                (C)).
                  [(C) Home equity indebtedness.--
                          [(i) In general.--The term ``home 
                        equity indebtedness'' means any 
                        indebtedness (other than acquisition 
                        indebtedness) secured by a qualified 
                        residence to the extent the aggregate 
                        amount of such indebtedness does not 
                        exceed--
                                  [(I) the fair market value of 
                                such qualified residence, 
                                reduced by
                                  [(II) the amount of 
                                acquisition indebtedness with 
                                respect to such residence.
                          [(ii) Limitation.--The aggregate 
                        amount treated as home equity 
                        indebtedness for any period shall not 
                        exceed $100,000 ($50,000 in the case of 
                        a separate return by a married 
                        individual).]
                  (C) Treatment of indebtedness incurred on or 
                before december 15, 2017.--
                          (i) In general.--In the case of any 
                        pre-December 15, 2017, indebtedness, 
                        subparagraph (B)(ii) shall not apply 
                        and the aggregate amount of such 
                        indebtedness treated as acquisition 
                        indebtedness for any period shall not 
                        exceed the excess (if any) of--
                                  (I) $1,000,000 ($500,000, in 
                                the case of a married 
                                individual filing a separate 
                                return), over
                                  (II) the aggregate 
                                outstanding pre-October 13, 
                                1987, indebtedness (as defined 
                                in subparagraph (D)).
                          (ii) Pre-december 15, 2017, 
                        indebtedness.--For purposes of this 
                        subparagraph--
                                  (I) In general.--The term 
                                ``pre-December 15, 2017, 
                                indebtedness'' means 
                                indebtedness (other than pre-
                                October 13, 1987, indebtedness) 
                                incurred on or before December 
                                15, 2017.
                                  (II) Binding written contract 
                                exception.--In the case of a 
                                taxpayer who enters into a 
                                written binding contract before 
                                December 15, 2017, to close on 
                                the purchase of a principal 
                                residence before January 1, 
                                2018, and who purchases such 
                                residence before April 1, 2018, 
                                the term ``pre-December 15, 
                                2017, indebtedness'' shall 
                                include indebtedness secured by 
                                such residence.
                          (iii) Refinancing indebtedness.--
                                  (I) In general.--In the case 
                                of any indebtedness which is 
                                incurred to refinance 
                                indebtedness, such refinanced 
                                indebtedness shall be treated 
                                for purposes of this 
                                subparagraph as incurred on the 
                                date that the original 
                                indebtedness was incurred to 
                                the extent the amount of the 
                                indebtedness resulting from 
                                such refinancing does not 
                                exceed the amount of the 
                                refinanced indebtedness.
                                  (II) Limitation on period of 
                                refinancing.--Subclause (I) 
                                shall not apply to any 
                                indebtedness after the 
                                expiration of the term of the 
                                original indebtedness or, if 
                                the principal of such original 
                                indebtedness is not amortized 
                                over its term, the expiration 
                                of the term of the 1st 
                                refinancing of such 
                                indebtedness (or if earlier, 
                                the date which is 30 years 
                                after the date of such 1st 
                                refinancing).
                  (D) Treatment of indebtedness incurred on or 
                before October 13, 1987.--
                          (i) In general.--In the case of any 
                        pre-October 13, 1987, indebtedness--
                                  (I) such indebtedness shall 
                                be treated as acquisition 
                                indebtedness, and
                                  (II) the limitation of 
                                subparagraph (B)(ii) shall not 
                                apply.
                          [(ii) Reduction in $1,000,000 
                        limitation.--The limitation of 
                        subparagraph (B)(ii) shall be reduced 
                        (but not below zero) by the aggregate 
                        amount of outstanding pre-October 13, 
                        1987, indebtedness.
                          [(iii)] (ii) Pre-October 13, 1987, 
                        indebtedness.--The term ``pre-October 
                        13, 1987, indebtedness'' means--
                                  (I) any indebtedness which 
                                was incurred on or before 
                                October 13, 1987, and which was 
                                secured by a qualified 
                                residence on October 13, 1987, 
                                and at all times thereafter 
                                before the interest is paid or 
                                accrued, or
                                  (II) any indebtedness which 
                                is secured by the qualified 
                                residence and was incurred 
                                after October 13, 1987, to 
                                refinance indebtedness 
                                described in subclause (I) (or 
                                refinanced indebtedness meeting 
                                the requirements of this 
                                subclause) to the extent 
                                (immediately after the 
                                refinancing) the principal 
                                amount of the indebtedness 
                                resulting from the refinancing 
                                does not exceed the principal 
                                amount of the refinanced 
                                indebtedness (immediately 
                                before the refinancing).
                          [(iv)] (iii) Limitation on period of 
                        refinancing.--Subclause (II) of [clause 
                        (iii)] clause (ii) shall not apply to 
                        any indebtedness after--
                                  (I) the expiration of the 
                                term of the indebtedness 
                                described in [clause (iii)(I)] 
                                clause (ii)(I), or
                                  (II) if the principal of the 
                                indebtedness described in 
                                [clause (iii)(I)] clause 
                                (ii)(I) is not amortized over 
                                its term, the expiration of the 
                                term of the 1st refinancing of 
                                such indebtedness (or if 
                                earlier, the date which is 30 
                                years after the date of such 
                                1st refinancing).
                  (E) Mortgage insurance premiums treated as 
                interest.--
                          (i) In general.--Premiums paid or 
                        accrued for qualified mortgage 
                        insurance by a taxpayer during the 
                        taxable year in connection with 
                        acquisition indebtedness with respect 
                        to a qualified residence of the 
                        taxpayer shall be treated for purposes 
                        of this section as interest which is 
                        qualified residence interest.
                          (ii) Phaseout.--The amount otherwise 
                        treated as interest under clause (i) 
                        shall be reduced (but not below zero) 
                        by 10 percent of such amount for each 
                        $1,000 ($500 in the case of a married 
                        individual filing a separate return) 
                        (or fraction thereof) that the 
                        taxpayer's adjusted gross income for 
                        the taxable year exceeds $100,000 
                        ($50,000 in the case of a married 
                        individual filing a separate return).
                          (iii) Limitation.--Clause (i) shall 
                        not apply with respect to any mortgage 
                        insurance contracts issued before 
                        January 1, 2007.
                          (iv) Termination.--Clause (i) shall 
                        not apply to amounts--
                                  (I) paid or accrued after 
                                December 31, 2017, or
                                  (II) properly allocable to 
                                any period after such date.
                  [(F) Special rules for taxable years 2018 
                through 2025.--
                          [(i) In general.--In the case of 
                        taxable years beginning after December 
                        31, 2017, and before January 1, 2026--
                                  [(I) Disallowance of home 
                                equity indebtedness interest.--
                                Subparagraph (A)(ii) shall not 
                                apply.
                                  [(II) Limitation on 
                                acquisition indebtedness.--
                                Subparagraph (B)(ii) shall be 
                                applied by substituting 
                                ``$750,000 ($375,000'' for 
                                ``$1,000,000 ($500,000''.
                                  [(III) Treatment of 
                                indebtedness incurred on or 
                                before December 15, 
                                2017Subclause (II) shall not 
                                apply to any indebtedness 
                                incurred on or before December 
                                15, 2017, and, in applying such 
                                subclause to any indebtedness 
                                incurred after such date, the 
                                limitation under such subclause 
                                shall be reduced (but not below 
                                zero) by the amount of any 
                                indebtedness incurred on or 
                                before December 15, 2017, which 
                                is treated as acquisition 
                                indebtedness for purposes of 
                                this subsection for the taxable 
                                year.
                                  [(IV) Binding contract 
                                exception.--In the case of a 
                                taxpayer who enters into a 
                                written binding contract before 
                                December 15, 2017, to close on 
                                the purchase of a principal 
                                residence before January 1, 
                                2018, and who purchases such 
                                residence before April 1, 2018, 
                                subclause (III) shall be 
                                applied by substituting ``April 
                                1, 2018'' for ``December 15, 
                                2017''.
                          [(ii) Treatment of limitation in 
                        taxable years after December 31, 
                        2025.--In the case of taxable years 
                        beginning after December 31, 2025, the 
                        limitation under subparagraph (B)(ii) 
                        shall be applied to the aggregate 
                        amount of indebtedness of the taxpayer 
                        described in subparagraph (B)(i) 
                        without regard to the taxable year in 
                        which the indebtedness was incurred.
                          [(iii) Treatment of refinancings of 
                        indebtedness.--
                                  [(I) In general.--In the case 
                                of any indebtedness which is 
                                incurred to refinance 
                                indebtedness, such refinanced 
                                indebtedness shall be treated 
                                for purposes of clause (i)(III) 
                                as incurred on the date that 
                                the original indebtedness was 
                                incurred to the extent the 
                                amount of the indebtedness 
                                resulting from such refinancing 
                                does not exceed the amount of 
                                the refinanced indebtedness.
                                  [(II) Limitation on period of 
                                refinancing.--Subclause (I) 
                                shall not apply to any 
                                indebtedness after the 
                                expiration of the term of the 
                                original indebtedness or, if 
                                the principal of such original 
                                indebtedness is not amortized 
                                over its term, the expiration 
                                of the term of the 1st 
                                refinancing of such 
                                indebtedness (or if earlier, 
                                the date which is 30 years 
                                after the date of such 1st 
                                refinancing).
                          [(iv) Coordination with exclusion of 
                        income from discharge of 
                        indebtedness.--Section 108(h)(2) shall 
                        be applied without regard to this 
                        subparagraph.]
          (4) Other definitions and special rules.--For 
        purposes of this subsection--
                  (A) Qualified residence.--
                          (i) In general.--The term ``qualified 
                        residence'' means--
                                  (I) the principal residence 
                                (within the meaning of section 
                                121) of the taxpayer, and
                                  (II) 1 other residence of the 
                                taxpayer which is selected by 
                                the taxpayer for purposes of 
                                this subsection for the taxable 
                                year and which is used by the 
                                taxpayer as a residence (within 
                                the meaning of section 
                                280A(d)(1)).
                          (ii) Married individuals filing 
                        separate returns.--If a married couple 
                        does not file a joint return for the 
                        taxable year--
                                  (I) such couple shall be 
                                treated as 1 taxpayer for 
                                purposes of clause (i), and
                                  (II) each individual shall be 
                                entitled to take into account 1 
                                residence unless both 
                                individuals consent in writing 
                                to 1 individual taking into 
                                account the principal residence 
                                and 1 other residence.
                          (iii) Residence not rented.--For 
                        purposes of clause (i)(II), 
                        notwithstanding section 280A(d)(1), if 
                        the taxpayer does not rent a dwelling 
                        unit at any time during a taxable year, 
                        such unit may be treated as a residence 
                        for such taxable year.
                  (B) Special rule for cooperative housing 
                corporations.--Any indebtedness secured by 
                stock held by the taxpayer as a tenant-
                stockholder (as defined in section 216) in a 
                cooperative housing corporation (as so defined) 
                shall be treated as secured by the house or 
                apartment which the taxpayer is entitled to 
                occupy as such a tenant-stockholder. If stock 
                described in the preceding sentence may not be 
                used to secure indebtedness, indebtedness shall 
                be treated as so secured if the taxpayer 
                establishes to the satisfaction of the 
                Secretary that such indebtedness was incurred 
                to acquire such stock.
                  (C) Unenforceable security interests.--
                Indebtedness shall not fail to be treated as 
                secured by any property solely because, under 
                any applicable State or local homestead or 
                other debtor protection law in effect on August 
                16, 1986, the security interest is ineffective 
                or the enforceability of the security interest 
                is restricted.
                  (D) Special rules for estates and trusts.--
                For purposes of determining whether any 
                interest paid or accrued by an estate or trust 
                is qualified residence interest, any residence 
                held by such estate or trust shall be treated 
                as a qualified residence of such estate or 
                trust if such estate or trust establishes that 
                such residence is a qualified residence of a 
                beneficiary who has a present interest in such 
                estate or trust or an interest in the residuary 
                of such estate or trust.
                  (E) Qualified mortgage insurance.--The term 
                ``qualified mortgage insurance'' means--
                          (i) mortgage insurance provided by 
                        the Department of Veterans Affairs, the 
                        Federal Housing Administration, or the 
                        Rural Housing Service, and
                          (ii) private mortgage insurance (as 
                        defined by section 2 of the Homeowners 
                        Protection Act of 1998 (12 U.S.C. 
                        4901), as in effect on the date of the 
                        enactment of this subparagraph).
                  (F) Special rules for prepaid qualified 
                mortgage insurance.--Any amount paid by the 
                taxpayer for qualified mortgage insurance that 
                is properly allocable to any mortgage the 
                payment of which extends to periods that are 
                after the close of the taxable year in which 
                such amount is paid shall be chargeable to 
                capital account and shall be treated as paid in 
                such periods to which so allocated. No 
                deduction shall be allowed for the unamortized 
                balance of such account if such mortgage is 
                satisfied before the end of its term. The 
                preceding sentences shall not apply to amounts 
                paid for qualified mortgage insurance provided 
                by the Department of Veterans Affairs or the 
                Rural Housing Service.
  (i) Applicable high yield discount obligation.--
          (1) In general.--For purposes of this section, the 
        term ``applicable high yield discount obligation'' 
        means any debt instrument if--
                  (A) the maturity date of such instrument is 
                more than 5 years from the date of issue,
                  (B) the yield to maturity on such instrument 
                equals or exceeds the sum of--
                          (i) the applicable Federal rate in 
                        effect under section 1274(d) for the 
                        calendar month in which the obligation 
                        is issued, plus
                          (ii) 5 percentage points, and (C) 
                        such instrument has significant 
                        original issue discount.
        For purposes of subparagraph (B)(i), the Secretary may 
        by regulation (i) permit a rate to be used with respect 
        to any debt instrument which is higher than the 
        applicable Federal rate if the taxpayer establishes to 
        the satisfaction of the Secretary that such higher rate 
        is based on the same principles as the applicable 
        Federal rate and is appropriate for the term of the 
        instrument, or (ii) permit, on a temporary basis, a 
        rate to be used with respect to any debt instrument 
        which is higher than the applicable Federal rate if the 
        Secretary determines that such rate is appropriate in 
        light of distressed conditions in the debt capital 
        markets.
          (2) Significant original issue discount.--For 
        purposes of paragraph (1)(C), a debt instrument shall 
        be treated as having significant original issue 
        discount if--
                  (A) the aggregate amount which would be 
                includible in gross income with respect to such 
                instrument for periods before the close of any 
                accrual period (as defined in section 
                1272(a)(5)) ending after the date 5 years after 
                the date of issue, exceeds--
                  (B) the sum of--
                          (i) the aggregate amount of interest 
                        to be paid under the instrument before 
                        the close of such accrual period, and
                          (ii) the product of the issue price 
                        of such instrument (as defined in 
                        sections 1273(b) and 1274(a)) and its 
                        yield to maturity.
          (3) Special rules.--For purposes of determining 
        whether a debt instrument is an applicable high yield 
        discount obligation--
                  (A) any payment under the instrument shall be 
                assumed to be made on the last day permitted 
                under the instrument, and
                  (B) any payment to be made in the form of 
                another obligation of the issuer (or a related 
                person within the meaning of section 453(f)(1)) 
                shall be assumed to be made when such 
                obligation is required to be paid in cash or in 
                property other than such obligation.
        Except for purposes of paragraph (1)(B), any reference 
        to an obligation in subparagraph (B) of this paragraph 
        shall be treated as including a reference to stock.
          (4) Debt instrument.--For purposes of this 
        subsection, the term ``debt instrument'' means any 
        instrument which is a debt instrument as defined in 
        section 1275(a).
          (5) Regulations.--The Secretary shall prescribe such 
        regulations as may be appropriate to carry out the 
        purposes of this subsection and subsection (e)(5), 
        including--
                  (A) regulations providing for modifications 
                to the provisions of this subsection and 
                subsection (e)(5) in the case of varying rates 
                of interest, put or call options, indefinite 
                maturities, contingent payments, assumptions of 
                debt instruments, conversion rights, or other 
                circumstances where such modifications are 
                appropriate to carry out the purposes of this 
                subsection and subsection (e)(5), and
                  (B) regulations to prevent avoidance of the 
                purposes of this subsection and subsection 
                (e)(5) through the use of issuers other than C 
                corporations, agreements to borrow amounts due 
                under the debt instrument, or other 
                arrangements.
  (j) Limitation on business interest.--
          (1) In general.--The amount allowed as a deduction 
        under this chapter for any taxable year for business 
        interest shall not exceed the sum of--
                  (A) the business interest income of such 
                taxpayer for such taxable year,
                  (B) 30 percent of the adjusted taxable income 
                of such taxpayer for such taxable year, plus
                  (C) the floor plan financing interest of such 
                taxpayer for such taxable year.
        The amount determined under subparagraph (B) shall not 
        be less than zero.
          (2) Carryforward of disallowed business interest.--
        The amount of any business interest not allowed as a 
        deduction for any taxable year by reason of paragraph 
        (1) shall be treated as business interest paid or 
        accrued in the succeeding taxable year.
          (3) Exemption for certain small businesses.--In the 
        case of any taxpayer (other than a tax shelter 
        prohibited from using the cash receipts and 
        disbursements method of accounting under section 
        448(a)(3)) which meets the gross receipts test of 
        section 448(c) for any taxable year, paragraph (1) 
        shall not apply to such taxpayer for such taxable year. 
        In the case of any taxpayer which is not a corporation 
        or a partnership, the gross receipts test of section 
        448(c) shall be applied in the same manner as if such 
        taxpayer were a corporation or partnership.
          (4) Application to partnerships, etc.--
                  (A) In general.--In the case of any 
                partnership--
                          (i) this subsection shall be applied 
                        at the partnership level and any 
                        deduction for business interest shall 
                        be taken into account in determining 
                        the non- separately stated taxable 
                        income or loss of the partnership, and
                          (ii) the adjusted taxable income of 
                        each partner of such partnership--
                                  (I) shall be determined 
                                without regard to such 
                                partner's distributive share of 
                                any items of income, gain, 
                                deduction, or loss of such 
                                partnership, and
                                  (II) shall be increased by 
                                such partner's distributive 
                                share of such partnership's 
                                excess taxable income.
                For purposes of clause (ii)(II), a partner's 
                distributive share of partnership excess 
                taxable income shall be determined in the same 
                manner as the partner's distributive share of 
                nonseparately stated taxable income or loss of 
                the partnership.
                  (B) Special rules for carryforwards.--
                          (i) In general.--The amount of any 
                        business interest not allowed as a 
                        deduction to a partnership for any 
                        taxable year by reason of paragraph (1) 
                        for any taxable year--
                                  (I) shall not be treated 
                                under paragraph (2) as business 
                                interest paid or accrued by the 
                                partnership in the succeeding 
                                taxable year, and
                                  (II) shall, subject to clause 
                                (ii), be treated as excess 
                                business interest which is 
                                allocated to each partner in 
                                the same manner as the non-
                                separately stated taxable 
                                income or loss of the 
                                partnership.
                          (ii) Treatment of excess business 
                        interest allocated to partners.--If a 
                        partner is allocated any excess 
                        business interest from a partnership 
                        under clause (i) for any taxable year--
                                  (I) such excess business 
                                interest shall be treated as 
                                business interest paid or 
                                accrued by the partner in the 
                                next succeeding taxable year in 
                                which the partner is allocated 
                                excess taxable income from such 
                                partnership, but only to the 
                                extent of such excess taxable 
                                income, and
                                  (II) any portion of such 
                                excess business interest 
                                remaining after the application 
                                of subclause (I) shall, subject 
                                to the limitations of subclause 
                                (I), be treated as business 
                                interest paid or accrued in 
                                succeeding taxable years.
                        For purposes of applying this 
                        paragraph, excess taxable income 
                        allocated to a partner from a 
                        partnership for any taxable year shall 
                        not be taken into account under 
                        paragraph (1)(A) with respect to any 
                        business interest other than excess 
                        business interest from the partnership 
                        until all such excess business interest 
                        for such taxable year and all preceding 
                        taxable years has been treated as paid 
                        or accrued under clause (ii).
                          (iii) Basis adjustments.--
                                  (I) In general.--The adjusted 
                                basis of a partner in a 
                                partnership interest shall be 
                                reduced (but not below zero) by 
                                the amount of excess business 
                                interest allocated to the 
                                partner under clause (i)(II).
                                  (II) Special rule for 
                                dispositions.--If a partner 
                                disposes of a partnership 
                                interest, the adjusted basis of 
                                the partner in the partnership 
                                interest shall be increased 
                                immediately before the 
                                disposition by the amount of 
                                the excess (if any) of the 
                                amount of the basis reduction 
                                under subclause (I) over the 
                                portion of any excess business 
                                interest allocated to the 
                                partner under clause (i)(II) 
                                which has previously been 
                                treated under clause (ii) as 
                                business interest paid or 
                                accrued by the partner. The 
                                preceding sentence shall also 
                                apply to transfers of the 
                                partnership interest (including 
                                by reason of death) in a 
                                transaction in which gain is 
                                not recognized in whole or in 
                                part. No deduction shall be 
                                allowed to the transferor or 
                                transferee under this chapter 
                                for any excess business 
                                interest resulting in a basis 
                                increase under this subclause.
                  (C) Excess taxable income.--The term ``excess 
                taxable income'' means, with respect to any 
                partnership, the amount which bears the same 
                ratio to the partnership's adjusted taxable 
                income as--
                          (i) the excess (if any) of--
                                  (I) the amount determined for 
                                the partnership under paragraph 
                                (1)(B), over
                                  (II) the amount (if any) by 
                                which the business interest of 
                                the partnership, reduced by the 
                                floor plan financing interest, 
                                exceeds the business interest 
                                income of the partnership, 
                                bears to
                          (ii) the amount determined for the 
                        partnership under paragraph (1)(B).
                  (D) Application to s corporations.--Rules 
                similar to the rules of subparagraphs (A) and 
                (C) shall apply with respect to any S 
                corporation and its shareholders.
          (5) Business interest.--For purposes of this 
        subsection, the term ``business interest'' means any 
        interest paid or accrued on indebtedness properly 
        allocable to a trade or business. Such term shall not 
        include investment interest (within the meaning of 
        subsection (d)).
          (6) Business interest income.--For purposes of this 
        subsection, the term ``business interest income'' means 
        the amount of interest includible in the gross income 
        of the taxpayer for the taxable year which is properly 
        allocable to a trade or business. Such term shall not 
        include investment income (within the meaning of 
        subsection (d)).
          (7) Trade or business.--For purposes of this 
        subsection--
                  (A) In general.--The term ``trade or 
                business'' shall not include--
                          (i) the trade or business of 
                        performing services as an employee,
                          (ii) any electing real property trade 
                        or business,
                          (iii) any electing farming business, 
                        or
                          (iv) the trade or business of the 
                        furnishing or sale of--
                                  (I) electrical energy, water, 
                                or sewage disposal services,
                                  (II) gas or steam through a 
                                local distribution system, or
                                  (III) transportation of gas 
                                or steam by pipeline, if the 
                                rates for such furnishing or 
                                sale, as the case may be, have 
                                been established or approved by 
                                a State or political 
                                subdivision thereof, by any 
                                agency or instrumentality of 
                                the United States, by a public 
                                service or public utility 
                                commission or other similar 
                                body of any State or political 
                                subdivision thereof, or by the 
                                governing or ratemaking body of 
                                an electric cooperative.
                  (B) Electing real property trade or 
                business.--For purposes of this paragraph, the 
                term ``electing real property trade or 
                business'' means any trade or business which is 
                described in section 469(c)(7)(C) and which 
                makes an election under this subparagraph. Any 
                such election shall be made at such time and in 
                such manner as the Secretary shall prescribe, 
                and, once made, shall be irrevocable.
                  (C) Electing farming business.--For purposes 
                of this paragraph, the term ``electing farming 
                business'' means--
                          (i) a farming business (as defined in 
                        section 263A(e)(4)) which makes an 
                        election under this subparagraph, or
                          (ii) any trade or business of a 
                        specified agricultural or horticultural 
                        cooperative (as defined in section 
                        199A(g)(2)) with respect to which the 
                        cooperative makes an election under 
                        this subparagraph.
                Any such election shall be made at such time 
                and in such manner as the Secretary shall 
                prescribe, and, once made, shall be 
                irrevocable.
          (8) Adjusted taxable income.--For purposes of this 
        subsection, the term ``adjusted taxable income'' means 
        the taxable income of the taxpayer--
                  (A) computed without regard to--
                          (i) any item of income, gain, 
                        deduction, or loss which is not 
                        properly allocable to a trade or 
                        business,
                          (ii) any business interest or 
                        business interest income,
                          (iii) the amount of any net operating 
                        loss deduction under section 172,
                          (iv) the amount of any deduction 
                        allowed under section 199A, and
                          (v) in the case of taxable years 
                        beginning before January 1, 2022, any 
                        deduction allowable for depreciation, 
                        amortization, or depletion, and
                  (B) computed with such other adjustments as 
                provided by the Secretary.
          (9) Floor plan financing interest defined.--For 
        purposes of this subsection--
                  (A) In general.--The term ``floor plan 
                financing interest'' means interest paid or 
                accrued on floor plan financing indebtedness.
                  (B) Floor plan financing indebtedness.--The 
                term ``floor plan financing indebtedness'' 
                means indebtedness--
                          (i) used to finance the acquisition 
                        of motor vehicles held for sale or 
                        lease, and
                          (ii) secured by the inventory so 
                        acquired.
                  (C) Motor vehicle.--The term ``motor 
                vehicle'' means a motor vehicle that is any of 
                the following:
                          (i) Any self-propelled vehicle 
                        designed for transporting persons or 
                        property on a public street, highway, 
                        or road.
                          (ii) A boat.
                          (iii) Farm machinery or equipment.
          (10) Cross references.--
                  (A) For requirement that an electing real 
                property trade or business use the alternative 
                depreciation system, see section 168(g)(1)(F).
                  (B) For requirement that an electing farming 
                business use the alternative depreciation 
                system, see section 168(g)(1)(G).
  (k) Section 6166 interest.--No deduction shall be allowed 
under this section for any interest payable under section 6601 
on any unpaid portion of the tax imposed by section 2001 for 
the period during which an extension of time for payment of 
such tax is in effect under section 6166.
  (l) Disallowance of deduction on certain debt instruments of 
corporations.--
          (1) In general.--No deduction shall be allowed under 
        this chapter for any interest paid or accrued on a 
        disqualified debt instrument.
          (2) Disqualified debt instrument.--For purposes of 
        this subsection, the term ``disqualified debt 
        instrument'' means any indebtedness of a corporation 
        which is payable in equity of the issuer or a related 
        party or equity held by the issuer (or any related 
        party) in any other person.
          (3) Special rules for amounts payable in equity.--For 
        purposes of paragraph (2), indebtedness shall be 
        treated as payable in equity of the issuer or any other 
        person only if--
                  (A) a substantial amount of the principal or 
                interest is required to be paid or converted, 
                or at the option of the issuer or a related 
                party is payable in, or convertible into, such 
                equity,
                  (B) a substantial amount of the principal or 
                interest is required to be determined, or at 
                the option of the issuer or a related party is 
                determined, by reference to the value of such 
                equity, or
                  (C) the indebtedness is part of an 
                arrangement which is reasonably expected to 
                result in a transaction described in 
                subparagraph (A) or (B).
        For purposes of this paragraph, principal or interest 
        shall be treated as required to be so paid, converted, 
        or determined if it may be required at the option of 
        the holder or a related party and there is a 
        substantial certainty the option will be exercised.
          (4) Capitalization allowed with respect to equity of 
        persons other than issuer and related parties.--If the 
        disqualified debt instrument of a corporation is 
        payable in equity held by the issuer (or any related 
        party) in any other person (other than a related 
        party), the basis of such equity shall be increased by 
        the amount not allowed as a deduction by reason of 
        paragraph (1) with respect to the instrument.
          (5) Exception for certain instruments issued by 
        dealers in securities.--For purposes of this 
        subsection, the term ``disqualified debt instrument'' 
        does not include indebtedness issued by a dealer in 
        securities (or a related party) which is payable in, or 
        by reference to, equity (other than equity of the 
        issuer or a related party) held by such dealer in its 
        capacity as a dealer in securities. For purposes of 
        this paragraph, the term ``dealer in securities'' has 
        the meaning given such term by section 475.
          (6) Related party.--For purposes of this subsection, 
        a person is a related party with respect to another 
        person if such person bears a relationship to such 
        other person described in section 267(b) or 707(b).
          (7) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection, including 
        regulations preventing avoidance of this subsection 
        through the use of an issuer other than a corporation.
  (m) Interest on unpaid taxes attributable to nondisclosed 
reportable transactions.--No deduction shall be allowed under 
this chapter for any interest paid or accrued under section 
6601 on any underpayment of tax which is attributable to the 
portion of any reportable transaction understatement (as 
defined in section 6662A(b)) with respect to which the 
requirement of section 6664(d)(2)(A) is not met.
  (n) Cross references.--
          (1) For disallowance of certain amounts paid in 
        connection with insurance, endowment, or annuity 
        contracts, see section 264.
          (2) For disallowance of deduction for interest 
        relating to tax-exempt income, see section 265(a)(2).
          (3) For disallowance of deduction for carrying 
        charges chargeable to capital account, see section 266.
          (4) For disallowance of interest with respect to 
        transactions between related taxpayers, see section 
        267.
          (5) For treatment of redeemable ground rents and real 
        property held subject to liabilities under redeemable 
        ground rents, see section 1055.

SEC. 164. TAXES.

  (a) General rule.--Except as otherwise provided in this 
section, the following taxes shall be allowed as a deduction 
for the taxable year within which paid or accrued:
          (1) State and local, and foreign, real property 
        taxes.
          (2) State and local personal property taxes.
          (3) State and local, and foreign, income, war 
        profits, and excess profits taxes.
          (4) The GST tax imposed on income distributions.
In addition, there shall be allowed as a deduction State and 
local, and foreign, taxes not described in the preceding 
sentence which are paid or accrued within the taxable year in 
carrying on a trade or business or an activity described in 
section 212 (relating to expenses for production of income). 
Notwithstanding the preceding sentence, any tax (not described 
in the first sentence of this subsection) which is paid or 
accrued by the taxpayer in connection with an acquisition or 
disposition of property shall be treated as part of the cost of 
the acquired property or, in the case of a disposition, as a 
reduction in the amount realized on the disposition.
  (b) Definitions and special rules.--For purposes of this 
section--
          (1) Personal property taxes.--The term ``personal 
        property tax'' means an ad valorem tax which is imposed 
        on an annual basis in respect of personal property.
          (2) State or local taxes.--A State or local tax 
        includes only a tax imposed by a State, a possession of 
        the United States, or a political subdivision of any of 
        the foregoing, or by the District of Columbia.
          (3) Foreign taxes.--A foreign tax includes only a tax 
        imposed by the authority of a foreign country.
          (4) Special rules for GST tax.--
                  (A) In general.--The GST tax imposed on 
                income distributions is--
                          (i) the tax imposed by section 2601, 
                        and
                          (ii) any State tax described in 
                        section 2604 (as in effect before its 
                        repeal),
                but only to the extent such tax is imposed on a 
                transfer which is included in the gross income 
                of the distributee and to which section 666 
                does not apply.
                  (B) Special rule for tax paid before due 
                date.--Any tax referred to in subparagraph (A) 
                imposed with respect to a transfer occurring 
                during the taxable year of the distributee (or, 
                in the case of a taxable termination, the 
                trust) which is paid not later than the time 
                prescribed by law (including extensions) for 
                filing the return with respect to such transfer 
                shall be treated as having been paid on the 
                last day of the taxable year in which the 
                transfer was made.
          (5) General sales taxes.--For purposes of subsection 
        (a)--
                  (A) Election to deduct state and local sales 
                taxes in lieu of state and local income 
                taxes.--At the election of the taxpayer for the 
                taxable year, subsection (a) shall be applied--
                          (i) without regard to the reference 
                        to State and local income taxes, and
                          (ii) as if State and local general 
                        sales taxes were referred to in a 
                        paragraph thereof.
                  (B) Definition of general sales tax.--The 
                term ``general sales tax'' means a tax imposed 
                at one rate with respect to the sale at retail 
                of a broad range of classes of items.
                  (C) Special rules for food, etc..--In the 
                case of items of food, clothing, medical 
                supplies, and motor vehicles--
                          (i) the fact that the tax does not 
                        apply with respect to some or all of 
                        such items shall not be taken into 
                        account in determining whether the tax 
                        applies with respect to a broad range 
                        of classes of items, and
                          (ii) the fact that the rate of tax 
                        applicable with respect to some or all 
                        of such items is lower than the general 
                        rate of tax shall not be taken into 
                        account in determining whether the tax 
                        is imposed at one rate.
                  (D) Items taxed at different rates.--Except 
                in the case of a lower rate of tax applicable 
                with respect to an item described in 
                subparagraph (C), no deduction shall be allowed 
                under this paragraph for any general sales tax 
                imposed with respect to an item at a rate other 
                than the general rate of tax.
                  (E) Compensating use taxes.--A compensating 
                use tax with respect to an item shall be 
                treated as a general sales tax. For purposes of 
                the preceding sentence, the term ``compensating 
                use tax'' means, with respect to any item, a 
                tax which--
                          (i) is imposed on the use, storage, 
                        or consumption of such item, and
                          (ii) is complementary to a general 
                        sales tax, but only if a deduction is 
                        allowable under this paragraph with 
                        respect to items sold at retail in the 
                        taxing jurisdiction which are similar 
                        to such item.
                  (F) Special rule for motor vehicles.--In the 
                case of motor vehicles, if the rate of tax 
                exceeds the general rate, such excess shall be 
                disregarded and the general rate shall be 
                treated as the rate of tax.
                  (G) Separately stated general sales taxes.--
                If the amount of any general sales tax is 
                separately stated, then, to the extent that the 
                amount so stated is paid by the consumer (other 
                than in connection with the consumer's trade or 
                business) to the seller, such amount shall be 
                treated as a tax imposed on, and paid by, such 
                consumer.
                  (H) Amount of deduction may be determined 
                under tables.--
                          (i) In general.--At the election of 
                        the taxpayer for the taxable year, the 
                        amount of the deduction allowed under 
                        this paragraph for such year shall be--
                                  (I) the amount determined 
                                under this paragraph (without 
                                regard to this subparagraph) 
                                with respect to motor vehicles, 
                                boats, and other items 
                                specified by the Secretary, and
                                  (II) the amount determined 
                                under tables prescribed by the 
                                Secretary with respect to items 
                                to which subclause (I) does not 
                                apply.
                          (ii) Requirements for tables.--The 
                        tables prescribed under clause (i)--
                                  (I) shall reflect the 
                                provisions of this paragraph,
                                  (II) shall be based on the 
                                average consumption by 
                                taxpayers on a State-by-State 
                                basis (as determined by the 
                                Secretary) of items to which 
                                clause (i)(I) does not apply, 
                                taking into account filing 
                                status, number of dependents, 
                                adjusted gross income, and 
                                rates of State and local 
                                general sales taxation, and
                                  (III) need only be determined 
                                with respect to adjusted gross 
                                incomes up to the applicable 
                                amount [(as determined under 
                                section 68(b))].
                          (iii) Applicable amount defined.--For 
                        purposes of clause (ii), the term 
                        ``applicable amount'' means--
                                  (I) $300,000 in the case of a 
                                joint return or a surviving 
                                spouse,
                                  (II) $275,000 in the case of 
                                a head of household,
                                  (III) $250,000 in the case of 
                                an individual who is not 
                                married and who is not a 
                                surviving spouse or head of 
                                household, and
                                  (IV) 1/2 the amount 
                                applicable under subclause (I) 
                                in the case of a married 
                                individual filing a separate 
                                return.
                        For purposes of this paragraph, marital 
                        status shall be determined under 
                        section 7703. In the case of any 
                        taxable year beginning in calendar 
                        years after 2017, each of the dollar 
                        amounts in this clause shall be 
                        increased by an amount equal to such 
                        dollar amount, multiplied by the cost-
                        of-living adjustment determined under 
                        section 1(f)(3) for the calendar year 
                        in which the taxable year begins, 
                        determined by substituting ``2012'' for 
                        ``2016'' in subparagraph (A)(ii) 
                        thereof. If any amount after adjustment 
                        under the preceding sentence is not a 
                        multiple of $50, such amount shall be 
                        rounded to the next lowest multiple of 
                        $50.
          [(6) Limitation on individual deductions for taxable 
        years 2018 through 2025.--In the case of an individual 
        and a taxable year beginning after December 31, 2017, 
        and before January 1, 2026--
                  [(A) foreign real property taxes shall not be 
                taken into account under subsection (a)(1), and
                  [(B) the aggregate amount of taxes taken into 
                account under paragraphs (1), (2), and (3) of 
                subsection (a) and paragraph (5) of this 
                subsection for any taxable year shall not 
                exceed $10,000 ($5,000 in the case of a married 
                individual filing a separate return).]
          (6) Limitation on individual deductions.--In the case 
        of an individual--
                  (A) no deduction shall be allowed under this 
                chapter for foreign real property taxes paid or 
                accrued during the taxable year, and
                  (B) the aggregate amount of the deduction 
                allowed under this chapter for taxes described 
                in paragraphs (1), (2), and (3) of subsection 
                (a) and paragraph (5) of this subsection paid 
                or accrued by the taxpayer during the taxable 
                year shall not exceed $10,000 ($5,000 in the 
                case of a married individual filing a separate 
                return).
        The preceding sentence shall not apply to any foreign 
        taxes described in subsection (a)(3) or to any taxes 
        described in paragraph (1) and (2) of subsection (a) 
        which are paid or accrued in carrying on a trade or 
        business or an activity described in section 212. For 
        purposes of subparagraph (B), an amount paid in a 
        taxable year beginning before January 1, 2018, with 
        respect to a State or local income tax imposed for a 
        taxable year beginning after December 31, 2017, shall 
        be treated as paid on the last day of the taxable year 
        for which such tax is so imposed.
  (c) Deduction denied in case of certain taxes.--No deduction 
shall be allowed for the following taxes:
          (1) Taxes assessed against local benefits of a kind 
        tending to increase the value of the property assessed; 
        but this paragraph shall not prevent the deduction of 
        so much of such taxes as is properly allocable to 
        maintenance or interest charges.
          (2) Taxes on real property, to the extent that 
        subsection (d) requires such taxes to be treated as 
        imposed on another taxpayer.
  (d) Apportionment of taxes on real property between seller 
and purchaser.--
          (1) General rule.--For purposes of subsection (a), if 
        real property is sold during any real property tax 
        year, then--
                  (A) so much of the real property tax as is 
                properly allocable to that part of such year 
                which ends on the day before the date of the 
                sale shall be treated as a tax imposed on the 
                seller, and
                  (B) so much of such tax as is properly 
                allocable to that part of such year which 
                begins on the date of the sale shall be treated 
                as a tax imposed on the purchaser.
          (2) Special rules.--
                  (A) in the case of any sale of real property, 
                if--
                          (i) a taxpayer may not, by reason of 
                        his method of accounting, deduct any 
                        amount for taxes unless paid, and
                          (ii) the other party to the sale is 
                        (under the law imposing the real 
                        property tax) liable for the real 
                        property tax for the real property tax 
                        year,
                then for purposes of subsection (a) the 
                taxpayer shall be treated as having paid, on 
                the date of the sale, so much of such tax as, 
                under paragraph (1) of this subsection, is 
                treated as imposed on the taxpayer. For 
                purposes of the preceding sentence, if neither 
                party is liable for the tax, then the party 
                holding the property at the time the tax 
                becomes a lien on the property shall be 
                considered liable for the real property tax for 
                the real property tax year.
                  (B) In the case of any sale of real property, 
                if the taxpayer's taxable income for the 
                taxable year during which the sale occurs is 
                computed under an accrual method of accounting, 
                and if no election under section 461(c) 
                (relating to the accrual of real property 
                taxes) applies, then, for purposes of 
                subsection (a), that portion of such tax 
                which--
                          (i) is treated, under paragraph (1) 
                        of this subsection, as imposed on the 
                        taxpayer, and
                          (ii) may not, by reason of the 
                        taxpayer's method of accounting, be 
                        deducted by the taxpayer for any 
                        taxable year,
                shall be treated as having accrued on the date 
                of the sale.
  (e) Taxes of shareholder paid by corporation.--Where a 
corporation pays a tax imposed on a shareholder on his interest 
as a shareholder, and where the shareholder does not reimburse 
the corporation, then--
          (1) the deduction allowed by subsection (a) shall be 
        allowed to the corporation; and
          (2) no deduction shall be allowed the shareholder for 
        such tax.
  (f) Deduction for one-half of self-employment taxes.--
          (1) In general.--In the case of an individual, in 
        addition to the taxes described in subsection (a), 
        there shall be allowed as a deduction for the taxable 
        year an amount equal to one-half of the taxes imposed 
        by section 1401 (other than the taxes imposed by 
        section 1401(b)(2)) for such taxable year.
          (2) Deduction treated as attributable to trade or 
        business.--For purposes of this chapter, the deduction 
        allowed by paragraph (1) shall be treated as 
        attributable to a trade or business carried on by the 
        taxpayer which does not consist of the performance of 
        services by the taxpayer as an employee.
  (g) Cross references.--
          (1) For provisions disallowing any deduction for 
        certain taxes, see section 275.
          (2) For treatment of taxes imposed by Indian tribal 
        governments (or their subdivisions), see section 7871.

SEC. 165. LOSSES.

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

           *       *       *       *       *       *       *

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

  (a) Allowance of deduction.--
          (1) General rule.--There shall be allowed as a 
        deduction any charitable contribution (as defined in 
        subsection (c)) payment of which is made within the 
        taxable year. A charitable contribution shall be 
        allowable as a deduction only if verified under 
        regulations prescribed by the Secretary.
          (2) Corporations on accrual basis.--In the case of a 
        corporation reporting its taxable income on the accrual 
        basis, if--
                  (A) the board of directors authorizes a 
                charitable contribution during any taxable 
                year, and
                  (B) payment of such contribution is made 
                after the close of such taxable year and on or 
                before the 15th day of the fourth month 
                following the close of such taxable year,
        then the taxpayer may elect to treat such contribution 
        as paid during such taxable year. The election may be 
        made only at the time of the filing of the return for 
        such taxable year, and shall be signified in such 
        manner as the Secretary shall by regulations prescribe.
          (3) Future interests in tangible personal property.--
        For purposes of this section, payment of a charitable 
        contribution which consists of a future interest in 
        tangible personal property shall be treated as made 
        only when all intervening interests in, and rights to 
        the actual possession or enjoyment of, the property 
        have expired or are held by persons other than the 
        taxpayer or those standing in a relationship to the 
        taxpayer described in section 267(b) or 707(b). For 
        purposes of the preceding sentence, a fixture which is 
        intended to be severed from the real property shall be 
        treated as tangible personal property.
  (b) Percentage limitations.--
          (1) Individuals.--In the case of an individual, the 
        deduction provided in subsection (a) shall be limited 
        as provided in the succeeding subparagraphs.
                  (A) General rule.--[Any charitable 
                contribution] Any charitable contribution other 
                than a contribution described in subparagraph 
                (G) to--
                          (i) a church or a convention or 
                        association of churches,
                          (ii) an educational organization 
                        which normally maintains a regular 
                        faculty and curriculum and normally has 
                        a regularly enrolled body of pupils or 
                        students in attendance at the place 
                        where its educational activities are 
                        regularly carried on,
                          (iii) an organization the principal 
                        purpose or functions of which are the 
                        providing of medical or hospital care 
                        or medical education or medical 
                        research, if the organization is a 
                        hospital, or if the organization is a 
                        medical research organization directly 
                        engaged in the continuous active 
                        conduct of medical research in 
                        conjunction with a hospital, and during 
                        the calendar year in which the 
                        contribution is made such organization 
                        is committed to spend such 
                        contributions for such research before 
                        January 1 of the fifth calendar year 
                        which begins after the date such 
                        contribution is made,
                          (iv) an organization which normally 
                        receives a substantial part of its 
                        support (exclusive of income received 
                        in the exercise or performance by such 
                        organization of its charitable, 
                        educational, or other purpose or 
                        function constituting the basis for its 
                        exemption under section 501(a)) from 
                        the United States or any State or 
                        political subdivision thereof or from 
                        direct or indirect contributions from 
                        the general public, and which is 
                        organized and operated exclusively to 
                        receive, hold, invest, and administer 
                        property and to make expenditures to or 
                        for the benefit of a college or 
                        university which is an organization 
                        referred to in clause (ii) of this 
                        subparagraph and which is an agency or 
                        instrumentality of a State or political 
                        subdivision thereof, or which is owned 
                        or operated by a State or political 
                        subdivision thereof or by an agency or 
                        instrumentality of one or more States 
                        or political subdivisions,
                          (v) a governmental unit referred to 
                        in subsection (c)(1),
                          (vi) an organization referred to in 
                        subsection (c)(2) which normally 
                        receives a substantial part of its 
                        support (exclusive of income received 
                        in the exercise or performance by such 
                        organization of its charitable, 
                        educational, or other purpose or 
                        function constituting the basis for its 
                        exemption under section 501(a)) from a 
                        governmental unit referred to in 
                        subsection (c)(1) or from direct or 
                        indirect contributions from the general 
                        public,
                          (vii) a private foundation described 
                        in subparagraph (F),
                          (viii) an organization described in 
                        section 509(a)(2) or (3), or
                          (ix) an agricultural research 
                        organization directly engaged in the 
                        continuous active conduct of 
                        agricultural research (as defined in 
                        section 1404 of the National 
                        Agricultural Research, Extension, and 
                        Teaching Policy Act of 1977) in 
                        conjunction with a land-grant college 
                        or university (as defined in such 
                        section) or a non-land grant college of 
                        agriculture (as defined in such 
                        section), and during the calendar year 
                        in which the contribution is made such 
                        organization is committed to spend such 
                        contribution for such research before 
                        January 1 of the fifth calendar year 
                        which begins after the date such 
                        contribution is made,
                shall be allowed to the extent that the 
                aggregate of such contributions does not exceed 
                50 percent of the taxpayer's contribution base 
                for the taxable year.
                  (B) Other contributions.--Any charitable 
                contribution other than a charitable 
                contribution [to which subparagraph (A) 
                applies] to which subparagraph (A) or (G) 
                applies shall be allowed to the extent that the 
                aggregate of such contributions does not exceed 
                the lesser of--
                          (i) 30 percent of the taxpayer's 
                        contribution base for the taxable year, 
                        or
                          [(ii) the excess of 50 percent of the 
                        taxpayer's contribution base for the 
                        taxable year over the amount of 
                        charitable contributions allowable 
                        under subparagraph (A) (determined 
                        without regard to subparagraph (C)).]
                          (ii) the excess of--
                                  (I) the sum of 50 percent of 
                                the taxpayer's contribution 
                                base for the taxable year, plus 
                                so much of the amount of 
                                charitable contributions 
                                allowable under subparagraph 
                                (G) as does not exceed 10 
                                percent of such contribution 
                                base, over
                                  (II) the amount of charitable 
                                contributions allowable under 
                                subparagraphs (A) and (G) 
                                (determined without regard to 
                                subparagraph (C)).
                If the aggregate of such contributions exceeds 
                the limitation of the preceding sentence, such 
                excess shall be treated (in a manner consistent 
                with the rules of subsection (d)(1)) as a 
                charitable contribution [(to which subparagraph 
                (A) does not apply)] (to which neither 
                subparagraph (A) nor (G) applies) in each of 
                the 5 succeeding taxable years in order of 
                time.
                  (C) Special limitation with respect to 
                contributions described in subparagraph (A) of 
                certain capital gain property (i) In the case 
                of charitable contributions described in 
                subparagraph (A) of capital gain property to 
                which subsection (e)(1)(B) does not apply, the 
                total amount of contributions of such property 
                which may be taken into account under 
                subsection (a) for any taxable year shall not 
                exceed 30 percent of the taxpayer's 
                contribution base for such year. For purposes 
                of this subsection, contributions of capital 
                gain property to which this subparagraph 
                applies shall be taken into account after all 
                other charitable contributions (other than 
                charitable contributions to which subparagraph 
                (D) applies).
                          (ii) If charitable contributions 
                        described in subparagraph (A) of 
                        capital gain property to which clause 
                        (i) applies exceeds 30 percent of the 
                        taxpayer's contribution base for any 
                        taxable year, such excess shall be 
                        treated, in a manner consistent with 
                        the rules of subsection (d)(1), as a 
                        charitable contribution of capital gain 
                        property to which clause (i) applies in 
                        each of the 5 succeeding taxable years 
                        in order of time.
                          (iii) At the election of the taxpayer 
                        (made at such time and in such manner 
                        as the Secretary prescribes by 
                        regulations), subsection (e)(1) shall 
                        apply to all contributions of capital 
                        gain property (to which subsection 
                        (e)(1)(B) does not otherwise apply) 
                        made by the taxpayer during the taxable 
                        year. If such an election is made, 
                        clauses (i) and (ii) shall not apply to 
                        contributions of capital gain property 
                        made during the taxable year, and, in 
                        applying subsection (d)(1) for such 
                        taxable year with respect to 
                        contributions of capital gain property 
                        made in any prior contribution year for 
                        which an election was not made under 
                        this clause, such contributions shall 
                        be reduced as if subsection (e)(1) had 
                        applied to such contributions in the 
                        year in which made.
                          (iv) For purposes of this paragraph, 
                        the term ``capital gain property'' 
                        means, with respect to any 
                        contribution, any capital asset the 
                        sale of which at its fair market value 
                        at the time of the contribution would 
                        have resulted in gain which would have 
                        been long-term capital gain. For 
                        purposes of the preceding sentence, any 
                        property which is property used in the 
                        trade or business (as defined in 
                        section 1231(b)) shall be treated as a 
                        capital asset.
                  (D) Special limitation with respect to 
                contributions of capital gain property to 
                organizations not described in subparagraph (A)
                          (i) In general.--In the case of 
                        charitable contributions (other than 
                        charitable contributions to which 
                        subparagraph (A) applies) of capital 
                        gain property, the total amount of such 
                        contributions of such property taken 
                        into account under subsection (a) for 
                        any taxable year shall not exceed the 
                        lesser of--
                                  (I) 20 percent of the 
                                taxpayer's contribution base 
                                for the taxable year, or
                                  (II) the excess of 30 percent 
                                of the taxpayer's contribution 
                                base for the taxable year over 
                                the amount of the contributions 
                                of capital gain property to 
                                which subparagraph (C) applies.
                        For purposes of this subsection, 
                        contributions of capital gain property 
                        to which this subparagraph applies 
                        shall be taken into account after all 
                        other charitable contributions.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(1)) as a 
                        charitable contribution of capital gain 
                        property to which clause (i) applies in 
                        each of the 5 succeeding taxable years 
                        in order of time.
                  (E) Contributions of qualified conservation 
                contributions.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1)) shall be allowed 
                        to the extent the aggregate of such 
                        contributions does not exceed the 
                        excess of 50 percent of the taxpayer's 
                        contribution base over the amount of 
                        all other charitable contributions 
                        allowable under this paragraph.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(1)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding years in order of time.
                          (iii) Coordination with other 
                        subparagraphs.--For purposes of 
                        applying this subsection and subsection 
                        (d)(1), contributions described in 
                        clause (i) shall not be treated as 
                        described in subparagraph (A), (B), 
                        (C), or (D) and such subparagraphs 
                        shall apply without regard to such 
                        contributions.
                          (iv) Special rule for contribution of 
                        property used in agriculture or 
                        livestock production.--
                                  (I) In general.--If the 
                                individual is a qualified 
                                farmer or rancher for the 
                                taxable year for which the 
                                contribution is made, clause 
                                (i) shall be applied by 
                                substituting ``100 percent'' 
                                for ``50 percent''.
                                  (II) Exception.--Subclause 
                                (I) shall not apply to any 
                                contribution of property made 
                                after the date of the enactment 
                                of this subparagraph which is 
                                used in agriculture or 
                                livestock production (or 
                                available for such production) 
                                unless such contribution is 
                                subject to a restriction that 
                                such property remain available 
                                for such production. This 
                                subparagraph shall be applied 
                                separately with respect to 
                                property to which subclause (I) 
                                does not apply by reason of the 
                                preceding sentence prior to its 
                                application to property to 
                                which subclause (I) does apply.
                          (v) Definition.--For purposes of 
                        clause (iv), the term ``qualified 
                        farmer or rancher'' means a taxpayer 
                        whose gross income from the trade or 
                        business of farming (within the meaning 
                        of section 2032A(e)(5)) is greater than 
                        50 percent of the taxpayer's gross 
                        income for the taxable year.
                  (F) Certain private foundations.--The private 
                foundations referred to in subparagraph 
                (A)(vii) and subsection (e)(1)(B) are--
                          (i) a private operating foundation 
                        (as defined in section 4942(j)(3)),
                          (ii) any other private foundation (as 
                        defined in section 509(a)) which, not 
                        later than the 15th day of the third 
                        month after the close of the 
                        foundation's taxable year in which 
                        contributions are received, makes 
                        qualifying distributions (as defined in 
                        section 4942(g), without regard to 
                        paragraph (3) thereof), which are 
                        treated, after the application of 
                        section 4942(g)(3), as distributions 
                        out of corpus (in accordance with 
                        section 4942(h)) in an amount equal to 
                        100 percent of such contributions, and 
                        with respect to which the taxpayer 
                        obtains adequate records or other 
                        sufficient evidence from the foundation 
                        showing that the foundation made such 
                        qualifying distributions, and
                          (iii) a private foundation all of the 
                        contributions to which are pooled in a 
                        common fund and which would be 
                        described in section 509(a)(3) but for 
                        the right of any substantial 
                        contributor (hereafter in this clause 
                        called ``donor'') or his spouse to 
                        designate annually the recipients, from 
                        among organizations described in 
                        paragraph (1) of section 509(a), of the 
                        income attributable to the donor's 
                        contribution to the fund and to direct 
                        (by deed or by will) the payment, to an 
                        organization described in such 
                        paragraph (1), of the corpus in the 
                        common fund attributable to the donor's 
                        contribution; but this clause shall 
                        apply only if all of the income of the 
                        common fund is required to be (and is) 
                        distributed to one or more 
                        organizations described in such 
                        paragraph (1) not later than the 15th 
                        day of the third month after the close 
                        of the taxable year in which the income 
                        is realized by the fund and only if all 
                        of the corpus attributable to any 
                        donor's contribution to the fund is 
                        required to be (and is) distributed to 
                        one or more of such organizations not 
                        later than one year after his death or 
                        after the death of his surviving spouse 
                        if she has the right to designate the 
                        recipients of such corpus.
                  [(G) Increased limitation for cash 
                contributions.--
                          [(i) In general.--In the case of any 
                        contribution of cash to an organization 
                        described in subparagraph (A), the 
                        total amount of such contributions 
                        which may be taken into account under 
                        subsection (a) for any taxable year 
                        beginning after December 31, 2017, and 
                        before January 1, 2026, shall not 
                        exceed 60 percent of the taxpayer's 
                        contribution base for such year.
                          [(ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the applicable 
                        limitation under clause (i) for any 
                        taxable year described in such clause, 
                        such excess shall be treated (in a 
                        manner consistent with the rules of 
                        subsection (d)(1)) as a charitable 
                        contribution to which clause (i) 
                        applies in each of the 5 succeeding 
                        years in order of time.
                          [(iii) Coordination with 
                        subparagraphs (A) and (B)
                                  [(I) In general.--
                                Contributions taken into 
                                account under this subparagraph 
                                shall not be taken into account 
                                under subparagraph (A).
                                  [(II) Limitation reduction.--
                                For each taxable year described 
                                in clause (i), and each taxable 
                                year to which any contribution 
                                under this subparagraph is 
                                carried over under clause (ii), 
                                subparagraph (A) shall be 
                                applied by reducing (but not 
                                below zero) the contribution 
                                limitation allowed for the 
                                taxable year under such 
                                subparagraph by the aggregate 
                                contributions allowed under 
                                this subparagraph for such 
                                taxable year, and subparagraph 
                                (B) shall be applied by 
                                treating any reference to 
                                subparagraph (A) as a reference 
                                to both subparagraph (A) and 
                                this subparagraph.]
                  (G) Cash contributions.--
                          (i) In general.--Any contribution of 
                        cash to an organization described in 
                        subparagraph (A) shall be allowed to 
                        the extent that the aggregate of such 
                        contributions does not exceed 60 
                        percent of the taxpayer's contribution 
                        base for the taxable year, reduced by 
                        the aggregate amount of contributions 
                        allowable under subparagraph (A) for 
                        such taxpayer for such year.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(1)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 5 succeeding 
                        years in order of time.
                  (H) Contribution base defined.--For purposes 
                of this section, the term ``contribution base'' 
                means adjusted gross income (computed without 
                regard to any net operating loss carryback to 
                the taxable year under section 172).
          (2) Corporations.--In the case of a corporation--
                  (A) In general.--The total deductions under 
                subsection (a) for any taxable year (other than 
                for contributions to which subparagraph (B) or 
                (C) applies) shall not exceed 10 percent of the 
                taxpayer's taxable income.
                  (B) Qualified conservation contributions by 
                certain corporate farmers and ranchers.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1))--
                                  (I) which is made by a 
                                corporation which, for the 
                                taxable year during which the 
                                contribution is made, is a 
                                qualified farmer or rancher (as 
                                defined in paragraph (1)(E)(v)) 
                                and the stock of which is not 
                                readily tradable on an 
                                established securities market 
                                at any time during such year, 
                                and
                                  (II) which, in the case of 
                                contributions made after the 
                                date of the enactment of this 
                                subparagraph, is a contribution 
                                of property which is used in 
                                agriculture or livestock 
                                production (or available for 
                                such production) and which is 
                                subject to a restriction that 
                                such property remain available 
                                for such production,
                        shall be allowed to the extent the 
                        aggregate of such contributions does 
                        not exceed the excess of the taxpayer's 
                        taxable income over the amount of 
                        charitable contributions allowable 
                        under subparagraph (A).
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(2)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding taxable years in order of 
                        time.
                  (C) Qualified conservation contributions by 
                certain Native Corporations.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1)) which--
                                  (I) is made by a Native 
                                Corporation, and
                                  (II) is a contribution of 
                                property which was land 
                                conveyed under the Alaska 
                                Native Claims Settlement Act,
                        shall be allowed to the extent that the 
                        aggregate amount of such contributions 
                        does not exceed the excess of the 
                        taxpayer's taxable income over the 
                        amount of charitable contributions 
                        allowable under subparagraph (A).
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(2)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding taxable years in order of 
                        time.
                          (iii) Native Corporation.--For 
                        purposes of this subparagraph, the term 
                        ``Native Corporation'' has the meaning 
                        given such term by section 3(m) of the 
                        Alaska Native Claims Settlement Act.
                  (D) Taxable income.--For purposes of this 
                paragraph, taxable income shall be computed 
                without regard to--
                          (i) this section,
                          (ii) part VIII (except section 248),
                          (iii) any net operating loss 
                        carryback to the taxable year under 
                        section 172,
                          (iv) any capital loss carryback to 
                        the taxable year under section 
                        1212(a)(1)
                          (v) section 199A(g).
  (c) Charitable contribution defined.--For purposes of this 
section, the term ``charitable contribution'' means a 
contribution or gift to or for the use of--
          (1) A State, a possession of the United States, or 
        any political subdivision of any of the foregoing, or 
        the United States or the District of Columbia, but only 
        if the contribution or gift is made for exclusively 
        public purposes.
          (2) A corporation, trust, or community chest, fund, 
        or foundation--
                  (A) created or organized in the United States 
                or in any possession thereof, or under the law 
                of the United States, any State, the District 
                of Columbia, or any possession of the United 
                States;
                  (B) organized and operated exclusively for 
                religious, charitable, scientific, literary, or 
                educational purposes, or to foster national or 
                international amateur sports competition (but 
                only if no part of its activities involve the 
                provision of athletic facilities or equipment), 
                or for the prevention of cruelty to children or 
                animals;
                  (C) no part of the net earnings of which 
                inures to the benefit of any private 
                shareholder or individual; and
                  (D) which is not disqualified for tax 
                exemption under section 501(c)(3) by reason of 
                attempting to influence legislation, and which 
                does not participate in, or intervene in 
                (including the publishing or distributing of 
                statements), any political campaign on behalf 
                of (or in opposition to) any candidate for 
                public office.
        A contribution or gift by a corporation to a trust, 
        chest, fund, or foundation shall be deductible by 
        reason of this paragraph only if it is to be used 
        within the United States or any of its possessions 
        exclusively for purposes specified in subparagraph (B). 
        Rules similar to the rules of section 501(j) shall 
        apply for purposes of this paragraph.
          (3) A post or organization of war veterans, or an 
        auxiliary unit or society of, or trust or foundation 
        for, any such post or organization--
                  (A) organized in the United States or any of 
                its possessions, and
                  (B) no part of the net earnings of which 
                inures to the benefit of any private 
                shareholder or individual.
          (4) In the case of a contribution or gift by an 
        individual, a domestic fraternal society, order, or 
        association, operating under the lodge system, but only 
        if such contribution or gift is to be used exclusively 
        for religious, charitable, scientific, literary, or 
        educational purposes, or for the prevention of cruelty 
        to children or animals.
          (5) A cemetery company owned and operated exclusively 
        for the benefit of its members, or any corporation 
        chartered solely for burial purposes as a cemetery 
        corporation and not permitted by its charter to engage 
        in any business not necessarily incident to that 
        purpose, if such company or corporation is not operated 
        for profit and no part of the net earnings of such 
        company or corporation inures to the benefit of any 
        private shareholder or individual.
For purposes of this section, the term ``charitable 
contribution'' also means an amount treated under subsection 
(g) as paid for the use of an organization described in 
paragraph (2), (3), or (4).
  (d) Carryovers of excess contributions.--
          (1) Individuals.--
                  (A) In general.--In the case of an 
                individual, if the amount of charitable 
                contributions described in subsection (b)(1)(A) 
                payment of which is made within a taxable year 
                (hereinafter in this paragraph referred to as 
                the ``contribution year'') exceeds 50 percent 
                of the taxpayer's contribution base for such 
                year, such excess shall be treated as a 
                charitable contribution described in subsection 
                (b)(1)(A) paid in each of the 5 succeeding 
                taxable years in order of time, but, with 
                respect to any such succeeding taxable year, 
                only to the extent of the lesser of the two 
                following amounts:
                          (i) the amount by which 50 percent of 
                        the taxpayer's contribution base for 
                        such succeeding taxable year exceeds 
                        the sum of the charitable contributions 
                        described in subsection (b)(1)(A) 
                        payment of which is made by the 
                        taxpayer within such succeeding taxable 
                        year (determined without regard to this 
                        subparagraph) and the charitable 
                        contributions described in subsection 
                        (b)(1)(A) payment of which was made in 
                        taxable years before the contribution 
                        year which are treated under this 
                        subparagraph as having been paid in 
                        such succeeding taxable year; or
                          (ii) in the case of the first 
                        succeeding taxable year, the amount of 
                        such excess, and in the case of the 
                        second, third, fourth, or fifth 
                        succeeding taxable year, the portion of 
                        such excess not treated under this 
                        subparagraph as a charitable 
                        contribution described in subsection 
                        (b)(1)(A) paid in any taxable year 
                        intervening between the contribution 
                        year and such succeeding taxable year.
                  (B) Special rule for net operating loss 
                carryovers.--In applying subparagraph (A), the 
                excess determined under subparagraph (A) for 
                the contribution year shall be reduced to the 
                extent that such excess reduces taxable income 
                (as computed for purposes of the second 
                sentence of section 172(b)(2)) and increases 
                the net operating loss deduction for a taxable 
                year succeeding the contribution year.
          (2) Corporations.--
                  (A) In general.--Any contribution made by a 
                corporation in a taxable year (hereinafter in 
                this paragraph referred to as the 
                ``contribution year'') in excess of the amount 
                deductible for such year under subsection 
                (b)(2)(A) shall be deductible for each of the 5 
                succeeding taxable years in order of time, but 
                only to the extent of the lesser of the two 
                following amounts: (i) the excess of the 
                maximum amount deductible for such succeeding 
                taxable year under subsection (b)(2)(A) over 
                the sum of the contributions made in such year 
                plus the aggregate of the excess contributions 
                which were made in taxable years before the 
                contribution year and which are deductible 
                under this subparagraph for such succeeding 
                taxable year; or (ii) in the case of the first 
                succeeding taxable year, the amount of such 
                excess contribution, and in the case of the 
                second, third, fourth, or fifth succeeding 
                taxable year, the portion of such excess 
                contribution not deductible under this 
                subparagraph for any taxable year intervening 
                between the contribution year and such 
                succeeding taxable year.
                  (B) Special rule for net operating loss 
                carryovers.--For purposes of subparagraph (A), 
                the excess of--
                          (i) the contributions made by a 
                        corporation in a taxable year to which 
                        this section applies, over
                          (ii) the amount deductible in such 
                        year under the limitation in subsection 
                        (b)(2)(A),
                shall be reduced to the extent that such excess 
                reduces taxable income (as computed for 
                purposes of the second sentence of section 
                172(b)(2)) and increases a net operating loss 
                carryover under section 172 to a succeeding 
                taxable year.
  (e) Certain contributions of ordinary income and capital gain 
property.--
          (1) General rule.--The amount of any charitable 
        contribution of property otherwise taken into account 
        under this section shall be reduced by the sum of--
                  (A) the amount of gain which would not have 
                been long-term capital gain (determined without 
                regard to section 1221(b)(3)) if the property 
                contributed had been sold by the taxpayer at 
                its fair market value (determined at the time 
                of such contribution), and
                  (B) in the case of a charitable 
                contribution--
                          (i) of tangible personal property--
                                  (I) if the use by the donee 
                                is unrelated to the purpose or 
                                function constituting the basis 
                                for its exemption under section 
                                501 (or, in the case of a 
                                governmental unit, to any 
                                purpose or function described 
                                in subsection (c)), or
                                  (II) which is applicable 
                                property (as defined in 
                                paragraph (7)(C), but without 
                                regard to clause (ii) thereof) 
                                which is sold, exchanged, or 
                                otherwise disposed of by the 
                                donee before the last day of 
                                the taxable year in which the 
                                contribution was made and with 
                                respect to which the donee has 
                                not made a certification in 
                                accordance with paragraph 
                                (7)(D),
                          (ii) to or for the use of a private 
                        foundation (as defined in section 
                        509(a)), other than a private 
                        foundation described in subsection 
                        (b)(1)(F),
                          (iii) of any patent, copyright (other 
                        than a copyright described in section 
                        1221(a)(3) or 1231(b)(1)(C)), 
                        trademark, trade name, trade secret, 
                        know- how, software (other than 
                        software described in section 
                        197(e)(3)(A)(i)), or similar property, 
                        or applications or registrations of 
                        such property, or
                          (iv) of any taxidermy property which 
                        is contributed by the person who 
                        prepared, stuffed, or mounted the 
                        property or by any person who paid or 
                        incurred the cost of such preparation, 
                        stuffing, or mounting,
                the amount of gain which would have been long-
                term capital gain if the property contributed 
                had been sold by the taxpayer at its fair 
                market value (determined at the time of such 
                contribution).
        For purposes of applying this paragraph (other than in 
        the case of gain to which section 617(d)(1), 1245(a), 
        1250(a), 1252(a), or 1254(a) applies), property which 
        is property used in the trade or business (as defined 
        in section 1231(b)) shall be treated as a capital 
        asset. For purposes of applying this paragraph in the 
        case of a charitable contribution of stock in an S 
        corporation, rules similar to the rules of section 751 
        shall apply in determining whether gain on such stock 
        would have been long-term capital gain if such stock 
        were sold by the taxpayer.
          (2) Allocation of basis.--For purposes of paragraph 
        (1), in the case of a charitable contribution of less 
        than the taxpayer's entire interest in the property 
        contributed, the taxpayer's adjusted basis in such 
        property shall be allocated between the interest 
        contributed and any interest not contributed in 
        accordance with regulations prescribed by the 
        Secretary.
          (3) Special rule for certain contributions of 
        inventory and other property.--
                  (A) Qualified contributions.--For purposes of 
                this paragraph, a qualified contribution shall 
                mean a charitable contribution of property 
                described in paragraph (1) or (2) of section 
                1221(a), by a corporation (other than a 
                corporation which is an S corporation) to an 
                organization which is described in section 
                501(c)(3) and is exempt under section 501(a) 
                (other than a private foundation, as defined in 
                section 509(a), which is not an operating 
                foundation, as defined in section 4942(j)(3)), 
                but only if--
                          (i) the use of the property by the 
                        donee is related to the purpose or 
                        function constituting the basis for its 
                        exemption under section 501 and the 
                        property is to be used by the donee 
                        solely for the care of the ill, the 
                        needy, or infants;
                          (ii) the property is not transferred 
                        by the donee in exchange for money, 
                        other property, or services;
                          (iii) the taxpayer receives from the 
                        donee a written statement representing 
                        that its use and disposition of the 
                        property will be in accordance with the 
                        provisions of clauses (i) and (ii); and
                          (iv) in the case where the property 
                        is subject to regulation under the 
                        Federal Food, Drug, and Cosmetic Act, 
                        as amended, such property must fully 
                        satisfy the applicable requirements of 
                        such Act and regulations promulgated 
                        thereunder on the date of transfer and 
                        for one hundred and eighty days prior 
                        thereto.
                  (B) Amount of reduction.--The reduction under 
                paragraph (1)(A) for any qualified contribution 
                (as defined in subparagraph (A)) shall be no 
                greater than the sum of--
                          (i) one-half of the amount computed 
                        under paragraph (1)(A) (computed 
                        without regard to this paragraph), and
                          (ii) the amount (if any) by which the 
                        charitable contribution deduction under 
                        this section for any qualified 
                        contribution (computed by taking into 
                        account the amount determined in clause 
                        (i), but without regard to this clause) 
                        exceeds twice the basis of such 
                        property.
                  (C) Special rule for contributions of food 
                inventory.--
                          (i) General rule.--In the case of a 
                        charitable contribution of food from 
                        any trade or business of the taxpayer, 
                        this paragraph shall be applied--
                                  (I) without regard to whether 
                                the contribution is made by a C 
                                corporation, and
                                  (II) only to food that is 
                                apparently wholesome food.
                          (ii) Limitation.--The aggregate 
                        amount of such contributions for any 
                        taxable year which may be taken into 
                        account under this section shall not 
                        exceed--
                                  (I) in the case of any 
                                taxpayer other than a C 
                                corporation, 15 percent of the 
                                taxpayer's aggregate net income 
                                for such taxable year from all 
                                trades or businesses from which 
                                such contributions were made 
                                for such year, computed without 
                                regard to this section, and
                                  (II) in the case of a C 
                                corporation, 15 percent of 
                                taxable income (as defined in 
                                subsection (b)(2)(D)).
                          (iii) Rules related to limitation.--
                                  (I) Carryover.--If such 
                                aggregate amount exceeds the 
                                limitation imposed under clause 
                                (ii), such excess shall be 
                                treated (in a manner consistent 
                                with the rules of subsection 
                                (d)) as a charitable 
                                contribution described in 
                                clause (i) in each of the 5 
                                succeeding taxable years in 
                                order of time.
                                  (II) Coordination with 
                                overall corporate limitation.--
                                In the case of any charitable 
                                contribution which is allowable 
                                after the application of clause 
                                (ii)(II), subsection (b)(2)(A) 
                                shall not apply to such 
                                contribution, but the 
                                limitation imposed by such 
                                subsection shall be reduced 
                                (but not below zero) by the 
                                aggregate amount of such 
                                contributions. For purposes of 
                                subsection (b)(2)(B), such 
                                contributions shall be treated 
                                as allowable under subsection 
                                (b)(2)(A).
                          (iv) Determination of basis for 
                        certain taxpayers.--If a taxpayer--
                                  (I) does not account for 
                                inventories under section 471, 
                                and
                                  (II) is not required to 
                                capitalize indirect costs under 
                                section 263A,
                        the taxpayer may elect, solely for 
                        purposes of subparagraph (B), to treat 
                        the basis of any apparently wholesome 
                        food as being equal to 25 percent of 
                        the fair market value of such food.
                          (v) Determination of fair market 
                        value.--In the case of any such 
                        contribution of apparently wholesome 
                        food which cannot or will not be sold 
                        solely by reason of internal standards 
                        of the taxpayer, lack of market, or 
                        similar circumstances, or by reason of 
                        being produced by the taxpayer 
                        exclusively for the purposes of 
                        transferring the food to an 
                        organization described in subparagraph 
                        (A), the fair market value of such 
                        contribution shall be determined--
                                  (I) without regard to such 
                                internal standards, such lack 
                                of market, such circumstances, 
                                or such exclusive purpose, and
                                  (II) by taking into account 
                                the price at which the same or 
                                substantially the same food 
                                items (as to both type and 
                                quality) are sold by the 
                                taxpayer at the time of the 
                                contribution (or, if not so 
                                sold at such time, in the 
                                recent past).
                          (vi) Apparently wholesome food.--For 
                        purposes of this subparagraph, the term 
                        ``apparently wholesome food'' has the 
                        meaning given to such term by section 
                        22(b)(2) of the Bill Emerson Good 
                        Samaritan Food Donation Act (42 U.S.C. 
                        1791(b)(2)), as in effect on the date 
                        of the enactment of this subparagraph.
                  (D) This paragraph shall not apply to so much 
                of the amount of the gain described in 
                paragraph (1)(A) which would be long-term 
                capital gain but for the application of 
                sections 617, 1245, 1250, or 1252.
          (4) Special rule for contributions of scientific 
        property used for research.--
                  (A) Limit on reduction.--In the case of a 
                qualified research contribution, the reduction 
                under paragraph (1)(A) shall be no greater than 
                the amount determined under paragraph (3)(B).
                  (B) Qualified research contributions.--For 
                purposes of this paragraph, the term 
                ``qualified research contribution'' means a 
                charitable contribution by a corporation of 
                tangible personal property described in 
                paragraph (1) of section 1221(a), but only if--
                          (i) the contribution is to an 
                        organization described in subparagraph 
                        (A) or subparagraph (B) of section 
                        41(e)(6),
                          (ii) the property is constructed or 
                        assembled by the taxpayer,
                          (iii) the contribution is made not 
                        later than 2 years after the date the 
                        construction or assembly of the 
                        property is substantially completed,
                          (iv) the original use of the property 
                        is by the donee,
                          (v) the property is scientific 
                        equipment or apparatus substantially 
                        all of the use of which by the donee is 
                        for research or experimentation (within 
                        the meaning of section 174), or for 
                        research training, in the United States 
                        in physical or biological sciences,
                          (vi) the property is not transferred 
                        by the donee in exchange for money, 
                        other property, or services, and
                          (vii) the taxpayer receives from the 
                        donee a written statement representing 
                        that its use and disposition of the 
                        property will be in accordance with the 
                        provisions of clauses (v) and (vi).
                  (C) Construction of property by taxpayer.--
                For purposes of this paragraph, property shall 
                be treated as constructed by the taxpayer only 
                if the cost of the parts used in the 
                construction of such property (other than parts 
                manufactured by the taxpayer or a related 
                person) do not exceed 50 percent of the 
                taxpayer's basis in such property.
                  (D) Corporation.--For purposes of this 
                paragraph, the term ``corporation'' shall not 
                include--
                          (i) an S corporation,
                          (ii) a personal holding company (as 
                        defined in section 542), and
                          (iii) a service organization (as 
                        defined in section 414(m)(3)).
          (5) Special rule for contributions of stock for which 
        market quotations are readily available.--
                  (A) In general.--Subparagraph (B)(ii) of 
                paragraph (1) shall not apply to any 
                contribution of qualified appreciated stock.
                  (B) Qualified appreciated stock.--Except as 
                provided in subparagraph (C), for purposes of 
                this paragraph, the term ``qualified 
                appreciated stock'' means any stock of a 
                corporation--
                          (i) for which (as of the date of the 
                        contribution) market quotations are 
                        readily available on an established 
                        securities market, and
                          (ii) which is capital gain property 
                        (as defined in subsection 
                        (b)(1)(C)(iv)).
                  (C) Donor may not contribute more than 10 
                percent of stock of corporation.--
                          (i) In general.--In the case of any 
                        donor, the term ``qualified appreciated 
                        stock'' shall not include any stock of 
                        a corporation contributed by the donor 
                        in a contribution to which paragraph 
                        (1)(B)(ii) applies (determined without 
                        regard to this paragraph) to the extent 
                        that the amount of the stock so 
                        contributed (when increased by the 
                        aggregate amount of all prior such 
                        contributions by the donor of stock in 
                        such corporation) exceeds 10 percent 
                        (in value) of all of the outstanding 
                        stock of such corporation.
                          (ii) Special rule.--For purposes of 
                        clause (i), an individual shall be 
                        treated as making all contributions 
                        made by any member of his family (as 
                        defined in section 267(c)(4)).
          (7) Recapture of deduction on certain dispositions of 
        exempt use property.--
                  (A) In general.--In the case of an applicable 
                disposition of applicable property, there shall 
                be included in the income of the donor of such 
                property for the taxable year of such donor in 
                which the applicable disposition occurs an 
                amount equal to the excess (if any) of--
                          (i) the amount of the deduction 
                        allowed to the donor under this section 
                        with respect to such property, over
                          (ii) the donor's basis in such 
                        property at the time such property was 
                        contributed.
                  (B) Applicable disposition.--For purposes of 
                this paragraph, the term ``applicable 
                disposition'' means any sale, exchange, or 
                other disposition by the donee of applicable 
                property--
                          (i) after the last day of the taxable 
                        year of the donor in which such 
                        property was contributed, and
                          (ii) before the last day of the 3-
                        year period beginning on the date of 
                        the contribution of such property,
                unless the donee makes a certification in 
                accordance with subparagraph (D).
                  (C) Applicable property.--For purposes of 
                this paragraph, the term ``applicable 
                property'' means charitable deduction property 
                (as defined in section 6050L(a)(2)(A))--
                          (i) which is tangible personal 
                        property the use of which is identified 
                        by the donee as related to the purpose 
                        or function constituting the basis of 
                        the donee's exemption under section 
                        501, and
                          (ii) for which a deduction in excess 
                        of the donor's basis is allowed.
                  (D) Certification.--A certification meets the 
                requirements of this subparagraph if it is a 
                written statement which is signed under penalty 
                of perjury by an officer of the donee 
                organization and--
                          (i) which--
                                  (I) certifies that the use of 
                                the property by the donee was 
                                substantial and related to the 
                                purpose or function 
                                constituting the basis for the 
                                donee's exemption under section 
                                501, and
                                  (II) describes how the 
                                property was used and how such 
                                use furthered such purpose or 
                                function, or
                          (ii) which--
                                  (I) states the intended use 
                                of the property by the donee at 
                                the time of the contribution, 
                                and
                                  (II) certifies that such 
                                intended use has become 
                                impossible or infeasible to 
                                implement.
  (f) Disallowance of deduction in certain cases and special 
rules.--
          (1) In general.--No deduction shall be allowed under 
        this section for a contribution to or for the use of an 
        organization or trust described in section 508(d) or 
        4948(c)(4) subject to the conditions specified in such 
        sections.
          (2) Contributions of property placed in trust.--
                  (A) Remainder interest.--In the case of 
                property transferred in trust, no deduction 
                shall be allowed under this section for the 
                value of a contribution of a remainder interest 
                unless the trust is a charitable remainder 
                annuity trust or a charitable remainder 
                unitrust (described in section 664), or a 
                pooled income fund (described in section 
                642(c)(5)).
                  (B) Income interests, etc..--No deduction 
                shall be allowed under this section for the 
                value of any interest in property (other than a 
                remainder interest) transferred in trust unless 
                the interest is in the form of a guaranteed 
                annuity or the trust instrument specifies that 
                the interest is a fixed percentage distributed 
                yearly of the fair market value of the trust 
                property (to be determined yearly) and the 
                grantor is treated as the owner of such 
                interest for purposes of applying section 671. 
                If the donor ceases to be treated as the owner 
                of such an interest for purposes of applying 
                section 671, at the time the donor ceases to be 
                so treated, the donor shall for purposes of 
                this chapter be considered as having received 
                an amount of income equal to the amount of any 
                deduction he received under this section for 
                the contribution reduced by the discounted 
                value of all amounts of income earned by the 
                trust and taxable to him before the time at 
                which he ceases to be treated as the owner of 
                the interest. Such amounts of income shall be 
                discounted to the date of the contribution. The 
                Secretary shall prescribe such regulations as 
                may be necessary to carry out the purposes of 
                this subparagraph.
                  (C) Denial of deduction in case of payments 
                by certain trusts.--In any case in which a 
                deduction is allowed under this section for the 
                value of an interest in property described in 
                subparagraph (B), transferred in trust, no 
                deduction shall be allowed under this section 
                to the grantor or any other person for the 
                amount of any contribution made by the trust 
                with respect to such interest.
                  (D) Exception.--This paragraph shall not 
                apply in a case in which the value of all 
                interests in property transferred in trust are 
                deductible under subsection (a).
          (3) Denial of deduction in case of certain 
        contributions of partial interests in property.--
                  (A) In general.--In the case of a 
                contribution (not made by a transfer in trust) 
                of an interest in property which consists of 
                less than the taxpayer's entire interest in 
                such property, a deduction shall be allowed 
                under this section only to the extent that the 
                value of the interest contributed would be 
                allowable as a deduction under this section if 
                such interest had been transferred in trust. 
                For purposes of this subparagraph, a 
                contribution by a taxpayer of the right to use 
                property shall be treated as a contribution of 
                less than the taxpayer's entire interest in 
                such property.
                  (B) Exceptions.--Subparagraph (A) shall not 
                apply to--
                          (i) a contribution of a remainder 
                        interest in a personal residence or 
                        farm,
                          (ii) a contribution of an undivided 
                        portion of the taxpayer's entire 
                        interest in property, and
                          (iii) a qualified conservation 
                        contribution.
          (4) Valuation of remainder interest in real 
        property.--For purposes of this section, in determining 
        the value of a remainder interest in real property, 
        depreciation (computed on the straight line method) and 
        depletion of such property shall be taken into account, 
        and such value shall be discounted at a rate of 6 
        percent per annum, except that the Secretary may 
        prescribe a different rate.
          (5) Reduction for certain interest.--If, in 
        connection with any charitable contribution, a 
        liability is assumed by the recipient or by any other 
        person, or if a charitable contribution is of property 
        which is subject to a liability, then, to the extent 
        necessary to avoid the duplication of amounts, the 
        amount taken into account for purposes of this section 
        as the amount of the charitable contribution--
                  (A) shall be reduced for interest (i) which 
                has been paid (or is to be paid) by the 
                taxpayer, (ii) which is attributable to the 
                liability, and (iii) which is attributable to 
                any period after the making of the 
                contribution, and
                  (B) in the case of a bond, shall be further 
                reduced for interest (i) which has been paid 
                (or is to be paid) by the taxpayer on 
                indebtedness incurred or continued to purchase 
                or carry such bond, and (ii) which is 
                attributable to any period before the making of 
                the contribution.
        The reduction pursuant to subparagraph (B) shall not 
        exceed the interest (including interest equivalent) on 
        the bond which is attributable to any period before the 
        making of the contribution and which is not (under the 
        taxpayer's method of accounting) includible in the 
        gross income of the taxpayer for any taxable year. For 
        purposes of this paragraph, the term ``bond'' means any 
        bond, debenture, note, or certificate or other evidence 
        of indebtedness.
          (6) Deductions for out-of-pocket expenditures.--No 
        deduction shall be allowed under this section for an 
        out-of-pocket expenditure made by any person on behalf 
        of an organization described in subsection (c) (other 
        than an organization described in section 501(h)(5) 
        (relating to churches, etc.)) if the expenditure is 
        made for the purpose of influencing legislation (within 
        the meaning of section 501(c)(3)).
          (7) Reformations to comply with paragraph (2)
                  (A) In general.--A deduction shall be allowed 
                under subsection (a) in respect of any 
                qualified reformation (within the meaning of 
                section 2055(e)(3)(B)).
                  (B) Rules similar to section 2055(e)(3) to 
                apply.--For purposes of this paragraph, rules 
                similar to the rules of section 2055(e)(3) 
                shall apply.
          (8) Substantiation requirement for certain 
        contributions.--
                  (A) General rule.--No deduction shall be 
                allowed under subsection (a) for any 
                contribution of $250 or more unless the 
                taxpayer substantiates the contribution by a 
                contemporaneous written acknowledgment of the 
                contribution by the donee organization that 
                meets the requirements of subparagraph (B).
                  (B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following 
                information:
                          (i) The amount of cash and a 
                        description (but not value) of any 
                        property other than cash contributed.
                          (ii) Whether the donee organization 
                        provided any goods or services in 
                        consideration, in whole or in part, for 
                        any property described in clause (i).
                          (iii) A description and good faith 
                        estimate of the value of any goods or 
                        services referred to in clause (ii) or, 
                        if such goods or services consist 
                        solely of intangible religious 
                        benefits, a statement to that effect.
                For purposes of this subparagraph, the term 
                ``intangible religious benefit'' means any 
                intangible religious benefit which is provided 
                by an organization organized exclusively for 
                religious purposes and which generally is not 
                sold in a commercial transaction outside the 
                donative context.
                  (C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgment shall be 
                considered to be contemporaneous if the 
                taxpayer obtains the acknowledgment on or 
                before the earlier of--
                          (i) the date on which the taxpayer 
                        files a return for the taxable year in 
                        which the contribution was made, or
                          (ii) the due date (including 
                        extensions) for filing such return.
                  (D) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph, including regulations that may 
                provide that some or all of the requirements of 
                this paragraph do not apply in appropriate 
                cases.
          (9) Denial of deduction where contribution for 
        lobbying activities.--No deduction shall be allowed 
        under this section for a contribution to an 
        organization which conducts activities to which section 
        162(e)(1) applies on matters of direct financial 
        interest to the donor's trade or business, if a 
        principal purpose of the contribution was to avoid 
        Federal income tax by securing a deduction for such 
        activities under this section which would be disallowed 
        by reason of section 162(e) if the donor had conducted 
        such activities directly. No deduction shall be allowed 
        under section 162(a) for any amount for which a 
        deduction is disallowed under the preceding sentence.
          (10) Split-dollar life insurance, annuity, and 
        endowment contracts.--
                  (A) In general.--Nothing in this section or 
                in section 545(b)(2), 642(c), 2055, 2106(a)(2), 
                or 2522 shall be construed to allow a 
                deduction, and no deduction shall be allowed, 
                for any transfer to or for the use of an 
                organization described in subsection (c) if in 
                connection with such transfer--
                          (i) the organization directly or 
                        indirectly pays, or has previously 
                        paid, any premium on any personal 
                        benefit contract with respect to the 
                        transferor, or
                          (ii) there is an understanding or 
                        expectation that any person will 
                        directly or indirectly pay any premium 
                        on any personal benefit contract with 
                        respect to the transferor.
                  (B) Personal benefit contract.--For purposes 
                of subparagraph (A), the term ``personal 
                benefit contract'' means, with respect to the 
                transferor, any life insurance, annuity, or 
                endowment contract if any direct or indirect 
                beneficiary under such contract is the 
                transferor, any member of the transferor's 
                family, or any other person (other than an 
                organization described in subsection (c)) 
                designated by the transferor.
                  (C) Application to charitable remainder 
                trusts.--In the case of a transfer to a trust 
                referred to in subparagraph (E), references in 
                subparagraphs (A) and (F) to an organization 
                described in subsection (c) shall be treated as 
                a reference to such trust.
                  (D) Exception for certain annuity 
                contracts.--If, in connection with a transfer 
                to or for the use of an organization described 
                in subsection (c), such organization incurs an 
                obligation to pay a charitable gift annuity (as 
                defined in section 501(m)) and such 
                organization purchases any annuity contract to 
                fund such obligation, persons receiving 
                payments under the charitable gift annuity 
                shall not be treated for purposes of 
                subparagraph (B) as indirect beneficiaries 
                under such contract if--
                          (i) such organization possesses all 
                        of the incidents of ownership under 
                        such contract,
                          (ii) such organization is entitled to 
                        all the payments under such contract, 
                        and
                          (iii) the timing and amount of 
                        payments under such contract are 
                        substantially the same as the timing 
                        and amount of payments to each such 
                        person under such obligation (as such 
                        obligation is in effect at the time of 
                        such transfer).
                  (E) Exception for certain contracts held by 
                charitable remainder trusts.--A person shall 
                not be treated for purposes of subparagraph (B) 
                as an indirect beneficiary under any life 
                insurance, annuity, or endowment contract held 
                by a charitable remainder annuity trust or a 
                charitable remainder unitrust (as defined in 
                section 664(d)) solely by reason of being 
                entitled to any payment referred to in 
                paragraph (1)(A) or (2)(A) of section 664(d) 
                if--
                          (i) such trust possesses all of the 
                        incidents of ownership under such 
                        contract, and
                          (ii) such trust is entitled to all 
                        the payments under such contract.
                  (F) Excise tax on premiums paid.--
                          (i) In general.--There is hereby 
                        imposed on any organization described 
                        in subsection (c) an excise tax equal 
                        to the premiums paid by such 
                        organization on any life insurance, 
                        annuity, or endowment contract if the 
                        payment of premiums on such contract is 
                        in connection with a transfer for which 
                        a deduction is not allowable under 
                        subparagraph (A), determined without 
                        regard to when such transfer is made.
                          (ii) Payments by other persons.--For 
                        purposes of clause (i), payments made 
                        by any other person pursuant to an 
                        understanding or expectation referred 
                        to in subparagraph (A) shall be treated 
                        as made by the organization.
                          (iii) Reporting.--Any organization on 
                        which tax is imposed by clause (i) with 
                        respect to any premium shall file an 
                        annual return which includes--
                                  (I) the amount of such 
                                premiums paid during the year 
                                and the name and TIN of each 
                                beneficiary under the contract 
                                to which the premium relates, 
                                and
                                  (II) such other information 
                                as the Secretary may require.
                        The penalties applicable to returns 
                        required under section 6033 shall apply 
                        to returns required under this clause. 
                        Returns required under this clause 
                        shall be furnished at such time and in 
                        such manner as the Secretary shall by 
                        forms or regulations require.
                          (iv) Certain rules to apply.--The tax 
                        imposed by this subparagraph shall be 
                        treated as imposed by chapter 42 for 
                        purposes of this title other than 
                        subchapter B of chapter 42.
                  (G) Special rule where state requires 
                specification of charitable gift annuitant in 
                contract.--In the case of an obligation to pay 
                a charitable gift annuity referred to in 
                subparagraph (D) which is entered into under 
                the laws of a State which requires, in order 
                for the charitable gift annuity to be exempt 
                from insurance regulation by such State, that 
                each beneficiary under the charitable gift 
                annuity be named as a beneficiary under an 
                annuity contract issued by an insurance company 
                authorized to transact business in such State, 
                the requirements of clauses (i) and (ii) of 
                subparagraph (D) shall be treated as met if--
                          (i) such State law requirement was in 
                        effect on February 8, 1999,
                          (ii) each such beneficiary under the 
                        charitable gift annuity is a bona fide 
                        resident of such State at the time the 
                        obligation to pay a charitable gift 
                        annuity is entered into, and
                          (iii) the only persons entitled to 
                        payments under such contract are 
                        persons entitled to payments as 
                        beneficiaries under such obligation on 
                        the date such obligation is entered 
                        into.
                  (H) Member of family.--For purposes of this 
                paragraph, an individual's family consists of 
                the individual's grandparents, the grandparents 
                of such individual's spouse, the lineal 
                descendants of such grandparents, and any 
                spouse of such a lineal descendant.
                  (I) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph, including regulations to 
                prevent the avoidance of such purposes.
          (11) Qualified appraisal and other documentation for 
        certain contributions.--
                  (A) In general.--
                          (i) Denial of deduction.--In the case 
                        of an individual, partnership, or 
                        corporation, no deduction shall be 
                        allowed under subsection (a) for any 
                        contribution of property for which a 
                        deduction of more than $500 is claimed 
                        unless such person meets the 
                        requirements of subparagraphs (B), (C), 
                        and (D), as the case may be, with 
                        respect to such contribution.
                          (ii) Exceptions.--
                                  (I) Readily valued 
                                property.--Subparagraphs (C) 
                                and (D) shall not apply to 
                                cash, property described in 
                                subsection (e)(1)(B)(iii) or 
                                section 1221(a)(1), publicly 
                                traded securities (as defined 
                                in section 6050L(a)(2)(B)), and 
                                any qualified vehicle described 
                                in paragraph (12)(A)(ii) for 
                                which an acknowledgement under 
                                paragraph (12)(B)(iii) is 
                                provided.
                                  (II) Reasonable cause.--
                                Clause (i) shall not apply if 
                                it is shown that the failure to 
                                meet such requirements is due 
                                to reasonable cause and not to 
                                willful neglect.
                  (B) Property description for contributions of 
                more than $500.--In the case of contributions 
                of property for which a deduction of more than 
                $500 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership or corporation includes with the 
                return for the taxable year in which the 
                contribution is made a description of such 
                property and such other information as the 
                Secretary may require. The requirements of this 
                subparagraph shall not apply to a C corporation 
                which is not a personal service corporation or 
                a closely held C corporation.
                  (C) Qualified appraisal for contributions of 
                more than $5,000.--In the case of contributions 
                of property for which a deduction of more than 
                $5,000 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership, or corporation obtains a qualified 
                appraisal of such property and attaches to the 
                return for the taxable year in which such 
                contribution is made such information regarding 
                such property and such appraisal as the 
                Secretary may require.
                  (D) Substantiation for contributions of more 
                than $500,000.--In the case of contributions of 
                property for which a deduction of more than 
                $500,000 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership, or corporation attaches to the 
                return for the taxable year a qualified 
                appraisal of such property.
                  (E) Qualified appraisal and appraiser.--For 
                purposes of this paragraph--
                          (i) Qualified appraisal.--The term 
                        ``qualified appraisal'' means, with 
                        respect to any property, an appraisal 
                        of such property which--
                                  (I) is treated for purposes 
                                of this paragraph as a 
                                qualified appraisal under 
                                regulations or other guidance 
                                prescribed by the Secretary, 
                                and
                                  (II) is conducted by a 
                                qualified appraiser in 
                                accordance with generally 
                                accepted appraisal standards 
                                and any regulations or other 
                                guidance prescribed under 
                                subclause (I).
                          (ii) Qualified appraiser.--Except as 
                        provided in clause (iii), the term 
                        ``qualified appraiser'' means an 
                        individual who--
                                  (I) has earned an appraisal 
                                designation from a recognized 
                                professional appraiser 
                                organization or has otherwise 
                                met minimum education and 
                                experience requirements set 
                                forth in regulations prescribed 
                                by the Secretary,
                                  (II) regularly performs 
                                appraisals for which the 
                                individual receives 
                                compensation, and
                                  (III) meets such other 
                                requirements as may be 
                                prescribed by the Secretary in 
                                regulations or other guidance.
                          (iii) Specific appraisals.--An 
                        individual shall not be treated as a 
                        qualified appraiser with respect to any 
                        specific appraisal unless--
                                  (I) the individual 
                                demonstrates verifiable 
                                education and experience in 
                                valuing the type of property 
                                subject to the appraisal, and
                                  (II) the individual has not 
                                been prohibited from practicing 
                                before the Internal Revenue 
                                Service by the Secretary under 
                                section 330(c) of title 31, 
                                United States Code, at any time 
                                during the 3-year period ending 
                                on the date of the appraisal.
                  (F) Aggregation of similar items of 
                property.--For purposes of determining 
                thresholds under this paragraph, property and 
                all similar items of property donated to 1 or 
                more donees shall be treated as 1 property.
                  (G) Special rule for pass-thru entities.--In 
                the case of a partnership or S corporation, 
                this paragraph shall be applied at the entity 
                level, except that the deduction shall be 
                denied at the partner or shareholder level.
                  (H) Regulations.--The Secretary may prescribe 
                such regulations as may be necessary or 
                appropriate to carry out the purposes of this 
                paragraph, including regulations that may 
                provide that some or all of the requirements of 
                this paragraph do not apply in appropriate 
                cases.
          (12) Contributions of used motor vehicles, boats, and 
        airplanes.--
                  (A) In general.--In the case of a 
                contribution of a qualified vehicle the claimed 
                value of which exceeds $500--
                          (i) paragraph (8) shall not apply and 
                        no deduction shall be allowed under 
                        subsection (a) for such contribution 
                        unless the taxpayer substantiates the 
                        contribution by a contemporaneous 
                        written acknowledgement of the 
                        contribution by the donee organization 
                        that meets the requirements of 
                        subparagraph (B) and includes the 
                        acknowledgement with the taxpayer's 
                        return of tax which includes the 
                        deduction, and
                          (ii) if the organization sells the 
                        vehicle without any significant 
                        intervening use or material improvement 
                        of such vehicle by the organization, 
                        the amount of the deduction allowed 
                        under subsection (a) shall not exceed 
                        the gross proceeds received from such 
                        sale.
                  (B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following 
                information:
                          (i) The name and taxpayer 
                        identification number of the donor.
                          (ii) The vehicle identification 
                        number or similar number.
                          (iii) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        applies--
                                  (I) a certification that the 
                                vehicle was sold in an arm's 
                                length transaction between 
                                unrelated parties,
                                  (II) the gross proceeds from 
                                the sale, and
                                  (III) a statement that the 
                                deductible amount may not 
                                exceed the amount of such gross 
                                proceeds.
                          (iv) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        does not apply--
                                  (I) a certification of the 
                                intended use or material 
                                improvement of the vehicle and 
                                the intended duration of such 
                                use, and
                                  (II) a certification that the 
                                vehicle would not be 
                                transferred in exchange for 
                                money, other property, or 
                                services before completion of 
                                such use or improvement.
                          (v) Whether the donee organization 
                        provided any goods or services in 
                        consideration, in whole or in part, for 
                        the qualified vehicle.
                          (vi) A description and good faith 
                        estimate of the value of any goods or 
                        services referred to in clause (v) or, 
                        if such goods or services consist 
                        solely of intangible religious benefits 
                        (as defined in paragraph (8)(B)), a 
                        statement to that effect.
                  (C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgement shall be 
                considered to be contemporaneous if the donee 
                organization provides it within 30 days of--
                          (i) the sale of the qualified 
                        vehicle, or
                          (ii) in the case of an 
                        acknowledgement including a 
                        certification described in subparagraph 
                        (B)(iv), the contribution of the 
                        qualified vehicle.
                  (D) Information to Secretary.--A donee 
                organization required to provide an 
                acknowledgement under this paragraph shall 
                provide to the Secretary the information 
                contained in the acknowledgement. Such 
                information shall be provided at such time and 
                in such manner as the Secretary may prescribe.
                  (E) Qualified vehicle.--For purposes of this 
                paragraph, the term ``qualified vehicle'' means 
                any--
                          (i) motor vehicle manufactured 
                        primarily for use on public streets, 
                        roads, and highways,
                          (ii) boat, or
                          (iii) airplane.
                Such term shall not include any property which 
                is described in section 1221(a)(1).
                  (F) Regulations or other guidance.--The 
                Secretary shall prescribe such regulations or 
                other guidance as may be necessary to carry out 
                the purposes of this paragraph. The Secretary 
                may prescribe regulations or other guidance 
                which exempts sales by the donee organization 
                which are in direct furtherance of such 
                organization's charitable purpose from the 
                requirements of subparagraphs (A)(ii) and 
                (B)(iv)(II).
          (13) Contributions of certain interests in buildings 
        located in registered historic districts.--
                  (A) In general.--No deduction shall be 
                allowed with respect to any contribution 
                described in subparagraph (B) unless the 
                taxpayer includes with the return for the 
                taxable year of the contribution a $500 filing 
                fee.
                  (B) Contribution described.--A contribution 
                is described in this subparagraph if such 
                contribution is a qualified conservation 
                contribution (as defined in subsection (h)) 
                which is a restriction with respect to the 
                exterior of a building described in subsection 
                (h)(4)(C)(ii) and for which a deduction is 
                claimed in excess of $10,000.
                  (C) Dedication of fee.--Any fee collected 
                under this paragraph shall be used for the 
                enforcement of the provisions of subsection 
                (h).
          (14) Reduction for amounts attributable to 
        rehabilitation credit.--In the case of any qualified 
        conservation contribution (as defined in subsection 
        (h)), the amount of the deduction allowed under this 
        section shall be reduced by an amount which bears the 
        same ratio to the fair market value of the contribution 
        as--
                  (A) the sum of the credits allowed to the 
                taxpayer under section 47 for the 5 preceding 
                taxable years with respect to any building 
                which is a part of such contribution, bears to
                  (B) the fair market value of the building on 
                the date of the contribution.
          (15) Special rule for taxidermy property.--
                  (A) Basis.--For purposes of this section and 
                notwithstanding section 1012, in the case of a 
                charitable contribution of taxidermy property 
                which is made by the person who prepared, 
                stuffed, or mounted the property or by any 
                person who paid or incurred the cost of such 
                preparation, stuffing, or mounting, only the 
                cost of the preparing, stuffing, or mounting 
                shall be included in the basis of such 
                property.
                  (B) Taxidermy property.--For purposes of this 
                section, the term ``taxidermy property'' means 
                any work of art which--
                          (i) is the reproduction or 
                        preservation of an animal, in whole or 
                        in part,
                          (ii) is prepared, stuffed, or mounted 
                        for purposes of recreating one or more 
                        characteristics of such animal, and
                          (iii) contains a part of the body of 
                        the dead animal.
          (16) Contributions of clothing and household items.--
                  (A) In general.--In the case of an 
                individual, partnership, or corporation, no 
                deduction shall be allowed under subsection (a) 
                for any contribution of clothing or a household 
                item unless such clothing or household item is 
                in good used condition or better.
                  (B) Items of minimal value.--Notwithstanding 
                subparagraph (A), the Secretary may by 
                regulation deny a deduction under subsection 
                (a) for any contribution of clothing or a 
                household item which has minimal monetary 
                value.
                  (C) Exception for certain property.--
                Subparagraphs (A) and (B) shall not apply to 
                any contribution of a single item of clothing 
                or a household item for which a deduction of 
                more than $500 is claimed if the taxpayer 
                includes with the taxpayer's return a qualified 
                appraisal with respect to the property.
                  (D) Household items.--For purposes of this 
                paragraph--
                          (i) In general.--The term ``household 
                        items'' includes furniture, 
                        furnishings, electronics, appliances, 
                        linens, and other similar items.
                          (ii) Excluded items.--Such term does 
                        not include--
                                  (I) food,
                                  (II) paintings, antiques, and 
                                other objects of art,
                                  (III) jewelry and gems, and
                                  (IV) collections.
                  (E) Special rule for pass-thru entities.--In 
                the case of a partnership or S corporation, 
                this paragraph shall be applied at the entity 
                level, except that the deduction shall be 
                denied at the partner or shareholder level.
          (17) Recordkeeping.--No deduction shall be allowed 
        under subsection (a) for any contribution of a cash, 
        check, or other monetary gift unless the donor 
        maintains as a record of such contribution a bank 
        record or a written communication from the donee 
        showing the name of the donee organization, the date of 
        the contribution, and the amount of the contribution.
          (18) Contributions to donor advised funds.--A 
        deduction otherwise allowed under subsection (a) for 
        any contribution to a donor advised fund (as defined in 
        section 4966(d)(2)) shall only be allowed if--
                  (A) the sponsoring organization (as defined 
                in section 4966(d)(1)) with respect to such 
                donor advised fund is not--
                          (i) described in paragraph (3), (4), 
                        or (5) of subsection (c), or
                          (ii) a type III supporting 
                        organization (as defined in section 
                        4943(f)(5)(A)) which is not a 
                        functionally integrated type III 
                        supporting organization (as defined in 
                        section 4943(f)(5)(B)), and
                  (B) the taxpayer obtains a contemporaneous 
                written acknowledgment (determined under rules 
                similar to the rules of paragraph (8)(C)) from 
                the sponsoring organization (as so defined) of 
                such donor advised fund that such organization 
                has exclusive legal control over the assets 
                contributed.
  (g) Amounts paid to maintain certain students as members of 
taxpayer's household.--
          (1) In general.--Subject to the limitations provided 
        by paragraph (2), amounts paid by the taxpayer to 
        maintain an individual (other than a dependent, as 
        defined in [section 152] section 7706 (determined 
        without regard to subsections (b)(1), (b)(2), and 
        (d)(1)(B) thereof), or a relative of the taxpayer) as a 
        member of his household during the period that such 
        individual is--
                  (A) a member of the taxpayer's household 
                under a written agreement between the taxpayer 
                and an organization described in paragraph (2), 
                (3), or (4) of subsection (c) to implement a 
                program of the organization to provide 
                educational opportunities for pupils or 
                students in private homes, and
                  (B) a full-time pupil or student in the 
                twelfth or any lower grade at an educational 
                organization described in section 
                170(b)(1)(A)(ii) located in the United States, 
                shall be treated as amounts paid for the use of 
                the organization.
          (2) Limitations.--
                  (A) Amount.--Paragraph (1) shall apply to 
                amounts paid within the taxable year only to 
                the extent that such amounts do not exceed $50 
                multiplied by the number of full calendar 
                months during the taxable year which fall 
                within the period described in paragraph (1). 
                For purposes of the preceding sentence, if 15 
                or more days of a calendar month fall within 
                such period such month shall be considered as a 
                full calendar month.
                  (B) Compensation or reimbursement.--Paragraph 
                (1) shall not apply to any amount paid by the 
                taxpayer within the taxable year if the 
                taxpayer receives any money or other property 
                as compensation or reimbursement for 
                maintaining the individual in his household 
                during the period described in paragraph (1).
          (3) Relative defined.--For purposes of paragraph (1), 
        the term ``relative of the taxpayer'' means an 
        individual who, with respect to the taxpayer, bears any 
        of the relationships described in subparagraphs (A) 
        through (G) of [section 152(d)(2)] section 7706(d)(2).
          (4) No other amount allowed as deduction.--No 
        deduction shall be allowed under subsection (a) for any 
        amount paid by a taxpayer to maintain an individual as 
        a member of his household under a program described in 
        paragraph (1)(A) except as provided in this subsection.
  (h) Qualified conservation contribution.--
          (1) In general.--For purposes of subsection 
        (f)(3)(B)(iii), the term ``qualified conservation 
        contribution'' means a contribution--
                  (A) of a qualified real property interest,
                  (B) to a qualified organization,
                  (C) exclusively for conservation purposes.
          (2) Qualified real property interest.--For purposes 
        of this subsection, the term ``qualified real property 
        interest'' means any of the following interests in real 
        property:
                  (A) the entire interest of the donor other 
                than a qualified mineral interest,
                  (B) a remainder interest, and
                  (C) a restriction (granted in perpetuity) on 
                the use which may be made of the real property.
          (3) Qualified organization.--For purposes of 
        paragraph (1), the term ``qualified organization'' 
        means an organization which--
                  (A) is described in clause (v) or (vi) of 
                subsection (b)(1)(A), or
                  (B) is described in section 501(c)(3) and--
                          (i) meets the requirements of section 
                        509(a)(2), or
                          (ii) meets the requirements of 
                        section 509(a)(3) and is controlled by 
                        an organization described in 
                        subparagraph (A) or in clause (i) of 
                        this subparagraph.
          (4) Conservation purpose defined.--
                  (A) In general.--For purposes of this 
                subsection, the term ``conservation purpose'' 
                means--
                          (i) the preservation of land areas 
                        for outdoor recreation by, or the 
                        education of, the general public,
                          (ii) the protection of a relatively 
                        natural habitat of fish, wildlife, or 
                        plants, or similar ecosystem,
                          (iii) the preservation of open space 
                        (including farmland and forest land) 
                        where such preservation is--
                                  (I) for the scenic enjoyment 
                                of the general public, or
                                  (II) pursuant to a clearly 
                                delineated Federal, State, or 
                                local governmental conservation 
                                policy,
                        and will yield a significant public 
                        benefit, or
                          (iv) the preservation of an 
                        historically important land area or a 
                        certified historic structure.
                  (B) Special rules with respect to buildings 
                in registered historic districts.--In the case 
                of any contribution of a qualified real 
                property interest which is a restriction with 
                respect to the exterior of a building described 
                in subparagraph (C)(ii), such contribution 
                shall not be considered to be exclusively for 
                conservation purposes unless--
                          (i) such interest--
                                  (I) includes a restriction 
                                which preserves the entire 
                                exterior of the building 
                                (including the front, sides, 
                                rear, and height of the 
                                building), and
                                  (II) prohibits any change in 
                                the exterior of the building 
                                which is inconsistent with the 
                                historical character of such 
                                exterior,
                          (ii) the donor and donee enter into a 
                        written agreement certifying, under 
                        penalty of perjury, that the donee--
                                  (I) is a qualified 
                                organization (as defined in 
                                paragraph (3)) with a purpose 
                                of environmental protection, 
                                land conservation, open space 
                                preservation, or historic 
                                preservation, and
                                  (II) has the resources to 
                                manage and enforce the 
                                restriction and a commitment to 
                                do so, and
                          (iii) in the case of any contribution 
                        made in a taxable year beginning after 
                        the date of the enactment of this 
                        subparagraph, the taxpayer includes 
                        with the taxpayer's return for the 
                        taxable year of the contribution--
                                  (I) a qualified appraisal 
                                (within the meaning of 
                                subsection (f)(11)(E)) of the 
                                qualified property interest,
                                  (II) photographs of the 
                                entire exterior of the 
                                building, and
                                  (III) a description of all 
                                restrictions on the development 
                                of the building.
                  (C) Certified historic structure.--For 
                purposes of subparagraph (A)(iv), the term 
                ``certified historic structure'' means--
                          (i) any building, structure, or land 
                        area which is listed in the National 
                        Register, or
                          (ii) any building which is located in 
                        a registered historic district (as 
                        defined in section 47(c)(3)(B)) and is 
                        certified by the Secretary of the 
                        Interior to the Secretary as being of 
                        historic significance to the district.
        A building, structure, or land area satisfies the 
        preceding sentence if it satisfies such sentence either 
        at the time of the transfer or on the due date 
        (including extensions) for filing the transferor's 
        return under this chapter for the taxable year in which 
        the transfer is made.
          (5) Exclusively for conservation purposes.--For 
        purposes of this subsection--
                  (A) Conservation purpose must be protected.--
                A contribution shall not be treated as 
                exclusively for conservation purposes unless 
                the conservation purpose is protected in 
                perpetuity.
                  (B) No surface mining permitted.--
                          (i) In general.--Except as provided 
                        in clause (ii), in the case of a 
                        contribution of any interest where 
                        there is a retention of a qualified 
                        mineral interest, subparagraph (A) 
                        shall not be treated as met if at any 
                        time there may be extraction or removal 
                        of minerals by any surface mining 
                        method.
                          (ii) Special rule.--With respect to 
                        any contribution of property in which 
                        the ownership of the surface estate and 
                        mineral interests has been and remains 
                        separated, subparagraph (A) shall be 
                        treated as met if the probability of 
                        surface mining occurring on such 
                        property is so remote as to be 
                        negligible.
          (6) Qualified mineral interest.--For purposes of this 
        subsection, the term ``qualified mineral interest'' 
        means--
                  (A) subsurface oil, gas, or other minerals, 
                and
                  (B) the right to access to such minerals.
  (i) Standard mileage rate for use of passenger automobile.--
For purposes of computing the deduction under this section for 
use of a passenger automobile, the standard mileage rate shall 
be 14 cents per mile.
  (j) Denial of deduction for certain travel expenses.--No 
deduction shall be allowed under this section for traveling 
expenses (including amounts expended for meals and lodging) 
while away from home, whether paid directly or by 
reimbursement, unless there is no significant element of 
personal pleasure, recreation, or vacation in such travel.
  (l) Treatment of certain amounts paid to or for the benefit 
of institutions of higher education.--
          (1) In general.--No deduction shall be allowed under 
        this section for any amount described in paragraph (2).
          (2) Amount described.--For purposes of paragraph (1), 
        an amount is described in this paragraph if--
                  (A) the amount is paid by the taxpayer to or 
                for the benefit of an educational 
                organization--
                          (i) which is described in subsection 
                        (b)(1)(A)(ii), and
                          (ii) which is an institution of 
                        higher education (as defined in section 
                        3304(f)), and
                  (B) the taxpayer receives (directly or 
                indirectly) as a result of paying such amount 
                the right to purchase tickets for seating at an 
                athletic event in an athletic stadium of such 
                institution.
        If any portion of a payment is for the purchase of such 
        tickets, such portion and the remaining portion (if 
        any) of such payment shall be treated as separate 
        amounts for purposes of this subsection.
  (m) Certain donee income from intellectual property treated 
as an additional charitable contribution.--
          (1) Treatment as additional contribution.--In the 
        case of a taxpayer who makes a qualified intellectual 
        property contribution, the deduction allowed under 
        subsection (a) for each taxable year of the taxpayer 
        ending on or after the date of such contribution shall 
        be increased (subject to the limitations under 
        subsection (b)) by the applicable percentage of 
        qualified donee income with respect to such 
        contribution which is properly allocable to such year 
        under this subsection.
          (2) Reduction in additional deductions to extent of 
        initial deduction.--With respect to any qualified 
        intellectual property contribution, the deduction 
        allowed under subsection (a) shall be increased under 
        paragraph (1) only to the extent that the aggregate 
        amount of such increases with respect to such 
        contribution exceed the amount allowed as a deduction 
        under subsection (a) with respect to such contribution 
        determined without regard to this subsection.
          (3) Qualified donee income.--For purposes of this 
        subsection, the term ``qualified donee income'' means 
        any net income received by or accrued to the donee 
        which is properly allocable to the qualified 
        intellectual property.
          (4) Allocation of qualified donee income to taxable 
        years of donor.--For purposes of this subsection, 
        qualified donee income shall be treated as properly 
        allocable to a taxable year of the donor if such income 
        is received by or accrued to the donee for the taxable 
        year of the donee which ends within or with such 
        taxable year of the donor.
          (5) 10-year limitation.--Income shall not be treated 
        as properly allocable to qualified intellectual 
        property for purposes of this subsection if such income 
        is received by or accrued to the donee after the 10-
        year period beginning on the date of the contribution 
        of such property.
          (6) Benefit limited to life of intellectual 
        property.--Income shall not be treated as properly 
        allocable to qualified intellectual property for 
        purposes of this subsection if such income is received 
        by or accrued to the donee after the expiration of the 
        legal life of such property.
          (7) Applicable percentage.--For purposes of this 
        subsection, the term ``applicable percentage'' means 
        the percentage determined under the following table 
        which corresponds to a taxable year of the donor ending 
        on or after the date of the qualified intellectual 
        property contribution:

 
------------------------------------------------------------------------
 Taxable Year of Donor Ending on or
     After Date of Contribution:            Applicable Percentage:
------------------------------------------------------------------------
1st.................................  100
 ..
2nd.................................  100
 ..
3rd.................................  90
 ..
4th.................................  80
 ..
5th.................................  70
 ..
6th.................................  60
 ..
7th.................................  50
 ..
8th.................................  40
 ..
9th.................................  30
 ..
10th................................  20
 ..
11th................................  10
 ..
12th................................  10
 ..
------------------------------------------------------------------------

          (8) Qualified intellectual property contribution.--
        For purposes of this subsection, the term ``qualified 
        intellectual property contribution'' means any 
        charitable contribution of qualified intellectual 
        property--
                  (A) the amount of which taken into account 
                under this section is reduced by reason of 
                subsection (e)(1), and
                  (B) with respect to which the donor informs 
                the donee at the time of such contribution that 
                the donor intends to treat such contribution as 
                a qualified intellectual property contribution 
                for purposes of this subsection and section 
                6050L.
          (9) Qualified intellectual property.--For purposes of 
        this subsection, the term ``qualified intellectual 
        property'' means property described in subsection 
        (e)(1)(B)(iii) (other than property contributed to or 
        for the use of an organization described in subsection 
        (e)(1)(B)(ii)).
          (10) Other special rules.--
                  (A) Application of limitations on charitable 
                contributions.--Any increase under this 
                subsection of the deduction provided under 
                subsection (a) shall be treated for purposes of 
                subsection (b) as a deduction which is 
                attributable to a charitable contribution to 
                the donee to which such increase relates.
                  (B) Net income determined by donee.--The net 
                income taken into account under paragraph (3) 
                shall not exceed the amount of such income 
                reported under section 6050L(b)(1).
                  (C) Deduction limited to 12 taxable years.--
                Except as may be provided under subparagraph 
                (D)(i), this subsection shall not apply with 
                respect to any qualified intellectual property 
                contribution for any taxable year of the donor 
                after the 12th taxable year of the donor which 
                ends on or after the date of such contribution.
                  (D) Regulations.--The Secretary may issue 
                regulations or other guidance to carry out the 
                purposes of this subsection, including 
                regulations or guidance--
                          (i) modifying the application of this 
                        subsection in the case of a donor or 
                        donee with a short taxable year, and
                          (ii) providing for the determination 
                        of an amount to be treated as net 
                        income of the donee which is properly 
                        allocable to qualified intellectual 
                        property in the case of a donee who 
                        uses such property to further a purpose 
                        or function constituting the basis of 
                        the donee's exemption under section 501 
                        (or, in the case of a governmental 
                        unit, any purpose described in section 
                        170(c)) and does not possess a right to 
                        receive any payment from a third party 
                        with respect to such property.
  (n) Expenses paid by certain whaling captains in support of 
Native Alaskan subsistence whaling.--
          (1) In general.--In the case of an individual who is 
        recognized by the Alaska Eskimo Whaling Commission as a 
        whaling captain charged with the responsibility of 
        maintaining and carrying out sanctioned whaling 
        activities and who engages in such activities during 
        the taxable year, the amount described in paragraph (2) 
        (to the extent such amount does not exceed $10,000 for 
        the taxable year) shall be treated for purposes of this 
        section as a charitable contribution.
          (2) Amount described.--
                  (A) In general.--The amount described in this 
                paragraph is the aggregate of the reasonable 
                and necessary whaling expenses paid by the 
                taxpayer during the taxable year in carrying 
                out sanctioned whaling activities.
                  (B) Whaling expenses.--For purposes of 
                subparagraph (A), the term ``whaling expenses'' 
                includes expenses for--
                          (i) the acquisition and maintenance 
                        of whaling boats, weapons, and gear 
                        used in sanctioned whaling activities,
                          (ii) the supplying of food for the 
                        crew and other provisions for carrying 
                        out such activities, and
                          (iii) storage and distribution of the 
                        catch from such activities.
          (3) Sanctioned whaling activities.--For purposes of 
        this subsection, the term ``sanctioned whaling 
        activities'' means subsistence bowhead whale hunting 
        activities conducted pursuant to the management plan of 
        the Alaska Eskimo Whaling Commission.
          (4) Substantiation of expenses.--The Secretary shall 
        issue guidance requiring that the taxpayer substantiate 
        the whaling expenses for which a deduction is claimed 
        under this subsection, including by maintaining 
        appropriate written records with respect to the time, 
        place, date, amount, and nature of the expense, as well 
        as the taxpayer's eligibility for such deduction, and 
        that (to the extent provided by the Secretary) such 
        substantiation be provided as part of the taxpayer's 
        return of tax.
  (o) Special rules for fractional gifts.--
          (1) Denial of deduction in certain cases.--
                  (A) In general.--No deduction shall be 
                allowed for a contribution of an undivided 
                portion of a taxpayer's entire interest in 
                tangible personal property unless all interests 
                in the property are held immediately before 
                such contribution by--
                          (i) the taxpayer, or
                          (ii) the taxpayer and the donee.
                  (B) Exceptions.--The Secretary may, by 
                regulation, provide for exceptions to 
                subparagraph (A) in cases where all persons who 
                hold an interest in the property make 
                proportional contributions of an undivided 
                portion of the entire interest held by such 
                persons.
          (2) Valuation of subsequent gifts.--In the case of 
        any additional contribution, the fair market value of 
        such contribution shall be determined by using the 
        lesser of--
                  (A) the fair market value of the property at 
                the time of the initial fractional 
                contribution, or
                  (B) the fair market value of the property at 
                the time of the additional contribution.
          (3) Recapture of deduction in certain cases; addition 
        to tax.--
                  (A) Recapture.--The Secretary shall provide 
                for the recapture of the amount of any 
                deduction allowed under this section (plus 
                interest) with respect to any contribution of 
                an undivided portion of a taxpayer's entire 
                interest in tangible personal property--
                          (i) in any case in which the donor 
                        does not contribute all of the 
                        remaining interests in such property to 
                        the donee (or, if such donee is no 
                        longer in existence, to any person 
                        described in section 170(c)) on or 
                        before the earlier of--
                                  (I) the date that is 10 years 
                                after the date of the initial 
                                fractional contribution, or
                                  (II) the date of the death of 
                                the donor, and (ii) in any case 
                                in which the donee has not, 
                                during the period beginning on 
                                the date of the initial 
                                fractional contribution and 
                                ending on the date described in 
                                clause (i)--
                                  (I) had substantial physical 
                                possession of the property, and
                                  (II) used the property in a 
                                use which is related to a 
                                purpose or function 
                                constituting the basis for the 
                                organizations' exemption under 
                                section 501.
                  (B) Addition to tax.--The tax imposed under 
                this chapter for any taxable year for which 
                there is a recapture under subparagraph (A) 
                shall be increased by 10 percent of the amount 
                so recaptured.
          (4) Definitions.--For purposes of this subsection--
                  (A) Additional contribution.--The term 
                ``additional contribution'' means any 
                charitable contribution by the taxpayer of any 
                interest in property with respect to which the 
                taxpayer has previously made an initial 
                fractional contribution.
                  (B) Initial fractional contribution.--The 
                term ``initial fractional contribution'' means, 
                with respect to any taxpayer, the first 
                charitable contribution of an undivided portion 
                of the taxpayer's entire interest in any 
                tangible personal property.
  (p) Other cross references.--
          (1) For treatment of certain organizations providing 
        child care, see section 501(k).
          (2) For charitable contributions of estates and 
        trusts, see section 642(c).
          (3) For nondeductibility of contributions by common 
        trust funds, see section 584.
          (4) For charitable contributions of partners, see 
        section 702.
          (5) For charitable contributions of nonresident 
        aliens, see section 873.
          (6) For treatment of gifts for benefit of or use in 
        connection with the Naval Academy as gifts to or for 
        use of the United States, see section 6973 of title 10, 
        United States Code.
          (7) For treatment of gifts accepted by the Secretary 
        of State, the Director of the International 
        Communication Agency, or the Director of the United 
        States International Development Cooperation Agency, as 
        gifts to or for the use of the United States, see 
        section 25 of the State Department Basic Authorities 
        Act of 1956.
          (8) For treatment of gifts of money accepted by the 
        Attorney General for credit to the ``Commissary Funds 
        Federal Prisons'' as gifts to or for the use of the 
        United States, see section 4043 of title 18, United 
        States Code.
          (9) For charitable contributions to or for the use of 
        Indian tribal governments (or their subdivisions), see 
        section 7871.

           *       *       *       *       *       *       *

SEC. 172. NET OPERATING LOSS DEDUCTION.

  (a) Deduction allowed.--There shall be allowed as a deduction 
for the taxable year an amount equal to the lesser of--
          (1) the aggregate of the net operating loss 
        carryovers to such year, plus the net operating loss 
        carrybacks to such year, or
          (2) 80 percent of taxable income computed without 
        regard to the deduction allowable under this section.
For purposes of this subtitle, the term ``net operating loss 
deduction'' means the deduction allowed by this subsection.
  (b) Net operating loss carrybacks and carryovers.--
          (1) Years to which loss may be carried.--
                  (A) General rule.--Except as otherwise 
                provided in this paragraph, a net operating 
                loss for any taxable year--
                          (i) except as otherwise provided in 
                        this paragraph, shall not be a net 
                        operating loss carryback to any taxable 
                        year preceding the taxable year of such 
                        loss, and
                          (ii) shall be a net operating loss 
                        carryover to each taxable year 
                        following the taxable year of the loss.
                  (B) Farming losses.--
                          (i) In general.--In the case of any 
                        portion of a net operating loss for the 
                        taxable year which is a farming loss 
                        with respect to the taxpayer, such loss 
                        shall be a net operating loss carryback 
                        to each of the 2 taxable years 
                        preceding the taxable year of such 
                        loss.
                          (ii) Farming loss.--For purposes of 
                        this section, the term ``farming loss'' 
                        means the lesser of--
                                  (I) the amount which would be 
                                the net operating loss for the 
                                taxable year if only income and 
                                deductions attributable to 
                                farming businesses (as defined 
                                in section 263A(e)(4)) are 
                                taken into account, or
                                  (II) the amount of the net 
                                operating loss for such taxable 
                                year.
                          (iii) Coordination with paragraph 
                        (2).--For purposes of applying 
                        paragraph (2), a farming loss for any 
                        taxable year shall be treated as a 
                        separate net operating loss for such 
                        taxable year to be taken into account 
                        after the remaining portion of the net 
                        operating loss for such taxable year.
                          (iv) Election.--Any taxpayer entitled 
                        to a 2-year carryback under clause (i) 
                        from any loss year may elect not to 
                        have such clause apply to such loss 
                        year. Such election shall be made in 
                        such manner as prescribed by the 
                        Secretary and shall be made by the due 
                        date (including extensions of time) for 
                        filing the taxpayer's return for the 
                        taxable year of the net operating loss. 
                        Such election, once made for any 
                        taxable year, shall be irrevocable for 
                        such taxable year.
                  (C) Insurance companies.--In the case of an 
                insurance company (as defined in section 
                816(a)) other than a life insurance company, 
                the net operating loss for any taxable year--
                          (i) shall be a net operating loss 
                        carryback to each of the 2 taxable 
                        years preceding the taxable year of 
                        such loss, and
                          (ii) shall be a net operating loss 
                        carryover to each of the 20 taxable 
                        years following the taxable year of the 
                        loss.
          (2) Amount of carrybacks and carryovers.--The entire 
        amount of the net operating loss for any taxable year 
        (hereinafter in this section referred to as the ``loss 
        year'') shall be carried to the earliest of the taxable 
        years to which (by reason of paragraph (1)) such loss 
        may be carried. The portion of such loss which shall be 
        carried to each of the other taxable years shall be the 
        excess, if any, of the amount of such loss over the sum 
        of the taxable income for each of the prior taxable 
        years to which such loss may be carried. For purposes 
        of the preceding sentence, the taxable income for any 
        such prior taxable year shall--
                  (A) be computed with the modifications 
                specified in subsection (d) other than 
                paragraphs (1), (4), and (5) thereof, and by 
                determining the amount of the net operating 
                loss deduction without regard to the net 
                operating loss for the loss year or for any 
                taxable year thereafter,
                  (B) not be considered to be less than zero, 
                and
                  (C) not exceed the amount determined under 
                subsection (a)(2) for such prior taxable year.
          (3) Election to waive carryback.--Any taxpayer 
        entitled to a carryback period under paragraph (1) may 
        elect to relinquish the entire carryback period with 
        respect to a net operating loss for any taxable year. 
        Such election shall be made in such manner as may be 
        prescribed by the Secretary, and shall be made by the 
        due date (including extensions of time) for filing the 
        taxpayer's return for the taxable year of the net 
        operating loss for which the election is to be in 
        effect. Such election, once made for any taxable year, 
        shall be irrevocable for such taxable year.
  (c) Net operating loss defined.--For purposes of this 
section, the term ``net operating loss'' means the excess of 
the deductions allowed by this chapter over the gross income. 
Such excess shall be computed with the modifications specified 
in subsection (d).
  (d) Modifications.--The modifications referred to in this 
section are as follows:
          (1) Net operating loss deduction.--No net operating 
        loss deduction shall be allowed.
          (2) Capital gains and losses of taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation--
                  (A) the amount deductible on account of 
                losses from sales or exchanges of capital 
                assets shall not exceed the amount includable 
                on account of gains from sales or exchanges of 
                capital assets; and
                  (B) the exclusion provided by section 1202 
                shall not be allowed.
          [(3) Deduction for personal exemptions.--No deduction 
        shall be allowed under section 151 (relating to 
        personal exemptions). No deduction in lieu of any such 
        deduction shall be allowed.]
          (4) Nonbusiness deductions of taxpayers other than 
        corporations.--In the case of a taxpayer other than a 
        corporation, the deductions allowable by this chapter 
        which are not attributable to a taxpayer's trade or 
        business shall be allowed only to the extent of the 
        amount of the gross income not derived from such trade 
        or business. For purposes of the preceding sentence--
                  (A) any gain or loss from the sale or other 
                disposition of--
                          (i) property, used in the trade or 
                        business, of a character which is 
                        subject to the allowance for 
                        depreciation provided in section 167, 
                        or
                          (ii) real property used in the trade 
                        or business, shall be treated as 
                        attributable to the trade or business;
                  (B) the modifications specified in paragraphs 
                (1), (2)(B), and (3) shall be taken into 
                account;
                  (C) any deduction for casualty or theft 
                losses allowable under paragraph (2) or (3) of 
                section 165(c) shall be treated as attributable 
                to the trade or business; and
                  (D) any deduction allowed under section 404 
                to the extent attributable to contributions 
                which are made on behalf of an individual who 
                is an employee within the meaning of section 
                401(c)(1) shall not be treated as attributable 
                to the trade or business of such individual.
          (5) Computation of deduction for dividends 
        received.--The deductions allowed by sections 243 
        (relating to dividends received by corporations) and 
        245 (relating to dividends received from certain 
        foreign corporations) shall be computed without regard 
        to section 246(b) (relating to limitation on aggregate 
        amount of deductions).
          (6) Modifications related to real estate investment 
        trusts.--In the case of any taxable year for which part 
        II of subchapter M (relating to real estate investment 
        trusts) applies to the taxpayer--
                  (A) the net operating loss for such taxable 
                year shall be computed by taking into account 
                the adjustments described in section 857(b)(2) 
                (other than the deduction for dividends paid 
                described in section 857(b)(2)(B));
                  (B) where such taxable year is a ``prior 
                taxable year'' referred to in paragraph (2) of 
                subsection (b), the term ``taxable income'' in 
                such paragraph shall mean ``real estate 
                investment trust taxable income'' (as defined 
                in section 857(b)(2)); and
                  (C) subsection (a)(2) shall be applied by 
                substituting ``real estate investment trust 
                taxable income (as defined in section 857(b)(2) 
                but without regard to the deduction for 
                dividends paid (as defined in section 561))'' 
                for ``taxable income''.
          (8) Qualified business income deduction.--Any 
        deduction under section 199A shall not be allowed.
          (9) Deduction for foreign-derived intangible 
        income.--The deduction under section 250 shall not be 
        allowed.
  (e) Law applicable to computations.--In determining the 
amount of any net operating loss carryback or carryover to any 
taxable year, the necessary computations involving any other 
taxable year shall be made under the law applicable to such 
other taxable year.
  (f) Special rule for insurance companies.--In the case of an 
insurance company (as defined in section 816(a)) other than a 
life insurance company--
          (1) the amount of the deduction allowed under 
        subsection (a) shall be the aggregate of the net 
        operating loss carryovers to such year, plus the net 
        operating loss carrybacks to such year, and
          (2) subparagraph (C) of subsection (b)(2) shall not 
        apply.
  (g) Cross references.--
          (1) For treatment of net operating loss carryovers in 
        certain corporate acquisitions, see section 381.
          (2) For special limitation on net operating loss 
        carryovers in case of a corporate change of ownership, 
        see section 382.

           *       *       *       *       *       *       *

Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *

PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

           *       *       *       *       *       *       *

SEC. 199A. QUALIFIED BUSINESS INCOME.

  (a) Allowance of deduction.--In the case of a taxpayer other 
than a corporation, there shall be allowed as a deduction for 
any taxable year an amount equal to the lesser of--
          (1) the combined qualified business income amount of 
        the taxpayer, or
          (2) an amount equal to 20 percent of the excess (if 
        any) of--
                  (A) the taxable income of the taxpayer for 
                the taxable year, over
                  (B) the net capital gain (as defined in 
                section 1(h)) of the taxpayer for such taxable 
                year.
  (b) Combined qualified business income amount.--For purposes 
of this section--
          (1) In general.--The term ``combined qualified 
        business income amount'' means, with respect to any 
        taxable year, an amount equal to--
                  (A) the sum of the amounts determined under 
                paragraph (2) for each qualified trade or 
                business carried on by the taxpayer, plus
                  (B) 20 percent of the aggregate amount of the 
                qualified REIT dividends and qualified publicly 
                traded partnership income of the taxpayer for 
                the taxable year.
          (2) Determination of deductible amount for each trade 
        or business.--The amount determined under this 
        paragraph with respect to any qualified trade or 
        business is the lesser of--
                  (A) 20 percent of the taxpayer's qualified 
                business income with respect to the qualified 
                trade or business, or
                  (B) the greater of--
                          (i) 50 percent of the W-2 wages with 
                        respect to the qualified trade or 
                        business, or
                          (ii) the sum of 25 percent of the W-2 
                        wages with respect to the qualified 
                        trade or business, plus 2.5 percent of 
                        the unadjusted basis immediately after 
                        acquisition of all qualified property.
          (3) Modifications to limit based on taxable income.--
                  (A) Exception from limit.--In the case of any 
                taxpayer whose taxable income for the taxable 
                year does not exceed the threshold amount, 
                paragraph (2) shall be applied without regard 
                to subparagraph (B).
                  (B) Phase-in of limit for certain 
                taxpayers.--
                          (i) In general.--If--
                                  (I) the taxable income of a 
                                taxpayer for any taxable year 
                                exceeds the threshold amount, 
                                but does not exceed the sum of 
                                the threshold amount plus 
                                $50,000 ($100,000 in the case 
                                of a joint return), and
                                  (II) the amount determined 
                                under paragraph (2)(B) 
                                (determined without regard to 
                                this subparagraph) with respect 
                                to any qualified trade or 
                                business carried on by the 
                                taxpayer is less than the 
                                amount determined under 
                                paragraph (2)(A) with respect 
                                such trade or business, then 
                                paragraph (2) shall be applied 
                                with respect to such trade or 
                                business without regard to 
                                subparagraph (B) thereof and by 
                                reducing the amount determined 
                                under subparagraph (A) thereof 
                                by the amount determined under 
                                clause (ii).
                          (ii) Amount of reduction.--The amount 
                        determined under this subparagraph is 
                        the amount which bears the same ratio 
                        to the excess amount as--
                                  (I) the amount by which the 
                                taxpayer's taxable income for 
                                the taxable year exceeds the 
                                threshold amount, bears to
                                  (II) $50,000 ($100,000 in the 
                                case of a joint return).
                          (iii) Excess amount.--For purposes of 
                        clause (ii), the excess amount is the 
                        excess of--
                                  (I) the amount determined 
                                under paragraph (2)(A) 
                                (determined without regard to 
                                this paragraph), over
                                  (II) the amount determined 
                                under paragraph (2)(B) 
                                (determined without regard to 
                                this paragraph).
          (4) Wages, etc.
                  (A) In general.--The term ``W-2 wages'' 
                means, with respect to any person for any 
                taxable year of such person, the amounts 
                described in paragraphs (3) and (8) of section 
                6051(a) paid by such person with respect to 
                employment of employees by such person during 
                the calendar year ending during such taxable 
                year.
                  (B) Limitation to wages attributable to 
                qualified business income.--Such term shall not 
                include any amount which is not properly 
                allocable to qualified business income for 
                purposes of subsection (c)(1).
                  (C) Return requirement.--Such term shall not 
                include any amount which is not properly 
                included in a return filed with the Social 
                Security Administration on or before the 60th 
                day after the due date (including extensions) 
                for such return.
          (5) Acquisitions, dispositions, and short taxable 
        years.--The Secretary shall provide for the application 
        of this subsection in cases of a short taxable year or 
        where the taxpayer acquires, or disposes of, the major 
        portion of a trade or business or the major portion of 
        a separate unit of a trade or business during the 
        taxable year.
          (6) Qualified property.--For purposes of this 
        section:
                  (A) In general.--The term ``qualified 
                property'' means, with respect to any qualified 
                trade or business for a taxable year, tangible 
                property of a character subject to the 
                allowance for depreciation under section 167--
                          (i) which is held by, and available 
                        for use in, the qualified trade or 
                        business at the close of the taxable 
                        year,
                          (ii) which is used at any point 
                        during the taxable year in the 
                        production of qualified business 
                        income, and
                          (iii) the depreciable period for 
                        which has not ended before the close of 
                        the taxable year.
                  (B) Depreciable period.--The term 
                ``depreciable period'' means, with respect to 
                qualified property of a taxpayer, the period 
                beginning on the date the property was first 
                placed in service by the taxpayer and ending on 
                the later of--
                          (i) the date that is 10 years after 
                        such date, or
                          (ii) the last day of the last full 
                        year in the applicable recovery period 
                        that would apply to the property under 
                        section 168 (determined without regard 
                        to subsection (g) thereof).
          (7) Special rule with respect to income received from 
        cooperatives.--In the case of any qualified trade or 
        business of a patron of a specified agricultural or 
        horticultural cooperative, the amount determined under 
        paragraph (2) with respect to such trade or business 
        shall be reduced by the lesser of--
                  (A) 9 percent of so much of the qualified 
                business income with respect to such trade or 
                business as is properly allocable to qualified 
                payments received from such cooperative, or
                  (B) 50 percent of so much of the W-2 wages 
                with respect to such trade or business as are 
                so allocable.
  (c) Qualified business income.--For purposes of this 
section--
          (1) In general.--The term ``qualified business 
        income'' means, for any taxable year, the net amount of 
        qualified items of income, gain, deduction, and loss 
        with respect to any qualified trade or business of the 
        taxpayer. Such term shall not include any qualified 
        REIT dividends, or qualified publicly traded 
        partnership income.
          (2) Carryover of losses.--If the net amount of 
        qualified income, gain, deduction, and loss with 
        respect to qualified trades or businesses of the 
        taxpayer for any taxable year is less than zero, such 
        amount shall be treated as a loss from a qualified 
        trade or business in the succeeding taxable year.
          (3) Qualified items of income, gain, deduction, and 
        loss.--For purposes of this subsection--
                  (A) In general.--The term ``qualified items 
                of income, gain, deduction, and loss'' means 
                items of income, gain, deduction, and loss to 
                the extent such items are--
                          (i) effectively connected with the 
                        conduct of a trade or business within 
                        the United States (within the meaning 
                        of section 864(c), determined by 
                        substituting ``qualified trade or 
                        business (within the meaning of section 
                        199A)'' for ``nonresident alien 
                        individual or a foreign corporation'' 
                        or for ``a foreign corporation'' each 
                        place it appears), and
                          (ii) included or allowed in 
                        determining taxable income for the 
                        taxable year.
                  (B) Exceptions.--The following items shall 
                not be taken into account as a qualified item 
                of income, gain, deduction, or loss:
                          (i) Any item of short-term capital 
                        gain, short-term capital loss, long-
                        term capital gain, or long-term capital 
                        loss.
                          (ii) Any dividend, income equivalent 
                        to a dividend, or payment in lieu of 
                        dividends described in section 
                        954(c)(1)(G). Any amount described in 
                        section 1385(a)(1) shall not be treated 
                        as described in this clause.
                          (iii) Any interest income other than 
                        interest income which is properly 
                        allocable to a trade or business.
                          (iv) Any item of gain or loss 
                        described in subparagraph (C) or (D) of 
                        section 954(c)(1) (applied by 
                        substituting ``qualified trade or 
                        business'' for ``controlled foreign 
                        corporation'').
                          (v) Any item of income, gain, 
                        deduction, or loss taken into account 
                        under section 954(c)(1)(F) (determined 
                        without regard to clause (ii) thereof 
                        and other than items attributable to 
                        notional principal contracts entered 
                        into in transactions qualifying under 
                        section 1221(a)(7)).
                          (vi) Any amount received from an 
                        annuity which is not received in 
                        connection with the trade or business.
                          (vii) Any item of deduction or loss 
                        properly allocable to an amount 
                        described in any of the preceding 
                        clauses.
          (4) Treatment of reasonable compensation and 
        guaranteed payments.--Qualified business income shall 
        not include--
                  (A) reasonable compensation paid to the 
                taxpayer by any qualified trade or business of 
                the taxpayer for services rendered with respect 
                to the trade or business,
                  (B) any guaranteed payment described in 
                section 707(c) paid to a partner for services 
                rendered with respect to the trade or business, 
                and
                  (C) to the extent provided in regulations, 
                any payment described in section 707(a) to a 
                partner for services rendered with respect to 
                the trade or business.
  (d) Qualified trade or business.--For purposes of this 
section--
          (1) In general.--The term ``qualified trade or 
        business'' means any trade or business other than--
                  (A) a specified service trade or business, or
                  (B) the trade or business of performing 
                services as an employee.
          (2) Specified service trade or business.--The term 
        ``specified service trade or business'' means any trade 
        or business--
                  (A) which is described in section 
                1202(e)(3)(A) (applied without regard to the 
                words ``engineering, architecture,'') or which 
                would be so described if the term ``employees 
                or owners'' were substituted for ``employees'' 
                therein, or
                  (B) which involves the performance of 
                services that consist of investing and 
                investment management, trading, or dealing in 
                securities (as defined in section 475(c)(2)), 
                partnership interests, or commodities (as 
                defined in section 475(e)(2)).
          (3) Exception for specified service businesses based 
        on taxpayer's income.--
                  (A) In general.--If, for any taxable year, 
                the taxable income of any taxpayer is less than 
                the sum of the threshold amount plus $50,000 
                ($100,000 in the case of a joint return), 
                then--
                          (i) any specified service trade or 
                        business of the taxpayer shall not fail 
                        to be treated as a qualified trade or 
                        business due to paragraph (1)(A), but
                          (ii) only the applicable percentage 
                        of qualified items of income, gain, 
                        deduction, or loss, and the W-2 wages 
                        and the unadjusted basis immediately 
                        after acquisition of qualified 
                        property, of the taxpayer allocable to 
                        such specified service trade or 
                        business shall be taken into account in 
                        computing the qualified business 
                        income, W-2 wages, and the unadjusted 
                        basis immediately after acquisition of 
                        qualified property of the taxpayer for 
                        the taxable year for purposes of 
                        applying this section.
                  (B) Applicable percentage.--For purposes of 
                subparagraph (A), the term ``applicable 
                percentage'' means, with respect to any taxable 
                year, 100 percent reduced (not below zero) by 
                the percentage equal to the ratio of--
                          (i) the taxable income of the 
                        taxpayer for the taxable year in excess 
                        of the threshold amount, bears to
                          (ii) $50,000 ($100,000 in the case of 
                        a joint return).
  (e) Other definitions.--For purposes of this section--
          (1) Taxable income.--Except as otherwise provided in 
        subsection (g)(2)(B), taxable income shall be computed 
        without regard to any deduction allowable under this 
        section.
          (2) Threshold amount.--
                  (A) In general.--The term ``threshold 
                amount'' means $157,500 (200 percent of such 
                amount in the case of a joint return).
                  (B) Inflation adjustment.--In the case of any 
                taxable year beginning after 2018, the dollar 
                amount in subparagraph (A) shall be increased 
                by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2017'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                The amount of any increase under the preceding 
                sentence shall be rounded as provided in 
                section 1(f)(7).
          (3) Qualified REIT dividend.--The term ``qualified 
        REIT dividend'' means any dividend from a real estate 
        investment trust received during the taxable year 
        which--
                  (A) is not a capital gain dividend, as 
                defined in section 857(b)(3), and
                  (B) is not qualified dividend income, as 
                defined in section 1(h)(11).
          (4) Qualified publicly traded partnership income.--
        The term ``qualified publicly traded partnership 
        income'' means, with respect to any qualified trade or 
        business of a taxpayer, the sum of--
                  (A) the net amount of such taxpayer's 
                allocable share of each qualified item of 
                income, gain, deduction, and loss (as defined 
                in subsection (c)(3) and determined after the 
                application of subsection (c)(4)) from a 
                publicly traded partnership (as defined in 
                section 7704(a)) which is not treated as a 
                corporation under section 7704(c), plus
                  (B) any gain recognized by such taxpayer upon 
                disposition of its interest in such partnership 
                to the extent such gain is treated as an amount 
                realized from the sale or exchange of property 
                other than a capital asset under section 
                751(a).
  (f) Special rules.--
          (1) Application to partnerships and s corporations.--
                  (A) In general.--In the case of a partnership 
                or S corporation--
                          (i) this section shall be applied at 
                        the partner or shareholder level,
                          (ii) each partner or shareholder 
                        shall take into account such person's 
                        allocable share of each qualified item 
                        of income, gain, deduction, and loss, 
                        and
                          (iii) each partner or shareholder 
                        shall be treated for purposes of 
                        subsection (b) as having W-2 wages and 
                        unadjusted basis immediately after 
                        acquisition of qualified property for 
                        the taxable year in an amount equal to 
                        such person's allocable share of the W-
                        2 wages and the unadjusted basis 
                        immediately after acquisition of 
                        qualified property of the partnership 
                        or S corporation for the taxable year 
                        (as determined under regulations 
                        prescribed by the Secretary).
                For purposes of clause (iii), a partner's or 
                shareholder's allocable share of W-2 wages 
                shall be determined in the same manner as the 
                partner's or shareholder's allocable share of 
                wage expenses. For purposes of such clause, 
                partner's or shareholder's allocable share of 
                the unadjusted basis immediately after 
                acquisition of qualified property shall be 
                determined in the same manner as the partner's 
                or shareholder's allocable share of 
                depreciation. For purposes of this 
                subparagraph, in the case of an S corporation, 
                an allocable share shall be the shareholder's 
                pro rata share of an item.
                  (B) Application to trusts and estates.--Rules 
                similar to the rules under section 
                199(d)(1)(B)(i) (as in effect on December 1, 
                2017) for the apportionment of W-2 wages shall 
                apply to the apportionment of W-2 wages and the 
                apportionment of unadjusted basis immediately 
                after acquisition of qualified property under 
                this section.
                  (C) Treatment of trades or business in Puerto 
                Rico.--
                          (i) In general.--In the case of any 
                        taxpayer with qualified business income 
                        from sources within the commonwealth of 
                        Puerto Rico, if all such income is 
                        taxable under section 1 for such 
                        taxable year, then for purposes of 
                        determining the qualified business 
                        income of such taxpayer for such 
                        taxable year, the term ``United 
                        States'' shall include the Commonwealth 
                        of Puerto Rico.
                          (ii) Special rule for applying 
                        limit.--In the case of any taxpayer 
                        described in clause (i), the 
                        determination of W-2 wages of such 
                        taxpayer with respect to any qualified 
                        trade or business conducted in Puerto 
                        Rico shall be made without regard to 
                        any exclusion under section 3401(a)(8) 
                        for remuneration paid for services in 
                        Puerto Rico.
          (2) Coordination with minimum tax.--For purposes of 
        determining alternative minimum taxable income under 
        section 55, qualified business income shall be 
        determined without regard to any adjustments under 
        sections 56 through 59.
          (3) Deduction limited to income taxes.--The deduction 
        under subsection (a) shall only be allowed for purposes 
        of this chapter.
          (4) Regulations.--The Secretary shall prescribe such 
        regulations as are necessary to carry out the purposes 
        of this section, including regulations--
                  (A) for requiring or restricting the 
                allocation of items and wages under this 
                section and such reporting requirements as the 
                Secretary determines appropriate, and
                  (B) for the application of this section in 
                the case of tiered entities.
  (g) Deduction for income attributable to domestic production 
activities of specified agricultural or horticultural 
cooperatives.--
          (1) Allowance of deduction.--
                  (A) In general.--In the case of a taxpayer 
                which is a specified agricultural or 
                horticultural cooperative, there shall be 
                allowed as a deduction an amount equal to 9 
                percent of the lesser of--
                          (i) the qualified production 
                        activities income of the taxpayer for 
                        the taxable year, or
                          (ii) the taxable income of the 
                        taxpayer for the taxable year.
                  (B) Limitation.--
                          (i) In general.--The deduction 
                        allowable under subparagraph (A) for 
                        any taxable year shall not exceed 50 
                        percent of the W-2 wages of the 
                        taxpayer for the taxable year.
                          (ii) W-2 wages.--For purposes of this 
                        subparagraph, the W-2 wages of the 
                        taxpayer shall be determined in the 
                        same manner as under subsection (b)(4) 
                        (without regard to subparagraph (B) 
                        thereof and after application of 
                        subsection (b)(5)), except that such 
                        wages shall not include any amount 
                        which is not properly allocable to 
                        domestic production gross receipts for 
                        purposes of paragraph (3)(A).
                  (C) Taxable income of cooperatives determined 
                without regard to certain deductions.--For 
                purposes of this subsection, the taxable income 
                of a specified agricultural or horticultural 
                cooperative shall be computed without regard to 
                any deduction allowable under subsection (b) or 
                (c) of section 1382 (relating to patronage 
                dividends, per-unit retain allocations, and 
                nonpatronage distributions).
          (2) Deduction allowed to patrons.--
                  (A) In general.--In the case of any eligible 
                taxpayer who receives a qualified payment from 
                a specified agricultural or horticultural 
                cooperative, there shall be allowed as a 
                deduction for the taxable year in which such 
                payment is received an amount equal to the 
                portion of the deduction allowed under 
                paragraph (1) to such cooperative which is--
                          (i) allowed with respect to the 
                        portion of the qualified production 
                        activities income to which such payment 
                        is attributable, and
                          (ii) identified by such cooperative 
                        in a written notice mailed to such 
                        taxpayer during the payment period 
                        described in section 1382(d).
                  (B) Limitation based on taxable income.--The 
                deduction allowed to any taxpayer under this 
                paragraph shall not exceed the taxable income 
                of the taxpayer determined without regard to 
                the deduction allowed under this paragraph and 
                after taking into account any deduction allowed 
                to the taxpayer under subsection (a) for the 
                taxable year.
                  (C) Cooperative denied deduction for portion 
                of qualified payments.--The taxable income of a 
                specified agricultural or horticultural 
                cooperative shall not be reduced under section 
                1382 by reason of that portion of any qualified 
                payment as does not exceed the deduction 
                allowable under subparagraph (A) with respect 
                to such payment.
                  (D) Eligible taxpayer.--For purposes of this 
                paragraph, the term ``eligible taxpayer'' 
                means--
                          (i) a taxpayer other than a 
                        corporation, or
                          (ii) a specified agricultural or 
                        horticultural cooperative.
                  (E) Qualified payment.--For purposes of this 
                section, the term ``qualified payment'' means, 
                with respect to any eligible taxpayer, any 
                amount which--
                          (i) is described in paragraph (1) or 
                        (3) of section 1385(a),
                          (ii) is received by such taxpayer 
                        from a specified agricultural or 
                        horticultural cooperative, and
                          (iii) is attributable to qualified 
                        production activities income with 
                        respect to which a deduction is allowed 
                        to such cooperative under paragraph 
                        (1).
          (3) Qualified production activities income.--For 
        purposes of this subsection--
                  (A) In general.--The term ``qualified 
                production activities income'' for any taxable 
                year means an amount equal to the excess (if 
                any) of--
                          (i) the taxpayer's domestic 
                        production gross receipts for such 
                        taxable year, over
                          (ii) the sum of--
                                  (I) the cost of goods sold 
                                that are allocable to such 
                                receipts, and
                                  (II) other expenses, losses, 
                                or deductions (other than the 
                                deduction allowed under this 
                                subsection), which are properly 
                                allocable to such receipts.
                  (B) Allocation method.--The Secretary shall 
                prescribe rules for the proper allocation of 
                items described in subparagraph (A) for 
                purposes of determining qualified production 
                activities income. Such rules shall provide for 
                the proper allocation of items whether or not 
                such items are directly allocable to domestic 
                production gross receipts.
                  (C) Special rules for determining costs.--
                          (i) In general.--For purposes of 
                        determining costs under subclause (I) 
                        of subparagraph (A)(ii), any item or 
                        service brought into the United States 
                        shall be treated as acquired by 
                        purchase, and its cost shall be treated 
                        as not less than its value immediately 
                        after it entered the United States. A 
                        similar rule shall apply in determining 
                        the adjusted basis of leased or rented 
                        property where the lease or rental 
                        gives rise to domestic production gross 
                        receipts.
                          (ii) Exports for further 
                        manufacture.--In the case of any 
                        property described in clause (i) that 
                        had been exported by the taxpayer for 
                        further manufacture, the increase in 
                        cost or adjusted basis under clause (i) 
                        shall not exceed the difference between 
                        the value of the property when exported 
                        and the value of the property when 
                        brought back into the United States 
                        after the further manufacture.
                  (D) Domestic production gross receipts.--
                          (i) In general.--The term ``domestic 
                        production gross receipts'' means the 
                        gross receipts of the taxpayer which 
                        are derived from any lease, rental, 
                        license, sale, exchange, or other 
                        disposition of any agricultural or 
                        horticultural product which was 
                        manufactured, produced, grown, or 
                        extracted by the taxpayer (determined 
                        after the application of paragraph 
                        (4)(B)) in whole or significant part 
                        within the United States. Such term 
                        shall not include gross receipts of the 
                        taxpayer which are derived from the 
                        lease, rental, license, sale, exchange, 
                        or other disposition of land.
                          (ii) Related persons.--
                                  (I) In general.--The term 
                                ``domestic production gross 
                                receipts'' shall not include 
                                any gross receipts of the 
                                taxpayer derived from property 
                                leased, licensed, or rented by 
                                the taxpayer for use by any 
                                related person.
                                  (II) Related person.--For 
                                purposes of subclause (I), a 
                                person shall be treated as 
                                related to another person if 
                                such persons are treated as a 
                                single employer under 
                                subsection (a) or (b) of 
                                section 52 or subsection (m) or 
                                (o) of section 414, except that 
                                determinations under 
                                subsections (a) and (b) of 
                                section 52 shall be made 
                                without regard to section 
                                1563(b).
          (4) Specified agricultural or horticultural 
        cooperative.--For purposes of this section--
                  (A) In general.--The term ``specified 
                agricultural or horticultural cooperative'' 
                means an organization to which part I of 
                subchapter T applies which is engaged--
                          (i) in the manufacturing, production, 
                        growth, or extraction in whole or 
                        significant part of any agricultural or 
                        horticultural product, or
                          (ii) in the marketing of agricultural 
                        or horticultural products.
                  (B) Application to marketing cooperatives.--A 
                specified agricultural or horticultural 
                cooperative described in subparagraph (A)(ii) 
                shall be treated as having manufactured, 
                produced, grown, or extracted in whole or 
                significant part any agricultural or 
                horticultural product marketed by the specified 
                agricultural or horticultural cooperative which 
                its patrons have so manufactured, produced, 
                grown, or extracted.
          (5) Definitions and special rules.--
                  (A) Special rule for affiliated groups.--
                          (i) In general.--All members of an 
                        expanded affiliated group shall be 
                        treated as a single corporation for 
                        purposes of this subsection.
                          (ii) Partnerships owned by expanded 
                        affiliated groups.--For purposes of 
                        paragraph (3)(D), if all of the 
                        interests in the capital and profits of 
                        a partnership are owned by members of a 
                        single expanded affiliated group at all 
                        times during the taxable year of such 
                        partnership, the partnership and all 
                        members of such group shall be treated 
                        as a single taxpayer during such 
                        period.
                          (iii) Expanded affiliated group.--For 
                        purposes of this subsection, the term 
                        ``expanded affiliated group'' means an 
                        affiliated group as defined in section 
                        1504(a), determined--
                                  (I) by substituting ``more 
                                than 50 percent'' for ``at 
                                least 80 percent'' each place 
                                it appears, and
                                  (II) without regard to 
                                paragraphs (2) and (4) of 
                                section 1504(b).
                          (iv) Allocation of deduction.--Except 
                        as provided in regulations, the 
                        deduction under paragraph (1) shall be 
                        allocated among the members of the 
                        expanded affiliated group in proportion 
                        to each member's respective amount (if 
                        any) of qualified production activities 
                        income.
                  (B) Special rule for cooperative partners.--
                In the case of a specified agricultural or 
                horticultural cooperative which is a partner in 
                a partnership, rules similar to the rules of 
                subsection (f)(1) shall apply for purposes of 
                this subsection.
                  (C) Trade or business requirement.--This 
                subsection shall be applied by only taking into 
                account items which are attributable to the 
                actual conduct of a trade or business.
                  (D) Unrelated business taxable income.--For 
                purposes of determining the tax imposed by 
                section 511, this section shall be applied by 
                substituting ``unrelated business taxable 
                income'' for ``taxable income'' each place it 
                appears in this section (other than this 
                subparagraph).
                  (E) Special rule for cooperative with oil 
                related qualified production activities 
                income.--
                          (i) In general.--If a specified 
                        agricultural or horticultural 
                        cooperative has oil related qualified 
                        production activities income for any 
                        taxable year, the amount otherwise 
                        allowable as a deduction under 
                        paragraph (1) shall be reduced by 3 
                        percent of the least of--
                                  (I) the oil related qualified 
                                production activities income of 
                                the cooperative for the taxable 
                                year,
                                  (II) the qualified production 
                                activities income of the 
                                cooperative for the taxable 
                                year, or
                                  (III) taxable income.
                          (ii) Oil related qualified production 
                        activities income.--For purposes of 
                        this subparagraph, the term ``oil 
                        related qualified production activities 
                        income'' means for any taxable year the 
                        qualified production activities income 
                        which is attributable to the 
                        production, refining, processing, 
                        transportation, or distribution of oil, 
                        gas, or any primary product thereof 
                        (within the meaning of section 
                        927(a)(2)(C), as in effect before its 
                        repeal) during such taxable year.
          (6) Regulations.--The Secretary shall prescribe such 
        regulations as are necessary to carry out the purposes 
        of this subsection, including regulations which prevent 
        more than 1 taxpayer from being allowed a deduction 
        under this subsection with respect to any activity 
        described in paragraph (3)(D)(i). Such regulations 
        shall be based on the regulations applicable to 
        cooperatives and their patrons under section 199 (as in 
        effect before its repeal).
  (h) Anti-abuse rules.--The Secretary shall--
          (1) apply rules similar to the rules under section 
        179(d)(2) in order to prevent the manipulation of the 
        depreciable period of qualified property using 
        transactions between related parties, and
          (2) prescribe rules for determining the unadjusted 
        basis immediately after acquisition of qualified 
        property acquired in like-kind exchanges or involuntary 
        conversions.
  [(i) Termination.--This section shall not apply to taxable 
years beginning after December 31, 2025.]

        PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

Sec. 211. Allowance of deductions.
     * * * * * * *
[Sec. 217. Moving expenses.]
Sec. 217. Certain moving expenses of members of Armed Forces.

           *       *       *       *       *       *       *

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

  (a) Allowance of deduction.--There shall be allowed as a 
deduction the expenses paid during the taxable year, not 
compensated for by insurance or otherwise, for medical care of 
the taxpayer, his spouse, or a dependent (as defined in 
[section 152] section 7706, determined without regard to 
subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the 
extent that such expenses exceed 10 percent (7.5 percent in the 
case of any taxable year beginning after December 31, 2018, and 
ending before January 1, 2021) of adjusted gross income.
  (b) Limitation with respect to medicine and drugs.--An amount 
paid during the taxable year for medicine or a drug shall be 
taken into account under subsection (a) only if such medicine 
or drug is a prescribed drug or is insulin.
  (c) Special rule for decedents.--
          (1) Treatment of expenses paid after death.--For 
        purposes of subsection (a), expenses for the medical 
        care of the taxpayer which are paid out of his estate 
        during the 1-year period beginning with the day after 
        the date of his death shall be treated as paid by the 
        taxpayer at the time incurred.
          (2) Limitation.--Paragraph (1) shall not apply if the 
        amount paid is allowable under section 2053 as a 
        deduction in computing the taxable estate of the 
        decedent, but this paragraph shall not apply if (within 
        the time and in the manner and form prescribed by the 
        Secretary) there is filed--
                  (A) a statement that such amount has not been 
                allowed as a deduction under section 2053, and
                  (B) a waiver of the right to have such amount 
                allowed at any time as a deduction under 
                section 2053.
  (d) Definitions.--For purposes of this section--
          (1) The term ``medical care'' means amounts paid--
                  (A) for the diagnosis, cure, mitigation, 
                treatment, or prevention of disease, or for the 
                purpose of affecting any structure or function 
                of the body,
                  (B) for transportation primarily for and 
                essential to medical care referred to in 
                subparagraph (A),
                  (C) for qualified long-term care services (as 
                defined in section 7702B(c)), or
                  (D) for insurance (including amounts paid as 
                premiums under part B of title XVIII of the 
                Social Security Act, relating to supplementary 
                medical insurance for the aged) covering 
                medical care referred to in subparagraphs (A) 
                and (B) or for any qualified long- term care 
                insurance contract (as defined in section 
                7702B(b)).
        In the case of a qualified long-term care insurance 
        contract (as defined in section 7702B(b)), only 
        eligible long-term care premiums (as defined in 
        paragraph (10)) shall be taken into account under 
        subparagraph (D).
          (2) Amounts paid for certain lodging away from home 
        treated as paid for medical care
          Amounts paid for lodging (not lavish or extravagant 
        under the circumstances) while away from home primarily 
        for and essential to medical care referred to in 
        paragraph (1)(A) shall be treated as amounts paid for 
        medical care if--
                  (A) the medical care referred to in paragraph 
                (1)(A) is provided by a physician in a licensed 
                hospital (or in a medical care facility which 
                is related to, or the equivalent of, a licensed 
                hospital), and
                  (B) there is no significant element of 
                personal pleasure, recreation, or vacation in 
                the travel away from home.
        The amount taken into account under the preceding 
        sentence shall not exceed $50 for each night for each 
        individual.
          (3) Prescribed drug
          The term ``prescribed drug'' means a drug or 
        biological which requires a prescription of a physician 
        for its use by an individual.
          (4) Physician
          The term ``physician'' has the meaning given to such 
        term by section 1861(r) of the Social Security Act (42 
        U.S.C. 1395x(r)).
          (5) Special rule in the case of child of divorced 
        parents, etc.
          Any child to whom [section 152(e)] section 7706(e) 
        applies shall be treated as a dependent of both parents 
        for purposes of this section.
          (6) In the case of an insurance contract under which 
        amounts are payable for other than medical care 
        referred to in subparagraphs (A), (B), and (C) of 
        paragraph (1)--
                  (A) no amount shall be treated as paid for 
                insurance to which paragraph (1)(D) applies 
                unless the charge for such insurance is either 
                separately stated in the contract, or furnished 
                to the policyholder by the insurance company in 
                a separate statement,
                  (B) the amount taken into account as the 
                amount paid for such insurance shall not exceed 
                such charge, and
                  (C) no amount shall be treated as paid for 
                such insurance if the amount specified in the 
                contract (or furnished to the policyholder by 
                the insurance company in a separate statement) 
                as the charge for such insurance is 
                unreasonably large in relation to the total 
                charges under the contract.
          (7) Subject to the limitations of paragraph (6), 
        premiums paid during the taxable year by a taxpayer 
        before he attains the age of 65 for insurance covering 
        medical care (within the meaning of subparagraphs (A), 
        (B), and (C) of paragraph (1)) for the taxpayer, his 
        spouse, or a dependent after the taxpayer attains the 
        age of 65 shall be treated as expenses paid during the 
        taxable year for insurance which constitutes medical 
        care if premiums for such insurance are payable (on a 
        level payment basis) under the contract for a period of 
        10 years or more or until the year in which the 
        taxpayer attains the age of 65 (but in no case for a 
        period of less than 5 years).
          (8) The determination of whether an individual is 
        married at any time during the taxable year shall be 
        made in accordance with the provisions of section 
        6013(d) (relating to determination of status as husband 
        and wife).
          (9) Cosmetic surgery.--
                  (A) In general.--The term ``medical care'' 
                does not include cosmetic surgery or other 
                similar procedures, unless the surgery or 
                procedure is necessary to ameliorate a 
                deformity arising from, or directly related to, 
                a congenital abnormality, a personal injury 
                resulting from an accident or trauma, or 
                disfiguring disease.
                  (B) Cosmetic surgery defined.--For purposes 
                of this paragraph, the term ``cosmetic 
                surgery'' means any procedure which is directed 
                at improving the patient's appearance and does 
                not meaningfully promote the proper function of 
                the body or prevent or treat illness or 
                disease.
          (10) Eligible long-term care premiums.--
                  (A) In general.--For purposes of this 
                section, the term ``eligible long-term care 
                Premiums'' means the amount paid during a 
                taxable year for any qualified long-term care 
                insurance contract (as defined in section 
                7702B(b)) covering an individual, to the extent 
                such amount does not exceed the limitation 
                determined under the following table:

 
------------------------------------------------------------------------
 In the case of an individual with
an attained age before the close of           The limitation is:
        the taxable year of:
------------------------------------------------------------------------
40 or less                           $200
More than 40 but not more than 50    375
More than 50 but not more than 60    750
More than 60 but not more than 70    2,000
More than 70                         2,500.
------------------------------------------------------------------------

                  (B) Indexing.--
                          (i) In general.--In the case of any 
                        taxable year beginning in a calendar 
                        year after 1997, each dollar amount 
                        contained in subparagraph (A) shall be 
                        increased by the medical care cost 
                        adjustment of such amount for such 
                        calendar year. If any increase 
                        determined under the preceding sentence 
                        is not a multiple of $10, such increase 
                        shall be rounded to the nearest 
                        multiple of $10.
                          (ii) Medical care cost adjustment.--
                        For purposes of clause (i), the medical 
                        care cost adjustment for any calendar 
                        year is the percentage (if any) by 
                        which--
                                  (I) the medical care 
                                component of the C-CPI-U (as 
                                defined in section 1(f)(6)) for 
                                August of the preceding 
                                calendar year, exceeds
                                  (II) such component of the 
                                CPI (as defined in section 
                                1(f)(4)) for August of 1996, 
                                multiplied by the amount 
                                determined under section 
                                1(f)(3)(B).
                        The Secretary shall, in consultation 
                        with the Secretary of Health and Human 
                        Services, prescribe an adjustment which 
                        the Secretary determines is more 
                        appropriate for purposes of this 
                        paragraph than the adjustment described 
                        in the preceding sentence, and the 
                        adjustment so prescribed shall apply in 
                        lieu of the adjustment described in the 
                        preceding sentence.
          (11) Certain payments to relatives treated as not 
        paid for medical care --An amount paid for a qualified 
        long-term care service (as defined in section 7702B(c)) 
        provided to an individual shall be treated as not paid 
        for medical care if such service is provided--
                  (A) by the spouse of the individual or by a 
                relative (directly or through a partnership, 
                corporation, or other entity) unless the 
                service is provided by a licensed professional 
                with respect to such service, or
                  (B) by a corporation or partnership which is 
                related (within the meaning of section 267(b) 
                or 707(b)) to the individual.
        For purposes of this paragraph, the term ``relative'' 
        means an individual bearing a relationship to the 
        individual which is described in any of subparagraphs 
        (A) through (G) of [section 152(d)(2)] section 
        7706(d)(2). This paragraph shall not apply for purposes 
        of section 105(b) with respect to reimbursements 
        through insurance.
  (e) Exclusion of amounts allowed for care of certain 
dependents.--Any expense allowed as a credit under section 21 
shall not be treated as an expense paid for medical care.
  [(f) Special rules for 2013 through 2018.--In the case of any 
taxable year--
          [(1) beginning after December 31, 2012, and ending 
        before January 1, 2017, in the case of a taxpayer if 
        such taxpayer or such taxpayer's spouse has attained 
        age 65 before the close of such taxable year, and
          [(2) beginning after December 31, 2016, and ending 
        before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by 
substituting ``7.5 percent'' for ``10 percent''.]

           *       *       *       *       *       *       *

SEC. 217. [MOVING EXPENSES]  CERTAIN MOVING EXPENSES OF MEMBERS OF 
                    ARMED FORCES.

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

           *       *       *       *       *       *       *

SEC. 220. ARCHER MSAS.

  (a) Deduction allowed.--In the case of an individual who is 
an eligible individual for any month during the taxable year, 
there shall be allowed as a deduction for the taxable year an 
amount equal to the aggregate amount paid in cash during such 
taxable year by such individual to an Archer MSA of such 
individual.
  (b) Limitations.--
          (1) In general.--The amount allowable as a deduction 
        under subsection (a) to an individual for the taxable 
        year shall not exceed the sum of the monthly 
        limitations for months during such taxable year that 
        the individual is an eligible individual.
          (2) Monthly limitation.--The monthly limitation for 
        any month is the amount equal to 1/12 of--
                  (A) in the case of an individual who has 
                self-only coverage under the high deductible 
                health plan as of the first day of such month, 
                65 percent of the annual deductible under such 
                coverage, and
                  (B) in the case of an individual who has 
                family coverage under the high deductible 
                health plan as of the first day of such month, 
                75 percent of the annual deductible under such 
                coverage.
          (3) Special rule for married individuals.--In the 
        case of individuals who are married to each other, if 
        either spouse has family coverage--
                  (A) both spouses shall be treated as having 
                only such family coverage (and if such spouses 
                each have family coverage under different 
                plans, as having the family coverage with the 
                lowest annual deductible), and
                  (B) the limitation under paragraph (1) (after 
                the application of subparagraph (A) of this 
                paragraph) shall be divided equally between 
                them unless they agree on a different division.
          (4) Deduction not to exceed compensation.--
                  (A) Employees.--The deduction allowed under 
                subsection (a) for contributions as an eligible 
                individual described in subclause (I) of 
                subsection (c)(1)(A)(iii) shall not exceed such 
                individual's wages, salaries, tips, and other 
                employee compensation which are attributable to 
                such individual's employment by the employer 
                referred to in such subclause.
                  (B) Self-employed individuals.--The deduction 
                allowed under subsection (a) for contributions 
                as an eligible individual described in 
                subclause (II) of subsection (c)(1)(A)(iii) 
                shall not exceed such individual's earned 
                income (as defined in section 401(c)(1)) 
                derived by the taxpayer from the trade or 
                business with respect to which the high 
                deductible health plan is established.
                  (C) Community property laws not to apply.--
                The limitations under this paragraph shall be 
                determined without regard to community property 
                laws.
          (5) Coordination with exclusion for employer 
        contributions.--No deduction shall be allowed under 
        this section for any amount paid for any taxable year 
        to an Archer MSA of an individual if--
                  (A) any amount is contributed to any Archer 
                MSA of such individual for such year which is 
                excludable from gross income under section 
                106(b), or
                  (B) if such individual's spouse is covered 
                under the high deductible health plan covering 
                such individual, any amount is contributed for 
                such year to any Archer MSA of such spouse 
                which is so excludable.
          (6) Denial of deduction to dependents.--No deduction 
        shall be allowed under this section to any individual 
        [with respect to whom a deduction under section 151 is 
        allowable to] who is a dependent of another taxpayer 
        for a taxable year beginning in the calendar year in 
        which such individual's taxable year begins.
          (7) Medicare eligible individuals.--The limitation 
        under this subsection for any month with respect to an 
        individual shall be zero for the first month such 
        individual is entitled to benefits under title XVIII of 
        the Social Security Act and for each month thereafter.
  (c) Definitions.--For purposes of this section--
          (1) Eligible individual.--
                  (A) In general.--The term ``eligible 
                individual'' means, with respect to any month, 
                any individual if--
                          (i) such individual is covered under 
                        a high deductible health plan as of the 
                        1st day of such month,
                          (ii) such individual is not, while 
                        covered under a high deductible health 
                        plan, covered under any health plan--
                                  (I) which is not a high 
                                deductible health plan, and
                                  (II) which provides coverage 
                                for any benefit which is 
                                covered under the high 
                                deductible health plan, and
                          (iii)(I) the high deductible health 
                        plan covering such individual is 
                        established and maintained by the 
                        employer of such individual or of the 
                        spouse of such individual and such 
                        employer is a small employer, or
                                  (II) such individual is an 
                                employee (within the meaning of 
                                section 401(c)(1)) or the 
                                spouse of such an employee and 
                                the high deductible health plan 
                                covering such individual is not 
                                established or maintained by 
                                any employer of such individual 
                                or spouse.
                  (B) Certain coverage disregarded.--
                Subparagraph (A)(ii) shall be applied without 
                regard to--
                          (i) coverage for any benefit provided 
                        by permitted insurance, and
                          (ii) coverage (whether through 
                        insurance or otherwise) for accidents, 
                        disability, dental care, vision care, 
                        or long-term care.
                  (C) Continued eligibility of employee and 
                spouse establishing Archer MSAs.--If, while an 
                employer is a small employer--
                          (i) any amount is contributed to an 
                        Archer MSA of an individual who is an 
                        employee of such employer or the spouse 
                        of such an employee, and
                          (ii) such amount is excludable from 
                        gross income under section 106(b) or 
                        allowable as a deduction under this 
                        section,
                such individual shall not cease to meet the 
                requirement of subparagraph (A)(iii)(I) by 
                reason of such employer ceasing to be a small 
                employer so long as such employee continues to 
                be an employee of such employer.
                  (D) Limitations on eligibility.--For 
                limitations on number of taxpayers who are 
                eligible to have Archer MSAs, see subsection 
                (i).
          (2) High deductible health plan.--
                  (A) In general.--The term ``high deductible 
                health plan'' means a health plan--
                          (i) in the case of self-only 
                        coverage, which has an annual 
                        deductible which is not less than 
                        $1,500 and not more than $2,250,
                          (ii) in the case of family coverage, 
                        which has an annual deductible which is 
                        not less than $3,000 and not more than 
                        $4,500, and
                          (iii) the annual out-of-pocket 
                        expenses required to be paid under the 
                        plan (other than for premiums) for 
                        covered benefits does not exceed--
                                  (I) $3,000 for self-only 
                                coverage, and
                                  (II) $5,500 for family 
                                coverage.
                  (B) Special rules.--
                          (i) Exclusion of certain plans.--Such 
                        term does not include a health plan if 
                        substantially all of its coverage is 
                        coverage described in paragraph (1)(B).
                          (ii) Safe harbor for absence of 
                        preventive care deductible.--A plan 
                        shall not fail to be treated as a high 
                        deductible health plan by reason of 
                        failing to have a deductible for 
                        preventive care if the absence of a 
                        deductible for such care is required by 
                        State law.
          (3) Permitted insurance.--The term ``permitted 
        insurance'' means--
                  (A) insurance if substantially all of the 
                coverage provided under such insurance relates 
                to--
                          (i) liabilities incurred under 
                        workers' compensation laws,
                          (ii) tort liabilities,
                          (iii) liabilities relating to 
                        ownership or use of property, or
                          (iv) such other similar liabilities 
                        as the Secretary may specify by 
                        regulations,
                  (B) insurance for a specified disease or 
                illness, and
                  (C) insurance paying a fixed amount per day 
                (or other period) of hospitalization.
          (4) Small employer.--
                  (A) In general.--The term ``small employer'' 
                means, with respect to any calendar year, any 
                employer if such employer employed an average 
                of 50 or fewer employees on business days 
                during either of the 2 preceding calendar 
                years. For purposes of the preceding sentence, 
                a preceding calendar year may be taken into 
                account only if the employer was in existence 
                throughout such year.
                  (B) Employers not in existence in preceding 
                year.--In the case of an employer which was not 
                in existence throughout the 1st preceding 
                calendar year, the determination under 
                subparagraph (A) shall be based on the average 
                number of employees that it is reasonably 
                expected such employer will employ on business 
                days in the current calendar year.
                  (C) Certain growing employers retain 
                treatment as small employer.--The term ``small 
                employer'' includes, with respect to any 
                calendar year, any employer if--
                          (i) such employer met the requirement 
                        of subparagraph (A) (determined without 
                        regard to subparagraph (B)) for any 
                        preceding calendar year after 1996,
                          (ii) any amount was contributed to 
                        the Archer MSA of any employee of such 
                        employer with respect to coverage of 
                        such employee under a high deductible 
                        health plan of such employer during 
                        such preceding calendar year and such 
                        amount was excludable from gross income 
                        under section 106(b) or allowable as a 
                        deduction under this section, and
                          (iii) such employer employed an 
                        average of 200 or fewer employees on 
                        business days during each preceding 
                        calendar year after 1996.
                  (D) Special rules.--
                          (i) Controlled groups.--For purposes 
                        of this paragraph, all persons treated 
                        as a single employer under subsection 
                        (b), (c), (m), or (o) of section 414 
                        shall be treated as 1 employer.
                          (ii) Predecessors.--Any reference in 
                        this paragraph to an employer shall 
                        include a reference to any predecessor 
                        of such employer.
          (5) Family coverage.--The term ``family coverage'' 
        means any coverage other than self-only coverage.
  (d) Archer MSA.--For purposes of this section--
          (1) Archer MSA.--The term ``Archer MSA'' means a 
        trust created or organized in the United States as a 
        medical savings account exclusively for the purpose of 
        paying the qualified medical expenses of the account 
        holder, but only if the written governing instrument 
        creating the trust meets the following requirements:
                  (A) Except in the case of a rollover 
                contribution described in subsection (f)(5), no 
                contribution will be accepted--
                          (i) unless it is in cash, or
                          (ii) to the extent such contribution, 
                        when added to previous contributions to 
                        the trust for the calendar year, 
                        exceeds 75 percent of the highest 
                        annual limit deductible permitted under 
                        subsection (c)(2)(A)(ii) for such 
                        calendar year.
                  (B) The trustee is a bank (as defined in 
                section 408(n)), an insurance company (as 
                defined in section 816), or another person who 
                demonstrates to the satisfaction of the 
                Secretary that the manner in which such person 
                will administer the trust will be consistent 
                with the requirements of this section.
                  (C) No part of the trust assets will be 
                invested in life insurance contracts.
                  (D) The assets of the trust will not be 
                commingled with other property except in a 
                common trust fund or common investment fund.
                  (E) The interest of an individual in the 
                balance in his account is nonforfeitable.
          (2) Qualified medical expenses.--
                  (A) In general.--The term ``qualified medical 
                expenses'' means, with respect to an account 
                holder, amounts paid by such holder for medical 
                care (as defined in section 213(d)) for such 
                individual, the spouse of such individual, and 
                any dependent (as defined in [section 152] 
                section 7706, determined without regard to 
                subsections (b)(1), (b)(2), and (d)(1)(B) 
                thereof) of such individual, but only to the 
                extent such amounts are not compensated for by 
                insurance or otherwise. Such term shall include 
                an amount paid for medicine or a drug only if 
                such medicine or drug is a prescribed drug 
                (determined without regard to whether such drug 
                is available without a prescription) or is 
                insulin.
                  (B) Health insurance may not be purchased 
                from account.--
                          (i) In general.--Subparagraph (A) 
                        shall not apply to any payment for 
                        insurance.
                          (ii) Exceptions.--Clause (i) shall 
                        not apply to any expense for coverage 
                        under--
                                  (I) a health plan during any 
                                period of continuation coverage 
                                required under any Federal law,
                                  (II) a qualified long-term 
                                care insurance contract (as 
                                defined in section 7702B(b)), 
                                or
                                  (III) a health plan during a 
                                period in which the individual 
                                is receiving unemployment 
                                compensation under any Federal 
                                or State law.
                  (C) Medical expenses of individuals who are 
                not eligible individuals.--Subparagraph (A) 
                shall apply to an amount paid by an account 
                holder for medical care of an individual who is 
                not described in clauses (i) and (ii) of 
                subsection (c)(1)(A)for the month in which the 
                expense for such care is incurred only if no 
                amount is contributed (other than a rollover 
                contribution) to any Archer MSA of such account 
                holder for the taxable year which includes such 
                month. This subparagraph shall not apply to any 
                expense for coverage described in subclause (I) 
                or (III) of subparagraph (B)(ii).
          (3) Account holder.--The term ``account holder'' 
        means the individual on whose behalf the Archer MSA was 
        established.
          (4) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this 
        section:
                  (A) Section 219(d)(2) (relating to no 
                deduction for rollovers).
                  (B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                  (C) Except as provided in section 106(b), 
                section 219(f)(5) (relating to employer 
                payments).
                  (D) Section 408(g) (relating to community 
                property laws).
                  (E) Section 408(h) (relating to custodial 
                accounts).
  (e) Tax treatment of accounts.--
          (1) In general.--An Archer MSA is exempt from 
        taxation under this subtitle unless such account has 
        ceased to be an Archer MSA. Notwithstanding the 
        preceding sentence, any such account is subject to the 
        taxes imposed by section 511 (relating to imposition of 
        tax on unrelated business income of charitable, etc. 
        organizations).
          (2) Account terminations.--Rules similar to the rules 
        of paragraphs (2) and (4) of section 408(e) shall apply 
        to Archer MSAs, and any amount treated as distributed 
        under such rules shall be treated as not used to pay 
        qualified medical expenses.
  (f) Tax Treatment of distributions.--
          (1) Amounts used for qualified medical expenses.--Any 
        amount paid or distributed out of an Archer MSA which 
        is used exclusively to pay qualified medical expenses 
        of any account holder shall not be includible in gross 
        income.
          (2) Inclusion of amounts not used for qualified 
        medical expenses.--Any amount paid or distributed out 
        of an Archer MSA which is not used exclusively to pay 
        the qualified medical expenses of the account holder 
        shall be included in the gross income of such holder.
          (3) Excess contributions returned before due date of 
        return.--
                  (A) In general.--If any excess contribution 
                is contributed for a taxable year to any Archer 
                MSA of an individual, paragraph (2) shall not 
                apply to distributions from the Archer MSAs of 
                such individual (to the extent such 
                distributions do not exceed the aggregate 
                excess contributions to all such accounts of 
                such individual for such year) if--
                          (i) such distribution is received by 
                        the individual on or before the last 
                        day prescribed by law (including 
                        extensions of time) for filing such 
                        individual's return for such taxable 
                        year, and
                          (ii) such distribution is accompanied 
                        by the amount of net income 
                        attributable to such excess 
                        contribution.
                Any net income described in clause (ii) shall 
                be included in the gross income of the 
                individual for the taxable year in which it is 
                received.
                  (B) Excess contribution.--For purposes of 
                subparagraph (A), the term ``excess 
                contribution'' means any contribution (other 
                than a rollover contribution) which is neither 
                excludable from gross income under section 
                106(b) nor deductible under this section.
          (4) Additional tax on distributions not used for 
        qualified medical expenses.--
                  (A) In general.--The tax imposed by this 
                chapter on the account holder for any taxable 
                year in which there is a payment or 
                distribution from an Archer MSA of such holder 
                which is includible in gross income under 
                paragraph (2) shall be increased by 20 percent 
                of the amount which is so includible.
                  (B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment 
                or distribution is made after the account 
                holder becomes disabled within the meaning of 
                section 72(m)(7) or dies.
                  (C) Exception for distributions after 
                medicare eligibility.--Subparagraph (A) shall 
                not apply to any payment or distribution after 
                the date on which the account holder attains 
                the age specified in section 1811 of the Social 
                Security Act.
          (5) Rollover contribution.--An amount is described in 
        this paragraph as a rollover contribution if it meets 
        the requirements of subparagraphs (A) and (B).
                  (A) In general.--Paragraph (2) shall not 
                apply to any amount paid or distributed from an 
                Archer MSA to the account holder to the extent 
                the amount received is paid into an Archer MSA 
                or a health savings account (as defined in 
                section 223(d)) for the benefit of such holder 
                not later than the 60th day after the day on 
                which the holder receives the payment or 
                distribution.
                  (B) Limitation.--This paragraph shall not 
                apply to any amount described in subparagraph 
                (A) received by an individual from an Archer 
                MSA if, at any time during the 1-year period 
                ending on the day of such receipt, such 
                individual received any other amount described 
                in subparagraph (A) from an Archer MSA which 
                was not includible in the individual's gross 
                income because of the application of this 
                paragraph.
          (6) Coordination with medical expense deduction.--For 
        purposes of determining the amount of the deduction 
        under section 213, any payment or distribution out of 
        an Archer MSA for qualified medical expenses shall not 
        be treated as an expense paid for medical care.
          (7) Transfer of account incident to divorce.--The 
        transfer of an individual's interest in an Archer MSA 
        to an individual's spouse or former spouse under a 
        divorce or separation instrument described in clause 
        (i) of section 121(d)(3)(C) shall not be considered a 
        taxable transfer made by such individual 
        notwithstanding any other provision of this subtitle, 
        and such interest shall, after such transfer, be 
        treated as an Archer MSA with respect to which such 
        spouse is the account holder.
          (8) Treatment after death of account holder.--
                  (A) Treatment if designated beneficiary is 
                spouse.--If the account holder's surviving 
                spouse acquires such holder's interest in an 
                Archer MSA by reason of being the designated 
                beneficiary of such account at the death of the 
                account holder, such Archer MSA shall be 
                treated as if the spouse were the account 
                holder.
                  (B) Other cases.--
                          (i) In general.--If, by reason of the 
                        death of the account holder, any person 
                        acquires the account holder's interest 
                        in an Archer MSA in a case to which 
                        subparagraph (A) does not apply--
                                  (I) such account shall cease 
                                to be an Archer MSA as of the 
                                date of death, and
                                  (II) an amount equal to the 
                                fair market value of the assets 
                                in such account on such date 
                                shall be includible if such 
                                person is not the estate of 
                                such holder, in such person's 
                                gross income for the taxable 
                                year which includes such date, 
                                or if such person is the estate 
                                of such holder, in such 
                                holder's gross income for the 
                                last taxable year of such 
                                holder.
                          (ii) Special rules.--
                                  (I) Reduction of inclusion 
                                for pre-death expenses.--The 
                                amount includible in gross 
                                income under clause (i) by any 
                                person (other than the estate) 
                                shall be reduced by the amount 
                                of qualified medical expenses 
                                which were incurred by the 
                                decedent before the date of the 
                                decedent's death and paid by 
                                such person within 1 year after 
                                such date.
                                  (II) Deduction for estate 
                                taxes.--An appropriate 
                                deduction shall be allowed 
                                under section 691(c) to any 
                                person (other than the decedent 
                                or the decedent's spouse) with 
                                respect to amounts included in 
                                gross income under clause (i) 
                                by such person.
  (g) Cost-of-living adjustment.--In the case of any taxable 
year beginning in a calendar year after 1998, each dollar 
amount in subsection (c)(2) shall be increased by an amount 
equal to--
          (1) such dollar amount, multiplied by
          (2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which such 
        taxable year begins by substituting ``calendar year 
        1997'' for ``calendar year 2016'' in subparagraph 
        (A)(ii) thereof.
If any increase under the preceding sentence is not a multiple 
of $50, such increase shall be rounded to the nearest multiple 
of $50.
  (h) Reports.--The Secretary may require the trustee of an 
Archer MSA to make such reports regarding such account to the 
Secretary and to the account holder with respect to 
contributions, distributions, and such other matters as the 
Secretary determines appropriate. The reports required by this 
subsection shall be filed at such time and in such manner and 
furnished to such individuals at such time and in such manner 
as may be required by the Secretary.
  (i) Limitation on number of taxpayers having Archer MSAs.--
          (1) In general.--Except as provided in paragraph (5), 
        no individual shall be treated as an eligible 
        individual for any taxable year beginning after the 
        cut-off year unless--
                  (A) such individual was an active MSA 
                participant for any taxable year ending on or 
                before the close of the cut-off year, or
                  (B) such individual first became an active 
                MSA participant for a taxable year ending after 
                the cut-off year by reason of coverage under a 
                high deductible health plan of an MSA-
                participating employer.
          (2) Cut-off year.--For purposes of paragraph (1), the 
        term ``cut-off year'' means the earlier of--
                  (A) calendar year 2007, or
                  (B) the first calendar year before 2007 for 
                which the Secretary determines under subsection 
                (j) that the numerical limitation for such year 
                has been exceeded.
          (3) Active MSA participant.--For purposes of this 
        subsection--
                  (A) In general.--The term ``active MSA 
                participant'' means, with respect to any 
                taxable year, any individual who is the account 
                holder of any Archer MSA into which any 
                contribution was made which was excludable from 
                gross income under section 106(b), or allowable 
                as a deduction under this section, for such 
                taxable year.
                  (B) Special rule for cut-off years before 
                2007.--In the case of a cut-off year before 
                2007--
                          (i) an individual shall not be 
                        treated as an eligible individual for 
                        any month of such year or an active MSA 
                        participant under paragraph (1)(A) 
                        unless such individual is, on or before 
                        the cut-off date, covered under a high 
                        deductible health plan, and
                          (ii) an employer shall not be treated 
                        as an MSA-participating employer unless 
                        the employer, on or before the cut-off 
                        date, offered coverage under a high 
                        deductible health plan to any employee.
                  (C) Cut-off date.--For purposes of 
                subparagraph (B)--
                          (i) In general.--Except as otherwise 
                        provided in this subparagraph, the cut-
                        off date is October 1 of the cut-off 
                        year.
                          (ii) Employees with enrollment 
                        periods after October 1.--In the case 
                        of an individual described in subclause 
                        (I) of subsection (c)(1)(A)(iii), if 
                        the regularly scheduled enrollment 
                        period for health plans of the 
                        individual's employer occurs during the 
                        last 3 months of the cut-off year, the 
                        cut-off date is December 31 of the cut-
                        off year.
                          (iii) Self-employed individuals.--In 
                        the case of an individual described in 
                        subclause (II) of subsection 
                        (c)(1)(A)(iii), the cut-off date is 
                        November 1 of the cut-off year.
                          (iv) Special rules for 1997.--If 1997 
                        is a cut-off year by reason of 
                        subsection (j)(1)(A)--
                                  (I) each of the cut-off dates 
                                under clauses (i) and (iii) 
                                shall be 1 month earlier than 
                                the date determined without 
                                regard to this clause, and
                                  (II) clause (ii) shall be 
                                applied by substituting ``4 
                                months'' for ``3 months''.
          (4) MSA-participating employer.--For purposes of this 
        subsection, the term ``MSA-participating employer'' 
        means any small employer if--
                  (A) such employer made any contribution to 
                the Archer MSA of any employee during the cut-
                off year or any preceding calendar year which 
                was excludable from gross income under section 
                106(b), or
                  (B) at least 20 percent of the employees of 
                such employer who are eligible individuals for 
                any month of the cut-off year by reason of 
                coverage under a high deductible health plan of 
                such employer each made a contribution of at 
                least $100 to their Archer MSAs for any taxable 
                year ending with or within the cut-off year 
                which was allowable as a deduction under this 
                section.
          (5) Additional eligibility after cut-off year.--If 
        the Secretary determines under subsection (j)(2)(A) 
        that the numerical limit for the calendar year 
        following a cut-off year described in paragraph (2)(B) 
        has not been exceeded--
                  (A) this subsection shall not apply to any 
                otherwise eligible individual who is covered 
                under a high deductible health plan during the 
                first 6 months of the second calendar year 
                following the cut-off year (and such individual 
                shall be treated as an active MSA participant 
                for purposes of this subsection if a 
                contribution is made to any Archer MSA with 
                respect to such coverage), and
                  (B) any employer who offers coverage under a 
                high deductible health plan to any employee 
                during such 6-month period shall be treated as 
                an MSA-participating employer for purposes of 
                this subsection if the requirements of 
                paragraph (4) are met with respect to such 
                coverage.
        For purposes of this paragraph, subsection (j)(2)(A) 
        shall be applied for 1998 by substituting ``750,000'' 
        for ``600,000''.
  (j) Determination of whether numerical limits are exceeded.--
          (1) Determination of whether limit exceeded for 
        1997.--The numerical limitation for 1997 is exceeded 
        if, based on the reports required under paragraph (4), 
        the number of Archer MSAs established as of--
                  (A) April 30, 1997, exceeds 375,000, or
                  (B) June 30, 1997, exceeds 525,000.
          (2) Determination of whether limit exceeded for 1998, 
        1999, 2001, 2002, 2004, 2005, or 2006.--
                  (A) In general.--The numerical limitation for 
                1998, 1999, 2001, 2002, 2004, 2005, or 2006 is 
                exceeded if the sum of--
                          (i) the number of MSA returns filed 
                        on or before April 15 of such calendar 
                        year for taxable years ending with or 
                        within the preceding calendar year, 
                        plus
                          (ii) the Secretary's estimate 
                        (determined on the basis of the returns 
                        described in clause (i)) of the number 
                        of MSA returns for such taxable years 
                        which will be filed after such date,
                exceeds 750,000 (600,000 in the case of 1998). 
                For purposes of the preceding sentence, the 
                term ``MSA return'' means any return on which 
                any exclusion is claimed under section 106(b) 
                or any deduction is claimed under this section.
                  (B) Alternative computation of limitation.--
                The numerical limitation for 1998, 1999, 2001, 
                2002, 2004, 2005, or 2006 is also exceeded if 
                the sum of--
                          (i) 90 percent of the sum determined 
                        under subparagraph (A) for such 
                        calendar year, plus
                          (ii) the product of 2.5 and the 
                        number of Archer MSAs established 
                        during the portion of such year 
                        preceding July 1 (based on the reports 
                        required under paragraph (4)) for 
                        taxable years beginning in such year,
                exceeds 750,000.
                  (C) No limitation for 2000 or 2003.--The 
                numerical limitation shall not apply for 2000 
                or 2003.
          (3) Previously uninsured individuals not included in 
        determination.--
                  (A) In general.--The determination of whether 
                any calendar year is a cut-off year shall be 
                made by not counting the Archer MSA of any 
                previously uninsured individual.
                  (B) Previously uninsured individual.--For 
                purposes of this subsection, the term 
                ``previously uninsured individual'' means, with 
                respect to any Archer MSA, any individual who 
                had no health plan coverage (other than 
                coverage referred to in subsection (c)(1)(B)) 
                at any time during the 6-month period before 
                the date such individual's coverage under the 
                high deductible health plan commences.
          (4) Reporting by MSA trustees.--
                  (A) In general.--Not later than August 1 of 
                1997, 1998, 1999, 2001, 2002, 2004, 2005, and 
                2006, each person who is the trustee of an 
                Archer MSA established before July 1 of such 
                calendar year shall make a report to the 
                Secretary (in such form and manner as the 
                Secretary shall specify) which specifies--
                          (i) the number of Archer MSAs 
                        established before such July 1 (for 
                        taxable years beginning in such 
                        calendar year) of which such person is 
                        the trustee,
                          (ii) the name and TIN of the account 
                        holder of each such account, and
                          (iii) the number of such accounts 
                        which are accounts of previously 
                        uninsured individuals.
                  (B) Additional report for 1997.--Not later 
                than June 1, 1997, each person who is the 
                trustee of an Archer MSA established before May 
                1, 1997, shall make an additional report 
                described in subparagraph (A) but only with 
                respect to accounts established before May 1, 
                1997.
                  (C) Penalty for failure to file report.--The 
                penalty provided in section 6693(a) shall apply 
                to any report required by this paragraph, 
                except that--
                          (i) such section shall be applied by 
                        substituting ``$25'' for ``$50'', and
                          (ii) the maximum penalty imposed on 
                        any trustee shall not exceed $5,000.
                  (D) Aggregation of accounts.--To the extent 
                practicable, in determining the number of 
                Archer MSAs on the basis of the reports under 
                this paragraph, all Archer MSAs of an 
                individual shall be treated as 1 account and 
                all accounts of individuals who are married to 
                each other shall be treated as 1 account.
          (5) Date of making determinations.--Any determination 
        under this subsection that a calendar year is a cut-off 
        year shall be made by the Secretary and shall be 
        published not later than October 1 of such year.

SEC. 221. INTEREST ON EDUCATION LOANS.

  (a) Allowance of deduction.--In the case of an individual, 
there shall be allowed as a deduction for the taxable year an 
amount equal to the interest paid by the taxpayer during the 
taxable year on any qualified education loan.
  (b) Maximum deduction.--
          (1) In general.--Except as provided in paragraph (2), 
        the deduction allowed by subsection (a) for the taxable 
        year shall not exceed $2,500.
          (2) Limitation based on modified adjusted gross 
        income.--
                  (A) In general.--The amount which would (but 
                for this paragraph) be allowable as a deduction 
                under this section shall be reduced (but not 
                below zero) by the amount determined under 
                subparagraph (B).
                  (B) Amount of reduction.--The amount 
                determined under this subparagraph is the 
                amount which bears the same ratio to the amount 
                which would be so taken into account as--
                          (i) the excess of--
                                  (I) the taxpayer's modified 
                                adjusted gross income for such 
                                taxable year, over
                                  (II) $50,000 ($100,000 in the 
                                case of a joint return), bears 
                                to (ii) $15,000 ($30,000 in the 
                                case of a joint return).
                  (C) Modified adjusted gross income.--The term 
                ``modified adjusted gross income'' means 
                adjusted gross income determined--
                          (i) without regard to this section 
                        and sections 222, 911, 931, and 933, 
                        and
                          (ii) after application of sections 
                        86, 135, 137, 219, and 469 (c) 
                        Dependents not eligible for 
                        deduction.--No deduction shall be 
                        allowed by this section to an 
                        individual for the taxable year if a 
                        deduction under section 151 with 
                        respect to such individual is allowed 
                        to another taxpayer for the taxable 
                        year beginning in the calendar year in 
                        which such individual's taxable year 
                        begins.
  (d) Definitions.--For purposes of this section--
          (1) Qualified education loan.--The term ``qualified 
        education loan'' means any indebtedness incurred by the 
        taxpayer solely to pay qualified higher education 
        expenses--
                  (A) which are incurred on behalf of the 
                taxpayer, the taxpayer's spouse, or any 
                dependent of the taxpayer as of the time the 
                indebtedness was incurred,
                  (B) which are paid or incurred within a 
                reasonable period of time before or after the 
                indebtedness is incurred, and
                  (C) which are attributable to education 
                furnished during a period during which the 
                recipient was an eligible student.
        Such term includes indebtedness used to refinance 
        indebtedness which qualifies as a qualified education 
        loan. The term ``qualified education loan'' shall not 
        include any indebtedness owed to a person who is 
        related (within the meaning of section 267(b) or 
        707(b)(1)) to the taxpayer or to any person by reason 
        of a loan under any qualified employer plan (as defined 
        in section 72(p)(4)) or under any contract referred to 
        in section 72(p)(5).
          (2) Qualified higher education expenses.--The term 
        ``qualified higher education expenses'' means the cost 
        of attendance (as defined in section 472 of the Higher 
        Education Act of 1965, 20 U.S.C. 1087ll, as in effect 
        on the day before the date of the enactment of the 
        Taxpayer Relief Act of 1997) at an eligible educational 
        institution, reduced by the sum of--
                  (A) the amount excluded from gross income 
                under section 127, 135, 529, or 530 by reason 
                of such expenses, and
                  (B) the amount of any scholarship, allowance, 
                or payment described in section 25A(g)(2).
        For purposes of the preceding sentence, the term 
        ``eligible educational institution'' has the same 
        meaning given such term by section 25A(f)(2), except 
        that such term shall also include an institution 
        conducting an internship or residency program leading 
        to a degree or certificate awarded by an institution of 
        higher education, a hospital, or a health care facility 
        which offers postgraduate training.
          (3) Eligible student.--The term ``eligible student'' 
        has the meaning given such term by section 25A(b)(3).
          (4) Dependent.--The term ``dependent'' has the 
        meaning given such term by [section 152] section 7706 
        (determined without regard to subsections (b)(1), 
        (b)(2), and (d)(1)(B) thereof).
  (e) Special rules.--
          (1) Denial of double benefit.--No deduction shall be 
        allowed under this section for any amount for which a 
        deduction is allowable under any other provision of 
        this chapter.
          (2) Married couples must file joint return.--If the 
        taxpayer is married at the close of the taxable year, 
        the deduction shall be allowed under subsection (a) 
        only if the taxpayer and the taxpayer's spouse file a 
        joint return for the taxable year.
          (3) Marital status.--Marital status shall be 
        determined in accordance with section 7703.
  (f) Inflation adjustments.--
          (1) In general.--In the case of a taxable year 
        beginning after 2002, the $50,000 and $100,000 amounts 
        in subsection (b)(2) shall each be increased by an 
        amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2001'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
          (2) Rounding.--If any amount as adjusted under 
        paragraph (1) is not a multiple of $5,000, such amount 
        shall be rounded to the next lowest multiple of $5,000.

SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.

  (a) Allowance of deduction.--In the case of an individual, 
there shall be allowed as a deduction an amount equal to the 
qualified tuition and related expenses paid by the taxpayer 
during the taxable year.
  (b) Dollar limitations.--
          (1) In general.--The amount allowed as a deduction 
        under subsection (a) with respect to the taxpayer for 
        any taxable year shall not exceed the applicable dollar 
        limit.
          (2) Applicable dollar limit.--
                  (A) 2002 and 2003.--In the case of a taxable 
                year beginning in 2002 or 2003, the applicable 
                dollar limit shall be equal to--
                          (i) in the case of a taxpayer whose 
                        adjusted gross income for the taxable 
                        year does not exceed $65,000 ($130,000 
                        in the case of a joint return), $3,000, 
                        and--
                          (ii) in the case of any other 
                        taxpayer, zero.
                  (B) After 2003.--In the case of any taxable 
                year beginning after 2003, the applicable 
                dollar amount shall be equal to--
                          (i) in the case of a taxpayer whose 
                        adjusted gross income for the taxable 
                        year does not exceed $65,000 ($130,000 
                        in the case of a joint return), $4,000,
                          (ii) in the case of a taxpayer not 
                        described in clause (i) whose adjusted 
                        gross income for the taxable year does 
                        not exceed $80,000 ($160,000 in the 
                        case of a joint return), $2,000, and
                          (iii) in the case of any other 
                        taxpayer, zero.
                  (C) Adjusted gross income.--For purposes of 
                this paragraph, adjusted gross income shall be 
                determined--
                          (i) without regard to this section 
                        and sections 911, 931, and 933, and
                          (ii) after application of sections 
                        86, 135, 137, 219, 221, and 469.
  (c) No double benefit.--
          (1) In general.--No deduction shall be allowed under 
        subsection (a) for any expense for which a deduction is 
        allowed to the taxpayer under any other provision of 
        this chapter.
          (2) Coordination with other education incentives.--
                  (A) Denial of deduction if credit elected.--
                No deduction shall be allowed under subsection 
                (a) for a taxable year with respect to the 
                qualified tuition and related expenses with 
                respect to an individual if the taxpayer or any 
                other person elects to have section 25A apply 
                with respect to such individual for such year.
                  (B) Coordination with exclusions.--The total 
                amount of qualified tuition and related 
                expenses shall be reduced by the amount of such 
                expenses taken into account in determining any 
                amount excluded under section 135, 529(c)(1), 
                or 530(d)(2). For purposes of the preceding 
                sentence, the amount taken into account in 
                determining the amount excluded under section 
                529(c)(1) shall not include that portion of the 
                distribution which represents a return of any 
                contributions to the plan.
          (3) Dependents.--No deduction shall be allowed under 
        subsection (a) to any individual [with respect to whom 
        a deduction under section 151 is allowable to] who is a 
        dependent of another taxpayer for a taxable year 
        beginning in the calendar year in which such 
        individual's taxable year begins.
  (d) Definitions and special rules.--For purposes of this 
section--
          (1) Qualified tuition and related expenses.--The term 
        ``qualified tuition and related expenses'' has the 
        meaning given such term by section 25A(f). Such 
        expenses shall be reduced in the same manner as under 
        section 25A(g)(2).
          (2) Identification requirement.--No deduction shall 
        be allowed under subsection (a) to a taxpayer with 
        respect to the qualified tuition and related expenses 
        of an individual unless the taxpayer includes the name 
        and taxpayer identification number of the individual on 
        the return of tax for the taxable year.
          (3) Limitation on taxable year of deduction.--
                  (A) In general.--A deduction shall be allowed 
                under subsection (a) for qualified tuition and 
                related expenses for any taxable year only to 
                the extent such expenses are in connection with 
                enrollment at an institution of higher 
                education during the taxable year.
                  (B) Certain prepayments allowed.--
                Subparagraph (A) shall not apply to qualified 
                tuition and related expenses paid during a 
                taxable year if such expenses are in connection 
                with an academic term beginning during such 
                taxable year or during the first 3 months of 
                the next taxable year.
          (4) No deduction for married individuals filing 
        separate returns.--If the taxpayer is a married 
        individual (within the meaning of section 7703), this 
        section shall apply only if the taxpayer and the 
        taxpayer's spouse file a joint return for the taxable 
        year.
          (5) Nonresident aliens.--If the taxpayer is a 
        nonresident alien individual for any portion of the 
        taxable year, this section shall apply only if such 
        individual is treated as a resident alien of the United 
        States for purposes of this chapter by reason of an 
        election under subsection (g) or (h) of section 6013.
          (6) Payee statement requirement.--
                  (A) In general.--Except as otherwise provided 
                by the Secretary, no deduction shall be allowed 
                under subsection (a) unless the taxpayer 
                receives a statement furnished under section 
                6050S(d) which contains all of the information 
                required by paragraph (2) thereof.
                  (B) Statement received by dependent.--The 
                receipt of the statement referred to in 
                subparagraph (A) by an individual described in 
                subsection (c)(3) shall be treated for purposes 
                of subparagraph (A) as received by the 
                taxpayer.
          (7) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry 
        out this section, including regulations requiring 
        recordkeeping and information reporting.
  (e) Termination.--This section shall not apply to taxable 
years beginning after December 31, 2017.

SEC. 223. HEALTH SAVINGS ACCOUNTS.

  (a) Deduction allowed.--In the case of an individual who is 
an eligible individual for any month during the taxable year, 
there shall be allowed as a deduction for the taxable year an 
amount equal to the aggregate amount paid in cash during such 
taxable year by or on behalf of such individual to a health 
savings account of such individual.
  (b) Limitations.--
          (1) In general.--The amount allowable as a deduction 
        under subsection (a) to an individual for the taxable 
        year shall not exceed the sum of the monthly 
        limitations for months during such taxable year that 
        the individual is an eligible individual.
          (2) Monthly limitation.--The monthly limitation for 
        any month is \1/12\ of--
                  (A) in the case of an eligible individual who 
                has self- only coverage under a high deductible 
                health plan as of the first day of such month, 
                $2,250.
                  (B) in the case of an eligible individual who 
                has family coverage under a high deductible 
                health plan as of the first day of such month, 
                $4,500.
          (3) Additional contributions for individuals 55 or 
        older.--
                  (A) In general.--In the case of an individual 
                who has attained age 55 before the close of the 
                taxable year, the applicable limitation under 
                subparagraphs (A) and (B) of paragraph (2) 
                shall be increased by the additional 
                contribution amount.
                  (B) Additional contribution amount.--For 
                purposes of this section, the additional 
                contribution amount is the amount determined in 
                accordance with the following table:

 
------------------------------------------------------------------------
                                     The additional contribution amount
  For taxable years beginning in:                    is:
------------------------------------------------------------------------
2004                                $500
2005                                $600
2006                                $700
2007                                $800
2008                                $900
2009 and thereafter                 $1,000.
------------------------------------------------------------------------

          (4) Coordination with other contributions.--The 
        limitation which would (but for this paragraph) apply 
        under this subsection to an individual for any taxable 
        year shall be reduced (but not below zero) by the sum 
        of--
                  (A) the aggregate amount paid for such 
                taxable year to Archer MSAs of such individual,
                  (B) the aggregate amount contributed to 
                health savings accounts of such individual 
                which is excludable from the taxpayer's gross 
                income for such taxable year under section 
                106(d) (and such amount shall not be allowed as 
                a deduction under subsection (a)), and
                  (C) the aggregate amount contributed to 
                health savings accounts of such individual for 
                such taxable year under section 408(d)(9) (and 
                such amount shall not be allowed as a deduction 
                under subsection (a)).
        Subparagraph (A) shall not apply with respect to any 
        individual to whom paragraph (5) applies.
          (5) Special rule for married individuals.--In the 
        case of individuals who are married to each other, if 
        either spouse has family coverage--
                  (A) both spouses shall be treated as having 
                only such family coverage (and if such spouses 
                each have family coverage under different 
                plans, as having the family coverage with the 
                lowest annual deductible), and
                  (B) the limitation under paragraph (1) (after 
                the application of subparagraph (A) and without 
                regard to any additional contribution amount 
                under paragraph (3))--
                          (i) shall be reduced by the aggregate 
                        amount paid to Archer MSAs of such 
                        spouses for the taxable year, and
                          (ii) after such reduction, shall be 
                        divided equally between them unless 
                        they agree on a different division.
          (6) Denial of deduction to dependents.--No deduction 
        shall be allowed under this section to any individual 
        [with respect to whom a deduction under section 151 is 
        allowable to] who is a dependent of another taxpayer 
        for a taxable year beginning in the calendar year in 
        which such individual's taxable year begins.
          (7) Medicare eligible individuals.--The limitation 
        under this subsection for any month with respect to an 
        individual shall be zero for the first month such 
        individual is entitled to benefits under title XVIII of 
        the Social Security Act and for each month thereafter.
          (8) Increase in limit for individuals becoming 
        eligible individuals after the beginning of the year.--
                  (A) In general.--For purposes of computing 
                the limitation under paragraph (1) for any 
                taxable year, an individual who is an eligible 
                individual during the last month of such 
                taxable year shall be treated--
                          (i) as having been an eligible 
                        individual during each of the months in 
                        such taxable year, and
                          (ii) as having been enrolled, during 
                        each of the months such individual is 
                        treated as an eligible individual 
                        solely by reason of clause (i), in the 
                        same high deductible health plan in 
                        which the individual was enrolled for 
                        the last month of such taxable year.
                  (B) Failure to maintain high deductible 
                health plan coverage.--
                          (i) In general.--If, at any time 
                        during the testing period, the 
                        individual is not an eligible 
                        individual, then--
                                  (I) gross income of the 
                                individual for the taxable year 
                                in which occurs the first month 
                                in the testing period for which 
                                such individual is not an 
                                eligible individual is 
                                increased by the aggregate 
                                amount of all contributions to 
                                the health savings account of 
                                the individual which could not 
                                have been made but for 
                                subparagraph (A), and
                                  (II) the tax imposed by this 
                                chapter for any taxable year on 
                                the individual shall be 
                                increased by 10 percent of the 
                                amount of such increase.
                          (ii) Exception for disability or 
                        death.--Subclauses (I) and (II) of 
                        clause (i) shall not apply if the 
                        individual ceased to be an eligible 
                        individual by reason of the death of 
                        the individual or the individual 
                        becoming disabled (within the meaning 
                        of section 72(m)(7)).
                          (iii) Testing period.--The term 
                        ``testing period'' means the period 
                        beginning with the last month of the 
                        taxable year referred to in 
                        subparagraph (A) and ending on the last 
                        day of the 12th month following such 
                        month.
  (c) Definitions and special rules.--For purposes of this 
section--
          (1) Eligible individual.--
                  (A) In general.--The term ``eligible 
                individual'' means, with respect to any month, 
                any individual if--
                          (i) such individual is covered under 
                        a high deductible health plan as of the 
                        1st day of such month, and
                          (ii) such individual is not, while 
                        covered under a high deductible health 
                        plan, covered under any health plan--
                                  (I) which is not a high 
                                deductible health plan, and
                                  (II) which provides coverage 
                                for any benefit which is 
                                covered under the high 
                                deductible health plan.
                  (B) Certain coverage disregarded.--
                Subparagraph (A)(ii) shall be applied without 
                regard to--
                          (i) coverage for any benefit provided 
                        by permitted insurance,
                          (ii) coverage (whether through 
                        insurance or otherwise) for accidents, 
                        disability, dental care, vision care, 
                        or long-term care, and
                          (iii) for taxable years beginning 
                        after December 31, 2006, coverage under 
                        a health flexible spending arrangement 
                        during any period immediately following 
                        the end of a plan year of such 
                        arrangement during which unused 
                        benefits or contributions remaining at 
                        the end of such plan year may be paid 
                        or reimbursed to plan participants for 
                        qualified benefit expenses incurred 
                        during such period if--
                                  (I) the balance in such 
                                arrangement at the end of such 
                                plan year is zero, or
                                  (II) the individual is making 
                                a qualified HSA distribution 
                                (as defined in section 106(e)) 
                                in an amount equal to the 
                                remaining balance in such 
                                arrangement as of the end of 
                                such plan year, in accordance 
                                with rules prescribed by the 
                                Secretary.
                  (C) Special rule for individuals eligible for 
                certain veterans benefits.--An individual shall 
                not fail to be treated as an eligible 
                individual for any period merely because the 
                individual receives hospital care or medical 
                services under any law administered by the 
                Secretary of Veterans Affairs for a service-
                connected disability (within the meaning of 
                section 101(16) of title 38, United States 
                Code).
          (2) High deductible health plan.--
                  (A) In general.--The term ``high deductible 
                health plan'' means a health plan--
                          (i) which has an annual deductible 
                        which is not less than--
                                  (I) $1,000 for self-only 
                                coverage, and
                                  (II) twice the dollar amount 
                                in subclause (I) for family 
                                coverage, and
                          (ii) the sum of the annual deductible 
                        and the other annual out-of-pocket 
                        expenses required to be paid under the 
                        plan (other than for premiums) for 
                        covered benefits does not exceed--
                                  (I) $5,000 for self-only 
                                coverage, and
                                  (II) twice the dollar amount 
                                in subclause (I) for family 
                                coverage.
                  (B) Exclusion of certain plans.--Such term 
                does not include a health plan if substantially 
                all of its coverage is coverage described in 
                paragraph (1)(B).
                  (C) Safe harbor for absence of preventive 
                care deductible.--A plan shall not fail to be 
                treated as a high deductible health plan by 
                reason of failing to have a deductible for 
                preventive care (within the meaning of section 
                1861 of the Social Security Act, except as 
                otherwise provided by the Secretary).
                  (D) Special rules for network plans.--In the 
                case of a plan using a network of providers--
                          (i) Annual out-of-pocket 
                        limitation.--Such plan shall not fail 
                        to be treated as a high deductible 
                        health plan by reason of having an out-
                        of-pocket limitation for services 
                        provided outside of such network which 
                        exceeds the applicable limitation under 
                        subparagraph (A)(ii).
                          (ii) Annual deductible.--Such plan's 
                        annual deductible for services provided 
                        outside of such network shall not be 
                        taken into account for purposes of 
                        subsection (b)(2).
          (3) Permitted insurance.--The term ``permitted 
        insurance'' means--
                  (A) insurance if substantially all of the 
                coverage provided under such insurance relates 
                to--
                          (i) liabilities incurred under 
                        workers' compensation laws,
                          (ii) tort liabilities,
                          (iii) liabilities relating to 
                        ownership or use of property, or
                          (iv) such other similar liabilities 
                        as the Secretary may specify by 
                        regulations,
                  (B) insurance for a specified disease or 
                illness, and
                  (C) insurance paying a fixed amount per day 
                (or other period) of hospitalization.
          (4) Family coverage.--The term ``family coverage'' 
        means any coverage other than self-only coverage.
          (5) Archer MSA.--The term ``Archer MSA'' has the 
        meaning given such term in section 220(d).
  (d) Health savings account.--For purposes of this section--
          (1) In general.--The term ``health savings account'' 
        means a trust created or organized in the United States 
        as a health savings account exclusively for the purpose 
        of paying the qualified medical expenses of the account 
        beneficiary, but only if the written governing 
        instrument creating the trust meets the following 
        requirements:
                  (A) Except in the case of a rollover 
                contribution described in subsection (f)(5) or 
                section 220(f)(5), no contribution will be 
                accepted--
                          (i) unless it is in cash, or
                          (ii) to the extent such contribution, 
                        when added to previous contributions to 
                        the trust for the calendar year, 
                        exceeds the sum of--
                                  (I) the dollar amount in 
                                effect under subsection 
                                (b)(2)(B), and
                                  (II) the dollar amount in 
                                effect under subsection 
                                (b)(3)(B).
                  (B) The trustee is a bank (as defined in 
                section 408(n)), an insurance company (as 
                defined in section 816), or another person who 
                demonstrates to the satisfaction of the 
                Secretary that the manner in which such person 
                will administer the trust will be consistent 
                with the requirements of this section.
                  (C) No part of the trust assets will be 
                invested in life insurance contracts.
                  (D) The assets of the trust will not be 
                commingled with other property except in a 
                common trust fund or common investment fund.
                  (E) The interest of an individual in the 
                balance in his account is nonforfeitable.
          (2) Qualified medical expenses.--
                  (A) In general.--The term ``qualified medical 
                expenses'' means, with respect to an account 
                beneficiary, amounts paid by such beneficiary 
                for medical care (as defined in section 213(d)) 
                for such individual, the spouse of such 
                individual, and any dependent (as defined in 
                [section 152] section 7706, determined without 
                regard to subsections (b)(1), (b)(2), and 
                (d)(1)(B) thereof) of such individual, but only 
                to the extent such amounts are not compensated 
                for by insurance or otherwise. Such term shall 
                include an amount paid for medicine or a drug 
                only if such medicine or drug is a prescribed 
                drug (determined without regard to whether such 
                drug is available without a prescription) or is 
                insulin.
                  (B) Health insurance may not be purchased 
                from account.--Subparagraph (A) shall not apply 
                to any payment for insurance.
                  (C) Exceptions.--Subparagraph (B) shall not 
                apply to any expense for coverage under--
                          (i) a health plan during any period 
                        of continuation coverage required under 
                        any Federal law,
                          (ii) a qualified long-term care 
                        insurance contract (as defined in 
                        section 7702B(b)),
                          (iii) a health plan during a period 
                        in which the individual is receiving 
                        unemployment compensation under any 
                        Federal or State law, or
                          (iv) in the case of an account 
                        beneficiary who has attained the age 
                        specified in section 1811 of the Social 
                        Security Act, any health insurance 
                        other than a medicare supplemental 
                        policy (as defined in section 1882 of 
                        the Social Security Act).
          (3) Account beneficiary.--The term ``account 
        beneficiary'' means the individual on whose behalf the 
        health savings account was established.
          (4) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this 
        section:
                  (A) Section 219(d)(2) (relating to no 
                deduction for rollovers).
                  (B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                  (C) Except as provided in section 106(d), 
                section 219(f)(5) (relating to employer 
                payments).
                  (D) Section 408(g) (relating to community 
                property laws).
                  (E) Section 408(h) (relating to custodial 
                accounts).
  (e) Tax treatment of accounts.--
          (1) In general.--A health savings account is exempt 
        from taxation under this subtitle unless such account 
        has ceased to be a health savings account. 
        Notwithstanding the preceding sentence, any such 
        account is subject to the taxes imposed by section 511 
        (relating to imposition of tax on unrelated business 
        income of charitable, etc. organizations).
          (2) Account terminations.--Rules similar to the rules 
        of paragraphs (2) and (4) of section 408(e) shall apply 
        to health savings accounts, and any amount treated as 
        distributed under such rules shall be treated as not 
        used to pay qualified medical expenses.
  (f) Tax treatment of distributions.--
          (1) Amounts used for qualified medical expenses.--Any 
        amount paid or distributed out of a health savings 
        account which is used exclusively to pay qualified 
        medical expenses of any account beneficiary shall not 
        be includible in gross income.
          (2) Inclusion of amounts not used for qualified 
        medical expenses.--Any amount paid or distributed out 
        of a health savings account which is not used 
        exclusively to pay the qualified medical expenses of 
        the account beneficiary shall be included in the gross 
        income of such beneficiary.
          (3) Excess contributions returned before due date of 
        return.--
                  (A) In general.--If any excess contribution 
                is contributed for a taxable year to any health 
                savings account of an individual, paragraph (2) 
                shall not apply to distributions from the 
                health savings accounts of such individual (to 
                the extent such distributions do not exceed the 
                aggregate excess contributions to all such 
                accounts of such individual for such year) if--
                          (i) such distribution is received by 
                        the individual on or before the last 
                        day prescribed by law (including 
                        extensions of time) for filing such 
                        individual's return for such taxable 
                        year, and
                          (ii) such distribution is accompanied 
                        by the amount of net income 
                        attributable to such excess 
                        contribution.
                Any net income described in clause (ii) shall 
                be included in the gross income of the 
                individual for the taxable year in which it is 
                received.
                  (B) Excess contribution.--For purposes of 
                subparagraph (A), the term ``excess 
                contribution'' means any contribution (other 
                than a rollover contribution described in 
                paragraph (5) or section 220(f)(5)) which is 
                neither excludable from gross income under 
                section 106(d) nor deductible under this 
                section.
          (4) Additional tax on distributions not used for 
        qualified medical expenses.--
                  (A) In general.--The tax imposed by this 
                chapter on the account beneficiary for any 
                taxable year in which there is a payment or 
                distribution from a health savings account of 
                such beneficiary which is includible in gross 
                income under paragraph (2) shall be increased 
                by 20 percent of the amount which is so 
                includible.
                  (B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment 
                or distribution is made after the account 
                beneficiary becomes disabled within the meaning 
                of section 72(m)(7) or dies.
                  (C) Exception for distributions after 
                medicare eligibility.--Subparagraph (A) shall 
                not apply to any payment or distribution after 
                the date on which the account beneficiary 
                attains the age specified in section 1811 of 
                the Social Security Act.
          (5) Rollover contribution.--An amount is described in 
        this paragraph as a rollover contribution if it meets 
        the requirements of subparagraphs (A) and (B).
                  (A) In general.--Paragraph (2) shall not 
                apply to any amount paid or distributed from a 
                health savings account to the account 
                beneficiary to the extent the amount received 
                is paid into a health savings account for the 
                benefit of such beneficiary not later than the 
                60th day after the day on which the beneficiary 
                receives the payment or distribution.
                  (B) Limitation.--This paragraph shall not 
                apply to any amount described in subparagraph 
                (A) received by an individual from a health 
                savings account if, at any time during the 1-
                year period ending on the day of such receipt, 
                such individual received any other amount 
                described in subparagraph (A) from a health 
                savings account which was not includible in the 
                individual's gross income because of the 
                application of this paragraph.
          (6) Coordination with medical expense deduction.--For 
        purposes of determining the amount of the deduction 
        under section 213, any payment or distribution out of a 
        health savings account for qualified medical expenses 
        shall not be treated as an expense paid for medical 
        care.
          (7) Transfer of account incident to divorce.--The 
        transfer of an individual's interest in a health 
        savings account to an individual's spouse or former 
        spouse under a divorce or separation instrument 
        described in clause (i) of section 121(d)(3)(C) shall 
        not be considered a taxable transfer made by such 
        individual notwithstanding any other provision of this 
        subtitle, and such interest shall, after such transfer, 
        be treated as a health savings account with respect to 
        which such spouse is the account beneficiary.
          (8) Treatment after death of account beneficiary.--
                  (A) Treatment if designated beneficiary is 
                spouse.--If the account beneficiary's surviving 
                spouse acquires such beneficiary's interest in 
                a health savings account by reason of being the 
                designated beneficiary of such account at the 
                death of the account beneficiary, such health 
                savings account shall be treated as if the 
                spouse were the account beneficiary.
                  (B) Other cases.--
                          (i) In general.--If, by reason of the 
                        death of the account beneficiary, any 
                        person acquires the account 
                        beneficiary's interest in a health 
                        savings account in a case to which 
                        subparagraph (A) does not apply--
                                  (I) such account shall cease 
                                to be a health savings account 
                                as of the date of death, and
                                  (II) an amount equal to the 
                                fair market value of the assets 
                                in such account on such date 
                                shall be includible if such 
                                person is not the estate of 
                                such beneficiary, in such 
                                person's gross income for the 
                                taxable year which includes 
                                such date, or if such person is 
                                the estate of such beneficiary, 
                                in such beneficiary's gross 
                                income for the last taxable 
                                year of such beneficiary.
                          (ii) Special rules.--
                                  (I) Reduction of inclusion 
                                for predeath expenses.--The 
                                amount includible in gross 
                                income under clause (i) by any 
                                person (other than the estate) 
                                shall be reduced by the amount 
                                of qualified medical expenses 
                                which were incurred by the 
                                decedent before the date of the 
                                decedent's death and paid by 
                                such person within 1 year after 
                                such date.
                                  (II) Deduction for estate 
                                taxes.--An appropriate 
                                deduction shall be allowed 
                                under section 691(c) to any 
                                person (other than the decedent 
                                or the decedent's spouse) with 
                                respect to amounts included in 
                                gross income under clause (i) 
                                by such person.
  (g) Cost-of-living adjustment.--
          (1) In general.--Each dollar amount in subsections 
        (b)(2) and (c)(2)(A) shall be increased by an amount 
        equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which such taxable year begins determined by 
                substituting for ``calendar year 2016'' in 
                subparagraph (A)(ii) thereof--
                          (i) except as provided in clause 
                        (ii), ``calendar year 1997'', and
                          (ii) in the case of each dollar 
                        amount in subsection (c)(2)(A), 
                        ``calendar year 2003''.
        In the case of adjustments made for any taxable year 
        beginning after 2007, section 1(f)(4) shall be applied 
        for purposes of this paragraph by substituting ``March 
        31'' for ``August 31'', and the Secretary shall publish 
        the adjusted amounts under subsections (b)(2) and 
        (c)(2)(A) for taxable years beginning in any calendar 
        year no later than June 1 of the preceding calendar 
        year.
          (2) Rounding.--If any increase under paragraph (1) is 
        not a multiple of $50, such increase shall be rounded 
        to the nearest multiple of $50.
  (h) Reports.--The Secretary may require--
          (1) the trustee of a health savings account to make 
        such reports regarding such account to the Secretary 
        and to the account beneficiary with respect to 
        contributions, distributions, the return of excess 
        contributions, and such other matters as the Secretary 
        determines appropriate, and
          (2) any person who provides an individual with a high 
        deductible health plan to make such reports to the 
        Secretary and to the account beneficiary with respect 
        to such plan as the Secretary determines appropriate.
The reports required by this subsection shall be filed at such 
time and in such manner and furnished to such individuals at 
such time and in such manner as may be required by the 
Secretary.

           *       *       *       *       *       *       *

PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS

           *       *       *       *       *       *       *

PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *

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

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

           *       *       *       *       *       *       *

Subchapter D--Deferred Compensation, Etc

           *       *       *       *       *       *       *

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

           *       *       *       *       *       *       *

Subpart A--General Rule

           *       *       *       *       *       *       *

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

  (a) Requirements for qualification.--A trust created or 
organized in the United States and forming part of a stock 
bonus, pension, or profit-sharing plan of an employer for the 
exclusive benefit of his employees or their beneficiaries shall 
constitute a qualified trust under this section--
          (1) if contributions are made to the trust by such 
        employer, or employees, or both, or by another employer 
        who is entitled to deduct his contributions under 
        section 404(a)(3)(B) (relating to deduction for 
        contributions to profit-sharing and stock bonus plans), 
        or by a charitable remainder trust pursuant to a 
        qualified gratuitous transfer (as defined in section 
        664(g)(1)), for the purpose of distributing to such 
        employees or their beneficiaries the corpus and income 
        of the fund accumulated by the trust in accordance with 
        such plan;
          (2) if under the trust instrument it is impossible, 
        at any time prior to the satisfaction of all 
        liabilities with respect to employees and their 
        beneficiaries under the trust, for any part of the 
        corpus or income to be (within the taxable year or 
        thereafter) used for, or diverted to, purposes other 
        than for the exclusive benefit of his employees or 
        their beneficiaries (but this paragraph shall not be 
        construed, in the case of a multiemployer plan, to 
        prohibit the return of a contribution within 6 months 
        after the plan administrator determines that the 
        contribution was made by a mistake of fact or law 
        (other than a mistake relating to whether the plan is 
        described in section 401(a) or the trust which is part 
        of such plan is exempt from taxation under section 
        501(a), or the return of any withdrawal liability 
        payment determined to be an overpayment within 6 months 
        of such determination));
          (3) if the plan of which such trust is a part 
        satisfies the requirements of section 410 (relating to 
        minimum participation standards); and
          (4) if the contributions or benefits provided under 
        the plan do not discriminate in favor of highly 
        compensated employees (within the meaning of section 
        414(q)). For purposes of this paragraph, there shall be 
        excluded from consideration employees described in 
        section 410(b)(3)(A) and (C).
          (5) Special rules relating to nondiscrimination 
        requirements.--
                  (A) Salaried or clerical employees.--A 
                classification shall not be considered 
                discriminatory within the meaning of paragraph 
                (4) or section 410(b)(2)(A)(i) merely because 
                it is limited to salaried or clerical 
                employees.
                  (B) Contributions and benefits may bear 
                uniform relationship to compensation.--A plan 
                shall not be considered discriminatory within 
                the meaning of paragraph (4) merely because the 
                contributions or benefits of, or on behalf of, 
                the employees under the plan bear a uniform 
                relationship to the compensation (within the 
                meaning of section 414(s)) of such employees.
                  (C) Certain disparity permitted.--A plan 
                shall not be considered discriminatory within 
                the meaning of paragraph (4) merely because the 
                contributions or benefits of, or on behalf of, 
                the employees under the plan favor highly 
                compensated employees (as defined in section 
                414(q)) in the manner permitted under 
                subsection (l).
                  (D) Integrated defined benefit plan.--
                          (i) In general.--A defined benefit 
                        plan shall not be considered 
                        discriminatory within the meaning of 
                        paragraph (4) merely because the plan 
                        provides that the employer-derived 
                        accrued retirement benefit for any 
                        participant under the plan may not 
                        exceed the excess (if any) of--
                                  (I) the participant's final 
                                pay with the employer, over
                                  (II) the employer-derived 
                                retirement benefit created 
                                under Federal law attributable 
                                to service by the participant 
                                with the employer.
                        For purposes of this clause, the 
                        employer-derived retirement benefit 
                        created under Federal law shall be 
                        treated as accruing ratably over 35 
                        years.
                          (ii) Final pay.--For purposes of this 
                        subparagraph, the participant's final 
                        pay is the compensation (as defined in 
                        section 414(q)(4)) paid to the 
                        participant by the employer for any 
                        year--
                                  (I) which ends during the 5-
                                year period ending with the 
                                year in which the participant 
                                separated from service for the 
                                employer, and
                                  (II) for which the 
                                participant's total 
                                compensation from the employer 
                                was highest.
                  (E) 2 or more plans treated as single plan.--
                For purposes of determining whether 2 or more 
                plans of an employer satisfy the requirements 
                of paragraph (4) when considered as a single 
                plan--
                          (i) Contributions.--If the amount of 
                        contributions on behalf of the 
                        employees allowed as a deduction under 
                        section 404 for the taxable year with 
                        respect to such plans, taken together, 
                        bears a uniform relationship to the 
                        compensation (within the meaning of 
                        section 414(s)) of such employees, the 
                        plans shall not be considered 
                        discriminatory merely because the 
                        rights of employees to, or derived 
                        from, the employer contributions under 
                        the separate plans do not become 
                        nonforfeitable at the same rate.
                          (ii) Benefits.--If the employees' 
                        rights to benefits under the separate 
                        plans do not become nonforfeitable at 
                        the same rate, but the levels of 
                        benefits provided by the separate plans 
                        satisfy the requirements of regulations 
                        prescribed by the Secretary to take 
                        account of the differences in such 
                        rates, the plans shall not be 
                        considered discriminatory merely 
                        because of the difference in such 
                        rates.
                  (F) Social security retirement age.--For 
                purposes of testing for discrimination under 
                paragraph (4)--
                          (i) the social security retirement 
                        age (as defined in section 415(b)(8)) 
                        shall be treated as a uniform 
                        retirement age, and
                          (ii) subsidized early retirement 
                        benefits and joint and survivor 
                        annuities shall not be treated as being 
                        unavailable to employees on the same 
                        terms merely because such benefits or 
                        annuities are based in whole or in part 
                        on an employee's social security 
                        retirement age (as so defined).
                  (G) Governmental plans.--Paragraphs (3) and 
                (4) shall not apply to a governmental plan 
                (within the meaning of section 414(d)).
          (6) A plan shall be considered as meeting the 
        requirements of paragraph (3) during the whole of any 
        taxable year of the plan if on one day in each quarter 
        it satisfied such requirements.
          (7) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part satisfies the requirements of section 411 
        (relating to minimum vesting standards).
          (8) A trust forming part of a defined benefit plan 
        shall not constitute a qualified trust under this 
        section unless the plan provides that forfeitures must 
        not be applied to increase the benefits any employee 
        would otherwise receive under the plan.
          (9) Required distributions.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this subsection unless 
                the plan provides that the entire interest of 
                each employee--
                          (i) will be distributed to such 
                        employee not later than the required 
                        beginning date, or
                          (ii) will be distributed, beginning 
                        not later than the required beginning 
                        date, in accordance with regulations, 
                        over the life of such employee or over 
                        the lives of such employee and a 
                        designated beneficiary (or over a 
                        period not extending beyond the life 
                        expectancy of such employee or the life 
                        expectancy of such employee and a 
                        designated beneficiary).
                  (B) Required distribution where employee dies 
                before entire interest is distributed.--
                          (i) Where distributions have begun 
                        under subparagraph (A)(ii).--A trust 
                        shall not constitute a qualified trust 
                        under this section unless the plan 
                        provides that if--
                                  (I) the distribution of the 
                                employee's interest has begun 
                                in accordance with subparagraph 
                                (A)(ii), and
                                  (II) the employee dies before 
                                his entire interest has been 
                                distributed to him,
                        the remaining portion of such interest 
                        will be distributed at least as rapidly 
                        as under the method of distributions 
                        being used under subparagraph (A)(ii) 
                        as of the date of his death.
                          (ii) 5-year rule for other cases.--A 
                        trust shall not constitute a qualified 
                        trust under this section unless the 
                        plan provides that, if an employee dies 
                        before the distribution of the 
                        employee's interest has begun in 
                        accordance with subparagraph (A)(ii), 
                        the entire interest of the employee 
                        will be distributed within 5 years 
                        after the death of such employee.
                          (iii) Exception to 5-year rule for 
                        certain amounts payable over life of 
                        beneficiary.--If--
                                  (I) any portion of the 
                                employee's interest is payable 
                                to (or for the benefit of) a 
                                designated beneficiary,
                                  (II) such portion will be 
                                distributed (in accordance with 
                                regulations) over the life of 
                                such designated beneficiary (or 
                                over a period not extending 
                                beyond the life expectancy of 
                                such beneficiary), and
                                  (III) such distributions 
                                begin not later than 1 year 
                                after the date of the 
                                employee's death or such later 
                                date as the Secretary may by 
                                regulations prescribe,
                        for purposes of clause (ii), the 
                        portion referred to in subclause (I) 
                        shall be treated as distributed on the 
                        date on which such distributions begin.
                          (iv) Special rule for surviving 
                        spouse of employee.--If the designated 
                        beneficiary referred to in clause 
                        (iii)(I) is the surviving spouse of the 
                        employee--
                                  (I) the date on which the 
                                distributions are required to 
                                begin under clause (iii)(III) 
                                shall not be earlier than the 
                                date on which the employee 
                                would have attained age 70 1/2, 
                                and
                                  (II) if the surviving spouse 
                                dies before the distributions 
                                to such spouse begin, this 
                                subparagraph shall be applied 
                                as if the surviving spouse were 
                                the employee.
                  (C) Required beginning date.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``required 
                        beginning date'' means April 1 of the 
                        calendar year following the later of--
                                  (I) the calendar year in 
                                which the employee attains age 
                                70 1/2, or
                                  (II) the calendar year in 
                                which the employee retires.
                          (ii) Exception.--Subclause (II) of 
                        clause (i) shall not apply--
                                  (I) except as provided in 
                                section 409(d), in the case of 
                                an employee who is a 5-percent 
                                owner (as defined in section 
                                416) with respect to the plan 
                                year ending in the calendar 
                                year in which the employee 
                                attains age 70 1/2, or
                                  (II) for purposes of section 
                                408(a)(6) or (b)(3).
                          (iii) Actuarial adjustment.--In the 
                        case of an employee to whom clause 
                        (i)(II) applies who retires in a 
                        calendar year after the calendar year 
                        in which the employee attains age 70 1/
                        2, the employee's accrued benefit shall 
                        be actuarially increased to take into 
                        account the period after age 70 1/2 in 
                        which the employee was not receiving 
                        any benefits under the plan.
                          (iv) Exception for governmental and 
                        church plans.--Clauses (ii) and (iii) 
                        shall not apply in the case of a 
                        governmental plan or church plan. For 
                        purposes of this clause, the term 
                        ``church plan'' means a plan maintained 
                        by a church for church employees, and 
                        the term ``church'' means any church 
                        (as defined in section 3121(w)(3)(A)) 
                        or qualified church-controlled 
                        organization (as defined in section 
                        3121(w)(3)(B)).
                  (D) Life expectancy.--For purposes of this 
                paragraph, the life expectancy of an employee 
                and the employee's spouse (other than in the 
                case of a life annuity) may be redetermined but 
                not more frequently than annually.
                  (E) Designated beneficiary.--For purposes of 
                this paragraph, the term ``designated 
                beneficiary'' means any individual designated 
                as a beneficiary by the employee.
                  (F) Treatment of payments to children.--Under 
                regulations prescribed by the Secretary, for 
                purposes of this paragraph, any amount paid to 
                a child shall be treated as if it had been paid 
                to the surviving spouse if such amount will 
                become payable to the surviving spouse upon 
                such child reaching majority (or other 
                designated event permitted under regulations).
                  (G) Treatment of incidental death benefit 
                distributions.--For purposes of this title, any 
                distribution required under the incidental 
                death benefit requirements of this subsection 
                shall be treated as a distribution required 
                under this paragraph.
          (10) Other requirements.--
                  (A) Plans benefiting owner-employees.--In the 
                case of any plan which provides contributions 
                or benefits for employees some or all of whom 
                are owner-employees (as defined in subsection 
                (c)(3)), a trust forming part of such plan 
                shall constitute a qualified trust under this 
                section only if the requirements of subsection 
                (d) are also met.
                  (B) Top-heavy plans.--
                          (i) In general.--In the case of any 
                        top-heavy plan, a trust forming part of 
                        such plan shall constitute a qualified 
                        trust under this section only if the 
                        requirements of section 416 are met.
                          (ii) Plans which may become top-
                        heavy.--Except to the extent provided 
                        in regulations, a trust forming part of 
                        a plan (whether or not a top-heavy 
                        plan) shall constitute a qualified 
                        trust under this section only if such 
                        plan contains provisions--
                                  (I) which will take effect if 
                                such plan becomes a top-heavy 
                                plan, and
                                  (II) which meet the 
                                requirements of section 416.
                          (iii) Exemption for governmental 
                        plans.--This subparagraph shall not 
                        apply to any governmental plan.
          (11) Requirement of joint and survivor annuity and 
        preretirement survivor annuity.--
                  (A) In general.--In the case of any plan to 
                which this paragraph applies, except as 
                provided in section 417, a trust forming part 
                of such plan shall not constitute a qualified 
                trust under this section unless--
                          (i) in the case of a vested 
                        participant who does not die before the 
                        annuity starting date, the accrued 
                        benefit payable to such participant is 
                        provided in the form of a qualified 
                        joint and survivor annuity, and
                          (ii) in the case of a vested 
                        participant who dies before the annuity 
                        starting date and who has a surviving 
                        spouse, a qualified preretirement 
                        survivor annuity is provided to the 
                        surviving spouse of such participant.
                  (B) Plans to which paragraph applies.--This 
                paragraph shall apply to--
                          (i) any defined benefit plan,
                          (ii) any defined contribution plan 
                        which is subject to the funding 
                        standards of section 412, and
                          (iii) any participant under any other 
                        defined contribution plan unless--
                                  (I) such plan provides that 
                                the participant's 
                                nonforfeitable accrued benefit 
                                (reduced by any security 
                                interest held by the plan by 
                                reason of a loan outstanding to 
                                such participant) is payable in 
                                full, on the death of the 
                                participant, to the 
                                participant's surviving spouse 
                                (or, if there is no surviving 
                                spouse or the surviving spouse 
                                consents in the manner required 
                                under section 417(a)(2), to a 
                                designated beneficiary),
                                  (II) such participant does 
                                not elect a payment of benefits 
                                in the form of a life annuity, 
                                and
                                  (III) with respect to such 
                                participant, such plan is not a 
                                direct or indirect transferee 
                                (in a transfer after December 
                                31, 1984) of a plan which is 
                                described in clause (i) or (ii) 
                                or to which this clause applied 
                                with respect to the 
                                participant.
                Clause (iii)(III) shall apply only with respect 
                to the transferred assets (and income 
                therefrom) if the plan separately accounts for 
                such assets and any income therefrom.
                  (C) Exception for certain ESOP benefits.--
                          (i) In general.--In the case of--
                                  (I) a tax credit employee 
                                stock ownership plan (as 
                                defined in section 409(a)), or
                                  (II) an employee stock 
                                ownership plan (as defined in 
                                section 4975(e)(7)),
                        subparagraph (A) shall not apply to 
                        that portion of the employee's accrued 
                        benefit to which the requirements of 
                        section 409(h) apply.
                          (ii) Nonforfeitable benefit must be 
                        paid in full, etc.--In the case of any 
                        participant, clause (i) shall apply 
                        only if the requirements of subclauses 
                        (I), (II), and (III) of subparagraph 
                        (B)(iii) are met with respect to such 
                        participant.
                  (D) Special rule where participant and spouse 
                married less than 1 year.--A plan shall not be 
                treated as failing to meet the requirements of 
                subparagraphs (B)(iii) or (C) merely because 
                the plan provides that benefits will not be 
                payable to the surviving spouse of the 
                participant unless the participant and such 
                spouse had been married throughout the 1-year 
                period ending on the earlier of the 
                participant's annuity starting date or the date 
                of the participant's death.
                  (E) Exception for plans described in section 
                404(c).--This paragraph shall not apply to a 
                plan which the Secretary has determined is a 
                plan described in section 404(c) (or a 
                continuation thereof) in which participation is 
                substantially limited to individuals who, 
                before January 1, 1976, ceased employment 
                covered by the plan.
                  (F) Cross reference.--For--
                          (i) provisions under which 
                        participants may elect to waive the 
                        requirements of this paragraph, and
                          (ii) other definitions and special 
                        rules for purposes of this paragraph,
                see section 417.
          (12) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part provides that in the case of any merger or 
        consolidation with, or transfer of assets or 
        liabilities to, any other plan after September 2, 1974, 
        each participant in the plan would (if the plan then 
        terminated) receive a benefit immediately after the 
        merger, consolidation, or transfer which is equal to or 
        greater than the benefit he would have been entitled to 
        receive immediately before the merger, consolidation, 
        or transfer (if the plan had then terminated). The 
        preceding sentence does not apply to any multiemployer 
        plan with respect to any transaction to the extent that 
        participants either before or after the transaction are 
        covered under a multiemployer plan to which title IV of 
        the Employee Retirement Income Security Act of 1974 
        applies.
          (13) Assignment and alienation.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless the 
                plan of which such trust is a part provides 
                that benefits provided under the plan may not 
                be assigned or alienated. For purposes of the 
                preceding sentence, there shall not be taken 
                into account any voluntary and revocable 
                assignment of not to exceed 10 percent of any 
                benefit payment made by any participant who is 
                receiving benefits under the plan unless the 
                assignment or alienation is made for purposes 
                of defraying plan administration costs. For 
                purposes of this paragraph a loan made to a 
                participant or beneficiary shall not be treated 
                as an assignment or alienation if such loan is 
                secured by the participant's accrued 
                nonforfeitable benefit and is exempt from the 
                tax imposed by section 4975 (relating to tax on 
                prohibited transactions) by reason of section 
                4975(d)(1). This paragraph shall take effect on 
                January 1, 1976 and shall not apply to 
                assignments which were irrevocable on September 
                2, 1974.
                  (B) Special rules for domestic relations 
                orders.--Subparagraph (A) shall apply to the 
                creation, assignment, or recognition of a right 
                to any benefit payable with respect to a 
                participant pursuant to a domestic relations 
                order, except that subparagraph (A) shall not 
                apply if the order is determined to be a 
                qualified domestic relations order.
                  (C) Special rule for certain judgments and 
                settlements.--Subparagraph (A) shall not apply 
                to any offset of a participant's benefits 
                provided under a plan against an amount that 
                the participant is ordered or required to pay 
                to the plan if--
                          (i) the order or requirement to pay 
                        arises--
                                  (I) under a judgment of 
                                conviction for a crime 
                                involving such plan,
                                  (II) under a civil judgment 
                                (including a consent order or 
                                decree) entered by a court in 
                                an action brought in connection 
                                with a violation (or alleged 
                                violation) of part 4 of 
                                subtitle B of title I of the 
                                Employee Retirement Income 
                                Security Act of 1974, or
                                  (III) pursuant to a 
                                settlement agreement between 
                                the Secretary of Labor and the 
                                participant, or a settlement 
                                agreement between the Pension 
                                Benefit Guaranty Corporation 
                                and the participant, in 
                                connection with a violation (or 
                                alleged violation) of part 4 of 
                                such subtitle by a fiduciary or 
                                any other person,
                          (ii) the judgment, order, decree, or 
                        settlement agreement expressly provides 
                        for the offset of all or part of the 
                        amount ordered or required to be paid 
                        to the plan against the participant's 
                        benefits provided under the plan, and
                          (iii) in a case in which the survivor 
                        annuity requirements of section 
                        401(a)(11) apply with respect to 
                        distributions from the plan to the 
                        participant, if the participant has a 
                        spouse at the time at which the offset 
                        is to be made--
                                  (I) either such spouse has 
                                consented in writing to such 
                                offset and such consent is 
                                witnessed by a notary public or 
                                representative of the plan (or 
                                it is established to the 
                                satisfaction of a plan 
                                representative that such 
                                consent may not be obtained by 
                                reason of circumstances 
                                described in section 
                                417(a)(2)(B)), or an election 
                                to waive the right of the 
                                spouse to either a qualified 
                                joint and survivor annuity or a 
                                qualified preretirement 
                                survivor annuity is in effect 
                                in accordance with the 
                                requirements of section 417(a),
                                  (II) such spouse is ordered 
                                or required in such judgment, 
                                order, decree, or settlement to 
                                pay an amount to the plan in 
                                connection with a violation of 
                                part 4 of such subtitle, or
                                  (III) in such judgment, 
                                order, decree, or settlement, 
                                such spouse retains the right 
                                to receive the survivor annuity 
                                under a qualified joint and 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(i) and under a 
                                qualified preretirement 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(ii), determined 
                                in accordance with subparagraph 
                                (D).
                        A plan shall not be treated as failing 
                        to meet the requirements of this 
                        subsection, subsection (k), section 
                        403(b), or section 409(d) solely by 
                        reason of an offset described in this 
                        subparagraph.
                  (D) Survivor annuity.--
                          (i) In general.--The survivor annuity 
                        described in subparagraph (C)(iii)(III) 
                        shall be determined as if--
                                  (I) the participant 
                                terminated employment on the 
                                date of the offset,
                                  (II) there was no offset,
                                  (III) the plan permitted 
                                commencement of benefits only 
                                on or after normal retirement 
                                age,
                                  (IV) the plan provided only 
                                the minimum-required qualified 
                                joint and survivor annuity, and
                                  (V) the amount of the 
                                qualified preretirement 
                                survivor annuity under the plan 
                                is equal to the amount of the 
                                survivor annuity payable under 
                                the minimum-required qualified 
                                joint and survivor annuity.
                          (ii) Definition.--For purposes of 
                        this subparagraph, the term ``minimum- 
                        required qualified joint and survivor 
                        annuity'' means the qualified joint and 
                        survivor annuity which is the actuarial 
                        equivalent of the participant's accrued 
                        benefit (within the meaning of section 
                        411(a)(7)) and under which the survivor 
                        annuity is 50 percent of the amount of 
                        the annuity which is payable during the 
                        joint lives of the participant and the 
                        spouse.
          (14) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part provides that, unless the participant 
        otherwise elects, the payment of benefits under the 
        plan to the participant will begin not later than the 
        60th day after the latest of the close of the plan year 
        in which--
                  (A) the date on which the participant attains 
                the earlier of age 65 or the normal retirement 
                age specified under the plan,
                  (B) occurs the 10th anniversary of the year 
                in which the participant commenced 
                participation in the plan, or
                  (C) the participant terminates his service 
                with the employer.
        In the case of a plan which provides for the payment of 
        an early retirement benefit, a trust forming a part of 
        such plan shall not constitute a qualified trust under 
        this section unless a participant who satisfied the 
        service requirements for such early retirement benefit, 
        but separated from the service (with any nonforfeitable 
        right to an accrued benefit) before satisfying the age 
        requirement for such early retirement benefit, is 
        entitled upon satisfaction of such age requirement to 
        receive a benefit not less than the benefit to which he 
        would be entitled at the normal retirement age, 
        actuarially, reduced under regulations prescribed by 
        the Secretary.
          (15) A trust shall not constitute a qualified trust 
        under this section unless under the plan of which such 
        trust is a part--
                  (A) in the case of a participant or 
                beneficiary who is receiving benefits under 
                such plan, or
                  (B) in the case of a participant who is 
                separated from the service and who has 
                nonforfeitable rights to benefits,
        such benefits are not decreased by reason of any 
        increase in the benefit levels payable under title II 
        of the Social Security Act or any increase in the wage 
        base under such title II, if such increase takes place 
        after September 2, 1974, or (if later) the earlier of 
        the date of first receipt of such benefits or the date 
        of such separation, as the case may be.
          (16) A trust shall not constitute a qualified trust 
        under this section if the plan of which such trust is a 
        part provides for benefits or contributions which 
        exceed the limitations of section 415.
          (17) Compensation limit.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless, 
                under the plan of which such trust is a part, 
                the annual compensation of each employee taken 
                into account under the plan for any year does 
                not exceed $200,000.
                  (B) Cost-of-living adjustment.--The Secretary 
                shall adjust annually the $200,000 amount in 
                subparagraph (A) for increases in the cost-of-
                living at the same time and in the same manner 
                as adjustments under section 415(d); except 
                that the base period shall be the calendar 
                quarter beginning July 1, 2001, and any 
                increase which is not a multiple of $5,000 
                shall be rounded to the next lowest multiple of 
                $5,000.
          (19) A trust shall not constitute a qualified trust 
        under this section if under the plan of which such 
        trust is a part any part of a participant's accrued 
        benefit derived from employer contributions (whether or 
        not otherwise nonforfeitable), is forfeitable solely 
        because of withdrawal by such participant of any amount 
        attributable to the benefit derived from contributions 
        made by such participant. The preceding sentence shall 
        not apply to the accrued benefit of any participant 
        unless, at the time of such withdrawal, such 
        participant has a nonforfeitable right to at least 50 
        percent of such accrued benefit (as determined under 
        section 411). The first sentence of this paragraph 
        shall not apply to the extent that an accrued benefit 
        is permitted to be forfeited in accordance with section 
        411(a)(3)(D)(iii) (relating to proportional forfeitures 
        of benefits accrued before September 2, 1974, in the 
        event of withdrawal of certain mandatory 
        contributions).
          (20) A trust forming part of a pension plan shall not 
        be treated as failing to constitute a qualified trust 
        under this section merely because the pension plan of 
        which such trust is a part makes 1 or more 
        distributions within 1 taxable year to a distributee on 
        account of a termination of the plan of which the trust 
        is a part, or in the case of a profit-sharing or stock 
        bonus plan, a complete discontinuance of contributions 
        under such plan. This paragraph shall not apply to a 
        defined benefit plan unless the employer maintaining 
        such plan files a notice with the Pension Benefit 
        Guaranty Corporation (at the time and in the manner 
        prescribed by the Pension Benefit Guaranty Corporation) 
        notifying the Corporation of such payment or 
        distribution and the Corporation has approved such 
        payment or distribution or, within 90 days after the 
        date on which such notice was filed, has failed to 
        disapprove such payment or distribution. For purposes 
        of this paragraph, rules similar to the rules of 
        section 402(a)(6)(B) (as in effect before its repeal by 
        section 521 of the Unemployment Compensation Amendments 
        of 1992) shall apply.
          (22) If a defined contribution plan (other than a 
        profit-sharing plan)--
                  (A) is established by an employer whose stock 
                is not readily tradable on an established 
                market, and
                  (B) after acquiring securities of the 
                employer, more than 10 percent of the total 
                assets of the plan are securities of the 
                employer,
        any trust forming part of such plan shall not 
        constitute a qualified trust under this section unless 
        the plan meets the requirements of subsection (e) of 
        section 409. The requirements of subsection (e) of 
        section 409 shall not apply to any employees of an 
        employer who are participants in any defined 
        contribution plan established and maintained by such 
        employer if the stock of such employer is not readily 
        tradable on an established market and the trade or 
        business of such employer consists of publishing on a 
        regular basis a newspaper for general circulation. For 
        purposes of the preceding sentence, subsections (b), 
        (c), (m), and (o) of section 414 shall not apply except 
        for determining whether stock of the employer is not 
        readily tradable on an established market.
          (23) A stock bonus plan shall not be treated as 
        meeting the requirements of this section unless such 
        plan meets the requirements of subsections (h) and (o) 
        of section 409, except that in applying section 409(h) 
        for purposes of this paragraph, the term ``employer 
        securities'' shall include any securities of the 
        employer held by the plan.
          (24) Any group trust which otherwise meets the 
        requirements of this section shall not be treated as 
        not meeting such requirements on account of the 
        participation or inclusion in such trust of the moneys 
        of any plan or governmental unit described in section 
        818(a)(6).
          (25) Requirement that actuarial assumptions be 
        specified.--A defined benefit plan shall not be treated 
        as providing definitely determinable benefits unless, 
        whenever the amount of any benefit is to be determined 
        on the basis of actuarial assumptions, such assumptions 
        are specified in the plan in a way which precludes 
        employer discretion.
          (26) Additional participation requirements.--
                  (A) In general.--In the case of a trust which 
                is a part of a defined benefit plan, such trust 
                shall not constitute a qualified trust under 
                this subsection unless on each day of the plan 
                year such trust benefits at least the lesser 
                of--
                          (i) 50 employees of the employer, or
                          (ii) the greater of--
                                  (I) 40 percent of all 
                                employees of the employer, or
                                  (II) 2 employees (or if there 
                                is only 1 employee, such 
                                employee).
                  (B) Treatment of excludable employees.--
                          (i) In general.--A plan may exclude 
                        from consideration under this paragraph 
                        employees described in paragraphs (3) 
                        and (4)(A) of section 410(b).
                          (ii) Separate application for certain 
                        excludable employees.--If employees 
                        described in section 410(b)(4)(B) are 
                        covered under a plan which meets the 
                        requirements of subparagraph (A) 
                        separately with respect to such 
                        employees, such employees may be 
                        excluded from consideration in 
                        determining whether any plan of the 
                        employer meets such requirements if--
                                  (I) the benefits for such 
                                employees are provided under 
                                the same plan as benefits for 
                                other employees,
                                  (II) the benefits provided to 
                                such employees are not greater 
                                than comparable benefits 
                                provided to other employees 
                                under the plan, and
                                  (III) no highly compensated 
                                employee (within the meaning of 
                                section 414(q)) is included in 
                                the group of such employees for 
                                more than 1 year.
                  (C) Special rule for collective bargaining 
                units.--Except to the extent provided in 
                regulations, a plan covering only employees 
                described in section 410(b)(3)(A) may exclude 
                from consideration any employees who are not 
                included in the unit or units in which the 
                covered employees are included.
                  (D) Paragraph not to apply to multiemployer 
                plans.--Except to the extent provided in 
                regulations, this paragraph shall not apply to 
                employees in a multiemployer plan (within the 
                meaning of section 414(f)) who are covered by 
                collective bargaining agreements.
                  (E) Special rule for certain dispositions or 
                acquisitions.--Rules similar to the rules of 
                section 410(b)(6)(C) shall apply for purposes 
                of this paragraph.
                  (F) Separate lines of business.--At the 
                election of the employer and with the consent 
                of the Secretary, this paragraph may be applied 
                separately with respect to each separate line 
                of business of the employer. For purposes of 
                this paragraph, the term ``separate line of 
                business'' has the meaning given such term by 
                section 414(r) (without regard to paragraph 
                (2)(A) or (7) thereof).
                  (G) Exception for governmental plans.--This 
                paragraph shall not apply to a governmental 
                plan (within the meaning of section 414(d)).
                  (H) Regulations.--The Secretary may by 
                regulation provide that any separate benefit 
                structure, any separate trust, or any other 
                separate arrangement is to be treated as a 
                separate plan for purposes of applying this 
                paragraph.
          (27) Determinations as to profit-sharing plans.--
                  (A) Contributions need not be based on 
                profits.--The determination of whether the plan 
                under which any contributions are made is a 
                profit-sharing plan shall be made without 
                regard to current or accumulated profits of the 
                employer and without regard to whether the 
                employer is a tax- exempt organization.
                  (B) Plan must designate type.--In the case of 
                a plan which is intended to be a money purchase 
                pension plan or a profit-sharing plan, a trust 
                forming part of such plan shall not constitute 
                a qualified trust under this subsection unless 
                the plan designates such intent at such time 
                and in such manner as the Secretary may 
                prescribe.
          (28) Additional requirements relating to employee 
        stock ownership plans.--
                  (A) In general.--In the case of a trust which 
                is part of an employee stock ownership plan 
                (within the meaning of section 4975(e)(7)) or a 
                plan which meets the requirements of section 
                409(a), such trust shall not constitute a 
                qualified trust under this section unless such 
                plan meets the requirements of subparagraphs 
                (B) and (C).
                  (B) Diversification of investments.--
                          (i) In general.--A plan meets the 
                        requirements of this subparagraph if 
                        each qualified participant in the plan 
                        may elect within 90 days after the 
                        close of each plan year in the 
                        qualified election period to direct the 
                        plan as to the investment of at least 
                        25 percent of the participant's account 
                        in the plan (to the extent such portion 
                        exceeds the amount to which a prior 
                        election under this subparagraph 
                        applies). In the case of the election 
                        year in which the participant can make 
                        his last election, the preceding 
                        sentence shall be applied by 
                        substituting ``50 percent'' for ``25 
                        percent''.
                          (ii) Method of meeting 
                        requirements.--A plan shall be treated 
                        as meeting the requirements of clause 
                        (i) if--
                                  (I) the portion of the 
                                participant's account covered 
                                by the election under clause 
                                (i) is distributed within 90 
                                days after the period during 
                                which the election may be made, 
                                or
                                  (II) the plan offers at least 
                                3 investment options (not 
                                inconsistent with regulations 
                                prescribed by the Secretary) to 
                                each participant making an 
                                election under clause (i) and 
                                within 90 days after the period 
                                during which the election may 
                                be made, the plan invests the 
                                portion of the participant's 
                                account covered by the election 
                                in accordance with such 
                                election.
                          (iii) Qualified participant.--For 
                        purposes of this subparagraph, the term 
                        ``qualified participant'' means any 
                        employee who has completed at least 10 
                        years of participation under the plan 
                        and has attained age 55.
                          (iv) Qualified election period.--For 
                        purposes of this subparagraph, the term 
                        ``qualified election period'' means the 
                        6-plan-year period beginning with the 
                        later of--
                                  (I) the 1st plan year in 
                                which the individual first 
                                became a qualified participant, 
                                or
                                  (II) the 1st plan year 
                                beginning after December 31, 
                                1986.
                        For purposes of the preceding sentence, 
                        an employer may elect to treat an 
                        individual first becoming a qualified 
                        participant in the 1st plan year 
                        beginning in 1987 as having become a 
                        participant in the 1st plan year 
                        beginning in 1988.
                          (v) Exception.--This subparagraph 
                        shall not apply to an applicable 
                        defined contribution plan (as defined 
                        in paragraph (35)(E)).
                  (C) Use of independent appraiser.--A plan 
                meets the requirements of this subparagraph if 
                all valuations of employer securities which are 
                not readily tradable on an established 
                securities market with respect to activities 
                carried on by the plan are by an independent 
                appraiser. For purposes of the preceding 
                sentence, the term ``independent appraiser'' 
                means any appraiser meeting requirements 
                similar to the requirements of the regulations 
                prescribed under section 170(a)(1).
          (29) Benefit limitations.--In the case of a defined 
        benefit plan (other than a multiemployer plan or a CSEC 
        plan) to which the requirements of section 412 apply, 
        the trust of which the plan is a part shall not 
        constitute a qualified trust under this subsection 
        unless the plan meets the requirements of section 436.
          (30) Limitations on elective deferrals.--In the case 
        of a trust which is part of a plan under which elective 
        deferrals (within the meaning of section 402(g)(3)) may 
        be made with respect to any individual during a 
        calendar year, such trust shall not constitute a 
        qualified trust under this subsection unless the plan 
        provides that the amount of such deferrals under such 
        plan and all other plans, contracts, or arrangements of 
        an employer maintaining such plan may not exceed the 
        amount of the limitation in effect under section 
        402(g)(1)(A) for taxable years beginning in such 
        calendar year.
          (31) Direct transfer of eligible rollover 
        distributions.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless the 
                plan of which such trust is a part provides 
                that if the distributee of any eligible 
                rollover distribution--
                          (i) elects to have such distribution 
                        paid directly to an eligible retirement 
                        plan, and
                          (ii) specifies the eligible 
                        retirement plan to which such 
                        distribution is to be paid (in such 
                        form and at such time as the plan 
                        administrator may prescribe),
                such distribution shall be made in the form of 
                a direct trustee-to-trustee transfer to the 
                eligible retirement plan so specified.
                  (B) Certain mandatory distributions.--
                          (i) In general.--In case of a trust 
                        which is part of an eligible plan, such 
                        trust shall not constitute a qualified 
                        trust under this section unless the 
                        plan of which such trust is a part 
                        provides that if--
                                  (I) a distribution described 
                                in clause (ii) in excess of 
                                $1,000 is made, and
                                  (II) the distributee does not 
                                make an election under 
                                subparagraph (A) and does not 
                                elect to receive the 
                                distribution directly,
                        the plan administrator shall make such 
                        transfer to an individual retirement 
                        plan of a designated trustee or issuer 
                        and shall notify the distributee in 
                        writing (either separately or as part 
                        of the notice under section 402(f)) 
                        that the distribution may be 
                        transferred to another individual 
                        retirement plan.
                          (ii) Eligible plan.--For purposes of 
                        clause (i), the term ``eligible plan'' 
                        means a plan which provides that any 
                        nonforfeitable accrued benefit for 
                        which the present value (as determined 
                        under section 411(a)(11)) does not 
                        exceed $5,000 shall be immediately 
                        distributed to the participant.
                  (C) Limitation.--Subparagraphs (A) and (B) 
                shall apply only to the extent that the 
                eligible rollover distribution would be 
                includible in gross income if not transferred 
                as provided in subparagraph (A) (determined 
                without regard to sections 402(c), 403(a)(4), 
                403(b)(8), and 457(e)(16)). The preceding 
                sentence shall not apply to such distribution 
                if the plan to which such distribution is 
                transferred--
                          (i) is a qualified trust which is 
                        part of a plan which is a defined 
                        contribution plan and agrees to 
                        separately account for amounts so 
                        transferred, including separately 
                        accounting for the portion of such 
                        distribution which is includible in 
                        gross income and the portion of such 
                        distribution which is not so 
                        includible, or
                          (ii) is an eligible retirement plan 
                        described in clause (i) or (ii) of 
                        section 402(c)(8)(B).
                  (D) Eligible rollover distribution.--For 
                purposes of this paragraph, the term ``eligible 
                rollover distribution'' has the meaning given 
                such term by section 402(f)(2)(A).
                  (E) Eligible retirement plan.--For purposes 
                of this paragraph, the term ``eligible 
                retirement plan'' has the meaning given such 
                term by section 402(c)(8)(B), except that a 
                qualified trust shall be considered an eligible 
                retirement plan only if it is a defined 
                contribution plan, the terms of which permit 
                the acceptance of rollover distributions.
          (32) Treatment of failure to make certain payments if 
        plan has liquidity shortfall.--
                  (A) In general.--A trust forming part of a 
                pension plan to which section 430(j)(4) or 
                433(f)(5) applies shall not be treated as 
                failing to constitute a qualified trust under 
                this section merely because such plan ceases to 
                make any payment described in subparagraph (B) 
                during any period that such plan has a 
                liquidity shortfall (as defined in section 
                430(j)(4) or 433(f)(5)).
                  (B) Payments described.--A payment is 
                described in this subparagraph if such payment 
                is--
                          (i) any payment, in excess of the 
                        monthly amount paid under a single life 
                        annuity (plus any social security 
                        supplements described in the last 
                        sentence of section 411(a)(9)), to a 
                        participant or beneficiary whose 
                        annuity starting date (as defined in 
                        section 417(f)(2)) occurs during the 
                        period referred to in subparagraph (A),
                          (ii) any payment for the purchase of 
                        an irrevocable commitment from an 
                        insurer to pay benefits, and
                          (iii) any other payment specified by 
                        the Secretary by regulations.
                  (C) Period of shortfall.--For purposes of 
                this paragraph, a plan has a liquidity 
                shortfall during the period that there is an 
                underpayment of an installment under section 
                430(j)(3) or 433(f) by reason of section 
                430(j)(4)(A) or 433(f)(5), respectively.
          (33) Prohibition on benefit increases while sponsor 
        is in bankruptcy.--
                  (A) In general.--A trust which is part of a 
                plan to which this paragraph applies shall not 
                constitute a qualified trust under this section 
                if an amendment to such plan is adopted while 
                the employer is a debtor in a case under title 
                11, United States Code, or similar Federal or 
                State law, if such amendment increases 
                liabilities of the plan by reason of
                          (i) any increase in benefits,
                          (ii) any change in the accrual of 
                        benefits, or
                          (iii) any change in the rate at which 
                        benefits become nonforfeitable under 
                        the plan,
                with respect to employees of the debtor, and 
                such amendment is effective prior to the 
                effective date of such employer's plan of 
                reorganization.
                  (B) Exceptions.--This paragraph shall not 
                apply to any plan amendment if--
                          (i) the plan, were such amendment to 
                        take effect, would have a funding 
                        target attainment percentage (as 
                        defined in section 430(d)(2)) of 100 
                        percent or more,
                          (ii) the Secretary determines that 
                        such amendment is reasonable and 
                        provides for only de minimis increases 
                        in the liabilities of the plan with 
                        respect to employees of the debtor,
                          (iii) such amendment only repeals an 
                        amendment described in section 
                        412(d)(2), or
                          (iv) such amendment is required as a 
                        condition of qualification under this 
                        part.
                  (C) Plans to which this paragraph applies.--
                This paragraph shall apply only to plans (other 
                than multiemployer plans or CSEC plans) covered 
                under section 4021 of the Employee Retirement 
                Income Security Act of 1974.
                  (D) Employer.--For purposes of this 
                paragraph, the term ``employer'' means the 
                employer referred to in section 412(b)(1), 
                without regard to section 412(b)(2).
          (34) Benefits of missing participants on plan 
        termination.--In the case of a plan covered by title IV 
        of the Employee Retirement Income Security Act of 1974, 
        a trust forming part of such plan shall not be treated 
        as failing to constitute a qualified trust under this 
        section merely because the pension plan of which such 
        trust is a part, upon its termination, transfers 
        benefits of missing participants to the Pension Benefit 
        Guaranty Corporation in accordance with section 4050 of 
        such Act.
          (35) Diversification requirements for certain defined 
        contribution plans.--
                  (A) In general.--A trust which is part of an 
                applicable defined contribution plan shall not 
                be treated as a qualified trust unless the plan 
                meets the diversification requirements of 
                subparagraphs (B), (C), and (D).
                  (B) Employee contributions and elective 
                deferrals invested in employer securities.--In 
                the case of the portion of an applicable 
                individual's account attributable to employee 
                contributions and elective deferrals which is 
                invested in employer securities, a plan meets 
                the requirements of this subparagraph if the 
                applicable individual may elect to direct the 
                plan to divest any such securities and to 
                reinvest an equivalent amount in other 
                investment options meeting the requirements of 
                subparagraph (D).
                  (C) Employer contributions invested in 
                employer securities.--In the case of the 
                portion of the account attributable to employer 
                contributions other than elective deferrals 
                which is invested in employer securities, a 
                plan meets the requirements of this 
                subparagraph if each applicable individual 
                who--
                          (i) is a participant who has 
                        completed at least 3 years of service, 
                        or
                          (ii) is a beneficiary of a 
                        participant described in clause (i) or 
                        of a deceased participant,
                may elect to direct the plan to divest any such 
                securities and to reinvest an equivalent amount 
                in other investment options meeting the 
                requirements of subparagraph (D).
                  (D) Investment options.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if the plan 
                        offers not less than 3 investment 
                        options, other than employer 
                        securities, to which an applicable 
                        individual may direct the proceeds from 
                        the divestment of employer securities 
                        pursuant to this paragraph, each of 
                        which is diversified and has materially 
                        different risk and return 
                        characteristics.
                          (ii) Treatment of certain 
                        restrictions and conditions.--
                                  (I) Time for making 
                                investment choices.--A plan 
                                shall not be treated as failing 
                                to meet the requirements of 
                                this subparagraph merely 
                                because the plan limits the 
                                time for divestment and 
                                reinvestment to periodic, 
                                reasonable opportunities 
                                occurring no less frequently 
                                than quarterly.
                                  (II) Certain restrictions and 
                                conditions not allowed.--Except 
                                as provided in regulations, a 
                                plan shall not meet the 
                                requirements of this 
                                subparagraph if the plan 
                                imposes restrictions or 
                                conditions with respect to the 
                                investment of employer 
                                securities which are not 
                                imposed on the investment of 
                                other assets of the plan. This 
                                subclause shall not apply to 
                                any restrictions or conditions 
                                imposed by reason of the 
                                application of securities laws.
                  (E) Applicable defined contribution plan.--
                For purposes of this paragraph--
                          (i) In general.--The term 
                        ``applicable defined contribution 
                        plan'' means any defined contribution 
                        plan which holds any publicly traded 
                        employer securities.
                          (ii) Exception for certain ESOPS.--
                        Such term does not include an employee 
                        stock ownership plan if--
                                  (I) there are no 
                                contributions to such plan (or 
                                earnings thereunder) which are 
                                held within such plan and are 
                                subject to subsection (k) or 
                                (m), and
                                  (II) such plan is a separate 
                                plan for purposes of section 
                                414(l) with respect to any 
                                other defined benefit plan or 
                                defined contribution plan 
                                maintained by the same employer 
                                or employers.
                          (iii) Exception for one participant 
                        plans.--Such term does not include a 
                        one-participant retirement plan.
                          (iv) One-participant retirement 
                        plan.--For purposes of clause (iii), 
                        the term ``one-participant retirement 
                        plan'' means a retirement plan that on 
                        the first day of the plan year--
                                  (I) covered only one 
                                individual (or the individual 
                                and the individual's spouse) 
                                and the individual (or the 
                                individual and the individual's 
                                spouse) owned 100 percent of 
                                the plan sponsor (whether or 
                                not incorporated), or
                                  (II) covered only one or more 
                                partners (or partners and their 
                                spouses) in the plan sponsor.
                  (F) Certain plans treated as holding publicly 
                traded employer securities.--
                          (i) In general.--Except as provided 
                        in regulations or in clause (ii), a 
                        plan holding employer securities which 
                        are not publicly traded employer 
                        securities shall be treated as holding 
                        publicly traded employer securities if 
                        any employer corporation, or any member 
                        of a controlled group of corporations 
                        which includes such employer 
                        corporation, has issued a class of 
                        stock which is a publicly traded 
                        employer security.
                          (ii) Exception for certain controlled 
                        groups with publicly traded 
                        securities.--Clause (i) shall not apply 
                        to a plan if--
                                  (I) no employer corporation, 
                                or parent corporation of an 
                                employer corporation, has 
                                issued any publicly traded 
                                employer security, and
                                  (II) no employer corporation, 
                                or parent corporation of an 
                                employer corporation, has 
                                issued any special class of 
                                stock which grants particular 
                                rights to, or bears particular 
                                risks for, the holder or issuer 
                                with respect to any corporation 
                                described in clause (i) which 
                                has issued any publicly traded 
                                employer security.
                          (iii) Definitions.--For purposes of 
                        this subparagraph, the term--
                                  (I) ``controlled group of 
                                corporations'' has the meaning 
                                given such term by section 
                                1563(a), except that ``50 
                                percent'' shall be substituted 
                                for ``80 percent'' each place 
                                it appears,
                                  (II) ``employer corporation'' 
                                means a corporation which is an 
                                employer maintaining the plan, 
                                and
                                  (III) ``parent corporation'' 
                                has the meaning given such term 
                                by section 424(e).
                  (G) Other definitions.--For purposes of this 
                paragraph--
                          (i) Applicable individual.--The term 
                        ``applicable individual'' means--
                                  (I) any participant in the 
                                plan, and
                                  (II) any beneficiary who has 
                                an account under the plan with 
                                respect to which the 
                                beneficiary is entitled to 
                                exercise the rights of a 
                                participant.
                          (ii) Elective deferral.--The term 
                        ``elective deferral'' means an employer 
                        contribution described in section 
                        402(g)(3)(A).
                          (iii) Employer security.--The term 
                        ``employer security'' has the meaning 
                        given such term by section 407(d)(1) of 
                        the Employee Retirement Income Security 
                        Act of 1974.
                          (iv) Employee stock ownership plan.--
                        The term ``employee stock ownership 
                        plan'' has the meaning given such term 
                        by section 4975(e)(7).
                          (v) Publicly traded employer 
                        securities.--The term ``publicly traded 
                        employer securities'' means employer 
                        securities which are readily tradable 
                        on an established securities market.
                          (vi) Year of service.--The term 
                        ``year of service'' has the meaning 
                        given such term by section 411(a)(5).
                  (H) Transition rule for securities 
                attributable to employer contributions.--
                          (i) Rules phased in over 3 years.--
                                  (I) In general.--In the case 
                                of the portion of an account to 
                                which subparagraph (C) applies 
                                and which consists of employer 
                                securities acquired in a plan 
                                year beginning before January 
                                1, 2007, subparagraph (C) shall 
                                only apply to the applicable 
                                percentage of such securities. 
                                This subparagraph shall be 
                                applied separately with respect 
                                to each class of securities.
                                  (II) Exception for certain 
                                participants aged 55 or over.--
                                Subclause (I) shall not apply 
                                to an applicable individual who 
                                is a participant who has 
                                attained age 55 and completed 
                                at least 3 years of service 
                                before the first plan year 
                                beginning after December 31, 
                                2005.
                          (ii) Applicable percentage.--For 
                        purposes of clause (i), the applicable 
                        percentage shall be determined as 
                        follows:

 
------------------------------------------------------------------------
 Plan year to which subparagraph (C)
              applies:                   The applicable percentage is:
------------------------------------------------------------------------
1st....................               33
2d.....................               66
3d and following.......               100.
------------------------------------------------------------------------

          (36) Distributions during working retirement.--A 
        trust forming part of a pension plan shall not be 
        treated as failing to constitute a qualified trust 
        under this section solely because the plan provides 
        that a distribution may be made from such trust to an 
        employee who has attained age 62 and who is not 
        separated from employment at the time of such 
        distribution.
          (37) Death benefits under USERRA-qualified active 
        military service.--A trust shall not constitute a 
        qualified trust unless the plan provides that, in the 
        case of a participant who dies while performing 
        qualified military service (as defined in section 
        414(u)), the survivors of the participant are entitled 
        to any additional benefits (other than benefit accruals 
        relating to the period of qualified military service) 
        provided under the plan had the participant resumed and 
        then terminated employment on account of death.
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall 
apply only in the case of a plan to which section 411 (relating 
to minimum vesting standards) applies without regard to 
subsection (e)(2) of such section.
  (b) Certain retroactive changes in plan.--A stock bonus, 
pension, profit-sharing, or annuity plan shall be considered as 
satisfying the requirements of subsection (a) for the period 
beginning with the date on which it was put into effect, or for 
the period beginning with the earlier of the date on which 
there was adopted or put into effect any amendment which caused 
the plan to fail to satisfy such requirements, and ending with 
the time prescribed by law for filing the return of the 
employer for his taxable year in which such plan or amendment 
was adopted (including extensions thereof) or such later time 
as the Secretary may designate, if all provisions of the plan 
which are necessary to satisfy such requirements are in effect 
by the end of such period and have been made effective for all 
purposes for the whole of such period.
  (c) Definitions and rules relating to self-employed 
individuals and owner-employees.--For purposes of this 
section--
          (1) Self-employed individual treated as employee.--
                  (A) In general.--The term ``employee'' 
                includes, for any taxable year, an individual 
                who is a self-employed individual for such 
                taxable year.
                  (B) Self-employed individual.--The term 
                ``self-employed individual'' means, with 
                respect to any taxable year, an individual who 
                has earned income (as defined in paragraph (2)) 
                for such taxable year. To the extent provided 
                in regulations prescribed by the Secretary, 
                such term also includes, for any taxable year--
                          (i) an individual who would be a 
                        self-employed individual within the 
                        meaning of the preceding sentence but 
                        for the fact that the trade or business 
                        carried on by such individual did not 
                        have net profits for the taxable year, 
                        and
                          (ii) an individual who has been a 
                        self-employed individual within the 
                        meaning of the preceding sentence for 
                        any prior taxable year.
          (2) Earned income.--
                  (A) In general.--The term ``earned income'' 
                means the net earnings from self-employment (as 
                defined in section 1402(a)), but such net 
                earnings shall be determined--
                          (i) only with respect to a trade or 
                        business in which personal services of 
                        the taxpayer are a material income-
                        producing factor,
                          (ii) without regard to paragraphs (4) 
                        and (5) of section 1402(c),
                          (iii) in the case of any individual 
                        who is treated as an employee under 
                        subparagraph (A), (C), or (D) of 
                        section 3121(d)(3), without regard to 
                        section 1402(c)(2)
                          (iv) without regard to items which 
                        are not included in gross income for 
                        purposes of this chapter, and the 
                        deductions properly allocable to or 
                        chargeable against such items,
                          (v) with regard to the deductions 
                        allowed by section 404 to the taxpayer, 
                        and
                          (vi) with regard to the deduction 
                        allowed to the taxpayer by section 
                        164(f).
                For purposes of this subparagraph, section 
                1402, as in effect for a taxable year ending on 
                December 31, 1962, shall be treated as having 
                been in effect for all taxable years ending 
                before such date. For purposes of this part 
                only (other than sections 419 and 419A), this 
                subparagraph shall be applied as if the term 
                ``trade or business'' for purposes of section 
                1402 included service described in section 
                1402(c)(6).
                  (B) Repealed
                  (C) Income from disposition of certain 
                property.--For purposes of this section, the 
                term ``earned income'' includes gains (other 
                than any gain which is treated under any 
                provision of this chapter as gain from the sale 
                or exchange of a capital asset) and net 
                earnings derived from the sale or other 
                disposition of, the transfer of any interest 
                in, or the licensing of the use of property 
                (other than good will) by an individual whose 
                personal efforts created such property.
          (3) Owner-employee.--The term ``owner-employee'' 
        means an employee who--
                  (A) owns the entire interest in an 
                unincorporated trade or business, or
                  (B) in the case of a partnership, is a 
                partner who owns more than 10 percent of either 
                the capital interest or the profits interest in 
                such partnership.
        To the extent provided in regulations prescribed by the 
        Secretary, such term also means an individual who has 
        been an owner-employee within the meaning of the 
        preceding sentence.
          (4) Employer.--An individual who owns the entire 
        interest in an unincorporated trade or business shall 
        be treated as his own employer. A partnership shall be 
        treated as the employer of each partner who is an 
        employee within the meaning of paragraph (1).
          (5) Contributions on behalf of owner-employees.--The 
        term ``contribution on behalf of an owner-employee'' 
        includes, except as the context otherwise requires, a 
        contribution under a plan--
                  (A) by the employer for an owner-employee, 
                and
                  (B) by an owner-employee as an employee.
          (6) Special rule for certain fishermen.--For purposes 
        of this subsection, the term ``self-employed 
        individual'' includes an individual described in 
        section 3121(b)(20) (relating to certain fishermen).
  (d) Contribution limit on owner-employees.--A trust forming 
part of a pension or profit-sharing plan which provides 
contributions or benefits for employees some or all of whom are 
owner-employees shall constitute a qualified trust under this 
section only if, in addition to meeting the requirements of 
subsection (a), the plan provides that contributions on behalf 
of any owner-employee may be made only with respect to the 
earned income of such owner-employee which is derived from the 
trade or business with respect to which such plan is 
established.
  (f) Certain custodial accounts and contracts.--For purposes 
of this title, a custodial account, an annuity contract, or a 
contract (other than a life, health or accident, property, 
casualty, or liability insurance contract) issued by an 
insurance company qualified to do business in a State shall be 
treated as a qualified trust under this section if--
          (1) the custodial account or contract would, except 
        for the fact that it is not a trust, constitute a 
        qualified trust under this section, and
          (2) in the case of a custodial account the assets 
        thereof are held by a bank (as defined in section 
        408(n)) or another person who demonstrates, to the 
        satisfaction of the Secretary, that the manner in which 
        he will hold the assets will be consistent with the 
        requirements of this section.
For purposes of this title, in the case of a custodial account 
or contract treated as a qualified trust under this section by 
reason of this subsection, the person holding the assets of 
such account or holding such contract shall be treated as the 
trustee thereof.
  (g) Annuity defined.--For purposes of this section and 
sections 402, 403, and 404, the term ``annuity'' includes a 
face-amount certificate, as defined in section 2(a)(15) of the 
Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but 
does not include any contract or certificate issued after 
December 31, 1962, which is transferable, if any person other 
than the trustee of a trust described in section 401(a) which 
is exempt from tax under section 501(a) is the owner of such 
contract or certificate.
  (h) Medical, etc., benefits for retired employees and their 
spouses and dependents.--Under regulations prescribed by the 
Secretary, and subject to the provisions of section 420, a 
pension or annuity plan may provide for the payment of benefits 
for sickness, accident, hospitalization, and medical expenses 
of retired employees, their spouses and their dependents, but 
only if--
          (1) such benefits are subordinate to the retirement 
        benefits provided by the plan,
          (2) a separate account is established and maintained 
        for such benefits,
          (3) the employer's contributions to such separate 
        account are reasonable and ascertainable,
          (4) it is impossible, at any time prior to the 
        satisfaction of all liabilities under the plan to 
        provide such benefits, for any part of the corpus or 
        income of such separate account to be (within the 
        taxable year or thereafter) used for, or diverted to, 
        any purpose other than the providing of such benefits,
          (5) notwithstanding the provisions of subsection 
        (a)(2), upon the satisfaction of all liabilities under 
        the plan to provide such benefits, any amount remaining 
        in such separate account must, under the terms of the 
        plan, be returned to the employer, and
          (6) in the case of an employee who is a key employee, 
        a separate account is established and maintained for 
        such benefits payable to such employee (and his spouse 
        and dependents) and such benefits (to the extent 
        attributable to plan years beginning after March 31, 
        1984, for which the employee is a key employee) are 
        only payable to such employee (and his spouse and 
        dependents) from such separate account.
For purposes of paragraph (6), the term ``key employee'' means 
any employee, who at any time during the plan year or any 
preceding plan year during which contributions were made on 
behalf of such employee, is or was a key employee as defined in 
section 416(i). In no event shall the requirements of paragraph 
(1) be treated as met if the aggregate actual contributions for 
medical benefits, when added to actual contributions for life 
insurance protection under the plan, exceed 25 percent of the 
total actual contributions to the plan (other than 
contributions to fund past service credits) after the date on 
which the account is established. For purposes of this 
subsection, the term ``dependent'' shall include any individual 
who is a child (as defined in [section 152(f)(1)] section 
7706(f)(1)) of a retired employee who as of the end of the 
calendar year has not attained age 27.
  (i) Certain union-negotiated pension plans.--In the case of a 
trust forming part of a pension plan which has been determined 
by the Secretary to constitute a qualified trust under 
subsection (a) and to be exempt from taxation under section 
501(a) for a period beginning after contributions were first 
made to or for such trust, if it is shown to the satisfaction 
of the Secretary that--
          (1) such trust was created pursuant to a collective 
        bargaining agreement between employee representatives 
        and one or more employers,
          (2) any disbursements of contributions, made to or 
        for such trust before the time as of which the 
        Secretary or his delegate determined that the trust 
        constituted a qualified trust, substantially complied 
        with the terms of the trust, and the plan of which the 
        trust is a part, as subsequently qualified, and
          (3) before the time as of which the Secretary 
        determined that the trust constitutes a qualified 
        trust, the contributions to or for such trust were not 
        used in a manner which would jeopardize the interests 
        of its beneficiaries,
then such trust shall be considered as having constituted a 
qualified trust under subsection (a) and as having been exempt 
from taxation under section 501(a) for the period beginning on 
the date on which contributions were first made to or for such 
trust and ending on the date such trust first constituted 
(without regard to this subsection) a qualified trust under 
subsection (a).
  (k) Cash or deferred arrangements.--
          (1) General rule.--A profit-sharing or stock bonus 
        plan, a pre-ERISA money purchase plan, or a rural 
        cooperative plan shall not be considered as not 
        satisfying the requirements of subsection (a) merely 
        because the plan includes a qualified cash or deferred 
        arrangement.
          (2) Qualified cash or deferred arrangement.--A 
        qualified cash or deferred arrangement is any 
        arrangement which is part of a profit-sharing or stock 
        bonus plan, a pre-ERISA money purchase plan, or a rural 
        cooperative plan which meets the requirements of 
        subsection (a)--
                  (A) under which a covered employee may elect 
                to have the employer make payments as 
                contributions to a trust under the plan on 
                behalf of the employee, or to the employee 
                directly in cash;
                  (B) under which amounts held by the trust 
                which are attributable to employer 
                contributions made pursuant to the employee's 
                election--
                          (i) may not be distributable to 
                        participants or other beneficiaries 
                        earlier than--
                                  (I) severance from 
                                employment, death, or 
                                disability,
                                  (II) an event described in 
                                paragraph (10),
                                  (III) in the case of a 
                                profit-sharing or stock bonus 
                                plan, the attainment of age 59 
                                1/2,
                                  (IV) subject to the 
                                provisions of paragraph (14), 
                                upon hardship of the employee, 
                                or
                                  (V) in the case of a 
                                qualified reservist 
                                distribution (as defined in 
                                section 72(t)(2)(G)(iii)), the 
                                date on which a period referred 
                                to in subclause (III) of such 
                                section begins, and
                          (ii) will not be distributable merely 
                        by reason of the completion of a stated 
                        period of participation or the lapse of 
                        a fixed number of years;
                  (C) which provides that an employee's right 
                to his accrued benefit derived from employer 
                contributions made to the trust pursuant to his 
                election is nonforfeitable, and
                  (D) which does not require, as a condition of 
                participation in the arrangement, that an 
                employee complete a period of service with the 
                employer (or employers) maintaining the plan 
                extending beyond the period permitted under 
                section 410(a)(1) (determined without regard to 
                subparagraph (B)(i) thereof).
          (3) Application of participation and discrimination 
        standards.--
                  (A) A cash or deferred arrangement shall not 
                be treated as a qualified cash or deferred 
                arrangement unless--
                          (i) those employees eligible to 
                        benefit under the arrangement satisfy 
                        the provisions of section 410(b)(1), 
                        and
                          (ii) the actual deferral percentage 
                        for eligible highly compensated 
                        employees (as defined in paragraph (5)) 
                        for the plan year bears a relationship 
                        to the actual deferral percentage for 
                        all other eligible employees for the 
                        preceding plan year which meets either 
                        of the following tests:
                                  (I) The actual deferral 
                                percentage for the group of 
                                eligible highly compensated 
                                employees is not more than the 
                                actual deferral percentage of 
                                all other eligible employees 
                                multiplied by 1.25.
                                  (II) The excess of the actual 
                                deferral percentage for the 
                                group of eligible highly 
                                compensated employees over that 
                                of all other eligible employees 
                                is not more than 2 percentage 
                                points, and the actual deferral 
                                percentage for the group of 
                                eligible highly compensated 
                                employees is not more than the 
                                actual deferral percentage of 
                                all other eligible employees 
                                multiplied by 2.
                        If 2 or more plans which include cash 
                        or deferred arrangements are considered 
                        as 1 plan for purposes of section 
                        401(a)(4) or 410(b), the cash or 
                        deferred arrangements included in such 
                        plans shall be treated as 1 arrangement 
                        for purposes of this subparagraph.
                If any highly compensated employee is a 
                participant under 2 or more cash or deferred 
                arrangements of the employer, for purposes of 
                determining the deferral percentage with 
                respect to such employee, all such cash or 
                deferred arrangements shall be treated as 1 
                cash or deferred arrangement. An arrangement 
                may apply clause (ii) by using the plan year 
                rather than the preceding plan year if the 
                employer so elects, except that if such an 
                election is made, it may not be changed except 
                as provided by the Secretary.
                  (B) For purposes of subparagraph (A), the 
                actual deferral percentage for a specified 
                group of employees for a plan year shall be the 
                average of the ratios (calculated separately 
                for each employee in such group) of--
                          (i) the amount of employer 
                        contributions actually paid over to the 
                        trust on behalf of each such employee 
                        for such plan year, to
                          (ii) the employee's compensation for 
                        such plan year.
                  (C) A cash or deferred arrangement shall be 
                treated as meeting the requirements of 
                subsection (a)(4) with respect to contributions 
                if the requirements of subparagraph (A)(ii) are 
                met.
                  (D) For purposes of subparagraph (B), the 
                employer contributions on behalf of any 
                employee--
                          (i) shall include any employer 
                        contributions made pursuant to the 
                        employee's election under paragraph 
                        (2), and
                          (ii) under such rules as the 
                        Secretary may prescribe, may, at the 
                        election of the employer, include--
                                  (I) matching contributions 
                                (as defined in 401(m)(4)(A)) 
                                which meet the requirements of 
                                paragraph (2)(B) and (C), and
                                  (II) qualified nonelective 
                                contributions (within the 
                                meaning of section 
                                401(m)(4)(C)).
                  (E) For purposes of this paragraph, in the 
                case of the first plan year of any plan (other 
                than a successor plan), the amount taken into 
                account as the actual deferral percentage of 
                nonhighly compensated employees for the 
                preceding plan year shall be--
                          (i) 3 percent, or
                          (ii) if the employer makes an 
                        election under this subclause, the 
                        actual deferral percentage of nonhighly 
                        compensated employees determined for 
                        such first plan year.
                  (F) Special rule for early participation.--If 
                an employer elects to apply section 
                410(b)(4)(B) in determining whether a cash or 
                deferred arrangement meets the requirements of 
                subparagraph (A)(i), the employer may, in 
                determining whether the arrangement meets the 
                requirements of subparagraph (A)(ii), exclude 
                from consideration all eligible employees 
                (other than highly compensated employees) who 
                have not met the minimum age and service 
                requirements of section 410(a)(1)(A).
                  (G) Governmental plan.--A governmental plan 
                (within the meaning of section 414(d)) shall be 
                treated as meeting the requirements of this 
                paragraph.
          (4) Other requirements.--
                  (A) Benefits (other than matching 
                contributions) must not be contingent on 
                election to defer.--A cash or deferred 
                arrangement of any employer shall not be 
                treated as a qualified cash or deferred 
                arrangement if any other benefit is conditioned 
                (directly or indirectly) on the employee 
                electing to have the employer make or not make 
                contributions under the arrangement in lieu of 
                receiving cash. The preceding sentence shall 
                not apply to any matching contribution (as 
                defined in section 401(m)) made by reason of 
                such an election.
                  (B) Eligibility of state and local 
                governments and tax-exempt organizations.--
                          (i) Tax-exempts eligible.--Except as 
                        provided in clause (ii), any 
                        organization exempt from tax under this 
                        subtitle may include a qualified cash 
                        or deferred arrangement as part of a 
                        plan maintained by it.
                          (ii) Governments ineligible.--A cash 
                        or deferred arrangement shall not be 
                        treated as a qualified cash or deferred 
                        arrangement if it is part of a plan 
                        maintained by a State or local 
                        government or political subdivision 
                        thereof, or any agency or 
                        instrumentality thereof. This clause 
                        shall not apply to a rural cooperative 
                        plan or to a plan of an employer 
                        described in clause (iii).
                          (iii) Treatment of Indian tribal 
                        governments.--An employer which is an 
                        Indian tribal government (as defined in 
                        section 7701(a)(40)), a subdivision of 
                        an Indian tribal government (determined 
                        in accordance with section 7871(d)), an 
                        agency or instrumentality of an Indian 
                        tribal government or subdivision 
                        thereof, or a corporation chartered 
                        under Federal, State, or tribal law 
                        which is owned in whole or in part by 
                        any of the foregoing may include a 
                        qualified cash or deferred arrangement 
                        as part of a plan maintained by the 
                        employer.
                  (C) Coordination with other plans.--Except as 
                provided in section 401(m), any employer 
                contribution made pursuant to an employee's 
                election under a qualified cash or deferred 
                arrangement shall not be taken into account for 
                purposes of determining whether any other plan 
                meets the requirements of section 401(a) or 
                410(b). This subparagraph shall not apply for 
                purposes of determining whether a plan meets 
                the average benefit requirement of section 
                410(b)(2)(A)(ii).
          (5) Highly compensated employee.--For purposes of 
        this subsection, the term ``highly compensated 
        employee'' has the meaning given such term by section 
        414(q).
          (6) Pre-ERISA money purchase plan.--For purposes of 
        this subsection, the term ``pre-ERISA money purchase 
        plan'' means a pension plan--
                  (A) which is a defined contribution plan (as 
                defined in section 414(i)),
                  (B) which was in existence on June 27, 1974, 
                and which, on such date, included a salary 
                reduction arrangement, and
                  (C) under which neither the employee 
                contributions nor the employer contributions 
                may exceed the levels provided for by the 
                contribution formula in effect under the plan 
                on such date.
          (7) Rural cooperative plan.--For purposes of this 
        subsection--
                  (A) In general.--The term ``rural cooperative 
                plan'' means any pension plan--
                          (i) which is a defined contribution 
                        plan (as defined in section 414(i)), 
                        and
                          (ii) which is established and 
                        maintained by a rural cooperative.
                  (B) Rural cooperative defined.--For purposes 
                of subparagraph (A), the term ``rural 
                cooperative'' means--
                          (i) any organization which--
                                  (I) is engaged primarily in 
                                providing electric service on a 
                                mutual or cooperative basis, or
                                  (II) is engaged primarily in 
                                providing electric service to 
                                the public in its area of 
                                service and which is exempt 
                                from tax under this subtitle or 
                                which is a State or local 
                                government (or an agency or 
                                instrumentality thereof), other 
                                than a municipality (or an 
                                agency or instrumentality 
                                thereof),
                          (ii) any organization described in 
                        paragraph (4) or (6) of section 501(c) 
                        and at least 80 percent of the members 
                        of which are organizations described in 
                        clause (i),
                          (iii) a cooperative telephone company 
                        described in section 501(c)(12),
                          (iv) any organization which--
                                  (I) is a mutual irrigation or 
                                ditch company described in 
                                section 501(c)(12) (without 
                                regard to the 85 percent 
                                requirement thereof), or
                                  (II) is a district organized 
                                under the laws of a State as a 
                                municipal corporation for the 
                                purpose of irrigation, water 
                                conservation, or drainage, and
                          (v) an organization which is a 
                        national association of organizations 
                        described in clause (i), (ii),, (iii), 
                        or (iv).
                  (C) Special rule for certain distributions.--
                A rural cooperative plan which includes a 
                qualified cash or deferred arrangement shall 
                not be treated as violating the requirements of 
                section 401(a) or of paragraph (2) merely by 
                reason of a hardship distribution or a 
                distribution to a participant after attainment 
                of age 59 1/2. For purposes of this section, 
                the term ``hardship distribution'' means a 
                distribution described in paragraph 
                (2)(B)(i)(IV) (without regard to the limitation 
                of its application to profit-sharing or stock 
                bonus plans).
          (8) Arrangement not disqualified if excess 
        contributions distributed.--
                  (A) In general.--A cash or deferred 
                arrangement shall not be treated as failing to 
                meet the requirements of clause (ii) of 
                paragraph (3)(A) for any plan year if, before 
                the close of the following plan year--
                          (i) the amount of the excess 
                        contributions for such plan year (and 
                        any income allocable to such 
                        contributions through the end of such 
                        year) is distributed, or
                          (ii) to the extent provided in 
                        regulations, the employee elects to 
                        treat the amount of the excess 
                        contributions as an amount distributed 
                        to the employee and then contributed by 
                        the employee to the plan.
                Any distribution of excess contributions (and 
                income) may be made without regard to any other 
                provision of law.
                  (B) Excess contributions.--For purposes of 
                subparagraph (A), the term ``excess 
                contributions'' means, with respect to any plan 
                year, the excess of--
                          (i) the aggregate amount of employer 
                        contributions actually paid over to the 
                        trust on behalf of highly compensated 
                        employees for such plan year, over
                          (ii) the maximum amount of such 
                        contributions permitted under the 
                        limitations of clause (ii) of paragraph 
                        (3)(A) (determined by reducing 
                        contributions made on behalf of highly 
                        compensated employees in order of the 
                        actual deferral percentages beginning 
                        with the highest of such percentages).
                  (C) Method of distributing excess 
                contributions.--Any distribution of the excess 
                contributions for any plan year shall be made 
                to highly compensated employees on the basis of 
                the amount of contributions by, or on behalf 
                of, each of such employees.
                  (D) Additional tax under section 72(t) not to 
                apply.--No tax shall be imposed under section 
                72(t) on any amount required to be distributed 
                under this paragraph.
                  (E) Treatment of matching contributions 
                forfeited by reason of excess deferral or 
                contribution or permissible withdrawal.--For 
                purposes of paragraph (2)(C), a matching 
                contribution (within the meaning of subsection 
                (m)) shall not be treated as forfeitable merely 
                because such contribution is forfeitable if the 
                contribution to which the matching contribution 
                relates is treated as an excess contribution 
                under subparagraph (B), an excess deferral 
                under section 402(g)(2)(A), a permissible 
                withdrawal under section 414(w), or an excess 
                aggregate contribution under section 
                401(m)(6)(B).
                  (F) Cross reference.--For excise tax on 
                certain excess contributions, see section 4979.
          (9) Compensation.--For purposes of this subsection, 
        the term ``compensation'' has the meaning given such 
        term by section 414(s).
          (10) Distributions upon termination of plan.--
                  (A) In general.--An event described in this 
                subparagraph is the termination of the plan 
                without establishment or maintenance of another 
                defined contribution plan (other than an 
                employee stock ownership plan as defined in 
                section 4975(e)(7)).
                  (B) Distributions must be lump sum 
                distributions.--
                          (i) In general.--A termination shall 
                        not be treated as described in 
                        subparagraph (A) with respect to any 
                        employee unless the employee receives a 
                        lump sum distribution by reason of the 
                        termination.
                          (ii) Lump-sum distribution.--For 
                        purposes of this subparagraph, the term 
                        ``lump-sum distribution'' has the 
                        meaning given such term by section 
                        402(e)(4)(D) (without regard to 
                        subclauses (I), (II), (III), and (IV) 
                        of clause (i) thereof). Such term 
                        includes a distribution of an annuity 
                        contract from--
                                  (I) a trust which forms a 
                                part of a plan described in 
                                section 401(a) and which is 
                                exempt from tax under section 
                                501(a), or
                                  (II) an annuity plan 
                                described in section 403(a).
          (11) Adoption of simple plan to meet 
        nondiscrimination tests.--
                  (A) In general.--A cash or deferred 
                arrangement maintained by an eligible employer 
                shall be treated as meeting the requirements of 
                paragraph (3)(A)(ii) if such arrangement 
                meets--
                          (i) the contribution requirements of 
                        subparagraph (B),
                          (ii) the exclusive plan requirements 
                        of subparagraph (C), and
                          (iii) the vesting requirements of 
                        section 408(p)(3).
                  (B) Contribution requirements.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement--
                                  (I) an employee may elect to 
                                have the employer make elective 
                                contributions for the year on 
                                behalf of the employee to a 
                                trust under the plan in an 
                                amount which is expressed as a 
                                percentage of compensation of 
                                the employee but which in no 
                                event exceeds the amount in 
                                effect under section 
                                408(p)(2)(A)(ii),
                                  (II) the employer is required 
                                to make a matching contribution 
                                to the trust for the year in an 
                                amount equal to so much of the 
                                amount the employee elects 
                                under subclause (I) as does not 
                                exceed 3 percent of 
                                compensation for the year, and
                                  (III) no other contributions 
                                may be made other than 
                                contributions described in 
                                subclause (I) or (II).
                          (ii) Employer may elect 2-percent 
                        nonelective contribution.--An employer 
                        shall be treated as meeting the 
                        requirements of clause (i)(II) for any 
                        year if, in lieu of the contributions 
                        described in such clause, the employer 
                        elects (pursuant to the terms of the 
                        arrangement) to make nonelective 
                        contributions of 2 percent of 
                        compensation for each employee who is 
                        eligible to participate in the 
                        arrangement and who has at least $5,000 
                        of compensation from the employer for 
                        the year. If an employer makes an 
                        election under this subparagraph for 
                        any year, the employer shall notify 
                        employees of such election within a 
                        reasonable period of time before the 
                        60th day before the beginning of such 
                        year.
                          (iii) Administrative requirements.--
                                  (I) In general.--Rules 
                                similar to the rules of 
                                subparagraphs (B) and (C) of 
                                section 408(p)(5) shall apply 
                                for purposes of this 
                                subparagraph.
                                  (II) Notice of election 
                                period.--The requirements of 
                                this subparagraph shall not be 
                                treated as met with respect to 
                                any year unless the employer 
                                notifies each employee eligible 
                                to participate, within a 
                                reasonable period of time 
                                before the 60th day before the 
                                beginning of such year (and, 
                                for the first year the employee 
                                is so eligible, the 60th day 
                                before the first day such 
                                employee is so eligible), of 
                                the rules similar to the rules 
                                of section 408(p)(5)(C) which 
                                apply by reason of subclause 
                                (I).
                  (C) Exclusive plan requirement.--The 
                requirements of this subparagraph are met for 
                any year to which this paragraph applies if no 
                contributions were made, or benefits were 
                accrued, for services during such year under 
                any qualified plan of the employer on behalf of 
                any employee eligible to participate in the 
                cash or deferred arrangement, other than 
                contributions described in subparagraph (B).
                  (D) Definitions and special rule.--
                          (i) Definitions.--For purposes of 
                        this paragraph, any term used in this 
                        paragraph which is also used in section 
                        408(p) shall have the meaning given 
                        such term by such section.
                          (ii) Coordination with top-heavy 
                        rules.--A plan meeting the requirements 
                        of this paragraph for any year shall 
                        not be treated as a top-heavy plan 
                        under section 416 for such year if such 
                        plan allows only contributions required 
                        under this paragraph.
          (12) Alternative methods of meeting nondiscrimination 
        requirements.--
                  (A) In general.--A cash or deferred 
                arrangement shall be treated as meeting the 
                requirements of paragraph (3)(A)(ii) if such 
                arrangement--
                          (i) meets the contribution 
                        requirements of subparagraph (B) or 
                        (C), and
                          (ii) meets the notice requirements of 
                        subparagraph (D).
                  (B) Matching contributions.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, the employer makes 
                        matching contributions on behalf of 
                        each employee who is not a highly 
                        compensated employee in an amount equal 
                        to--
                                  (I) 100 percent of the 
                                elective contributions of the 
                                employee to the extent such 
                                elective contributions do not 
                                exceed 3 percent of the 
                                employee's compensation, and
                                  (II) 50 percent of the 
                                elective contributions of the 
                                employee to the extent that 
                                such elective contributions 
                                exceed 3 percent but do not 
                                exceed 5 percent of the 
                                employee's compensation.
                          (ii) Rate for highly compensated 
                        employees.--The requirements of this 
                        subparagraph are not met if, under the 
                        arrangement, the rate of matching 
                        contribution with respect to any 
                        elective contribution of a highly 
                        compensated employee at any rate of 
                        elective contribution is greater than 
                        that with respect to an employee who is 
                        not a highly compensated employee.
                          (iii) Alternative plan designs.--If 
                        the rate of any matching contribution 
                        with respect to any rate of elective 
                        contribution is not equal to the 
                        percentage required under clause (i), 
                        an arrangement shall not be treated as 
                        failing to meet the requirements of 
                        clause (i) if--
                                  (I) the rate of an employer's 
                                matching contribution does not 
                                increase as an employee's rate 
                                of elective contributions 
                                increase, and
                                  (II) the aggregate amount of 
                                matching contributions at such 
                                rate of elective contribution 
                                is at least equal to the 
                                aggregate amount of matching 
                                contributions which would be 
                                made if matching contributions 
                                were made on the basis of the 
                                percentages described in clause 
                                (i).
                  (C) Nonelective contributions.--The 
                requirements of this subparagraph are met if, 
                under the arrangement, the employer is 
                required, without regard to whether the 
                employee makes an elective contribution or 
                employee contribution, to make a contribution 
                to a defined contribution plan on behalf of 
                each employee who is not a highly compensated 
                employee and who is eligible to participate in 
                the arrangement in an amount equal to at least 
                3 percent of the employee's compensation.
                  (D) Notice requirement.--An arrangement meets 
                the requirements of this paragraph if, under 
                the arrangement, each employee eligible to 
                participate is, within a reasonable period 
                before any year, given written notice of the 
                employee's rights and obligations under the 
                arrangement which--
                          (i) is sufficiently accurate and 
                        comprehensive to apprise the employee 
                        of such rights and obligations, and
                          (ii) is written in a manner 
                        calculated to be understood by the 
                        average employee eligible to 
                        participate.
                  (E) Other requirements.--
                          (i) Withdrawal and vesting 
                        restrictions.--An arrangement shall not 
                        be treated as meeting the requirements 
                        of subparagraph (B) or (C) of this 
                        paragraph unless the requirements of 
                        subparagraphs (B) and (C) of paragraph 
                        (2) are met with respect to all 
                        employer contributions (including 
                        matching contributions) taken into 
                        account in determining whether the 
                        requirements of subparagraphs (B) and 
                        (C) of this paragraph are met.
                          (ii) Social security and similar 
                        contributions not taken into account.--
                        An arrangement shall not be treated as 
                        meeting the requirements of 
                        subparagraph (B) or (C) unless such 
                        requirements are met without regard to 
                        subsection (l), and, for purposes of 
                        subsection (l), employer contributions 
                        under subparagraph (B) or (C) shall not 
                        be taken into account.
                  (F) Other plans.--An arrangement shall be 
                treated as meeting the requirements under 
                subparagraph (A)(i) if any other plan 
                maintained by the employer meets such 
                requirements with respect to employees eligible 
                under the arrangement.
          (13) Alternative method for automatic contribution 
        arrangements to meet nondiscrimination requirements.--
                  (A) In general.--A qualified automatic 
                contribution arrangement shall be treated as 
                meeting the requirements of paragraph 
                (3)(A)(ii).
                  (B) Qualified automatic contribution 
                arrangement.--For purposes of this paragraph, 
                the term ``qualified automatic contribution 
                arrangement'' means any cash or deferred 
                arrangement which meets the requirements of 
                subparagraphs (C) through (E).
                  (C) Automatic deferral.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, each employee eligible to 
                        participate in the arrangement is 
                        treated as having elected to have the 
                        employer make elective contributions in 
                        an amount equal to a qualified 
                        percentage of compensation.
                          (ii) Election out.--The election 
                        treated as having been made under 
                        clause (i) shall cease to apply with 
                        respect to any employee if such 
                        employee makes an affirmative 
                        election--
                                  (I) to not have such 
                                contributions made, or
                                  (II) to make elective 
                                contributions at a level 
                                specified in such affirmative 
                                election.
                          (iii) Qualified percentage.--For 
                        purposes of this subparagraph, the term 
                        ``qualified percentage'' means, with 
                        respect to any employee, any percentage 
                        determined under the arrangement if 
                        such percentage is applied uniformly, 
                        does not exceed 10 percent, and is at 
                        least--
                                  (I) 3 percent during the 
                                period ending on the last day 
                                of the first plan year which 
                                begins after the date on which 
                                the first elective contribution 
                                described in clause (i) is made 
                                with respect to such employee,
                                  (II) 4 percent during the 
                                first plan year following the 
                                plan year described in 
                                subclause (I),
                                  (III) 5 percent during the 
                                second plan year following the 
                                plan year described in 
                                subclause (I), and
                                  (IV) 6 percent during any 
                                subsequent plan year.
                          (iv) Automatic deferral for current 
                        employees not required.--Clause (i) may 
                        be applied without taking into account 
                        any employee who--
                                  (I) was eligible to 
                                participate in the arrangement 
                                (or a predecessor arrangement) 
                                immediately before the date on 
                                which such arrangement becomes 
                                a qualified automatic 
                                contribution arrangement 
                                (determined after application 
                                of this clause), and
                                  (II) had an election in 
                                effect on such date either to 
                                participate in the arrangement 
                                or to not participate in the 
                                arrangement.
                  (D) Matching or nonelective contributions.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, the employer--
                                  (I) makes matching 
                                contributions on behalf of each 
                                employee who is not a highly 
                                compensated employee in an 
                                amount equal to the sum of 100 
                                percent of the elective 
                                contributions of the employee 
                                to the extent that such 
                                contributions do not exceed 1 
                                percent of compensation plus 50 
                                percent of so much of such 
                                contributions as exceed 1 
                                percent but do not exceed 6 
                                percent of compensation, or
                                  (II) is required, without 
                                regard to whether the employee 
                                makes an elective contribution 
                                or employee contribution, to 
                                make a contribution to a 
                                defined contribution plan on 
                                behalf of each employee who is 
                                not a highly compensated 
                                employee and who is eligible to 
                                participate in the arrangement 
                                in an amount equal to at least 
                                3 percent of the employee's 
                                compensation.
                          (ii) Application of rules for 
                        matching contributions.--The rules of 
                        clauses (ii) and (iii) of paragraph 
                        (12)(B) shall apply for purposes of 
                        clause (i)(I).
                          (iii) Withdrawal and vesting 
                        restrictions.--An arrangement shall not 
                        be treated as meeting the requirements 
                        of clause (i) unless, with respect to 
                        employer contributions (including 
                        matching contributions) taken into 
                        account in determining whether the 
                        requirements of clause (i) are met--
                                  (I) any employee who has 
                                completed at least 2 years of 
                                service (within the meaning of 
                                section 411(a)) has a 
                                nonforfeitable right to 100 
                                percent of the employee's 
                                accrued benefit derived from 
                                such employer contributions, 
                                and
                                  (II) the requirements of 
                                subparagraph (B) of paragraph 
                                (2) are met with respect to all 
                                such employer contributions.
                          (iv) Application of certain other 
                        rules.--The rules of subparagraphs 
                        (E)(ii) and (F) of paragraph (12) shall 
                        apply for purposes of subclauses (I) 
                        and (II) of clause (i).
                  (E) Notice requirements.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, within a 
                        reasonable period before each plan 
                        year, each employee eligible to 
                        participate in the arrangement for such 
                        year receives written notice of the 
                        employee's rights and obligations under 
                        the arrangement which--
                                  (I) is sufficiently accurate 
                                and comprehensive to apprise 
                                the employee of such rights and 
                                obligations, and
                                  (II) is written in a manner 
                                calculated to be understood by 
                                the average employee to whom 
                                the arrangement applies.
                          (ii) Timing and content 
                        requirements.--A notice shall not be 
                        treated as meeting the requirements of 
                        clause (i) with respect to an employee 
                        unless--
                                  (I) the notice explains the 
                                employee's right under the 
                                arrangement to elect not to 
                                have elective contributions 
                                made on the employee's behalf 
                                (or to elect to have such 
                                contributions made at a 
                                different percentage),
                                  (II) in the case of an 
                                arrangement under which the 
                                employee may elect among 2 or 
                                more investment options, the 
                                notice explains how 
                                contributions made under the 
                                arrangement will be invested in 
                                the absence of any investment 
                                election by the employee, and
                                  (III) the employee has a 
                                reasonable period of time after 
                                receipt of the notice described 
                                in subclauses (I) and (II) and 
                                before the first elective 
                                contribution is made to make 
                                either such election.
          (14) Special rules relating to hardship 
        withdrawals.--For purposes of paragraph (2)(B)(i)(IV)--
                  (A) Amounts which may be withdrawn.--The 
                following amounts may be distributed upon 
                hardship of the employee:
                          (i) Contributions to a profit-sharing 
                        or stock bonus plan to which section 
                        402(e)(3) applies.
                          (ii) Qualified nonelective 
                        contributions (as defined in subsection 
                        (m)(4)(C)).
                          (iii) Qualified matching 
                        contributions described in paragraph 
                        (3)(D)(ii)(I).
                          (iv) Earnings on any contributions 
                        described in clause (i), (ii), or 
                        (iii).
                  (B) No requirement to take available loan.--A 
                distribution shall not be treated as failing to 
                be made upon the hardship of an employee solely 
                because the employee does not take any 
                available loan under the plan.
  (l) Permitted disparity in plan contributions or benefits.--
          (1) In general.--The requirements of this subsection 
        are met with respect to a plan if--
                  (A) in the case of a defined contribution 
                plan, the requirements of paragraph (2) are 
                met, and
                  (B) in the case of a defined benefit plan, 
                the requirements of paragraph (3) are met.
          (2) Defined contribution plan.--
                  (A) In general.--A defined contribution plan 
                meets the requirements of this paragraph if the 
                excess contribution percentage does not exceed 
                the base contribution percentage by more than 
                the lesser of--
                          (i) the base contribution percentage, 
                        or
                          (ii) the greater of--
                                  (I) 5.7 percentage points, or
                                  (II) the percentage equal to 
                                the portion of the rate of tax 
                                under section 3111(a) (in 
                                effect as of the beginning of 
                                the year) which is attributable 
                                to old-age insurance.
                  (B) Contribution percentages.--For purposes 
                of this paragraph--
                          (i) Excess contribution percentage.--
                        The term ``excess contribution 
                        percentage'' means the percentage of 
                        compensation which is contributed by 
                        the employer under the plan with 
                        respect to that portion of each 
                        participant's compensation in excess of 
                        the integration level.
                          (ii) Base contribution percentage.--
                        The term ``base contribution 
                        percentage'' means the percentage of 
                        compensation contributed by the 
                        employer under the plan with respect to 
                        that portion of each participant's 
                        compensation not in excess of the 
                        integration level.
          (3) Defined benefit plan.--A defined benefit plan 
        meets the requirements of this paragraph if--
                  (A) Excess plans.--
                          (i) In general.--In the case of a 
                        plan other than an offset plan--
                                  (I) the excess benefit 
                                percentage does not exceed the 
                                base benefit percentage by more 
                                than the maximum excess 
                                allowance,
                                  (II) any optional form of 
                                benefit, preretirement benefit, 
                                actuarial factor, or other 
                                benefit or feature provided 
                                with respect to compensation in 
                                excess of the integration level 
                                is provided with respect to 
                                compensation not in excess of 
                                such level, and
                                  (III) benefits are based on 
                                average annual compensation.
                          (ii) Benefit percentages.--For 
                        purposes of this subparagraph, the 
                        excess and base benefit percentages 
                        shall be computed in the same manner as 
                        the excess and base contribution 
                        percentages under paragraph (2)(B), 
                        except that such determination shall be 
                        made on the basis of benefits 
                        attributable to employer contributions 
                        rather than contributions.
                  (B) Offset plans.--In the case of an offset 
                plan, the plan provides that--
                          (i) a participant's accrued benefit 
                        attributable to employer contributions 
                        (within the meaning of section 
                        411(c)(1)) may not be reduced (by 
                        reason of the offset) by more than the 
                        maximum offset allowance, and
                          (ii) benefits are based on average 
                        annual compensation.
          (4) Definitions relating to paragraph (3).--For 
        purposes of paragraph (3)--
                  (A) Maximum excess allowance.--The maximum 
                excess allowance is equal to--
                          (i) in the case of benefits 
                        attributable to any year of service 
                        with the employer taken into account 
                        under the plan, 3/4 of a percentage 
                        point, and
                          (ii) in the case of total benefits, 
                        3/4 of a percentage point, multiplied 
                        by the participant's years of service 
                        (not in excess of 35) with the employer 
                        taken into account under the plan.
                In no event shall the maximum excess allowance 
                exceed the base benefit percentage.
                  (B) Maximum offset allowance.--The maximum 
                offset allowance is equal to--
                          (i) in the case of benefits 
                        attributable to any year of service 
                        with the employer taken into account 
                        under the plan, 3/4 percent of the 
                        participant's final average 
                        compensation, and
                          (ii) in the case of total benefits, 
                        3/4 percent of the participant's final 
                        average compensation, multiplied by the 
                        participant's years of service (not in 
                        excess of 35) with the employer taken 
                        into account under the plan.
                In no event shall the maximum offset allowance 
                exceed 50 percent of the benefit which would 
                have accrued without regard to the offset 
                reduction.
                  (C) Reductions.--
                          (i) In general.--The Secretary shall 
                        prescribe regulations requiring the 
                        reduction of the 3/4 percentage factor 
                        under subparagraph (A) or (B)--
                                  (I) in the case of a plan 
                                other than an offset plan which 
                                has an integration level in 
                                excess of covered compensation, 
                                or
                                  (II) with respect to any 
                                participant in an offset plan 
                                who has final average 
                                compensation in excess of 
                                covered compensation.
                          (ii) Basis of reductions.--Any 
                        reductions under clause (i) shall be 
                        based on the percentages of 
                        compensation replaced by the employer-
                        derived portions of primary insurance 
                        amounts under the Social Security Act 
                        for participants with compensation in 
                        excess of covered compensation.
                  (D) Offset plan.--The term ``offset plan'' 
                means any plan with respect to which the 
                benefit attributable to employer contributions 
                for each participant is reduced by an amount 
                specified in the plan.
          (5) Other definitions and special rules.--For 
        purposes of this subsection--
                  (A) Integration level.--
                          (i) In general.--The term 
                        ``integration level'' means the amount 
                        of compensation specified under the 
                        plan (by dollar amount or formula) at 
                        or below which the rate at which 
                        contributions or benefits are provided 
                        (expressed as a percentage) is less 
                        than such rate above such amount.
                          (ii) Limitation.--The integration 
                        level for any year may not exceed the 
                        contribution and benefit base in effect 
                        under section 230 of the Social 
                        Security Act for such year.
                          (iii) Level to apply to all 
                        participants.--A plan's integration 
                        level shall apply with respect to all 
                        participants in the plan.
                          (iv) Multiple integration levels.--
                        Under rules prescribed by the 
                        Secretary, a defined benefit plan may 
                        specify multiple integration levels.
                  (B) Compensation.--The term ``compensation'' 
                has the meaning given such term by section 
                414(s).
                  (C) Average annual compensation.--The term 
                ``average annual compensation'' means the 
                participant's highest average annual 
                compensation for--
                          (i) any period of at least 3 
                        consecutive years, or
                          (ii) if shorter, the participant's 
                        full period of service.
                  (D) Final average compensation.--
                          (i) In general.--The term ``final 
                        average compensation'' means the 
                        participant's average annual 
                        compensation for--
                                  (I) the 3-consecutive year 
                                period ending with the current 
                                year, or
                                  (II) if shorter, the 
                                participant's full period of 
                                service.
                          (ii) Limitation.--A participant's 
                        final average compensation shall be 
                        determined by not taking into account 
                        in any year compensation in excess of 
                        the contribution and benefit base in 
                        effect under section 230 of the Social 
                        Security Act for such year.
                  (E) Covered compensation.--
                          (i) In general.--The term ``covered 
                        compensation'' means, with respect to 
                        an employee, the average of the 
                        contribution and benefit bases in 
                        effect under section 230 of the Social 
                        Security Act for each year in the 35-
                        year period ending with the year in 
                        which the employee attains the social 
                        security retirement age.
                          (ii) Computation for any year.--For 
                        purposes of clause (i), the 
                        determination for any year preceding 
                        the year in which the employee attains 
                        the social security retirement age 
                        shall be made by assuming that there is 
                        no increase in the bases described in 
                        clause (i) after the determination year 
                        and before the employee attains the 
                        social security retirement age.
                          (iii) Social security retirement 
                        age.--For purposes of this 
                        subparagraph, the term ``social 
                        security retirement age'' has the 
                        meaning given such term by section 
                        415(b)(8).
                  (F) Regulations.--The Secretary shall 
                prescribe such regulations as are necessary or 
                appropriate to carry out the purposes of this 
                subsection, including--
                          (i) in the case of a defined benefit 
                        plan which provides for unreduced 
                        benefits commencing before the social 
                        security retirement age (as defined in 
                        section 415(b)(8)), rules providing for 
                        the reduction of the maximum excess 
                        allowance and the maximum offset 
                        allowance, and
                          (ii) in the case of an employee 
                        covered by 2 or more plans of the 
                        employer which fail to meet the 
                        requirements of subsection (a)(4) 
                        (without regard to this subsection), 
                        rules preventing the multiple use of 
                        the disparity permitted under this 
                        subsection with respect to any 
                        employee.
                For purposes of clause (i), unreduced benefits 
                shall not include benefits for disability 
                (within the meaning of section 223(d) of the 
                Social Security Act).
          (6) Special rule for plan maintained by railroads.--
        In determining whether a plan which includes employees 
        of a railroad employer who are entitled to benefits 
        under the Railroad Retirement Act of 1974 meets the 
        requirements of this subsection, rules similar to the 
        rules set forth in this subsection shall apply. Such 
        rules shall take into account the employer-derived 
        portion of the employees' tier 2 railroad retirement 
        benefits and any supplemental annuity under the 
        Railroad Retirement Act of 1974.
  (m) Nondiscrimination test for matching contributions and 
employee contributions.--
          (1) In general.--A defined contribution plan shall be 
        treated as meeting the requirements of subsection 
        (a)(4) with respect to the amount of any matching 
        contribution or employee contribution for any plan year 
        only if the contribution percentage requirement of 
        paragraph (2) of this subsection is met for such plan 
        year.
          (2) Requirements.--
                  (A) Contribution percentage requirement.--A 
                plan meets the contribution percentage 
                requirement of this paragraph for any plan year 
                only if the contribution percentage for 
                eligible highly compensated employees for such 
                plan year does not exceed the greater of--
                          (i) 125 percent of such percentage 
                        for all other eligible employees for 
                        the preceding plan year, or
                          (ii) the lesser of 200 percent of 
                        such percentage for all other eligible 
                        employees for the preceding plan year, 
                        or such percentage for all other 
                        eligible employees for the preceding 
                        plan year plus 2 percentage points.
                This subparagraph may be applied by using the 
                plan year rather than the preceding plan year 
                if the employer so elects, except that if such 
                an election is made, it may not be changed 
                except as provided by the Secretary.
                  (B) Multiple plans treated as a single 
                plan.--If two or more plans of an employer to 
                which matching contributions, employee 
                contributions, or elective deferrals are made 
                are treated as one plan for purposes of section 
                410(b), such plans shall be treated as one plan 
                for purposes of this subsection. If a highly 
                compensated employee participates in two or 
                more plans of an employer to which 
                contributions to which this subsection applies 
                are made, all such contributions shall be 
                aggregated for purposes of this subsection.
          (3) Contribution percentage.--For purposes of 
        paragraph (2), the contribution percentage for a 
        specified group of employees for a plan year shall be 
        the average of the ratios (calculated separately for 
        each employee in such group) of--
                  (A) the sum of the matching contributions and 
                employee contributions paid under the plan on 
                behalf of each such employee for such plan 
                year, to
                  (B) the employee's compensation (within the 
                meaning of section 414(s)) for such plan year.
        Under regulations, an employer may elect to take into 
        account (in computing the contribution percentage) 
        elective deferrals and qualified nonelective 
        contributions under the plan or any other plan of the 
        employer. If matching contributions are taken into 
        account for purposes of subsection (k)(3)(A)(ii) for 
        any plan year, such contributions shall not be taken 
        into account under subparagraph (A) for such year. 
        Rules similar to the rules of subsection (k)(3)(E) 
        shall apply for purposes of this subsection.
          (4) Definitions.--For purposes of this subsection--
                  (A) Matching contribution.--The term 
                ``matching contribution'' means--
                          (i) any employer contribution made to 
                        a defined contribution plan on behalf 
                        of an employee on account of an 
                        employee contribution made by such 
                        employee, and
                          (ii) any employer contribution made 
                        to a defined contribution plan on 
                        behalf of an employee on account of an 
                        employee's elective deferral.
                  (B) Elective deferral.--The term ``elective 
                deferral'' means any employer contribution 
                described in section 402(g)(3).
                  (C) Qualified nonelective contributions.--The 
                term ``qualified nonelective contribution'' 
                means any employer contribution (other than a 
                matching contribution) with respect to which--
                          (i) the employee may not elect to 
                        have the contribution paid to the 
                        employee in cash instead of being 
                        contributed to the plan, and
                          (ii) the requirements of 
                        subparagraphs (B) and (C) of subsection 
                        (k)(2) are met.
          (5) Employees taken into consideration.--
                  (A) In general.--Any employee who is eligible 
                to make an employee contribution (or, if the 
                employer takes elective contributions into 
                account, elective contributions) or to receive 
                a matching contribution under the plan being 
                tested under paragraph (1) shall be considered 
                an eligible employee for purposes of this 
                subsection.
                  (B) Certain nonparticipants.--If an employee 
                contribution is required as a condition of 
                participation in the plan, any employee who 
                would be a participant in the plan if such 
                employee made such a contribution shall be 
                treated as an eligible employee on behalf of 
                whom no employer contributions are made.
                  (C) Special rule for early participation.--If 
                an employer elects to apply section 
                410(b)(4)(B) in determining whether a plan 
                meets the requirements of section 410(b), the 
                employer may, in determining whether the plan 
                meets the requirements of paragraph (2), 
                exclude from consideration all eligible 
                employees (other than highly compensated 
                employees) who have not met the minimum age and 
                service requirements of section 410(a)(1)(A).
          (6) Plan not disqualified if excess aggregate 
        contributions distributed before end of following plan 
        year.--
                  (A) In general.--A plan shall not be treated 
                as failing to meet the requirements of 
                paragraph (1) for any plan year if, before the 
                close of the following plan year, the amount of 
                the excess aggregate contributions for such 
                plan year (and any income allocable to such 
                contributions through the end of such year) is 
                distributed (or, if forfeitable, is forfeited). 
                Such contributions (and such income) may be 
                distributed without regard to any other 
                provision of law.
                  (B) Excess aggregate contributions.--For 
                purposes of subparagraph (A), the term ``excess 
                aggregate contributions'' means, with respect 
                to any plan year, the excess of--
                          (i) the aggregate amount of the 
                        matching contributions and employee 
                        contributions (and any qualified 
                        nonelective contribution or elective 
                        contribution taken into account in 
                        computing the contribution percentage) 
                        actually made on behalf of highly 
                        compensated employees for such plan 
                        year, over
                          (ii) the maximum amount of such 
                        contributions permitted under the 
                        limitations of paragraph (2)(A) 
                        (determined by reducing contributions 
                        made on behalf of highly compensated 
                        employees in order of their 
                        contribution percentages beginning with 
                        the highest of such percentages).
                  (C) Method of distributing excess aggregate 
                contributions.--Any distribution of the excess 
                aggregate contributions for any plan year shall 
                be made to highly compensated employees on the 
                basis of the amount of contributions on behalf 
                of, or by, each such employee. Forfeitures of 
                excess aggregate contributions may not be 
                allocated to participants whose contributions 
                are reduced under this paragraph.
                  (D) Coordination with subsection (k) and 
                402(g).--The determination of the amount of 
                excess aggregate contributions with respect to 
                a plan shall be made after--
                          (i) first determining the excess 
                        deferrals (within the meaning of 
                        section 402(g)), and
                          (ii) then determining the excess 
                        contributions under subsection (k).
          (7) Treatment of distributions.--
                  (A) Additional tax of section 72(t) not 
                applicable.--No tax shall be imposed under 
                section 72(t) on any amount required to be 
                distributed under paragraph (6).
                  (B) Exclusion of employee contributions.--Any 
                distribution attributable to employee 
                contributions shall not be included in gross 
                income except to the extent attributable to 
                income on such contributions.
          (8) Highly compensated employee.--For purposes of 
        this subsection, the term ``highly compensated 
        employee'' has the meaning given to such term by 
        section 414(q).
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        purposes of this subsection and subsection (k), 
        including regulations permitting appropriate 
        aggregation of plans and contributions.
          (10) Alternative method of satisfying tests.--A 
        defined contribution plan shall be treated as meeting 
        the requirements of paragraph (2) with respect to 
        matching contributions if the plan--
                  (A) meets the contribution requirements of 
                subparagraph (B) of subsection (k)(11),
                  (B) meets the exclusive plan requirements of 
                subsection (k)(11)(C), and
                  (C) meets the vesting requirements of section 
                408(p)(3).
          (11) Additional alternative method of satisfying 
        tests.--
                  (A) In general.--A defined contribution plan 
                shall be treated as meeting the requirements of 
                paragraph (2) with respect to matching 
                contributions if the plan--
                          (i) meets the contribution 
                        requirements of subparagraph (B) or (C) 
                        of subsection (k)(12),
                          (ii) meets the notice requirements of 
                        subsection (k)(12)(D), and
                          (iii) meets the requirements of 
                        subparagraph (B).
                  (B) Limitation on matching contributions.--
                The requirements of this subparagraph are met 
                if--
                          (i) matching contributions on behalf 
                        of any employee may not be made with 
                        respect to an employee's contributions 
                        or elective deferrals in excess of 6 
                        percent of the employee's compensation,
                          (ii) the rate of an employer's 
                        matching contribution does not increase 
                        as the rate of an employee's 
                        contributions or elective deferrals 
                        increase, and
                          (iii) the matching contribution with 
                        respect to any highly compensated 
                        employee at any rate of an employee 
                        contribution or rate of elective 
                        deferral is not greater than that with 
                        respect to an employee who is not a 
                        highly compensated employee.
          (12) Alternative method for automatic contribution 
        arrangements.--A defined contribution plan shall be 
        treated as meeting the requirements of paragraph (2) 
        with respect to matching contributions if the plan--
                  (A) is a qualified automatic contribution 
                arrangement (as defined in subsection (k)(13)), 
                and
                  (B) meets the requirements of paragraph 
                (11)(B).
          (13) Cross reference.--For excise tax on certain 
        excess contributions, see section 4979.
  (n) Coordination with qualified domestic relations orders.--
The Secretary shall prescribe such rules or regulations as may 
be necessary to coordinate the requirements of subsection 
(a)(13)(B) and section 414(p) (and the regulations issued by 
the Secretary of Labor thereunder) with the other provisions of 
this chapter.
  (o) Cross reference.--For exemption from tax of a trust 
qualified under this section, see section 501(a).

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

  (a) Taxability of beneficiary of exempt trust.--Except as 
otherwise provided in this section, any amount actually 
distributed to any distributee by any employees' trust 
described in section 401(a) which is exempt from tax under 
section 501(a) shall be taxable to the distributee, in the 
taxable year of the distributee in which distributed, under 
section 72 (relating to annuities).
  (b) Taxability of beneficiary of nonexempt trust.--
          (1) Contributions.--Contributions to an employees' 
        trust made by an employer during a taxable year of the 
        employer which ends with or within a taxable year of 
        the trust for which the trust is not exempt from tax 
        under section 501(a) shall be included in the gross 
        income of the employee in accordance with section 83 
        (relating to property transferred in connection with 
        performance of services), except that the value of the 
        employee's interest in the trust shall be substituted 
        for the fair market value of the property for purposes 
        of applying such section.
          (2) Distributions.--The amount actually distributed 
        or made available to any distributee by any trust 
        described in paragraph (1) shall be taxable to the 
        distributee, in the taxable year in which so 
        distributed or made available, under section 72 
        (relating to annuities), except that distributions of 
        income of such trust before the annuity starting date 
        (as defined in section 72(c)(4)) shall be included in 
        the gross income of the employee without regard to 
        section 72(e)(5) (relating to amounts not received as 
        annuities).
          (3) Grantor trusts.--A beneficiary of any trust 
        described in paragraph (1) shall not be considered the 
        owner of any portion of such trust under subpart E of 
        part I of subchapter J (relating to grantors and others 
        treated as substantial owners).
          (4) Failure to meet requirements of section 410(b)
                  (A) Highly compensated employees.--If 1 of 
                the reasons a trust is not exempt from tax 
                under section 501(a) is the failure of the plan 
                of which it is a part to meet the requirements 
                of section 401(a)(26) or 410(b), then a highly 
                compensated employee shall, in lieu of the 
                amount determined under paragraph (1) or (2) 
                include in gross income for the taxable year 
                with or within which the taxable year of the 
                trust ends an amount equal to the vested 
                accrued benefit of such employee (other than 
                the employee's investment in the contract) as 
                of the close of such taxable year of the trust.
                  (B) Failure to meet coverage tests.--If a 
                trust is not exempt from tax under section 
                501(a) for any taxable year solely because such 
                trust is part of a plan which fails to meet the 
                requirements of section 401(a)(26) or 410(b), 
                paragraphs (1) and (2) shall not apply by 
                reason of such failure to any employee who was 
                not a highly compensated employee during--
                          (i) such taxable year, or
                          (ii) any preceding period for which 
                        service was creditable to such employee 
                        under the plan.
                  (C) Highly compensated employee.--For 
                purposes of this paragraph, the term ``highly 
                compensated employee'' has the meaning given 
                such term by section 414(q).
  (c) Rules applicable to rollovers from exempt trusts.--
          (1) Exclusion from income.--If--
                  (A) any portion of the balance to the credit 
                of an employee in a qualified trust is paid to 
                the employee in an eligible rollover 
                distribution,
                  (B) the distributee transfers any portion of 
                the property received in such distribution to 
                an eligible retirement plan, and
                  (C) in the case of a distribution of property 
                other than money, the amount so transferred 
                consists of the property distributed,
        then such distribution (to the extent so transferred) 
        shall not be includible in gross income for the taxable 
        year in which paid.
          (2) Maximum amount which may be rolled over.--In the 
        case of any eligible rollover distribution, the maximum 
        amount transferred to which paragraph (1) applies shall 
        not exceed the portion of such distribution which is 
        includible in gross income (determined without regard 
        to paragraph (1)). The preceding sentence shall not 
        apply to such distribution to the extent--
                  (A) such portion is transferred in a direct 
                trustee-to-trustee transfer to a qualified 
                trust or to an annuity contract described in 
                section 403(b) and such trust or contract 
                provides for separate accounting for amounts so 
                transferred (and earnings thereon), including 
                separately accounting for the portion of such 
                distribution which is includible in gross 
                income and the portion of such distribution 
                which is not so includible, or
                  (B) such portion is transferred to an 
                eligible retirement plan described in clause 
                (i) or (ii) of paragraph (8)(B).
        In the case of a transfer described in subparagraph (A) 
        or (B), the amount transferred shall be treated as 
        consisting first of the portion of such distribution 
        that is includible in gross income (determined without 
        regard to paragraph (1)).
          (3) Time limit on transfers.--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), paragraph (1) shall 
                not apply to any transfer of a distribution 
                made after the 60th day following the day on 
                which the distributee received the property 
                distributed.
                  (B) Hardship exception.--The Secretary may 
                waive the 60-day requirement under subparagraph 
                (A) where the failure to waive such requirement 
                would be against equity or good conscience, 
                including casualty, disaster, or other events 
                beyond the reasonable control of the individual 
                subject to such requirement.
                  (C) Rollover of certain plan loan offset 
                amounts.--
                          (i) In general.--In the case of a 
                        qualified plan loan offset amount, 
                        paragraph (1) shall not apply to any 
                        transfer of such amount made after the 
                        due date (including extensions) for 
                        filing the return of tax for the 
                        taxable year in which such amount is 
                        treated as distributed from a qualified 
                        employer plan.
                          (ii) Qualified plan loan offset 
                        amount.--For purposes of this 
                        subparagraph, the term ``qualified plan 
                        loan offset amount'' means a plan loan 
                        offset amount which is treated as 
                        distributed from a qualified employer 
                        plan to a participant or beneficiary 
                        solely by reason of--
                                  (I) the termination of the 
                                qualified employer plan, or
                                  (II) the failure to meet the 
                                repayment terms of the loan 
                                from such plan because of the 
                                severance from employment of 
                                the participant.
                          (iii) Plan loan offset amount.--For 
                        purposes of clause (ii), the term 
                        ``plan loan offset amount'' means the 
                        amount by which the participant's 
                        accrued benefit under the plan is 
                        reduced in order to repay a loan from 
                        the plan.
                          (iv) Limitation.--This subparagraph 
                        shall not apply to any plan loan offset 
                        amount unless such plan loan offset 
                        amount relates to a loan to which 
                        section 72(p)(1) does not apply by 
                        reason of section 72(p)(2).
                          (v) Qualified employer plan.--For 
                        purposes of this subsection, the term 
                        ``qualified employer plan'' has the 
                        meaning given such term by section 
                        72(p)(4).
          (4) Eligible rollover distribution.--For purposes of 
        this subsection, the term ``eligible rollover 
        distribution'' means any distribution to an employee of 
        all or any portion of the balance to the credit of the 
        employee in a qualified trust; except that such term 
        shall not include--
                  (A) any distribution which is one of a series 
                of substantially equal periodic payments (not 
                less frequently than annually) made--
                          (i) for the life (or life expectancy) 
                        of the employee or the joint lives (or 
                        joint life expectancies) of the 
                        employee and the employee's designated 
                        beneficiary, or
                          (ii) for a specified period of 10 
                        years or more,
                  (B) any distribution to the extent such 
                distribution is required under section 
                401(a)(9), and
                  (C) any distribution which is made upon 
                hardship of the employee.
        If all or any portion of a distribution during 2009 is 
        treated as an eligible rollover distribution but would 
        not be so treated if the minimum distribution 
        requirements under section 401(a)(9) had applied during 
        2009, such distribution shall not be treated as an 
        eligible rollover distribution for purposes of section 
        401(a)(31) or 3405(c) or subsection (f) of this 
        section.
          (5) Transfer treated as rollover contribution under 
        section 408.--For purposes of this title, a transfer to 
        an eligible retirement plan described in clause (i) or 
        (ii) of paragraph (8)(B) resulting in any portion of a 
        distribution being excluded from gross income under 
        paragraph (1) shall be treated as a rollover 
        contribution described in section 408(d)(3).
          (6) Sales of distributed property.--For purposes of 
        this subsection--
                  (A) Transfer of proceeds from sale of 
                distributed property treated as transfer of 
                distributed property.--The transfer of an 
                amount equal to any portion of the proceeds 
                from the sale of property received in the 
                distribution shall be treated as the transfer 
                of property received in the distribution.
                  (B) Proceeds attributable to increase in 
                value.--The excess of fair market value of 
                property on sale over its fair market value on 
                distribution shall be treated as property 
                received in the distribution.
                  (C) Designation where amount of distribution 
                exceeds rollover contribution.--In any case 
                where part or all of the distribution consists 
                of property other than money--
                          (i) the portion of the money or other 
                        property which is to be treated as 
                        attributable to amounts not included in 
                        gross income, and
                          (ii) the portion of the money or 
                        other property which is to be treated 
                        as included in the rollover 
                        contribution,
                shall be determined on a ratable basis unless 
                the taxpayer designates otherwise. Any 
                designation under this subparagraph for a 
                taxable year shall be made not later than the 
                time prescribed by law for filing the return 
                for such taxable year (including extensions 
                thereof). Any such designation, once made, 
                shall be irrevocable.
                  (D) Nonrecognition of gain or loss.--No gain 
                or loss shall be recognized on any sale 
                described in subparagraph (A) to the extent 
                that an amount equal to the proceeds is 
                transferred pursuant to paragraph (1).
          (7) Special rule for frozen deposits.--
                  (A) In general.--The 60-day period described 
                in paragraph (3) shall not--
                          (i) include any period during which 
                        the amount transferred to the employee 
                        is a frozen deposit, or
                          (ii) end earlier than 10 days after 
                        such amount ceases to be a frozen 
                        deposit.
                  (B) Frozen deposits.--For purposes of this 
                subparagraph, the term ``frozen deposit'' means 
                any deposit which may not be withdrawn because 
                of--
                          (i) the bankruptcy or insolvency of 
                        any financial institution, or
                          (ii) any requirement imposed by the 
                        State in which such institution is 
                        located by reason of the bankruptcy or 
                        insolvency (or threat thereof) of 1 or 
                        more financial institutions in such 
                        State.
                A deposit shall not be treated as a frozen 
                deposit unless on at least 1 day during the 60-
                day period described in paragraph (3) (without 
                regard to this paragraph) such deposit is 
                described in the preceding sentence.
          (8) Definitions.--For purposes of this subsection--
                  (A) Qualified trust.--The term ``qualified 
                trust'' means an employees' trust described in 
                section 401(a) which is exempt from tax under 
                section 501(a).
                  (B) Eligible retirement plan.--The term 
                ``eligible retirement plan'' means--
                          (i) an individual retirement account 
                        described in section 408(a),
                          (ii) an individual retirement annuity 
                        described in section 408(b) (other than 
                        an endowment contract),
                          (iii) a qualified trust,
                          (iv) an annuity plan described in 
                        section 403(a),
                          (v) an eligible deferred compensation 
                        plan described in section 457(b) which 
                        is maintained by an eligible employer 
                        described in section 457(e)(1)(A), and
                          (vi) an annuity contract described in 
                        section 403(b).
                If any portion of an eligible rollover 
                distribution is attributable to payments or 
                distributions from a designated Roth account 
                (as defined in section 402A), an eligible 
                retirement plan with respect to such portion 
                shall include only another designated Roth 
                account and a Roth IRA.
          (9) Rollover where spouse receives distribution after 
        death of employee.--If any distribution attributable to 
        an employee is paid to the spouse of the employee after 
        the employee's death, the preceding provisions of this 
        subsection shall apply to such distribution in the same 
        manner as if the spouse were the employee.
          (10) Separate accounting.--Unless a plan described in 
        clause (v) of paragraph (8)(B) agrees to separately 
        account for amounts rolled into such plan from eligible 
        retirement plans not described in such clause, the plan 
        described in such clause may not accept transfers or 
        rollovers from such retirement plans.
          (11) Distributions to inherited individual retirement 
        plan of nonspouse beneficiary.--
                  (A) In general.--If, with respect to any 
                portion of a distribution from an eligible 
                retirement plan described in paragraph 
                (8)(B)(iii) of a deceased employee, a direct 
                trustee-to-trustee transfer is made to an 
                individual retirement plan described in clause 
                (i) or (ii) of paragraph (8)(B) established for 
                the purposes of receiving the distribution on 
                behalf of an individual who is a designated 
                beneficiary (as defined by section 
                401(a)(9)(E)) of the employee and who is not 
                the surviving spouse of the employee--
                          (i) the transfer shall be treated as 
                        an eligible rollover distribution,
                          (ii) the individual retirement plan 
                        shall be treated as an inherited 
                        individual retirement account or 
                        individual retirement annuity (within 
                        the meaning of section 408(d)(3)(C)) 
                        for purposes of this title, and
                          (iii) section 401(a)(9)(B) (other 
                        than clause (iv) thereof) shall apply 
                        to such plan.
                  (B) Certain trusts treated as 
                beneficiaries.--For purposes of this paragraph, 
                to the extent provided in rules prescribed by 
                the Secretary, a trust maintained for the 
                benefit of one or more designated beneficiaries 
                shall be treated in the same manner as a 
                designated beneficiary.
  (d) Taxability of beneficiary of certain foreign situs 
trusts.--For purposes of subsections (a), (b), and (c), a stock 
bonus, pension, or profit-sharing trust which would qualify for 
exemption from tax under section 501(a) except for the fact 
that it is a trust created or organized outside the United 
States shall be treated as if it were a trust exempt from tax 
under section 501(a).
  (e) Other rules applicable to exempt trusts.--
          (1) Alternate payees.--
                  (A) Alternate payee treated as distributee.--
                For purposes of subsection (a) and section 72, 
                an alternate payee who is the spouse or former 
                spouse of the participant shall be treated as 
                the distributee of any distribution or payment 
                made to the alternate payee under a qualified 
                domestic relations order (as defined in section 
                414(p)).
                  (B) Rollovers.--If any amount is paid or 
                distributed to an alternate payee who is the 
                spouse or former spouse of the participant by 
                reason of any qualified domestic relations 
                order (within the meaning of section 414(p)), 
                subsection (c) shall apply to such distribution 
                in the same manner as if such alternate payee 
                were the employee.
          (2) Distributions by United States to nonresident 
        aliens.--The amount includible under subsection (a) in 
        the gross income of a nonresident alien with respect to 
        a distribution made by the United States in respect of 
        services performed by an employee of the United States 
        shall not exceed an amount which bears the same ratio 
        to the amount includible in gross income without regard 
        to this paragraph as--
                  (A) the aggregate basic pay paid by the 
                United States to such employee for such 
                services, reduced by the amount of such basic 
                pay which was not includible in gross income by 
                reason of being from sources without the United 
                States, bears to
                  (B) the aggregate basic pay paid by the 
                United States to such employee for such 
                services.
        In the case of distributions under the civil service 
        retirement laws, the term ``basic pay'' shall have the 
        meaning provided in section 8331(3) of title 5, United 
        States Code.
          (3) Cash or deferred arrangements.--For purposes of 
        this title, contributions made by an employer on behalf 
        of an employee to a trust which is a part of a 
        qualified cash or deferred arrangement (as defined in 
        section 401(k)(2)) or which is part of a salary 
        reduction agreement under section 403(b) shall not be 
        treated as distributed or made available to the 
        employee nor as contributions made to the trust by the 
        employee merely because the arrangement includes 
        provisions under which the employee has an election 
        whether the contribution will be made to the trust or 
        received by the employee in cash.
          (4) Net unrealized appreciation.--
                  (A) Amounts attributable to employee 
                contributions.--For purposes of subsection (a) 
                and section 72, in the case of a distribution 
                other than a lump sum distribution, the amount 
                actually distributed to any distributee from a 
                trust described in subsection (a) shall not 
                include any net unrealized appreciation in 
                securities of the employer corporation 
                attributable to amounts contributed by the 
                employee (other than deductible employee 
                contributions within the meaning of section 
                72(o)(5)). This subparagraph shall not apply to 
                a distribution to which subsection (c) applies.
                  (B) Amounts attributable to employer 
                contributions.--For purposes of subsection (a) 
                and section 72, in the case of any lump sum 
                distribution which includes securities of the 
                employer corporation, there shall be excluded 
                from gross income the net unrealized 
                appreciation attributable to that part of the 
                distribution which consists of securities of 
                the employer corporation. In accordance with 
                rules prescribed by the Secretary, a taxpayer 
                may elect, on the return of tax on which a lump 
                sum distribution is required to be included, 
                not to have this subparagraph apply to such 
                distribution.
                  (C) Determination of amounts and 
                adjustments.--For purposes of subparagraphs (A) 
                and (B), net unrealized appreciation and the 
                resulting adjustments to basis shall be 
                determined in accordance with regulations 
                prescribed by the Secretary.
                  (D) Lump-sum distribution.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``lump-sum 
                        distribution'' means the distribution 
                        or payment within one taxable year of 
                        the recipient of the balance to the 
                        credit of an employee which becomes 
                        payable to the recipient--
                                  (I) on account of the 
                                employee's death,
                                  (II) after the employee 
                                attains age 59 1/2,
                                  (III) on account of the 
                                employee's separation from 
                                service, or
                                  (IV) after the employee has 
                                become disabled (within the 
                                meaning of section 72(m)(7)),
                from a trust which forms a part of a plan 
                described in section 401(a) and which is exempt 
                from tax under section 501 or from a plan 
                described in section 403(a). Subclause (III) of 
                this clause shall be applied only with respect 
                to an individual who is an employee without 
                regard to section 401(c)(1), and subclause (IV) 
                shall be applied only with respect to an 
                employee within the meaning of section 
                401(c)(1). For purposes of this clause, a 
                distribution to two or more trusts shall be 
                treated as a distribution to one recipient. For 
                purposes of this paragraph, the balance to the 
                credit of the employee does not include the 
                accumulated deductible employee contributions 
                under the plan (within the meaning of section 
                72(o)(5)).
                          (ii) Aggregation of certain trusts 
                        and plans.--For purposes of determining 
                        the balance to the credit of an 
                        employee under clause (i)--
                                  (I) all trusts which are part 
                                of a plan shall be treated as a 
                                single trust, all pension plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, all profit-sharing plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, and all stock bonus plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, and
                                  (II) trusts which are not 
                                qualified trusts under section 
                                401(a) and annuity contracts 
                                which do not satisfy the 
                                requirements of section 
                                404(a)(2) shall not be taken 
                                into account.
                          (iii) Community property laws.--The 
                        provisions of this paragraph shall be 
                        applied without regard to community 
                        property laws.
                          (iv) Amounts subject to penalty.--
                        This paragraph shall not apply to 
                        amounts described in subparagraph (A) 
                        of section 72(m)(5) to the extent that 
                        section 72(m)(5) applies to such 
                        amounts.
                          (v) Balance to credit of employee not 
                        to include amounts payable under 
                        qualified domestic relations order.--
                        For purposes of this paragraph, the 
                        balance to the credit of an employee 
                        shall not include any amount payable to 
                        an alternate payee under a qualified 
                        domestic relations order (within the 
                        meaning of section 414(p)).
                          (vi) Transfers to cost-of-living 
                        arrangement not treated as 
                        distribution.--For purposes of this 
                        paragraph, the balance to the credit of 
                        an employee under a defined 
                        contribution plan shall not include any 
                        amount transferred from such defined 
                        contribution plan to a qualified cost-
                        of-living arrangement (within the 
                        meaning of section 415(k)(2)) under a 
                        defined benefit plan.
                          (vii) Lump-sum distributions of 
                        alternate payees.--If any distribution 
                        or payment of the balance to the credit 
                        of an employee would be treated as a 
                        lump-sum distribution, then, for 
                        purposes of this paragraph, the payment 
                        under a qualified domestic relations 
                        order (within the meaning of section 
                        414(p)) of the balance to the credit of 
                        an alternate payee who is the spouse or 
                        former spouse of the employee shall be 
                        treated as a lump-sum distribution. For 
                        purposes of this clause, the balance to 
                        the credit of the alternate payee shall 
                        not include any amount payable to the 
                        employee.
                  (E) Definitions relating to securities.--For 
                purposes of this paragraph--
                          (i) Securities.--The term 
                        ``securities'' means only shares of 
                        stock and bonds or debentures issued by 
                        a corporation with interest coupons or 
                        in registered form.
                          (ii) Securities of the employer.--The 
                        term ``securities of the employer 
                        corporation'' includes securities of a 
                        parent or subsidiary corporation (as 
                        defined in subsections (e) and (f) of 
                        section 424) of the employer 
                        corporation.
          (6) Direct trustee-to-trustee transfers.--Any amount 
        transferred in a direct trustee-to-trustee transfer in 
        accordance with section 401(a)(31) shall not be 
        includible in gross income for the taxable year of such 
        transfer.
  (f) Written explanation to recipients of distributions 
eligible for rollover treatment.--
          (1) In general.--The plan administrator of any plan 
        shall, within a reasonable period of time before making 
        an eligible rollover distribution, provide a written 
        explanation to the recipient--
                  (A) of the provisions under which the 
                recipient may have the distribution directly 
                transferred to an eligible retirement plan and 
                that the automatic distribution by direct 
                transfer applies to certain distributions in 
                accordance with section 401(a)(31)(B),
                  (B) of the provision which requires the 
                withholding of tax on the distribution if it is 
                not directly transferred to an eligible 
                retirement plan,
                  (C) of the provisions under which the 
                distribution will not be subject to tax if 
                transferred to an eligible retirement plan 
                within 60 days after the date on which the 
                recipient received the distribution,
                  (D) if applicable, of the provisions of 
                subsections (d) and (e) of this section, and
                  (E) of the provisions under which 
                distributions from the eligible retirement plan 
                receiving the distribution may be subject to 
                restrictions and tax consequences which are 
                different from those applicable to 
                distributions from the plan making such 
                distribution.
          (2) Definitions.--For purposes of this subsection--
                  (A) Eligible rollover distribution.--The term 
                ``eligible rollover distribution'' has the same 
                meaning as when used in subsection (c) of this 
                section, paragraph (4) of section 403(a), 
                subparagraph (A) of section 403(b)(8), or 
                subparagraph (A) of section 457(e)(16). Such 
                term shall include any distribution to a 
                designated beneficiary which would be treated 
                as an eligible rollover distribution by reason 
                of subsection (c)(11), or section 403(a)(4)(B), 
                403(b)(8)(B), or 457(e)(16)(B), if the 
                requirements of subsection (c)(11) were 
                satisfied.
                  (B) Eligible retirement plan.--The term 
                ``eligible retirement plan'' has the meaning 
                given such term by subsection (c)(8)(B).
  (g) Limitation on exclusion for elective deferrals.--
          (1) In general.--
                  (A) Limitation.--Notwithstanding subsections 
                (e)(3) and (h)(1)(B), the elective deferrals of 
                any individual for any taxable year shall be 
                included in such individual's gross income to 
                the extent the amount of such deferrals for the 
                taxable year exceeds the applicable dollar 
                amount. The preceding sentence shall not apply 
                to the portion of such excess as does not 
                exceed the designated Roth contributions of the 
                individual for the taxable year.
                  (B) Applicable dollar amount.--For purposes 
                of subparagraph (A), the applicable dollar 
                amount is $15,000.
                  (C) Catch-up contributions.--In addition to 
                subparagraph (A), in the case of an eligible 
                participant (as defined in section 414(v)), 
                gross income shall not include elective 
                deferrals in excess of the applicable dollar 
                amount under subparagraph (B) to the extent 
                that the amount of such elective deferrals does 
                not exceed the applicable dollar amount under 
                section 414(v)(2)(B)(i) for the taxable year 
                (without regard to the treatment of the 
                elective deferrals by an applicable employer 
                plan under section 414(v)).
          (2) Distribution of excess deferrals.--
                  (A) In general.--If any amount (hereinafter 
                in this paragraph referred to as ``excess 
                deferrals'') is included in the gross income of 
                an individual under paragraph (1) (or would be 
                included but for the last sentence thereof) for 
                any taxable year--
                          (i) not later than the 1st March 1 
                        following the close of the taxable 
                        year, the individual may allocate the 
                        amount of such excess deferrals among 
                        the plans under which the deferrals 
                        were made and may notify each such plan 
                        of the portion allocated to it, and
                          (ii) not later than the 1st April 15 
                        following the close of the taxable 
                        year, each such plan may distribute to 
                        the individual the amount allocated to 
                        it under clause (i) (and any income 
                        allocable to such amount through the 
                        end of such taxable year).
                The distribution described in clause (ii) may 
                be made notwithstanding any other provision of 
                law.
                  (B) Treatment of distribution under section 
                401(k).--Except to the extent provided under 
                rules prescribed by the Secretary, 
                notwithstanding the distribution of any portion 
                of an excess deferral from a plan under 
                subparagraph (A)(ii), such portion shall, for 
                purposes of applying section 401(k)(3)(A)(ii), 
                be treated as an employer contribution.
                  (C) Taxation of distribution.--In the case of 
                a distribution to which subparagraph (A) 
                applies--
                          (i) except as provided in clause 
                        (ii), such distribution shall not be 
                        included in gross income, and
                          (ii) any income on the excess 
                        deferral shall, for purposes of this 
                        chapter, be treated as earned and 
                        received in the taxable year in which 
                        such income is distributed.
                No tax shall be imposed under section 72(t) on 
                any distribution described in the preceding 
                sentence.
                  (D) Partial distributions.--If a plan 
                distributes only a portion of any excess 
                deferral and income allocable thereto, such 
                portion shall be treated as having been 
                distributed ratably from the excess deferral 
                and the income.
          (3) Elective deferrals.--For purposes of this 
        subsection, the term ``elective deferrals'' means, with 
        respect to any taxable year, the sum of--
                  (A) any employer contribution under a 
                qualified cash or deferred arrangement (as 
                defined in section 401(k)) to the extent not 
                includible in gross income for the taxable year 
                under subsection (e)(3) (determined without 
                regard to this subsection),
                  (B) any employer contribution to the extent 
                not includible in gross income for the taxable 
                year under subsection (h)(1)(B) (determined 
                without regard to this subsection),
                  (C) any employer contribution to purchase an 
                annuity contract under section 403(b) under a 
                salary reduction agreement (within the meaning 
                of section 3121(a)(5)(D)), and
                  (D) any elective employer contribution under 
                section 408(p)(2)(A)(i).
        An employer contribution shall not be treated as an 
        elective deferral described in subparagraph (C) if 
        under the salary reduction agreement such contribution 
        is made pursuant to a one-time irrevocable election 
        made by the employee at the time of initial eligibility 
        to participate in the agreement or is made pursuant to 
        a similar arrangement involving a one-time irrevocable 
        election specified in regulations.
          (4) Cost-of-living adjustment.--In the case of 
        taxable years beginning after December 31, 2006, the 
        Secretary shall adjust the $15,000 amount under 
        paragraph (1)(B) at the same time and in the same 
        manner as under section 415(d), except that the base 
        period shall be the calendar quarter beginning July 1, 
        2005, and any increase under this paragraph which is 
        not a multiple of $500 shall be rounded to the next 
        lowest multiple of $500.
          (5) Disregard of community property laws.--This 
        subsection shall be applied without regard to community 
        property laws.
          (6) Coordination with section 72.--For purposes of 
        applying section 72, any amount includible in gross 
        income for any taxable year under this subsection but 
        which is not distributed from the plan during such 
        taxable year shall not be treated as investment in the 
        contract.
          (7) Special rule for certain organizations.--
                  (A) In general.--In the case of a qualified 
                employee of a qualified organization, with 
                respect to employer contributions described in 
                paragraph (3)(C) made by such organization, the 
                limitation of paragraph (1) for any taxable 
                year shall be increased by whichever of the 
                following is the least:
                          (i) $3,000,
                          (ii) $15,000 reduced by the sum of--
                                  (I) the amounts not included 
                                in gross income for prior 
                                taxable years by reason of this 
                                paragraph, plus
                                  (II) the aggregate amount of 
                                designated Roth contributions 
                                (as defined in section 402A(c)) 
                                permitted for prior taxable 
                                years by reason of this 
                                paragraph, or
                          (iii) the excess of $5,000 multiplied 
                        by the number of years of service of 
                        the employee with the qualified 
                        organization over the employer 
                        contributions described in paragraph 
                        (3) made by the organization on behalf 
                        of such employee for prior taxable 
                        years (determined in the manner 
                        prescribed by the Secretary).
                  (B) Qualified organization.--For purposes of 
                this paragraph, the term ``qualified 
                organization'' means any educational 
                organization, hospital, home health service 
                agency, health and welfare service agency, 
                church, or convention or association of 
                churches. Such term includes any organization 
                described in section 414(e)(3)(B)(ii). Terms 
                used in this subparagraph shall have the same 
                meaning as when used in section 415(c)(4) (as 
                in effect before the enactment of the Economic 
                Growth and Tax Relief Reconciliation Act of 
                2001).
                  (C) Qualified employee.--For purposes of this 
                paragraph, the term ``qualified employee'' 
                means any employee who has completed 15 years 
                of service with the qualified organization.
                  (D) Years of service.--For purposes of this 
                paragraph, the term ``years of service'' has 
                the meaning given such term by section 403(b).
          (8) Matching contributions on behalf of self-employed 
        individuals not treated as elective employer 
        contributions.--Except as provided in section 
        401(k)(3)(D)(ii), any matching contribution described 
        in section 401(m)(4)(A) which is made on behalf of a 
        self-employed individual (as defined in section 401(c)) 
        shall not be treated as an elective employer 
        contribution under a qualified cash or deferred 
        arrangement (as defined in section 401(k)) for purposes 
        of this title.
  (h) Special rules for simplified employee pensions.--For 
purposes of this chapter--
          (1) In general.--Except as provided in paragraph (2), 
        contributions made by an employer on behalf of an 
        employee to an individual retirement plan pursuant to a 
        simplified employee pension (as defined in section 
        408(k))--
                  (A) shall not be treated as distributed or 
                made available to the employee or as 
                contributions made by the employee, and
                  (B) if such contributions are made pursuant 
                to an arrangement under section 408(k)(6) under 
                which an employee may elect to have the 
                employer make contributions to the simplified 
                employee pension on behalf of the employee, 
                shall not be treated as distributed or made 
                available or as contributions made by the 
                employee merely because the simplified employee 
                pension includes provisions for such election.
          (2) Limitations on employer contributions.--
        Contributions made by an employer to a simplified 
        employee pension with respect to an employee for any 
        year shall be treated as distributed or made available 
        to such employee and as contributions made by the 
        employee to the extent such contributions exceed the 
        lesser of--
                  (A) 25 percent of the compensation (within 
                the meaning of section 414(s)) from such 
                employer includible in the employee's gross 
                income for the year (determined without regard 
                to the employer contributions to the simplified 
                employee pension), or
                  (B) the limitation in effect under section 
                415(c)(1)(A), reduced in the case of any highly 
                compensated employee (within the meaning of 
                section 414(q)) by the amount taken into 
                account with respect to such employee under 
                section 408(k)(3)(D).
          (3) Distributions.--Any amount paid or distributed 
        out of an individual retirement plan pursuant to a 
        simplified employee pension shall be included in gross 
        income by the payee or distributee, as the case may be, 
        in accordance with the provisions of section 408(d).
  (i) Treatment of self-employed individuals.--For purposes of 
this section, except as otherwise provided in subsection 
(e)(4)(D)(i), the term ``employee'' includes a self-employed 
individual (as defined in section 401(c)(1)(B)) and the 
employer of such individual shall be the person treated as his 
employer under section 401(c)(4).
  (j) Effect of disposition of stock by plan on net unrealized 
appreciation.--
          (1) In general.--For purposes of subsection (e)(4), 
        in the case of any transaction to which this subsection 
        applies, the determination of net unrealized 
        appreciation shall be made without regard to such 
        transaction.
          (2) Transaction to which subsection applies.--This 
        subsection shall apply to any transaction in which--
                  (A) the plan trustee exchanges the plan's 
                securities of the employer corporation for 
                other such securities, or
                  (B) the plan trustee disposes of securities 
                of the employer corporation and uses the 
                proceeds of such disposition to acquire 
                securities of the employer corporation within 
                90 days (or such longer period as the Secretary 
                may prescribe), except that this subparagraph 
                shall not apply to any employee with respect to 
                whom a distribution of money was made during 
                the period after such disposition and before 
                such acquisition.
  (k) Treatment of simple retirement accounts.--Rules similar 
to the rules of paragraphs (1) and (3) of subsection (h) shall 
apply to contributions and distributions with respect to a 
simple retirement account under section 408(p).
  (l) Distributions from governmental plans for health and 
long-term care insurance.--
          (1) In general.--In the case of an employee who is an 
        eligible retired public safety officer who makes the 
        election described in paragraph (6) with respect to any 
        taxable year of such employee, gross income of such 
        employee for such taxable year does not include any 
        distribution from an eligible retirement plan 
        maintained by the employer described in paragraph 
        (4)(B) to the extent that the aggregate amount of such 
        distributions does not exceed the amount paid by such 
        employee for qualified health insurance premiums for 
        such taxable year.
          (2) Limitation.--The amount which may be excluded 
        from gross income for the taxable year by reason of 
        paragraph (1) shall not exceed $3,000.
          (3) Distributions must otherwise be includible.--
                  (A) In general.--An amount shall be treated 
                as a distribution for purposes of paragraph (1) 
                only to the extent that such amount would be 
                includible in gross income without regard to 
                paragraph (1).
                  (B) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which an amount is treated as a 
                distribution for purposes of subparagraph (A), 
                the aggregate amounts distributed from an 
                eligible retirement plan in a taxable year (up 
                to the amount excluded under paragraph (1)) 
                shall be treated as includible in gross income 
                (without regard to subparagraph (A)) to the 
                extent that such amount does not exceed the 
                aggregate amount which would have been so 
                includible if all amounts to the credit of the 
                eligible public safety officer in all eligible 
                retirement plans maintained by the employer 
                described in paragraph (4)(B) were distributed 
                during such taxable year and all such plans 
                were treated as 1 contract for purposes of 
                determining under section 72 the aggregate 
                amount which would have been so includible. 
                Proper adjustments shall be made in applying 
                section 72 to other distributions in such 
                taxable year and subsequent taxable years.
          (4) Definitions.--For purposes of this subsection--
                  (A) Eligible retirement plan.--For purposes 
                of paragraph (1), the term ``eligible 
                retirement plan'' means a governmental plan 
                (within the meaning of section 414(d)) which is 
                described in clause (iii), (iv), (v), or (vi) 
                of subsection (c)(8)(B).
                  (B) Eligible retired public safety officer.--
                The term ``eligible retired public safety 
                officer'' means an individual who, by reason of 
                disability or attainment of normal retirement 
                age, is separated from service as a public 
                safety officer with the employer who maintains 
                the eligible retirement plan from which 
                distributions subject to paragraph (1) are 
                made.
                  (C) Public safety officer.--The term ``public 
                safety officer'' shall have the same meaning 
                given such term by section 1204(9)(A) of the 
                Omnibus Crime Control and Safe Streets Act of 
                1968 (42 U.S.C. 3796b(9)(A)), as in effect 
                immediately before the enactment of the 
                National Defense Authorization Act for Fiscal 
                Year 2013.
                  (D) Qualified health insurance premiums.--The 
                term ``qualified health insurance premiums'' 
                means premiums for coverage for the eligible 
                retired public safety officer, his spouse, and 
                dependents (as defined in [section 152] section 
                7706), by an accident or health plan or 
                qualified long-term care insurance contract (as 
                defined in section 7702B(b)).
          (5) Special rules.--For purposes of this subsection--
                  (A) Direct payment to insurer required.--
                Paragraph (1) shall only apply to a 
                distribution if payment of the premiums is made 
                directly to the provider of the accident or 
                health plan or qualified long-term care 
                insurance contract by deduction from a 
                distribution from the eligible retirement plan.
                  (B) Related plans treated as 1.--All eligible 
                retirement plans of an employer shall be 
                treated as a single plan.
          (6) Election described.--
                  (A) In general.--For purposes of paragraph 
                (1), an election is described in this paragraph 
                if the election is made by an employee after 
                separation from service with respect to amounts 
                not distributed from an eligible retirement 
                plan to have amounts from such plan distributed 
                in order to pay for qualified health insurance 
                premiums.
                  (B) Special rule.--A plan shall not be 
                treated as violating the requirements of 
                section 401, or as engaging in a prohibited 
                transaction for purposes of section 503(b), 
                merely because it provides for an election with 
                respect to amounts that are otherwise 
                distributable under the plan or merely because 
                of a distribution made pursuant to an election 
                described in subparagraph (A).
          (7) Coordination with medical expense deduction.--The 
        amounts excluded from gross income under paragraph (1) 
        shall not be taken into account under section 213.
          (8) Coordination with deduction for health insurance 
        costs of self-employed individuals.--The amounts 
        excluded from gross income under paragraph (1) shall 
        not be taken into account under section 162(l).

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SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER 
                    NONQUALIFIED DEFERRED COMPENSATION PLANS.

  (a) Rules relating to constructive receipt.--
          (1) Plan failures.--
                  (A) Gross income inclusion.--
                          (i) In general.--If at any time 
                        during a taxable year a nonqualified 
                        deferred compensation plan--
                                  (I) fails to meet the 
                                requirements of paragraphs (2), 
                                (3), and (4), or
                                  (II) is not operated in 
                                accordance with such 
                                requirements, all compensation 
                                deferred under the plan for the 
                                taxable year and all preceding 
                                taxable years shall be 
                                includible in gross income for 
                                the taxable year to the extent 
                                not subject to a substantial 
                                risk of forfeiture and not 
                                previously included in gross 
                                income.
                          (ii) Application only to affected 
                        participants.--Clause (i) shall only 
                        apply with respect to all compensation 
                        deferred under the plan for 
                        participants with respect to whom the 
                        failure relates.
                  (B) Interest and additional tax payable with 
                respect to previously deferred compensation.--
                          (i) In general.--If compensation is 
                        required to be included in gross income 
                        under subparagraph (A) for a taxable 
                        year, the tax imposed by this chapter 
                        for the taxable year shall be increased 
                        by the sum of--
                                  (I) the amount of interest 
                                determined under clause (ii), 
                                and
                                  (II) an amount equal to 20 
                                percent of the compensation 
                                which is required to be 
                                included in gross income.
                          (ii) Interest.--For purposes of 
                        clause (i), the interest determined 
                        under this clause for any taxable year 
                        is the amount of interest at the 
                        underpayment rate plus 1 percentage 
                        point on the underpayments that would 
                        have occurred had the deferred 
                        compensation been includible in gross 
                        income for the taxable year in which 
                        first deferred or, if later, the first 
                        taxable year in which such deferred 
                        compensation is not subject to a 
                        substantial risk of forfeiture.
          (2) Distributions.--
                  (A) In general.--The requirements of this 
                paragraph are met if the plan provides that 
                compensation deferred under the plan may not be 
                distributed earlier than--
                          (i) separation from service as 
                        determined by the Secretary (except as 
                        provided in subparagraph (B)(i)),
                          (ii) the date the participant becomes 
                        disabled (within the meaning of 
                        subparagraph (C)),
                          (iii) death,
                          (iv) a specified time (or pursuant to 
                        a fixed schedule) specified under the 
                        plan at the date of the deferral of 
                        such compensation,
                          (v) to the extent provided by the 
                        Secretary, a change in the ownership or 
                        effective control of the corporation, 
                        or in the ownership of a substantial 
                        portion of the assets of the 
                        corporation, or
                          (vi) the occurrence of an 
                        unforeseeable emergency.
                  (B) Special rules.--
                          (i) Specified employees.--In the case 
                        of any specified employee, the 
                        requirement of subparagraph (A)(i) is 
                        met only if distributions may not be 
                        made before the date which is 6 months 
                        after the date of separation from 
                        service (or, if earlier, the date of 
                        death of the employee). For purposes of 
                        the preceding sentence, a specified 
                        employee is a key employee (as defined 
                        in section 416(i) without regard to 
                        paragraph (5) thereof) of a corporation 
                        any stock in which is publicly traded 
                        on an established securities market or 
                        otherwise.
                          (ii) Unforeseeable emergency.--For 
                        purposes of subparagraph (A)(vi)--
                                  (I) In general.--The term 
                                ``unforeseeable emergency'' 
                                means a severe financial 
                                hardship to the participant 
                                resulting from an illness or 
                                accident of the participant, 
                                the participant's spouse, or a 
                                dependent (as defined in 
                                [section 152(a)] section 
                                7706(a)) of the participant, 
                                loss of the participant's 
                                property due to casualty, or 
                                other similar extraordinary and 
                                unforeseeable circumstances 
                                arising as a result of events 
                                beyond the control of the 
                                participant.
                                  (II) Limitation on 
                                distributions.--The requirement 
                                of subparagraph (A)(vi) is met 
                                only if, as determined under 
                                regulations of the Secretary, 
                                the amounts distributed with 
                                respect to an emergency do not 
                                exceed the amounts necessary to 
                                satisfy such emergency plus 
                                amounts necessary to pay taxes 
                                reasonably anticipated as a 
                                result of the distribution, 
                                after taking into account the 
                                extent to which such hardship 
                                is or may be relieved through 
                                reimbursement or compensation 
                                by insurance or otherwise or by 
                                liquidation of the 
                                participant's assets (to the 
                                extent the liquidation of such 
                                assets would not itself cause 
                                severe financial hardship).
                  (C) Disabled.--For purposes of subparagraph 
                (A)(ii), a participant shall be considered 
                disabled if the participant--
                          (i) is unable to engage in any 
                        substantial gainful activity by reason 
                        of any medically determinable physical 
                        or mental impairment which can be 
                        expected to result in death or can be 
                        expected to last for a continuous 
                        period of not less than 12 months, or
                          (ii) is, by reason of any medically 
                        determinable physical or mental 
                        impairment which can be expected to 
                        result in death or can be expected to 
                        last for a continuous period of not 
                        less than 12 months, receiving income 
                        replacement benefits for a period of 
                        not less than 3 months under an 
                        accident and health plan covering 
                        employees of the participant's 
                        employer.
          (3) Acceleration of benefits.--The requirements of 
        this paragraph are met if the plan does not permit the 
        acceleration of the time or schedule of any payment 
        under the plan, except as provided in regulations by 
        the Secretary.
          (4) Elections.--
                  (A) In general.--The requirements of this 
                paragraph are met if the requirements of 
                subparagraphs (B) and (C) are met.
                  (B) Initial deferral decision.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if the plan 
                        provides that compensation for services 
                        performed during a taxable year may be 
                        deferred at the participant's election 
                        only if the election to defer such 
                        compensation is made not later than the 
                        close of the preceding taxable year or 
                        at such other time as provided in 
                        regulations.
                          (ii) First year of eligibility.--In 
                        the case of the first year in which a 
                        participant becomes eligible to 
                        participate in the plan, such election 
                        may be made with respect to services to 
                        be performed subsequent to the election 
                        within 30 days after the date the 
                        participant becomes eligible to 
                        participate in such plan.
                          (iii) Performance-based 
                        compensation.--In the case of any 
                        performance-based compensation based on 
                        services performed over a period of at 
                        least 12 months, such election may be 
                        made no later than 6 months before the 
                        end of the period.
                  (C) Changes in time and form of 
                distribution.--The requirements of this 
                subparagraph are met if, in the case of a plan 
                which permits under a subsequent election a 
                delay in a payment or a change in the form of 
                payment--
                          (i) the plan requires that such 
                        election may not take effect until at 
                        least 12 months after the date on which 
                        the election is made,
                          (ii) in the case of an election 
                        related to a payment not described in 
                        clause (ii), (iii), or (vi) of 
                        paragraph (2)(A), the plan requires 
                        that the payment with respect to which 
                        such election is made be deferred for a 
                        period of not less than 5 years from 
                        the date such payment would otherwise 
                        have been made, and
                          (iii) the plan requires that any 
                        election related to a payment described 
                        in paragraph (2)(A)(iv) may not be made 
                        less than 12 months prior to the date 
                        of the first scheduled payment under 
                        such paragraph.
  (b) Rules relating to funding.--
          (1) Offshore property in a trust.--In the case of 
        assets set aside (directly or indirectly) in a trust 
        (or other arrangement determined by the Secretary) for 
        purposes of paying deferred compensation under a 
        nonqualified deferred compensation plan, for purposes 
        of section 83 such assets shall be treated as property 
        transferred in connection with the performance of 
        services whether or not such assets are available to 
        satisfy claims of general creditors--
                  (A) at the time set aside if such assets (or 
                such trust or other arrangement) are located 
                outside of the United States, or
                  (B) at the time transferred if such assets 
                (or such trust or other arrangement) are 
                subsequently transferred outside of the United 
                States.
        This paragraph shall not apply to assets located in a 
        foreign jurisdiction if substantially all of the 
        services to which the nonqualified deferred 
        compensation relates are performed in such 
        jurisdiction.
          (2) Employer's financial health.--In the case of 
        compensation deferred under a nonqualified deferred 
        compensation plan, there is a transfer of property 
        within the meaning of section 83 with respect to such 
        compensation as of the earlier of--
                  (A) the date on which the plan first provides 
                that assets will become restricted to the 
                provision of benefits under the plan in 
                connection with a change in the employer's 
                financial health, or
                  (B) the date on which assets are so 
                restricted, whether or not such assets are 
                available to satisfy claims of general 
                creditors.
          (3) Treatment of employer's defined benefit plan 
        during restricted period.--
                  (A) In general.--If--
                          (i) during any restricted period with 
                        respect to a single-employer defined 
                        benefit plan, assets are set aside or 
                        reserved (directly or indirectly) in a 
                        trust (or other arrangement as 
                        determined by the Secretary) or 
                        transferred to such a trust or other 
                        arrangement for purposes of paying 
                        deferred compensation of an applicable 
                        covered employee under a nonqualified 
                        deferred compensation plan of the plan 
                        sponsor or member of a controlled group 
                        which includes the plan sponsor, or
                          (ii) a nonqualified deferred 
                        compensation plan of the plan sponsor 
                        or member of a controlled group which 
                        includes the plan sponsor provides that 
                        assets will become restricted to the 
                        provision of benefits under the plan to 
                        an applicable covered employee in 
                        connection with such restricted period 
                        (or other similar financial measure 
                        determined by the Secretary) with 
                        respect to the defined benefit plan, or 
                        assets are so restricted,
                such assets shall, for purposes of section 83, 
                be treated as property transferred in 
                connection with the performance of services 
                whether or not such assets are available to 
                satisfy claims of general creditors. Clause (i) 
                shall not apply with respect to any assets 
                which are so set aside before the restricted 
                period with respect to the defined benefit 
                plan.
                  (B) Restricted period.--For purposes of this 
                section, the term ``restricted period'' means, 
                with respect to any plan described in 
                subparagraph (A)--
                          (i) any period during which the plan 
                        is in at-risk status (as defined in 
                        section 430(i)),
                          (ii) any period the plan sponsor is a 
                        debtor in a case under title 11, United 
                        States Code, or similar Federal or 
                        State law, and
                          (iii) the 12-month period beginning 
                        on the date which is 6 months before 
                        the termination date of the plan if, as 
                        of the termination date, the plan is 
                        not sufficient for benefit liabilities 
                        (within the meaning of section 4041 of 
                        the Employee Retirement Income Security 
                        Act of 1974).
                  (C) Special rule for payment of taxes on 
                deferred compensation included in income.--If 
                an employer provides directly or indirectly for 
                the payment of any Federal, State, or local 
                income taxes with respect to any compensation 
                required to be included in gross income by 
                reason of this paragraph--
                          (i) interest shall be imposed under 
                        subsection (a)(1)(B)(i)(I) on the 
                        amount of such payment in the same 
                        manner as if such payment was part of 
                        the deferred compensation to which it 
                        relates,
                          (ii) such payment shall be taken into 
                        account in determining the amount of 
                        the additional tax under subsection 
                        (a)(1)(B)(i)(II) in the same manner as 
                        if such payment was part of the 
                        deferred compensation to which it 
                        relates, and
                          (iii) no deduction shall be allowed 
                        under this title with respect to such 
                        payment.
                  (D) Other definitions.--For purposes of this 
                section--
                          (i) Applicable covered employee.--The 
                        term ``applicable covered employee'' 
                        means any--
                                  (I) covered employee of a 
                                plan sponsor,
                                  (II) covered employee of a 
                                member of a controlled group 
                                which includes the plan 
                                sponsor, and
                                  (III) former employee who was 
                                a covered employee at the time 
                                of termination of employment 
                                with the plan sponsor or a 
                                member of a controlled group 
                                which includes the plan 
                                sponsor.
                          (ii) Covered employee.--The term 
                        ``covered employee'' means an 
                        individual described in section 
                        162(m)(3) or an individual subject to 
                        the requirements of section 16(a) of 
                        the Securities Exchange Act of 1934.
          (4) Income inclusion for offshore trusts and 
        employer's financial health.--For each taxable year 
        that assets treated as transferred under this 
        subsection remain set aside in a trust or other 
        arrangement subject to paragraph (1), (2), or (3), any 
        increase in value in, or earnings with respect to, such 
        assets shall be treated as an additional transfer of 
        property under this subsection (to the extent not 
        previously included in income).
          (5) Interest on tax liability payable with respect to 
        transferred property.--
                  (A) In general.--If amounts are required to 
                be included in gross income by reason of 
                paragraph (1), (2), or (3) for a taxable year, 
                the tax imposed by this chapter for such 
                taxable year shall be increased by the sum of--
                          (i) the amount of interest determined 
                        under subparagraph (B), and
                          (ii) an amount equal to 20 percent of 
                        the amounts required to be included in 
                        gross income.
                  (B) Interest.--For purposes of subparagraph 
                (A), the interest determined under this 
                subparagraph for any taxable year is the amount 
                of interest at the underpayment rate plus 1 
                percentage point on the underpayments that 
                would have occurred had the amounts so required 
                to be included in gross income by paragraph 
                (1), (2), or (3) been includible in gross 
                income for the taxable year in which first 
                deferred or, if later, the first taxable year 
                in which such amounts are not subject to a 
                substantial risk of forfeiture.
  (c) No inference on earlier income inclusion or requirement 
of later inclusion.--Nothing in this section shall be construed 
to prevent the inclusion of amounts in gross income under any 
other provision of this chapter or any other rule of law 
earlier than the time provided in this section. Any amount 
included in gross income under this section shall not be 
required to be included in gross income under any other 
provision of this chapter or any other rule of law later than 
the time provided in this section.
  (d) Other definitions and special rules.--For purposes of 
this section:
          (1) Nonqualified deferred compensation plan.--The 
        term ``nonqualified deferred compensation plan'' means 
        any plan that provides for the deferral of 
        compensation, other than--
                  (A) a qualified employer plan, and
                  (B) any bona fide vacation leave, sick leave, 
                compensatory time, disability pay, or death 
                benefit plan.
          (2) Qualified employer plan.--The term ``qualified 
        employer plan'' means--
                  (A) any plan, contract, pension, account, or 
                trust described in subparagraph (A) or (B) of 
                section 219(g)(5) (without regard to 
                subparagraph (A)(iii)),
                  (B) any eligible deferred compensation plan 
                (within the meaning of section 457(b)), and
                  (C) any plan described in section 415(m).
          (3) Plan includes arrangements, etc..--The term 
        ``plan'' includes any agreement or arrangement, 
        including an agreement or arrangement that includes one 
        person.
          (4) Substantial risk of forfeiture.--The rights of a 
        person to compensation are subject to a substantial 
        risk of forfeiture if such person's rights to such 
        compensation are conditioned upon the future 
        performance of substantial services by any individual.
          (5) Treatment of earnings.--References to deferred 
        compensation shall be treated as including references 
        to income (whether actual or notional) attributable to 
        such compensation or such income.
          (6) Aggregation rules.--Except as provided by the 
        Secretary, rules similar to the rules of subsections 
        (b) and (c) of section 414 shall apply.
          (7) Treatment of qualified stock.--An arrangement 
        under which an employee may receive qualified stock (as 
        defined in section 83(i)(2)) shall not be treated as a 
        nonqualified deferred compensation plan with respect to 
        such employee solely because of such employee's 
        election, or ability to make an election, to defer 
        recognition of income under section 83(i).
  (e) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations--
          (1) providing for the determination of amounts of 
        deferral in the case of a nonqualified deferred 
        compensation plan which is a defined benefit plan,
          (2) relating to changes in the ownership and control 
        of a corporation or assets of a corporation for 
        purposes of subsection (a)(2)(A)(v),
          (3) exempting arrangements from the application of 
        subsection (b) if such arrangements will not result in 
        an improper deferral of United States tax and will not 
        result in assets being effectively beyond the reach of 
        creditors,
          (4) defining financial health for purposes of 
        subsection (b)(2), and
          (5) disregarding a substantial risk of forfeiture in 
        cases where necessary to carry out the purposes of this 
        section.

           *       *       *       *       *       *       *

Subchapter E--Accounting Periods and Methods of Accounting

           *       *       *       *       *       *       *

PART I--ACCOUNTING PERIODS

           *       *       *       *       *       *       *

SEC. 441. PERIOD FOR COMPUTATION OF TAXABLE INCOME.

  (a) Computation of taxable income.--Taxable income shall be 
computed on the basis of the taxpayer's taxable year.
  (b) Taxable year.--For purposes of this subtitle, the term 
``taxable year'' means--
          (1) the taxpayer's annual accounting period, if it is 
        a calendar year or a fiscal year;
          (2) the calendar year, if subsection (g) applies;
          (3) the period for which the return is made, if a 
        return is made for a period of less than 12 months; or
          (4) in the case of a DISC filing a return for a 
        period of at least 12 months, the period determined 
        under subsection (h).
  (c) Annual accounting period.--For purposes of this subtitle, 
the term ``annual accounting period'' means the annual period 
on the basis of which the taxpayer regularly computes his 
income in keeping his books.
  (d) Calendar year.--For purposes of this subtitle, the term 
``calendar year'' means a period of 12 months ending on 
December 31.
  (e) Fiscal year.--For purposes of this subtitle, the term 
``fiscal year'' means a period of 12 months ending on the last 
day of any month other than December. In the case of any 
taxpayer who has made the election provided by subsection (f) 
the term means the annual period (varying from 52 to 53 weeks) 
so elected.
  (f) Election of year consisting of 52-53 weeks.--
          (1) General rule.--A taxpayer who, in keeping his 
        books, regularly computes his income on the basis of an 
        annual period which varies from 52 to 53 weeks and ends 
        always on the same day of the week and ends always--
                  (A) on whatever date such same day of the 
                week last occurs in a calendar month, or
                  (B) on whatever date such same day of the 
                week falls which is nearest to the last day of 
                a calendar month,
        may (in accordance with the regulations prescribed 
        under paragraph (3)) elect to compute his taxable 
        income for purposes of this subtitle on the basis of 
        such annual period. This paragraph shall apply to 
        taxable years ending after the date of the enactment of 
        this title.
          (2) Special rules for 52-53-week year.--
                  (A) Effective dates.--In any case in which 
                the effective date or the applicability of any 
                provision of this title is expressed in terms 
                of taxable years beginning, including, or 
                ending with reference to a specified date which 
                is the first or last day of a month, a taxable 
                year described in paragraph (1) shall (except 
                for purposes of the computation under section 
                15) be treated--
                          (i) as beginning with the first day 
                        of the calendar month beginning nearest 
                        to the first day of such taxable year, 
                        or
                          (ii) as ending with the last day of 
                        the calendar month ending nearest to 
                        the last day of such taxable year,
                as the case may be.
                  (B) Change in accounting period.--In the case 
                of a change from or to a taxable year described 
                in paragraph (1)--
                          (i) if such change results in a short 
                        period (within the meaning of section 
                        443) of 359 days or more, or of less 
                        than 7 days, section 443(b) (relating 
                        to alternative tax computation) shall 
                        not apply;
                          (ii) if such change results in a 
                        short period of less than 7 days, such 
                        short period shall, for purposes of 
                        this subtitle, be added to and deemed a 
                        part of the following taxable year; and
                          (iii) if such change results in a 
                        short period to which subsection (b) of 
                        section 443 applies, the taxable income 
                        for such short period shall be placed 
                        on an annual basis for purposes of such 
                        subsection by multiplying the gross 
                        income for such short period (minus the 
                        deductions allowed by this chapter for 
                        the short period[, but only the 
                        adjusted amount of the deductions for 
                        personal exemptions as described in 
                        section 443(c)]) by 365, by dividing 
                        the result by the number of days in the 
                        short period, and the tax shall be the 
                        same part of the tax computed on the 
                        annual basis as the number of days in 
                        the short period is of 365 days.
          (3) Special rule for partnerships, S corporations, 
        and personal service corporations.--The Secretary may 
        by regulation provide terms and conditions for the 
        application of this subsection to a partnership, S 
        corporation, or personal service corporation (within 
        the meaning of section 441(i)(2)).
          (4) Regulations.--The Secretary shall prescribe such 
        regulations as he deems necessary for the application 
        of this subsection.
  (g) No books kept; no accounting period.--Except as provided 
in section 443 (relating to returns for periods of less than 12 
months), the taxpayer's taxable year shall be the calendar year 
if--
          (1) the taxpayer keeps no books;
          (2) the taxpayer does not have an annual accounting 
        period; or
          (3) the taxpayer has an annual accounting period, but 
        such period does not qualify as a fiscal year.
  (h) Taxable year of DISC's.--
          (1) In general.--For purposes of this subtitle, the 
        taxable year of any DISC shall be the taxable year of 
        that shareholder (or group of shareholders with the 
        same 12-month taxable year) who has the highest 
        percentage of voting power.
          (2) Special rule where more than one shareholder (or 
        group) has highest percentage.--If 2 or more 
        shareholders (or groups) have the highest percentage of 
        voting power under paragraph (1), the taxable year of 
        the DISC shall be the same 12-month period as that of 
        any such shareholder (or group).
          (3) Subsequent changes of ownership.--The Secretary 
        shall prescribe regulations under which paragraphs (1) 
        and (2) shall apply to a change of ownership of a 
        corporation after the taxable year of the corporation 
        has been determined under paragraph (1) or (2) only if 
        such change is a substantial change of ownership.
          (4) Voting power determined.--For purposes of this 
        subsection, voting power shall be determined on the 
        basis of total combined voting power of all classes of 
        stock of the corporation entitled to vote.
  (i) Taxable year of personal service corporations.--
          (1) In general.--For purposes of this subtitle, the 
        taxable year of any personal service corporation shall 
        be the calendar year unless the corporation 
        establishes, to the satisfaction of the Secretary, a 
        business purpose for having a different period for its 
        taxable year. For purposes of this paragraph, any 
        deferral of income to shareholders shall not be treated 
        as a business purpose.
          (2) Personal service corporation.--For purposes of 
        this subsection, the term ``personal service 
        corporation'' has the meaning given such term by 
        section 269A(b)(1), except that section 269A(b)(2) 
        shall be applied--
                  (A) by substituting ``any'' for ``more than 
                10 percent'', and
                  (B) by substituting ``any'' for ``50 percent 
                or more in value'' in section 318(a)(2)(C).
        A corporation shall not be treated as a personal 
        service corporation unless more than 10 percent of the 
        stock (by value) in such corporation is held by 
        employee-owners (within the meaning of section 
        269A(b)(2), as modified by the preceding sentence). If 
        a corporation is a member of an affiliated group filing 
        a consolidated return, all members of such group shall 
        be taken into account in determining whether such 
        corporation is a personal service corporation.

           *       *       *       *       *       *       *

SEC. 443. RETURNS FOR A PERIOD OF LESS THAN 12 MONTHS.

  (a) Returns for short period.--A return for a period of less 
than 12 months (referred to in this section as ``short 
period'') shall be made under any of the following 
circumstances:
          (1) Change of annual accounting period.--When the 
        taxpayer, with the approval of the Secretary, changes 
        his annual accounting period. In such a case, the 
        return shall be made for the short period beginning on 
        the day after the close of the former taxable year and 
        ending at the close of the day before the day 
        designated as the first day of the new taxable year.
          (2) Taxpayer not in existence for entire taxable 
        year.--When the taxpayer is in existence during only 
        part of what would otherwise be his taxable year.
  (b) Computation of tax on change of annual accounting 
period.--
          (1) General rule.--If a return is made under 
        paragraph (1) of subsection (a), the taxable income for 
        the short period shall be placed on an annual basis by 
        multiplying the [modified taxable income] taxable 
        income for such short period by 12, dividing the result 
        by the number of months in the short period. The tax 
        shall be the same part of the tax computed on the 
        annual basis as the number of months in the short 
        period is of 12 months.
          (2) Exception.--
                  (A) Computation based on 12-month period.--If 
                the taxpayer applies for the benefits of this 
                paragraph and establishes the amount of this 
                taxable income for the 12-month period 
                described in subparagraph (B), computed as if 
                that period were a taxable year and under the 
                law applicable to that year, then the tax for 
                the short period, computed under paragraph (1), 
                shall be reduced to the greater of the 
                following:
                          (i) an amount which bears the same 
                        ratio to the tax computed on the 
                        taxable income for the 12-month period 
                        as the [modified taxable income] 
                        taxable income computed on the basis of 
                        the short period bears to the [modified 
                        taxable income] taxable income for the 
                        12-month period; or
                          (ii) the tax computed on the 
                        [modified taxable income] taxable 
                        income for the short period.
                The taxpayer (other than a taxpayer to whom 
                subparagraph (B)(ii) applies) shall compute the 
                tax and file his return without the application 
                of this paragraph.
                  (B) 12-month period.--The 12-month period 
                referred to in subparagraph (A) shall be--
                          (i) the period of 12 months beginning 
                        on the first day of the short period, 
                        or
                          (ii) the period of 12 months ending 
                        at the close of the last day of the 
                        short period, if at the end of the 12 
                        months referred to in clause (i) the 
                        taxpayer is not in existence or (if a 
                        corporation) has theretofore disposed 
                        of substantially all of its assets.
                  (C) Application for benefits.--Application 
                for the benefits of this paragraph shall be 
                made in such manner and at such time as the 
                regulations prescribed under subparagraph (D) 
                may require; except that the time so prescribed 
                shall not be later than the time (including 
                extensions) for filing the return for the first 
                taxable year which ends on or after the day 
                which is 12 months after the first day of the 
                short period. Such application, in case the 
                return was filed without regard to this 
                paragraph, shall be considered a claim for 
                credit or refund with respect to the amount by 
                which the tax is reduced under this paragraph.
                  (D) Regulations.--The Secretary shall 
                prescribe such regulations as he deems 
                necessary for the application of this 
                paragraph.
          [(3) Modified taxable income defined.--For purposes 
        of this subsection the term modified taxable income 
        means, with respect to any period, the gross income for 
        such period minus the deductions allowed by this 
        chapter for such period (but, in the case of a short 
        period, only the adjusted amount of the deductions for 
        personal exemptions).]
  [(c) Adjustment in deduction for personal exemption.--In the 
case of a taxpayer other than a corporation, if a return is 
made for a short period by reason of subsection (a)(1) and if 
the tax is not computed under subsection (b)(2), then the 
exemptions allowed as a deduction under section 151 (and any 
deduction in lieu thereof) shall be reduced to amounts which 
bear the same ratio to the full exemptions as the number of 
months in the short period bears to 12.]
  [(d)] (c) Adjustment in computing minimum tax and tax 
preferences.--If a return is made for a short period by reason 
of subsection (a)--
          (1) the alternative minimum taxable income for the 
        short period shall be placed on an annual basis by 
        multiplying such amount by 12 and dividing the result 
        by the number of months in the short period, and
          (2) the amount computed under paragraph (1) of 
        section 55(a) shall bear the same relation to the tax 
        computed on the annual basis as the number of months in 
        the short period bears to 12.
  [(e)] (d) Cross references.--For inapplicability of 
subsection (b) in computing--
          (1) Accumulated earnings tax, see section 536.
          (2) Personal holding company tax, see section 546.
          (3) The taxable income of a regulated investment 
        company, see section 852(b)(2)(E).
          (4) The taxable income of a real estate investment 
        trust, see section 857(b)(2)(C).
  For returns for a period of less than 12 months in the case 
of a debtor's election to terminate a taxable year, see section 
1398(d)(2)(E).

           *       *       *       *       *       *       *

PART II--METHODS OF ACCOUNTING

           *       *       *       *       *       *       *

Subpart C--Taxable Year for Which Deductions Taken

           *       *       *       *       *       *       *

SEC. 461. GENERAL RULE FOR TAXABLE YEAR OF DEDUCTION.

  (a) General rule.--The amount of any deduction or credit 
allowed by this subtitle shall be taken for the taxable year 
which is the proper taxable year under the method of accounting 
used in computing taxable income.
  (b) Special rule in case of death.--In the case of the death 
of a taxpayer whose taxable income is computed under an accrual 
method of accounting, any amount accrued as a deduction or 
credit only by reason of the death of the taxpayer shall not be 
allowed in computing taxable income for the period in which 
falls the date of the taxpayer's death.
  (c) Accrual of real property taxes.--
          (1) In general.--If the taxable income is computed 
        under an accrual method of accounting, then, at the 
        election of the taxpayer, any real property tax which 
        is related to a definite period of time shall be 
        accrued ratably over that period.
          (2) When election may be made.--
                  (A) Without consent.--A taxpayer may, without 
                the consent of the Secretary, make an election 
                under this subsection for his first taxable 
                year in which he incurs real property taxes. 
                Such an election shall be made not later than 
                the time prescribed by law for filing the 
                return for such year (including extensions 
                thereof).
                  (B) With consent.--A taxpayer may, with the 
                consent of the Secretary, make an election 
                under this subsection at any time.
  (d) Limitation on acceleration of accrual of taxes.--
          (1) General rule.--In the case of a taxpayer whose 
        taxable income is computed under an accrual method of 
        accounting, to the extent that the time for accruing 
        taxes is earlier than it would be but for any action of 
        any taxing jurisdiction taken after December 31, 1960, 
        then, under regulations prescribed by the Secretary, 
        such taxes shall be treated as accruing at the time 
        they would have accrued but for such action by such 
        taxing jurisdiction.
          (2) Limitation.--Under regulations prescribed by the 
        Secretary, paragraph (1) shall be inapplicable to any 
        item of tax to the extent that its application would 
        (but for this paragraph) prevent all persons (including 
        successors in interest) from ever taking such item into 
        account.
  (e) Dividends or interest paid on certain deposits or 
withdrawable accounts.--Except as provided in regulations 
prescribed by the Secretary, amounts paid to, or credited to 
the accounts of, depositors or holders of accounts as dividends 
or interest on their deposits or withdrawable accounts (if such 
amounts paid or credited are withdrawable on demand subject 
only to customary notice to withdraw) by a mutual savings bank 
not having capital stock represented by shares, a domestic 
building and loan association, or a cooperative bank shall not 
be allowed as a deduction for the taxable year to the extent 
such amounts are paid or credited for periods representing more 
than 12 months. Any such amount not allowed as a deduction as 
the result of the application of the preceding sentence shall 
be allowed as a deduction for such other taxable year as the 
Secretary determines to be consistent with the preceding 
sentence.
  (f) Contested liabilities.--If--
          (1) the taxpayer contests an asserted liability,
          (2) the taxpayer transfers money or other property to 
        provide for the satisfaction of the asserted liability,
          (3) the contest with respect to the asserted 
        liability exists after the time of the transfer, and
          (4) but for the fact that the asserted liability is 
        contested, a deduction would be allowed for the taxable 
        year of the transfer (or for an earlier taxable year) 
        determined after application of subsection (h),
then the deduction shall be allowed for the taxable year of the 
transfer. This subsection shall not apply in respect of the 
deduction for income, war profits, and excess profits taxes 
imposed by the authority of any foreign country or possession 
of the United States.
  (g) Prepaid interest.--
          (1) In general.--If the taxable income of the 
        taxpayer is computed under the cash receipts and 
        disbursements method of accounting, interest paid by 
        the taxpayer which, under regulations prescribed by the 
        Secretary, is properly allocable to any period--
                  (A) with respect to which the interest 
                represents a charge for the use or forbearance 
                of money, and
                  (B) which is after the close of the taxable 
                year in which paid,
        shall be charged to capital account and shall be 
        treated as paid in the period to which so allocable.
          (2) Exception.--This subsection shall not apply to 
        points paid in respect of any indebtedness incurred in 
        connection with the purchase or improvement of, and 
        secured by, the principal residence of the taxpayer to 
        the extent that, under regulations prescribed by the 
        Secretary, such payment of points is an established 
        business practice in the area in which such 
        indebtedness is incurred, and the amount of such 
        payment does not exceed the amount generally charged in 
        such area.
  (h) Certain liabilities not incurred before economic 
performance.--
          (1) In general.--For purposes of this title, in 
        determining whether an amount has been incurred with 
        respect to any item during any taxable year, the all 
        events test shall not be treated as met any earlier 
        than when economic performance with respect to such 
        item occurs.
          (2) Time when economic performance occurs.--Except as 
        provided in regulations prescribed by the Secretary, 
        the time when economic performance occurs shall be 
        determined under the following principles:
                  (A) Services and property provided to the 
                taxpayer.--If the liability of the taxpayer 
                arises out of--
                          (i) the providing of services to the 
                        taxpayer by another person, economic 
                        performance occurs as such person 
                        provides such services,
                          (ii) the providing of property to the 
                        taxpayer by another person, economic 
                        performance occurs as the person 
                        provides such property, or
                          (iii) the use of property by the 
                        taxpayer, economic performance occurs 
                        as the taxpayer uses such property.
                  (B) Services and property provided by the 
                taxpayer.--If the liability of the taxpayer 
                requires the taxpayer to provide property or 
                services, economic performance occurs as the 
                taxpayer provides such property or services.
                  (C) Workers compensation and tort liabilities 
                of the taxpayer.--If the liability of the 
                taxpayer requires a payment to another person 
                and--
                          (i) arises under any workers 
                        compensation act, or
                          (ii) arises out of any tort, economic 
                        performance occurs as the payments to 
                        such person are made. Subparagraphs (A) 
                        and (B) shall not apply to any 
                        liability described in the preceding 
                        sentence.
                  (D) Other items.--In the case of any other 
                liability of the taxpayer, economic performance 
                occurs at the time determined under regulations 
                prescribed by the Secretary.
          (3) Exception for certain recurring items.--
                  (A) In general.--Notwithstanding paragraph 
                (1) an item shall be treated as incurred during 
                any taxable year if--
                          (i) the all events test with respect 
                        to such item is met during such taxable 
                        year (determined without regard to 
                        paragraph (1)),
                          (ii) economic performance with 
                        respect to such item occurs within the 
                        shorter of--
                                  (I) a reasonable period after 
                                the close of such taxable year, 
                                or
                                  (II) 8 1/2 months after the 
                                close of such taxable year,
                          (iii) such item is recurring in 
                        nature and the taxpayer consistently 
                        treats items of such kind as incurred 
                        in the taxable year in which the 
                        requirements of clause (i) are met, and
                          (iv) either--
                                  (I) such item is not a 
                                material item, or
                                  (II) the accrual of such item 
                                in the taxable year in which 
                                the requirements of clause (i) 
                                are met results in a more 
                                proper match against income 
                                than accruing such item in the 
                                taxable year in which economic 
                                performance occurs.
                  (B) Financial statements considered under 
                subparagraph (A)(iv).--In making a 
                determination under subparagraph (A)(iv), the 
                treatment of such item on financial statements 
                shall be taken into account.
                  (C) Paragraph not to apply to workers 
                compensation and tort liabilities.--This 
                paragraph shall not apply to any item described 
                in subparagraph (C) of paragraph (2).
          (4) All events test.--For purposes of this 
        subsection, the all events test is met with respect to 
        any item if all events have occurred which determine 
        the fact of liability and the amount of such liability 
        can be determined with reasonable accuracy.
          (5) Subsection not to apply to certain items.--This 
        subsection shall not apply to any item for which a 
        deduction is allowable under a provision of this title 
        which specifically provides for a deduction for a 
        reserve for estimated expenses.
  (i) Special rules for tax shelters.--
          (1) Recurring item exception not to apply.--In the 
        case of a tax shelter, economic performance shall be 
        determined without regard to paragraph (3) of 
        subsection (h).
          (2) Special rule for spudding of oil or gas wells.--
                  (A) In general.--In the case of a tax 
                shelter, economic performance with respect to 
                amounts paid during the taxable year for 
                drilling an oil or gas well shall be treated as 
                having occurred within a taxable year if 
                drilling of the well commences before the close 
                of the 90th day after the close of the taxable 
                year.
                  (B) Deduction limited to cash basis.--
                          (i) Tax shelter partnerships.--In the 
                        case of a tax shelter which is a 
                        partnership, in applying section 704(d) 
                        to a deduction or loss for any taxable 
                        year attributable to an item which is 
                        deductible by reason of subparagraph 
                        (A), the term ``cash basis'' shall be 
                        substituted for the term ``adjusted 
                        basis''.
                          (ii) Other tax shelters.--Under 
                        regulations prescribed by the 
                        Secretary, in the case of a tax shelter 
                        other than a partnership, the aggregate 
                        amount of the deductions allowable by 
                        reason of subparagraph (A) for any 
                        taxable year shall be limited in a 
                        manner similar to the limitation under 
                        clause (i).
                  (C) Cash basis defined.--For purposes of 
                subparagraph (B), a partner's cash basis in a 
                partnership shall be equal to the adjusted 
                basis of such partner's interest in the 
                partnership, determined without regard to--
                          (i) any liability of the partnership, 
                        and
                          (ii) any amount borrowed by the 
                        partner with respect to such 
                        partnership which--
                                  (I) was arranged by the 
                                partnership or by any person 
                                who participated in the 
                                organization, sale, or 
                                management of the partnership 
                                (or any person related to such 
                                person within the meaning of 
                                section 465(b)(3)(C)), or
                                  (II) was secured by any asset 
                                of the partnership.
          (3) Tax shelter defined.--For purposes of this 
        subsection, the term ``tax shelter'' means--
                  (A) any enterprise (other than a C 
                corporation) if at any time interests in such 
                enterprise have been offered for sale in any 
                offering required to be registered with any 
                Federal or State agency having the authority to 
                regulate the offering of securities for sale,
                  (B) any syndicate (within the meaning of 
                section 1256(e)(3)(B)), and
                  (C) any tax shelter (as defined in section 
                6662(d)(2)(C)(ii)).
          (4) Special rules for farming.--In the case of the 
        trade or business of farming (as defined in section 
        464(e)), in determining whether an entity is a tax 
        shelter, the definition of farming syndicate in 
        [subsection (k)] subsection (j) shall be substituted 
        for subparagraphs (A) and (B) of paragraph (3).
          (5) Economic performance.--For purposes of this 
        subsection, the term ``economic performance'' has the 
        meaning given such term by subsection (h).
  [(j) Limitation on excess farm losses of certain taxpayers.--
          [(1) Limitation.--If a taxpayer other than a C 
        corporation receives any applicable subsidy for any 
        taxable year, any excess farm loss of the taxpayer for 
        the taxable year shall not be allowed.
          [(2) Disallowed loss carried to next taxable year.--
        Any loss which is disallowed under paragraph (1) shall 
        be treated as a deduction of the taxpayer attributable 
        to farming businesses in the next taxable year.
          [(3) Applicable subsidy.--For purposes of this 
        subsection, the term ``applicable subsidy'' means--
                  [(A) any direct or counter-cyclical payment 
                under title I of the Food, Conservation, and 
                Energy Act of 2008, or any payment elected to 
                be received in lieu of any such payment, or
                  [(B) any Commodity Credit Corporation loan.
          [(4) Excess farm loss.--For purposes of this 
        subsection--
                  [(A) In general.--The term ``excess farm 
                loss'' means the excess of--
                          [(i) the aggregate deductions of the 
                        taxpayer for the taxable year which are 
                        attributable to farming businesses of 
                        such taxpayer (determined without 
                        regard to whether or not such 
                        deductions are disallowed for such 
                        taxable year under paragraph (1)), over
                          [(ii) the sum of--
                                  [(I) the aggregate gross 
                                income or gain of such taxpayer 
                                for the taxable year which is 
                                attributable to such farming 
                                businesses, plus
                                  [(II) the threshold amount 
                                for the taxable year.
                  [(B) Threshold amount.--
                          [(i) In general.--The term 
                        ``threshold amount'' means, with 
                        respect to any taxable year, the 
                        greater of--
                                  [(I) $300,000 ($150,000 in 
                                the case of married individuals 
                                filing separately), or
                                  [(II) the excess (if any) of 
                                the aggregate amounts described 
                                in subparagraph (A)(ii)(I) for 
                                the 5-consecutive taxable year 
                                period preceding the taxable 
                                year over the aggregate amounts 
                                described in subparagraph 
                                (A)(i) for such period.
                          [(ii) Special rules for determining 
                        aggregate amounts.--For purposes of 
                        clause (i)(II)--
                                  [(I) notwithstanding the 
                                disregard in subparagraph 
                                (A)(i) of any disallowance 
                                under paragraph (1), in the 
                                case of any loss which is 
                                carried forward under paragraph 
                                (2) from any taxable year, such 
                                loss (or any portion thereof) 
                                shall be taken into account for 
                                the first taxable year in which 
                                a deduction for such loss (or 
                                portion) is not disallowed by 
                                reason of this subsection, and
                                  [(II) the Secretary shall 
                                prescribe rules for the 
                                computation of the aggregate 
                                amounts described in such 
                                clause in cases where the 
                                filing status of the taxpayer 
                                is not the same for the taxable 
                                year and each of the taxable 
                                years in the period described 
                                in such clause.
                  [(C) Farming business.--
                          [(i) In general.--The term ``farming 
                        business'' has the meaning given such 
                        term in section 263A(e)(4).
                          [(ii) Certain trades and businesses 
                        included.--If, without regard to this 
                        clause, a taxpayer is engaged in a 
                        farming business with respect to any 
                        agricultural or horticultural 
                        commodity--
                                  [(I) the term ``farming 
                                business'' shall include any 
                                trade or business of the 
                                taxpayer of the processing of 
                                such commodity (without regard 
                                to whether the processing is 
                                incidental to the growing, 
                                raising, or harvesting of such 
                                commodity), and
                                  [(II) if the taxpayer is a 
                                member of a cooperative to 
                                which subchapter T applies, any 
                                trade or business of the 
                                cooperative described in 
                                subclause (I) shall be treated 
                                as the trade or business of the 
                                taxpayer.
                  [(D) Certain losses disregarded.--For 
                purposes of subparagraph (A)(i), there shall 
                not be taken into account any deduction for any 
                loss arising by reason of fire, storm, or other 
                casualty, or by reason of disease or drought, 
                involving any farming business.
          [(5) Application of subsection in case of 
        partnerships and S corporations.--In the case of a 
        partnership or S corporation--
                  [(A) this subsection shall be applied at the 
                partner or shareholder level, and
                  [(B) each partner's or shareholder's 
                proportionate share of the items of income, 
                gain, or deduction of the partnership or S 
                corporation for any taxable year from farming 
                businesses attributable to the partnership or S 
                corporation, and of any applicable subsidies 
                received by the partnership or S corporation 
                during the taxable year, shall be taken into 
                account by the partner or shareholder in 
                applying this subsection to the taxable year of 
                such partner or shareholder with or within 
                which the taxable year of the partnership or S 
                corporation ends.
        The Secretary may provide rules for the application of 
        this paragraph to any other pass-thru entity to the 
        extent necessary to carry out the provisions of this 
        subsection.
          [(6) Additional reporting.--The Secretary may 
        prescribe such additional reporting requirements as the 
        Secretary determines appropriate to carry out the 
        purposes of this subsection.
          [(7) Coordination with section 469.--This subsection 
        shall be applied before the application of section 
        469.]
  [(k)] (j) Farming syndicate defined.--
          (1) In general.--For purposes of subsection (i)(4), 
        the term ``farming syndicate'' means--
                  (A) a partnership or any other enterprise 
                other than a corporation which is not an S 
                corporation engaged in the trade or business of 
                farming, if at any time interests in such 
                partnership or enterprise have been offered for 
                sale in any offering required to be registered 
                with any Federal or State agency having 
                authority to regulate the offering of 
                securities for sale, or
                  (B) a partnership or any other enterprise 
                other than a corporation which is not an S 
                corporation engaged in the trade or business of 
                farming, if more than 35 percent of the losses 
                during any period are allocable to limited 
                partners or limited entrepreneurs.
          (2) Holdings attributable to active management.--For 
        purposes of paragraph (1)(B), the following shall be 
        treated as an interest which is not held by a limited 
        partner or a limited entrepreneur:
                  (A) in the case of any individual who has 
                actively participated (for a period of not less 
                than 5 years) in the management of any trade or 
                business of farming, any interest in a 
                partnership or other enterprise which is 
                attributable to such active participation,
                  (B) in the case of any individual whose 
                principal residence is on a farm, any 
                partnership or other enterprise engaged in the 
                trade or business of farming such farm,
                  (C) in the case of any individual who is 
                actively participating in the management of any 
                trade or business of farming or who is an 
                individual who is described in subparagraph (A) 
                or (B), any participation in the further 
                processing of livestock which was raised in 
                such trade or business (or in the trade or 
                business referred to in subparagraph (A) or 
                (B)),
                  (D) in the case of an individual whose 
                principal business activity involves active 
                participation in the management of a trade or 
                business of farming, any interest in any other 
                trade or business of farming, and,
                  (E) any interest held by a member of the 
                family (or a spouse of any such member) of a 
                grandparent of an individual described in 
                subparagraph (A), (B), (C), or (D) if the 
                interest in the partnership or the enterprise 
                is attributable to the active participation of 
                the individual described in subparagraph (A), 
                (B), (C), or (D).
        For purposes of subparagraph (A), where one farm is 
        substituted for or added to another farm, both farms 
        shall be treated as one farm. For purposes of 
        subparagraph (E), the term ``family'' has the meaning 
        given to such term by section 267(c)(4).
          (3) Farming.--For purposes of this subsection, the 
        term ``farming'' has the meaning given to such term by 
        section 464(e).
          (4) Limited entrepreneur.--For purposes of this 
        subsection, the term ``limited entrepreneur'' means a 
        person who--
                  (A) has an interest in an enterprise other 
                than as a limited partner, and
                  (B) does not actively participate in the 
                management of such enterprise.
  [(l)] (k) Limitation on excess business losses of 
noncorporate taxpayers.--
          [(1) Limitation.--
                  [(A) subsection (j) (relating to limitation 
                on excess farm losses of certain taxpayers) 
                shall not apply, and
                  [(B) any excess business loss of the taxpayer 
                for the taxable year shall not be allowed.]
          (1) Limitation.--In the case of a taxpayer other than 
        a corporation, any excess business loss of the taxpayer 
        for the taxable year shall not be allowed.
          (2) Disallowed loss carryover.--Any loss which is 
        disallowed under paragraph (1) shall be treated as a 
        net operating loss carryover to the following taxable 
        year under section 172.
          (3) Excess business loss.--For purposes of this 
        subsection--
                  (A) In general.--The term ``excess business 
                loss'' means the excess (if any) of--
                          (i) the aggregate deductions of the 
                        taxpayer for the taxable year which are 
                        attributable to trades or businesses of 
                        such taxpayer (determined without 
                        regard to whether or not such 
                        deductions are disallowed for such 
                        taxable year under paragraph (1)), over
                          (ii) the sum of--
                                  (I) the aggregate gross 
                                income or gain of such taxpayer 
                                for the taxable year which is 
                                attributable to such trades or 
                                businesses, plus
                                  (II) $250,000 (200 percent of 
                                such amount in the case of a 
                                joint return).
                  (B) Adjustment for inflation.--In the case of 
                any taxable year beginning after December 31, 
                2018, the $250,000 amount in subparagraph 
                (A)(ii)(II) shall be increased by an amount 
                equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``2017'' for ``2016'' in subparagraph 
                        (A)(ii) thereof.
        If any amount as increased under the preceding sentence 
        is not a multiple of $1,000, such amount shall be 
        rounded to the nearest multiple of $1,000.
          (4) Application of subsection in case of partnerships 
        and S corporations.--In the case of a partnership or S 
        corporation--
                  (A) this subsection shall be applied at the 
                partner or shareholder level, and
                  (B) each partner's or shareholder's allocable 
                share of the items of income, gain, deduction, 
                or loss of the partnership or S corporation for 
                any taxable year from trades or businesses 
                attributable to the partnership or S 
                corporation shall be taken into account by the 
                partner or shareholder in applying this 
                subsection to the taxable year of such partner 
                or shareholder with or within which the taxable 
                year of the partnership or S corporation ends.
                For purposes of this paragraph, in the case of 
                an S corporation, an allocable share shall be 
                the shareholder's pro rata share of an item.
          (5) Additional reporting.--The Secretary shall 
        prescribe such additional reporting requirements as the 
        Secretary determines necessary to carry out the 
        purposes of this subsection.
          (6) Coordination with section 469.--This subsection 
        shall be applied after the application of section 469.

           *       *       *       *       *       *       *

SEC. 464. LIMITATIONS ON DEDUCTIONS FOR CERTAIN FARMING EXPENSES.

  (a) General rule.--In the case of any taxpayer to whom 
subsection (d) applies, a deduction (otherwise allowable under 
this chapter) for amounts paid for feed, seed, fertilizer, or 
other similar farm supplies shall only be allowed for the 
taxable year in which such feed, seed, fertilizer, or other 
supplies are actually used or consumed, or, if later, for the 
taxable year for which allowable as a deduction (determined 
without regard to this section).
  (b) Certain poultry expenses.--In the case of any taxpayer to 
whom subsection (d) applies--
          (1) the cost of poultry (including egg-laying hens 
        and baby chicks) purchased for use in a trade or 
        business (or both for use in a trade or business and 
        for sale) shall be capitalized and deducted ratably 
        over the lesser of 12 months or their useful life in 
        the trade or business, and
          (2) the cost of poultry purchased for sale shall be 
        deducted for the taxable year in which the poultry is 
        sold or otherwise disposed of.
  (c) Exception.--Subsection (a) shall not apply to any amount 
paid for supplies which are on hand at the close of the taxable 
year on account of fire, storm, or other casualty, or on 
account of disease or drought.
  (d) Certain persons prepaying 50 percent or more of certain 
farming expenses.--
          (1) Taxpayer to whom subsection applies.--This 
        subsection applies to any taxpayer for any taxable year 
        if such taxpayer--
                  (A) does not use an accrual method of 
                accounting,
                  (B) has excess prepaid farm supplies for the 
                taxable year, and
                  (C) is not a qualified farm-related taxpayer.
          (2) Qualified farm-related taxpayer.--
                  (A) In general.--For purposes of this 
                subsection, the term ``qualified farm-related 
                taxpayer'' means any farm-related taxpayer if--
                          (i)(I) the aggregate prepaid farm 
                        supplies for the 3 taxable years 
                        preceding the taxable year are less 
                        than 50 percent of,
                                  (II) the aggregate deductible 
                                farming expenses (other than 
                                prepaid farm supplies) for such 
                                3 taxable years, or
                          (ii) the taxpayer has excess prepaid 
                        farm supplies for the taxable year by 
                        reason of any change in business 
                        operation directly attributable to 
                        extraordinary circumstances.
                  (B) Farm-related taxpayer.--For purposes of 
                this paragraph, the term ``farm-related 
                taxpayer'' means any taxpayer--
                          (i) whose principal residence (within 
                        the meaning of section 121) is on a 
                        farm,
                          (ii) who has a principal occupation 
                        of farming, or
                          (iii) who is a member of the family 
                        (within the meaning of [section 
                        461(k)(2)(E)] section 461(j)(2)(E) of a 
                        taxpayer described in clause (i) or 
                        (ii).
          (3) Definitions.--For purposes of this subsection--
                  (A) Excess prepaid farm supplies.--The term 
                ``excess prepaid farm supplies'' means the 
                prepaid farm supplies for the taxable year to 
                the extent the amount of such supplies exceeds 
                50 percent of the deductible farming expenses 
                for the taxable year (other than prepaid farm 
                supplies).
                  (B) Prepaid farm supplies.--The term 
                ``prepaid farm supplies'' means any amounts 
                which are described in subsection (a) or (b) 
                and would be allowable for a subsequent taxable 
                year under the rules of subsections (a) and 
                (b).
                  (C) Deductible farming expenses.--The term 
                ``deductible farming expenses'' means any 
                amount allowable as a deduction under this 
                chapter (including any amount allowable as a 
                deduction for depreciation or amortization) 
                which is properly allocable to the trade or 
                business of farming.
  (e) Farming.--For purposes of this section, the term 
``farming'' means the cultivation of land or the raising or 
harvesting of any agricultural or horticultural commodity 
including the raising, shearing, feeding, caring for, training, 
and management of animals. For purposes of the preceding 
sentence, trees (other than trees bearing fruit or nuts) shall 
not be treated as an agricultural or horticultural commodity.

           *       *       *       *       *       *       *

Subchapter F--Exempt Organizations

           *       *       *       *       *       *       *

PART I--GENERAL RULE

           *       *       *       *       *       *       *

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN TRUSTS, ETC.

  (a) Exemption from taxation.--An organization described in 
subsection (c) or (d) or section 401(a) shall be exempt from 
taxation under this subtitle unless such exemption is denied 
under section 502 or 503.
  (b) Tax on unrelated business income and certain other 
activities.--An organization exempt from taxation under 
subsection (a) shall be subject to tax to the extent provided 
in parts II, III, and VI of this subchapter, but 
(notwithstanding parts II, III, and VI of this subchapter) 
shall be considered an organization exempt from income taxes 
for the purpose of any law which refers to organizations exempt 
from income taxes.
  (c) List of exempt organizations.--The following 
organizations are referred to in subsection (a):
          (1) Any corporation organized under Act of Congress 
        which is an instrumentality of the United States but 
        only if such corporation--
                  (A) is exempt from Federal income taxes--
                          (i) under such Act as amended and 
                        supplemented before July` 18, 1984, or
                          (ii) under this title without regard 
                        to any provision of law which is not 
                        contained in this title and which is 
                        not contained in a revenue Act, or
                  (B) is described in subsection (l).
          (2) Corporations organized for the exclusive purpose 
        of holding title to property, collecting income 
        therefrom, and turning over the entire amount thereof, 
        less expenses, to an organization which itself is 
        exempt under this section. Rules similar to the rules 
        of subparagraph (G) of paragraph (25) shall apply for 
        purposes of this paragraph.
          (3) Corporations, and any community chest, fund, or 
        foundation, organized and operated exclusively for 
        religious, charitable, scientific, testing for public 
        safety, literary, or educational purposes, or to foster 
        national or international amateur sports competition 
        (but only if no part of its activities involve the 
        provision of athletic facilities or equipment), or for 
        the prevention of cruelty to children or animals, no 
        part of the net earnings of which inures to the benefit 
        of any private shareholder or individual, no 
        substantial part of the activities of which is carrying 
        on propaganda, or otherwise attempting, to influence 
        legislation (except as otherwise provided in subsection 
        (h)), and which does not participate in, or intervene 
        in (including the publishing or distributing of 
        statements), any political campaign on behalf of (or in 
        opposition to) any candidate for public office.
          (4)(A) Civic leagues or organizations not organized 
        for profit but operated exclusively for the promotion 
        of social welfare, or local associations of employees, 
        the membership of which is limited to the employees of 
        a designated person or persons in a particular 
        municipality, and the net earnings of which are devoted 
        exclusively to charitable, educational, or recreational 
        purposes.
                  (B) Subparagraph (A) shall not apply to an 
                entity unless no part of the net earnings of 
                such entity inures to the benefit of any 
                private shareholder or individual.
          (5) Labor, agricultural, or horticultural 
        organizations.
          (6) Business leagues, chambers of commerce, real-
        estate boards, boards of trade, or professional 
        football leagues (whether or not administering a 
        pension fund for football players), not organized for 
        profit and no part of the net earnings of which inures 
        to the benefit of any private shareholder or 
        individual.
          (7) Clubs organized for pleasure, recreation, and 
        other nonprofitable purposes, substantially all of the 
        activities of which are for such purposes and no part 
        of the net earnings of which inures to the benefit of 
        any private shareholder.
          (8) Fraternal beneficiary societies, orders, or 
        associations--
                  (A) operating under the lodge system or for 
                the exclusive benefit of the members of a 
                fraternity itself operating under the lodge 
                system, and
                  (B) providing for the payment of life, sick, 
                accident, or other benefits to the members of 
                such society, order, or association or their 
                dependents.
          (9) Voluntary employees' beneficiary associations 
        providing for the payment of life, sick, accident, or 
        other benefits to the members of such association or 
        their dependents or designated beneficiaries, if no 
        part of the net earnings of such association inures 
        (other than through such payments) to the benefit of 
        any private shareholder or individual. For purposes of 
        providing for the payment of sick and accident benefits 
        to members of such an association and their dependents, 
        the term ``dependent'' shall include any individual who 
        is a child (as defined in [section 152(f)(1)] section 
        7706(f)(1)) of a member who as of the end of the 
        calendar year has not attained age 27.
          (10) Domestic fraternal societies, orders, or 
        associations, operating under the lodge system--
                  (A) the net earnings of which are devoted 
                exclusively to religious, charitable, 
                scientific, literary, educational, and 
                fraternal purposes, and
                  (B) which do not provide for the payment of 
                life, sick, accident, or other benefits.
          (11) Teachers' retirement fund associations of a 
        purely local character, if--
                  (A) no part of their net earnings inures 
                (other than through payment of retirement 
                benefits) to the benefit of any private 
                shareholder or individual, and
                  (B) the income consists solely of amounts 
                received from public taxation, amounts received 
                from assessments on the teaching salaries of 
                members, and income in respect of investments.
          (12)(A) Benevolent life insurance associations of a 
        purely local character, mutual ditch or irrigation 
        companies, mutual or cooperative telephone companies, 
        or like organizations; but only if 85 percent or more 
        of the income consists of amounts collected from 
        members for the sole purpose of meeting losses and 
        expenses.
                  (B) In the case of a mutual or cooperative 
                telephone company, subparagraph (A) shall be 
                applied without taking into account any income 
                received or accrued--
                          (i) from a nonmember telephone 
                        company for the performance of 
                        communication services which involve 
                        members of the mutual or cooperative 
                        telephone company,
                          (ii) from qualified pole rentals,
                          (iii) from the sale of display 
                        listings in a directory furnished to 
                        the members of the mutual or 
                        cooperative telephone company, or
                          (iv) from the prepayment of a loan 
                        under section 306A, 306B, or 311 of the 
                        Rural Electrification Act of 1936 (as 
                        in effect on January 1, 1987).
                  (C) In the case of a mutual or cooperative 
                electric company, subparagraph (A) shall be 
                applied without taking into account any income 
                received or accrued--
                          (i) from qualified pole rentals, or
                          (ii) from any provision or sale of 
                        electric energy transmission services 
                        or ancillary services if such services 
                        are provided on a nondiscriminatory 
                        open access basis under an open access 
                        transmission tariff approved or 
                        accepted by FERC or under an 
                        independent transmission provider 
                        agreement approved or accepted by FERC 
                        (other than income received or accrued 
                        directly or indirectly from a member),
                          (iii) from the provision or sale of 
                        electric energy distribution services 
                        or ancillary services if such services 
                        are provided on a nondiscriminatory 
                        open access basis to distribute 
                        electric energy not owned by the mutual 
                        or electric cooperative company--
                                  (I) to end-users who are 
                                served by distribution 
                                facilities not owned by such 
                                company or any of its members 
                                (other than income received or 
                                accrued directly or indirectly 
                                from a member), or
                                  (II) generated by a 
                                generation facility not owned 
                                or leased by such company or 
                                any of its members and which is 
                                directly connected to 
                                distribution facilities owned 
                                by such company or any of its 
                                members (other than income 
                                received or accrued directly or 
                                indirectly from a member),
                          (iv) from any nuclear decommissioning 
                        transaction, or
                          (v) from any asset exchange or 
                        conversion transaction.
                  (D) For purposes of this paragraph, the term 
                ``qualified pole rental'' means any rental of a 
                pole (or other structure used to support wires) 
                if such pole (or other structure)--
                          (i) is used by the telephone or 
                        electric company to support one or more 
                        wires which are used by such company in 
                        providing telephone or electric 
                        services to its members, and
                          (ii) is used pursuant to the rental 
                        to support one or more wires (in 
                        addition to the wires described in 
                        clause (i)) for use in connection with 
                        the transmission by wire of electricity 
                        or of telephone or other 
                        communications.
                For purposes of the preceding sentence, the 
                term ``rental'' includes any sale of the right 
                to use the pole (or other structure).
                  (E) For purposes of subparagraph (C)(ii), the 
                term ``FERC'' means--
                          (i) the Federal Energy Regulatory 
                        Commission, or
                          (ii) in the case of any utility with 
                        respect to which all of the electricity 
                        generated, transmitted, or distributed 
                        by such utility is generated, 
                        transmitted, distributed, and consumed 
                        in the same State, the State agency of 
                        such State with the authority to 
                        regulate electric utilities.
                  (F) For purposes of subparagraph (C)(iv), the 
                term ``nuclear decommissioning transaction'' 
                means--
                          (i) any transfer into a trust, fund, 
                        or instrument established to pay any 
                        nuclear decommissioning costs if the 
                        transfer is in connection with the 
                        transfer of the mutual or cooperative 
                        electric company's interest in a 
                        nuclear power plant or nuclear power 
                        plant unit,
                          (ii) any distribution from any trust, 
                        fund, or instrument established to pay 
                        any nuclear decommissioning costs, or
                          (iii) any earnings from any trust, 
                        fund, or instrument established to pay 
                        any nuclear decommissioning costs.
                  (G) For purposes of subparagraph (C)(v), the 
                term ``asset exchange or conversion 
                transaction'' means any voluntary exchange or 
                involuntary conversion of any property related 
                to generating, transmitting, distributing, or 
                selling electric energy by a mutual or 
                cooperative electric company, the gain from 
                which qualifies for deferred recognition under 
                section 1031 or 1033, but only if the 
                replacement property acquired by such company 
                pursuant to such section constitutes property 
                which is used, or to be used, for--
                          (i) generating, transmitting, 
                        distributing, or selling electric 
                        energy, or
                          (ii) producing, transmitting, 
                        distributing, or selling natural gas.
                  (H)(i) In the case of a mutual or cooperative 
                electric company described in this paragraph or 
                an organization described in section 
                1381(a)(2)(C), income received or accrued from 
                a load loss transaction shall be treated as an 
                amount collected from members for the sole 
                purpose of meeting losses and expenses.
                          (ii) For purposes of clause (i), the 
                        term ``load loss transaction'' means 
                        any wholesale or retail sale of 
                        electric energy (other than to members) 
                        to the extent that the aggregate sales 
                        during the recovery period do not 
                        exceed the load loss mitigation sales 
                        limit for such period.
                          (iii) For purposes of clause (ii), 
                        the load loss mitigation sales limit 
                        for the recovery period is the sum of 
                        the annual load losses for each year of 
                        such period.
                          (iv) For purposes of clause (iii), a 
                        mutual or cooperative electric 
                        company's annual load loss for each 
                        year of the recovery period is the 
                        amount (if any) by which--
                                  (I) the megawatt hours of 
                                electric energy sold during 
                                such year to members of such 
                                electric company are less than
                                  (II) the megawatt hours of 
                                electric energy sold during the 
                                base year to such members.
                          (v) For purposes of clause (iv)(II), 
                        the term ``base year'' means--
                                  (I) the calendar year 
                                preceding the start-up year, or
                                  (II) at the election of the 
                                mutual or cooperative electric 
                                company, the second or third 
                                calendar years preceding the 
                                start-up year.
                          (vi) For purposes of this 
                        subparagraph, the recovery period is 
                        the 7-year period beginning with the 
                        start-up year.
                          (vii) For purposes of this 
                        subparagraph, the start-up year is the 
                        first year that the mutual or 
                        cooperative electric company offers 
                        nondiscriminatory open access or the 
                        calendar year which includes the date 
                        of the enactment of this subparagraph, 
                        if later, at the election of such 
                        company.
                          (viii) A company shall not fail to be 
                        treated as a mutual or cooperative 
                        electric company for purposes of this 
                        paragraph or as a corporation operating 
                        on a cooperative basis for purposes of 
                        section 1381(a)(2)(C) by reason of the 
                        treatment under clause (i).
                          (ix) For purposes of subparagraph 
                        (A), in the case of a mutual or 
                        cooperative electric company, income 
                        received, or accrued, indirectly from a 
                        member shall be treated as an amount 
                        collected from members for the sole 
                        purpose of meeting losses and expenses.
                  (I) In the case of a mutual or cooperative 
                electric company described in this paragraph or 
                an organization described in section 
                1381(a)(2), income received or accrued in 
                connection with an election under section 
                45J(e)(1) shall be treated as an amount 
                collected from members for the sole purpose of 
                meeting losses and expenses.
          (13) Cemetery companies owned and operated 
        exclusively for the benefit of their members or which 
        are not operated for profit; and any corporation 
        chartered solely for the purpose of the disposal of 
        bodies by burial or cremation which is not permitted by 
        its charter to engage in any business not necessarily 
        incident to that purpose and no part of the net 
        earnings of which inures to the benefit of any private 
        shareholder or individual.
          (14)(A) Credit unions without capital stock organized 
        and operated for mutual purposes and without profit.
                  (B) Corporations or associations without 
                capital stock organized before September 1, 
                1957, and operated for mutual purposes and 
                without profit for the purpose of providing 
                reserve funds for, and insurance of shares or 
                deposits in--
                          (i) domestic building and loan 
                        associations,
                          (ii) cooperative banks without 
                        capital stock organized and operated 
                        for mutual purposes and without profit,
                          (iii) mutual savings banks not having 
                        capital stock represented by shares, or
                          (iv) mutual savings banks described 
                        in section 591(b). (C) Corporations or 
                        associations organized before September 
                        1, 1957, and operated for mutual 
                        purposes and without profit for the 
                        purpose of providing reserve funds for 
                        associations or banks described in 
                        clause (i), (ii), or (iii) of 
                        subparagraph (B); but only if 85 
                        percent or more of the income is 
                        attributable to providing such reserve 
                        funds and to investments. This 
                        subparagraph shall not apply to any 
                        corporation or association entitled to 
                        exemption under subparagraph (B).
          (15)(A) Insurance companies (as defined in section 
        816(a)) other than life (including interinsurers and 
        reciprocal underwriters) if--
                          (i)(I) the gross receipts for the 
                        taxable year do not exceed $600,000, 
                        and
                                  (II) more than 50 percent of 
                                such gross receipts consist of 
                                premiums, or
                          (ii) in the case of a mutual 
                        insurance company--
                                  (I) the gross receipts of 
                                which for the taxable year do 
                                not exceed $150,000, and
                                  (II) more than 35 percent of 
                                such gross receipts consist of 
                                premiums.
        Clause (ii) shall not apply to a company if any 
        employee of the company, or a member of the employee's 
        family (as defined in section 2032A(e)(2)), is an 
        employee of another company exempt from taxation by 
        reason of this paragraph (or would be so exempt but for 
        this sentence).
                  (B) For purposes of subparagraph (A), in 
                determining whether any company or association 
                is described in subparagraph (A), such company 
                or association shall be treated as receiving 
                during the taxable year amounts described in 
                subparagraph (A) which are received during such 
                year by all other companies or associations 
                which are members of the same controlled group 
                as the insurance company or association for 
                which the determination is being made.
                  (C) For purposes of subparagraph (B), the 
                term ``controlled group'' has the meaning given 
                such term by section 831(b)(2)(B)(ii), except 
                that in applying section 831(b)(2)(B)(ii) for 
                purposes of this subparagraph, subparagraphs 
                (B) and (C) of section 1563(b)(2) shall be 
                disregarded.
          (16) Corporations organized by an association subject 
        to part IV of this subchapter or members thereof, for 
        the purpose of financing the ordinary crop operations 
        of such members or other producers, and operated in 
        conjunction with such association. Exemption shall not 
        be denied any such corporation because it has capital 
        stock, if the dividend rate of such stock is fixed at 
        not to exceed the legal rate of interest in the State 
        of incorporation or 8 percent per annum, whichever is 
        greater, on the value of the consideration for which 
        the stock was issued, and if substantially all such 
        stock (other than nonvoting preferred stock, the owners 
        of which are not entitled or permitted to participate, 
        directly or indirectly, in the profits of the 
        corporation, on dissolution or otherwise, beyond the 
        fixed dividends) is owned by such association, or 
        members thereof; nor shall exemption be denied any such 
        corporation because there is accumulated and maintained 
        by it a reserve required by State law or a reasonable 
        reserve for any necessary purpose.
          (17)(A) A trust or trusts forming part of a plan 
        providing for the payment of supplemental unemployment 
        compensation benefits, if--
                          (i) under the plan, it is impossible, 
                        at any time prior to the satisfaction 
                        of all liabilities, with respect to 
                        employees under the plan, for any part 
                        of the corpus or income to be (within 
                        the taxable year or thereafter) used 
                        for, or diverted to, any purpose other 
                        than the providing of supplemental 
                        unemployment compensation benefits,
                          (ii) such benefits are payable to 
                        employees under a classification which 
                        is set forth in the plan and which is 
                        found by the Secretary not to be 
                        discriminatory in favor of employees 
                        who are highly compensated employees 
                        (within the meaning of section 414(q)), 
                        and
                          (iii) such benefits do not 
                        discriminate in favor of employees who 
                        are highly compensated employees 
                        (within the meaning of section 414(q)). 
                        A plan shall not be considered 
                        discriminatory within the meaning of 
                        this clause merely because the benefits 
                        received under the plan bear a uniform 
                        relationship to the total compensation, 
                        or the basic or regular rate of 
                        compensation, of the employees covered 
                        by the plan.
                  (B) In determining whether a plan meets the 
                requirements of subparagraph (A), any benefits 
                provided under any other plan shall not be 
                taken into consideration, except that a plan 
                shall not be considered discriminatory--
                          (i) merely because the benefits under 
                        the plan which are first determined in 
                        a nondiscriminatory manner within the 
                        meaning of subparagraph (A) are then 
                        reduced by any sick, accident, or 
                        unemployment compensation benefits 
                        received under State or Federal law (or 
                        reduced by a portion of such benefits 
                        if determined in a nondiscriminatory 
                        manner), or
                          (ii) merely because the plan provides 
                        only for employees who are not eligible 
                        to receive sick, accident, or 
                        unemployment compensation benefits 
                        under State or Federal law the same 
                        benefits (or a portion of such benefits 
                        if determined in a nondiscriminatory 
                        manner) which such employees would 
                        receive under such laws if such 
                        employees were eligible for such 
                        benefits, or
                          (iii) merely because the plan 
                        provides only for employees who are not 
                        eligible under another plan (which 
                        meets the requirements of subparagraph 
                        (A)) of supplemental unemployment 
                        compensation benefits provided wholly 
                        by the employer the same benefits (or a 
                        portion of such benefits if determined 
                        in a nondiscriminatory manner) which 
                        such employees would receive under such 
                        other plan if such employees were 
                        eligible under such other plan, but 
                        only if the employees eligible under 
                        both plans would make a classification 
                        which would be nondiscriminatory within 
                        the meaning of subparagraph (A).
                  (C) A plan shall be considered to meet the 
                requirements of subparagraph (A) during the 
                whole of any year of the plan if on one day in 
                each quarter it satisfies such requirements.
                  (D) The term ``supplemental unemployment 
                compensation benefits'' means only--
                          (i) benefits which are paid to an 
                        employee because of his involuntary 
                        separation from the employment of the 
                        employer (whether or not such 
                        separation is temporary) resulting 
                        directly from a reduction in force, the 
                        discontinuance of a plant or operation, 
                        or other similar conditions, and
                          (ii) sick and accident benefits 
                        subordinate to the benefits described 
                        in clause (i).
                  (E) Exemption shall not be denied under 
                subsection (a) to any organization entitled to 
                such exemption as an association described in 
                paragraph (9) of this subsection merely because 
                such organization provides for the payment of 
                supplemental unemployment benefits (as defined 
                in subparagraph (D)(i)).
          (18) A trust or trusts created before June 25, 1959, 
        forming part of a plan providing for the payment of 
        benefits under a pension plan funded only by 
        contributions of employees, if--
                  (A) under the plan, it is impossible, at any 
                time prior to the satisfaction of all 
                liabilities with respect to employees under the 
                plan, for any part of the corpus or income to 
                be (within the taxable year or thereafter) used 
                for, or diverted to, any purpose other than the 
                providing of benefits under the plan,
                  (B) such benefits are payable to employees 
                under a classification which is set forth in 
                the plan and which is found by the Secretary 
                not to be discriminatory in favor of employees 
                who are highly compensated employees (within 
                the meaning of section 414(q)),
                  (C) such benefits do not discriminate in 
                favor of employees who are highly compensated 
                employees (within the meaning of section 
                414(q)). A plan shall not be considered 
                discriminatory within the meaning of this 
                subparagraph merely because the benefits 
                received under the plan bear a uniform 
                relationship to the total compensation, or the 
                basic or regular rate of compensation, of the 
                employees covered by the plan, and
                  (D) in the case of a plan under which an 
                employee may designate certain contributions as 
                deductible--
                          (i) such contributions do not exceed 
                        the amount with respect to which a 
                        deduction is allowable under section 
                        219(b)(3),
                          (ii) requirements similar to the 
                        requirements of section 
                        401(k)(3)(A)(ii) are met with respect 
                        to such elective contributions,
                          (iii) such contributions are treated 
                        as elective deferrals for purposes of 
                        section 402(g), and
                          (iv) the requirements of section 
                        401(a)(30) are met.
        For purposes of subparagraph (D)(ii), rules similar to 
        the rules of section 401(k)(8) shall apply. For 
        purposes of section 4979, any excess contribution under 
        clause (ii) shall be treated as an excess contribution 
        under a cash or deferred arrangement.
          (19) A post or organization of past or present 
        members of the Armed Forces of the United States, or an 
        auxiliary unit or society of, or a trust or foundation 
        for, any such post or organization--
                  (A) organized in the United States or any of 
                its possessions,
                  (B) at least 75 percent of the members of 
                which are past or present members of the Armed 
                Forces of the United States and substantially 
                all of the other members of which are 
                individuals who are cadets or are spouses, 
                widows, widowers, ancestors, or lineal 
                descendants of past or present members of the 
                Armed Forces of the United States or of cadets, 
                and
                  (C) no part of the net earnings of which 
                inures to the benefit of any private 
                shareholder or individual.
          (21)(A) A trust or trusts established in writing, 
        created or organized in the United States, and 
        contributed to by any person (except an insurance 
        company) if--
                          (i) the purpose of such trust or 
                        trusts is exclusively--
                                  (I) to satisfy, in whole or 
                                in part, the liability of such 
                                person for, or with respect to, 
                                claims for compensation for 
                                disability or death due to 
                                pneumoconiosis under Black Lung 
                                Acts,
                                  (II) to pay premiums for 
                                insurance exclusively covering 
                                such liability,
                                  (III) to pay administrative 
                                and other incidental expenses 
                                of such trust in connection 
                                with the operation of the trust 
                                and the processing of claims 
                                against such person under Black 
                                Lung Acts, and
                                  (IV) to pay accident or 
                                health benefits for retired 
                                miners and their spouses and 
                                dependents (including 
                                administrative and other 
                                incidental expenses of such 
                                trust in connection therewith) 
                                or premiums for insurance 
                                exclusively covering such 
                                benefits; and
                          (ii) no part of the assets of the 
                        trust may be used for, or diverted to, 
                        any purpose other than--
                                  (I) the purposes described in 
                                clause (i),
                                  (II) investment (but only to 
                                the extent that the trustee 
                                determines that a portion of 
                                the assets is not currently 
                                needed for the purposes 
                                described in clause (i)) in 
                                qualified investments, or
                                  (III) payment into the Black 
                                Lung Disability Trust Fund 
                                established under section 9501, 
                                or into the general fund of the 
                                United States Treasury (other 
                                than in satisfaction of any tax 
                                or other civil or criminal 
                                liability of the person who 
                                established or contributed to 
                                the trust).
                  (B) No deduction shall be allowed under this 
                chapter for any payment described in 
                subparagraph (A)(i)(IV) from such trust.
                  (C) Payments described in subparagraph 
                (A)(i)(IV) may be made from such trust during a 
                taxable year only to the extent that the 
                aggregate amount of such payments during such 
                taxable year does not exceed the excess (if 
                any), as of the close of the preceding taxable 
                year, of--
                          (i) the fair market value of the 
                        assets of the trust, over
                          (ii) 110 percent of the present value 
                        of the liability described in 
                        subparagraph (A)(i)(I) of such person.
                The determinations under the preceding sentence 
                shall be made by an independent actuary using 
                actuarial methods and assumptions (not 
                inconsistent with the regulations prescribed 
                under section 192(c)(1)(A)) each of which is 
                reasonable and which are reasonable in the 
                aggregate.
                  (D) For purposes of this paragraph:
                          (i) The term ``Black Lung Acts'' 
                        means part C of title IV of the Federal 
                        Mine Safety and Health Act of 1977, and 
                        any State law providing compensation 
                        for disability or death due to that 
                        pneumoconiosis.
                          (ii) The term ``qualified 
                        investments'' means--
                                  (I) public debt securities of 
                                the United States,
                                  (II) obligations of a State 
                                or local government which are 
                                not in default as to principal 
                                or interest, and
                                  (III) time or demand deposits 
                                in a bank (as defined in 
                                section 581) or an insured 
                                credit union (within the 
                                meaning of section 101(7) of 
                                the Federal Credit Union Act, 
                                12 U.S.C. 1752(7)) located in 
                                the United States.
                          (iii) The term ``miner'' has the same 
                        meaning as such term has when used in 
                        section 402(d) of the Black Lung 
                        Benefits Act (30 U.S.C. 902(d)).
                          (iv) The term ``incidental expenses'' 
                        includes legal, accounting, actuarial, 
                        and trustee expenses.
          (22) A trust created or organized in the United 
        States and established in writing by the plan sponsors 
        of multiemployer plans if--
                  (A) the purpose of such trust is 
                exclusively--
                          (i) to pay any amount described in 
                        section 4223(c) or (h) of the Employee 
                        Retirement Income Security Act of 1974, 
                        and
                          (ii) to pay reasonable and necessary 
                        administrative expenses in connection 
                        with the establishment and operation of 
                        the trust and the processing of claims 
                        against the trust,
                  (B) no part of the assets of the trust may be 
                used for, or diverted to, any purpose other 
                than--
                          (i) the purposes described in 
                        subparagraph (A), or
                          (ii) the investment in securities, 
                        obligations, or time or demand deposits 
                        described in clause (ii) of paragraph 
                        (21)(D),
                  (C) such trust meets the requirements of 
                paragraphs (2), (3), and (4) of section 
                4223(b), 4223(h), or, if applicable, section 
                4223(c) of the Employee Retirement Income 
                Security Act of 1974, and
                  (D) the trust instrument provides that, on 
                dissolution of the trust, assets of the trust 
                may not be paid other than to plans which have 
                participated in the plan or, in the case of a 
                trust established under section 4223(h) of such 
                Act, to plans with respect to which employers 
                have participated in the fund.
          (23) Any association organized before 1880 more than 
        75 percent of the members of which are present or past 
        members of the Armed Forces and a principal purpose of 
        which is to provide insurance and other benefits to 
        veterans or their dependents.
          (24) A trust described in section 4049 of the 
        Employee Retirement Income Security Act of 1974 (as in 
        effect on the date of the enactment of the Single-
        Employer Pension Plan Amendments Act of 1986).
          (25)(A) Any corporation or trust which--
                          (i) has no more than 35 shareholders 
                        or beneficiaries,
                          (ii) has only 1 class of stock or 
                        beneficial interest, and
                          (iii) is organized for the exclusive 
                        purposes of--
                                  (I) acquiring real property 
                                and holding title to, and 
                                collecting income from, such 
                                property, and
                                  (II) remitting the entire 
                                amount of income from such 
                                property (less expenses) to 1 
                                or more organizations described 
                                in subparagraph (C) which are 
                                shareholders of such 
                                corporation or beneficiaries of 
                                such trust.
        For purposes of clause (iii), the term ``real 
        property'' shall not include any interest as a tenant 
        in common (or similar interest) and shall not include 
        any indirect interest.
                  (B) A corporation or trust shall be described 
                in subparagraph (A) without regard to whether 
                the corporation or trust is organized by 1 or 
                more organizations described in subparagraph 
                (C).
                  (C) An organization is described in this 
                subparagraph if such organization is--
                          (i) a qualified pension, profit 
                        sharing, or stock bonus plan that meets 
                        the requirements of section 401(a),
                          (ii) a governmental plan (within the 
                        meaning of section 414(d)),
                          (iii) the United States, any State or 
                        political subdivision thereof, or any 
                        agency or instrumentality of any of the 
                        foregoing, or
                          (iv) any organization described in 
                        paragraph (3).
                  (D) A corporation or trust shall in no event 
                be treated as described in subparagraph (A) 
                unless such corporation or trust permits its 
                shareholders or beneficiaries--
                          (i) to dismiss the corporation's or 
                        trust's investment adviser, following 
                        reasonable notice, upon a vote of the 
                        shareholders or beneficiaries holding a 
                        majority of interest in the corporation 
                        or trust, and
                          (ii) to terminate their interest in 
                        the corporation or trust by either, or 
                        both, of the following alternatives, as 
                        determined by the corporation or trust:
                                  (I) by selling or exchanging 
                                their stock in the corporation 
                                or interest in the trust 
                                (subject to any Federal or 
                                State securities law) to any 
                                organization described in 
                                subparagraph (C) so long as the 
                                sale or exchange does not 
                                increase the number of 
                                shareholders or beneficiaries 
                                in such corporation or trust 
                                above 35, or
                                  (II) by having their stock or 
                                interest redeemed by the 
                                corporation or trust after the 
                                shareholder or beneficiary has 
                                provided 90 days notice to such 
                                corporation or trust.
                  (E)(i) For purposes of this title--
                                  (I) a corporation which is a 
                                qualified subsidiary shall not 
                                be treated as a separate 
                                corporation, and
                                  (II) all assets, liabilities, 
                                and items of income, deduction, 
                                and credit of a qualified 
                                subsidiary shall be treated as 
                                assets, liabilities, and such 
                                items (as the case may be) of 
                                the corporation or trust 
                                described in subparagraph (A).
                          (ii) For purposes of this 
                        subparagraph, the term ``qualified 
                        subsidiary'' means any corporation if, 
                        at all times during the period such 
                        corporation was in existence, 100 
                        percent of the stock of such 
                        corporation is held by the corporation 
                        or trust described in subparagraph (A).
                          (iii) For purposes of this subtitle, 
                        if any corporation which was a 
                        qualified subsidiary ceases to meet the 
                        requirements of clause (ii), such 
                        corporation shall be treated as a new 
                        corporation acquiring all of its assets 
                        (and assuming all of its liabilities) 
                        immediately before such cessation from 
                        the corporation or trust described in 
                        subparagraph (A) in exchange for its 
                        stock.
                  (F) For purposes of subparagraph (A), the 
                term ``real property'' includes any personal 
                property which is leased under, or in 
                connection with, a lease of real property, but 
                only if the rent attributable to such personal 
                property (determined under the rules of section 
                856(d)(1)) for the taxable year does not exceed 
                15 percent of the total rent for the taxable 
                year attributable to both the real and personal 
                property leased under, or in connection with, 
                such lease.
                  (G)(i) An organization shall not be treated 
                as failing to be described in this paragraph 
                merely by reason of the receipt of any 
                otherwise disqualifying income which is 
                incidentally derived from the holding of real 
                property.
                          (ii) Clause (i) shall not apply if 
                        the amount of gross income described in 
                        such clause exceeds 10 percent of the 
                        organization's gross income for the 
                        taxable year unless the organization 
                        establishes to the satisfaction of the 
                        Secretary that the receipt of gross 
                        income described in clause (i) in 
                        excess of such limitation was 
                        inadvertent and reasonable steps are 
                        being taken to correct the 
                        circumstances giving rise to such 
                        income.
          (26) Any membership organization if--
                  (A) such organization is established by a 
                State exclusively to provide coverage for 
                medical care (as defined in section 213(d)) on 
                a not-for-profit basis to individuals described 
                in subparagraph (B) through--
                          (i) insurance issued by the 
                        organization, or
                          (ii) a health maintenance 
                        organization under an arrangement with 
                        the organization,
                  (B) the only individuals receiving such 
                coverage through the organization are 
                individuals--
                          (i) who are residents of such State, 
                        and
                          (ii) who, by reason of the existence 
                        or history of a medical condition--
                                  (I) are unable to acquire 
                                medical care coverage for such 
                                condition through insurance or 
                                from a health maintenance 
                                organization, or
                                  (II) are able to acquire such 
                                coverage only at a rate which 
                                is substantially in excess of 
                                the rate for such coverage 
                                through the membership 
                                organization,
                  (C) the composition of the membership in such 
                organization is specified by such State, and
                  (D) no part of the net earnings of the 
                organization inures to the benefit of any 
                private shareholder or individual.
        A spouse and any qualifying child (as defined in 
        section 24(c)) of an individual described in 
        subparagraph (B) (without regard to this sentence) 
        shall be treated as described in subparagraph (B).
          (27)(A) Any membership organization if--
                          (i) such organization is established 
                        before June 1, 1996, by a State 
                        exclusively to reimburse its members 
                        for losses arising under workmen's 
                        compensation acts,
                          (ii) such State requires that the 
                        membership of such organization consist 
                        of--
                                  (I) all persons who issue 
                                insurance covering workmen's 
                                compensation losses in such 
                                State, and
                                  (II) all persons and 
                                governmental entities who self-
                                insure against such losses, and
                          (iii) such organization operates as a 
                        non-profit organization by--
                                  (I) returning surplus income 
                                to its members or workmen's 
                                compensation policyholders on a 
                                periodic basis, and
                                  (II) reducing initial 
                                premiums in anticipation of 
                                investment income.
                  (B) Any organization (including a mutual 
                insurance company) if--
                          (i) such organization is created by 
                        State law and is organized and operated 
                        under State law exclusively to--
                                  (I) provide workmen's 
                                compensation insurance which is 
                                required by State law or with 
                                respect to which State law 
                                provides significant 
                                disincentives if such insurance 
                                is not purchased by an 
                                employer, and
                                  (II) provide related coverage 
                                which is incidental to 
                                workmen's compensation 
                                insurance,
                          (ii) such organization must provide 
                        workmen's compensation insurance to any 
                        employer in the State (for employees in 
                        the State or temporarily assigned out-
                        of-State) which seeks such insurance 
                        and meets other reasonable requirements 
                        relating thereto,
                          (iii)(I) the State makes a financial 
                        commitment with respect to such 
                        organization either by extending the 
                        full faith and credit of the State to 
                        the initial debt of such organization 
                        or by providing the initial operating 
                        capital of such organization, and (II) 
                        in the case of periods after the date 
                        of enactment of this subparagraph, the 
                        assets of such organization revert to 
                        the State upon dissolution or State law 
                        does not permit the dissolution of such 
                        organization, and
                          (iv) the majority of the board of 
                        directors or oversight body of such 
                        organization are appointed by the chief 
                        executive officer or other executive 
                        branch official of the State, by the 
                        State legislature, or by both.
          (28) The National Railroad Retirement Investment 
        Trust established under section 15(j) of the Railroad 
        Retirement Act of 1974.
          (29) CO-OP health insurance issuers.--
                  (A) In general.--A qualified nonprofit health 
                insurance issuer (within the meaning of section 
                1322 of the Patient Protection and Affordable 
                Care Act) which has received a loan or grant 
                under the CO-OP program under such section, but 
                only with respect to periods for which the 
                issuer is in compliance with the requirements 
                of such section and any agreement with respect 
                to the loan or grant.
                  (B) Conditions for exemption.--Subparagraph 
                (A) shall apply to an organization only if--
                          (i) the organization has given notice 
                        to the Secretary, in such manner as the 
                        Secretary may by regulations prescribe, 
                        that it is applying for recognition of 
                        its status under this paragraph,
                          (ii) except as provided in section 
                        1322(c)(4) of the Patient Protection 
                        and Affordable Care Act, no part of the 
                        net earnings of which inures to the 
                        benefit of any private shareholder or 
                        individual,
                          (iii) no substantial part of the 
                        activities of which is carrying on 
                        propaganda, or otherwise attempting, to 
                        influence legislation, and
                          (iv) the organization does not 
                        participate in, or intervene in 
                        (including the publishing or 
                        distributing of statements), any 
                        political campaign on behalf of (or in 
                        opposition to) any candidate for public 
                        office.
  (d) Religious and apostolic organizations.--The following 
organizations are referred to in subsection (a): Religious or 
apostolic associations or corporations, if such associations or 
corporations have a common treasury or community treasury, even 
if such associations or corporations engage in business for the 
common benefit of the members, but only if the members thereof 
include (at the time of filing their returns) in their gross 
income their entire pro rata shares, whether distributed or 
not, of the taxable income of the association or corporation 
for such year. Any amount so included in the gross income of a 
member shall be treated as a dividend received.
  (e) Cooperative hospital service organizations.--For purposes 
of this title, an organization shall be treated as an 
organization organized and operated exclusively for charitable 
purposes, if--
          (1) such organization is organized and operated 
        solely--
                  (A) to perform, on a centralized basis, one 
                or more of the following services which, if 
                performed on its own behalf by a hospital which 
                is an organization described in subsection 
                (c)(3) and exempt from taxation under 
                subsection (a), would constitute activities in 
                exercising or performing the purpose or 
                function constituting the basis for its 
                exemption: data processing, purchasing 
                (including the purchasing of insurance on a 
                group basis), warehousing, billing and 
                collection (including the purchase of patron 
                accounts receivable on a recourse basis), food, 
                clinical, industrial engineering, laboratory, 
                printing, communications, record center, and 
                personnel (including selection, testing, 
                training, and education of personnel) services; 
                and
                  (B) to perform such services solely for two 
                or more hospitals each of which is--
                          (i) an organization described in 
                        subsection (c)(3) which is exempt from 
                        taxation under subsection (a),
                          (ii) a constituent part of an 
                        organization described in subsection 
                        (c)(3) which is exempt from taxation 
                        under subsection (a) and which, if 
                        organized and operated as a separate 
                        entity, would constitute an 
                        organization described in subsection 
                        (c)(3), or
                          (iii) owned and operated by the 
                        United States, a State, the District of 
                        Columbia, or a possession of the United 
                        States, or a political subdivision or 
                        an agency or instrumentality of any of 
                        the foregoing;
          (2) such organization is organized and operated on a 
        cooperative basis and allocates or pays, within 8 1/2 
        months after the close of its taxable year, all net 
        earnings to patrons on the basis of services performed 
        for them; and
          (3) if such organization has capital stock, all of 
        such stock outstanding is owned by its patrons.
For purposes of this title, any organization which, by reason 
of the preceding sentence, is an organization described in 
subsection (c)(3) and exempt from taxation under subsection 
(a), shall be treated as a hospital and as an organization 
referred to in section 170(b)(1)(A)(iii).
  (f) Cooperative service organizations of operating 
educational organizations.--For purposes of this title, if an 
organization is--
          (1) organized and operated solely to hold, commingle, 
        and collectively invest and reinvest (including 
        arranging for and supervising the performance by 
        independent contractors of investment services related 
        thereto) in stocks and securities, the moneys 
        contributed thereto by each of the members of such 
        organization, and to collect income therefrom and turn 
        over the entire amount thereof, less expenses, to such 
        members,
          (2) organized and controlled by one or more such 
        members, and
          (3) comprised solely of members that are 
        organizations described in clause (ii) or (iv) of 
        section 170(b)(1)(A)--
                  (A) which are exempt from taxation under 
                subsection (a), or
                  (B) the income of which is excluded from 
                taxation under section 115,
        then such organization shall be treated as an 
        organization organized and operated exclusively for 
        charitable purposes.
  (g) Definition of agricultural.--For purposes of subsection 
(c)(5), the term ``agricultural'' includes the art or science 
of cultivating land, harvesting crops or aquatic resources, or 
raising livestock.
  (h) Expenditures by public charities to influence 
legislation.--
          (1) General rule.--In the case of an organization to 
        which this subsection applies, exemption from taxation 
        under subsection (a) shall be denied because a 
        substantial part of the activities of such organization 
        consists of carrying on propaganda, or otherwise 
        attempting, to influence legislation, but only if such 
        organization normally--
                  (A) makes lobbying expenditures in excess of 
                the lobbying ceiling amount for such 
                organization for each taxable year, or
                  (B) makes grass roots expenditures in excess 
                of the grass roots ceiling amount for such 
                organization for each taxable year.
          (2) Definitions.--For purposes of this subsection--
                  (A) Lobbying expenditures.--The term 
                ``lobbying expenditures'' means expenditures 
                for the purpose of influencing legislation (as 
                defined in section 4911(d)).
                  (B) Lobbying ceiling amount.--The lobbying 
                ceiling amount for any organization for any 
                taxable year is 150 percent of the lobbying 
                nontaxable amount for such organization for 
                such taxable year, determined under section 
                4911.
                  (C) Grass roots expenditures.--The term 
                ``grass roots expenditures'' means expenditures 
                for the purpose of influencing legislation (as 
                defined in section 4911(d) without regard to 
                paragraph (1)(B) thereof).
                  (D) Grass roots ceiling amount.--The grass 
                roots ceiling amount for any organization for 
                any taxable year is 150 percent of the grass 
                roots nontaxable amount for such organization 
                for such taxable year, determined under section 
                4911.
          (3) Organizations to which this subsection applies.--
        This subsection shall apply to any organization which 
        has elected (in such manner and at such time as the 
        Secretary may prescribe) to have the provisions of this 
        subsection apply to such organization and which, for 
        the taxable year which includes the date the election 
        is made, is described in subsection (c)(3) and--
                  (A) is described in paragraph (4), and
                  (B) is not a disqualified organization under 
                paragraph (5).
          (4) Organizations permitted to elect to have this 
        subsection apply.--An organization is described in this 
        paragraph if it is described in--
                  (A) section 170(b)(1)(A)(ii) (relating to 
                educational institutions),
                  (B) section 170(b)(1)(A)(iii) (relating to 
                hospitals and medical research organizations),
                  (C) section 170(b)(1)(A)(iv) (relating to 
                organizations supporting government schools),
                  (D) section 170(b)(1)(A)(vi) (relating to 
                organizations publicly supported by charitable 
                contributions),
                  (E) section 170(b)(1)(A)(ix) (relating to 
                agricultural research organizations),
                  (F) section 509(a)(2) (relating to 
                organizations publicly supported by admissions, 
                sales, etc.), or
                  (G) section 509(a)(3) (relating to 
                organizations supporting certain types of 
                public charities) except that for purposes of 
                this subparagraph, section 509(a)(3) shall be 
                applied without regard to the last sentence of 
                section 509(a).
          (5) Disqualified organizations.--For purposes of 
        paragraph (3) an organization is a disqualified 
        organization if it is--
                  (A) described in section 170(b)(1)(A)(i) 
                (relating to churches),
                  (B) an integrated auxiliary of a church or of 
                a convention or association of churches, or
                  (C) a member of an affiliated group of 
                organizations (within the meaning of section 
                4911(f)(2)) if one or more members of such 
                group is described in subparagraph (A) or (B).
          (6) Years for which election is effective.--An 
        election by an organization under this subsection shall 
        be effective for all taxable years of such organization 
        which--
                  (A) end after the date the election is made, 
                and
                  (B) begin before the date the election is 
                revoked by such organization (under regulations 
                prescribed by the Secretary).
          (7) No effect on certain organizations.--With respect 
        to any organization for a taxable year for which--
                  (A) such organization is a disqualified 
                organization (within the meaning of paragraph 
                (5)), or
                  (B) an election under this subsection is not 
                in effect for such organization,
        nothing in this subsection or in section 4911 shall be 
        construed to affect the interpretation of the phrase, 
        ``no substantial part of the activities of which is 
        carrying on propaganda, or otherwise attempting, to 
        influence legislation,'' under subsection (c)(3).
          (8) Affiliated organizations For rules regarding 
        affiliated organizations, see section 4911(f).
  (i) Prohibition of discrimination by certain social clubs.--
Notwithstanding subsection (a), an organization which is 
described in subsection (c)(7) shall not be exempt from 
taxation under subsection (a) for any taxable year if, at any 
time during such taxable year, the charter, bylaws, or other 
governing instrument, of such organization or any written 
policy statement of such organization contains a provision 
which provides for discrimination against any person on the 
basis of race, color, or religion. The preceding sentence to 
the extent it relates to discrimination on the basis of 
religion shall not apply to--
          (1) an auxiliary of a fraternal beneficiary society 
        if such society--
                  (A) is described in subsection (c)(8) and 
                exempt from tax under subsection (a), and
                  (B) limits its membership to the members of a 
                particular religion, or
          (2) a club which in good faith limits its membership 
        to the members of a particular religion in order to 
        further the teachings or principles of that religion, 
        and not to exclude individuals of a particular race or 
        color.
  (j) Special rules for certain amateur sports organizations.--
          (1) In general.--In the case of a qualified amateur 
        sports organization--
                  (A) the requirement of subsection (c)(3) that 
                no part of its activities involve the provision 
                of athletic facilities or equipment shall not 
                apply, and
                  (B) such organization shall not fail to meet 
                the requirements of subsection (c)(3) merely 
                because its membership is local or regional in 
                nature.
          (2) Qualified amateur sports organization defined.--
        For purposes of this subsection, the term ``qualified 
        amateur sports organization'' means any organization 
        organized and operated exclusively to foster national 
        or international amateur sports competition if such 
        organization is also organized and operated primarily 
        to conduct national or international competition in 
        sports or to support and develop amateur athletes for 
        national or international competition in sports.
  (k) Treatment of certain organizations providing child 
care.--For purposes of subsection (c)(3) of this section and 
sections 170(c)(2), 2055(a)(2), and 2522(a)(2), the term 
``educational purposes'' includes the providing of care of 
children away from their homes if--
          (1) substantially all of the care provided by the 
        organization is for purposes of enabling individuals to 
        be gainfully employed, and
          (2) the services provided by the organization are 
        available to the general public.
  (l) Government corporations exempt under subsection (c)(1).--
For purposes of subsection (c)(1), the following organizations 
are described in this subsection:
          (1) The Central Liquidity Facility established under 
        title III of the Federal Credit Union Act (12 U.S.C. 
        1795 et seq.).
          (2) The Resolution Trust Corporation established 
        under section 21A of the Federal Home Loan Bank Act.
          (3) The Resolution Funding Corporation established 
        under section 21B of the Federal Home Loan Bank Act.
          (4) The Patient-Centered Outcomes Research Institute 
        established under section 1181(b) of the Social 
        Security Act.
  (m) Certain organizations providing commercial-type insurance 
not exempt from tax.--
          (1) Denial of tax exemption where providing 
        commercial-type insurance is substantial part of 
        activities.--An organization described in paragraph (3) 
        or (4) of subsection (c) shall be exempt from tax under 
        subsection (a) only if no substantial part of its 
        activities consists of providing commercial-type 
        insurance.
          (2) Other organizations taxed as insurance companies 
        on insurance business.--In the case of an organization 
        described in paragraph (3) or (4) of subsection (c) 
        which is exempt from tax under subsection (a) after the 
        application of paragraph (1) of this subsection--
                  (A) the activity of providing commercial-type 
                insurance shall be treated as an unrelated 
                trade or business (as defined in section 513), 
                and
                  (B) in lieu of the tax imposed by section 511 
                with respect to such activity, such 
                organization shall be treated as an insurance 
                company for purposes of applying subchapter L 
                with respect to such activity.
          (3) Commercial-type insurance.--For purposes of this 
        subsection, the term ``commercial-type insurance'' 
        shall not include--
                  (A) insurance provided at substantially below 
                cost to a class of charitable recipients,
                  (B) incidental health insurance provided by a 
                health maintenance organization of a kind 
                customarily provided by such organizations,
                  (C) property or casualty insurance provided 
                (directly or through an organization described 
                in section 414(e)(3)(B)(ii)) by a church or 
                convention or association of churches for such 
                church or convention or association of 
                churches,
                  (D) providing retirement or welfare benefits 
                (or both) by a church or a convention or 
                association of churches (directly or through an 
                organization described in section 414(e)(3)(A) 
                or 414(e)(3)(B)(ii)) for the employees 
                (including employees described in section 
                414(e)(3)(B)) of such church or convention or 
                association of churches or the beneficiaries of 
                such employees, and
                  (E) charitable gift annuities.
          (4) Insurance includes annuities.--For purposes of 
        this subsection, the issuance of annuity contracts 
        shall be treated as providing insurance.
          (5) Charitable gift annuity.--For purposes of 
        paragraph (3)(E), the term ``charitable gift annuity'' 
        means an annuity if--
                  (A) a portion of the amount paid in 
                connection with the issuance of the annuity is 
                allowable as a deduction under section 170 or 
                2055, and
                  (B) the annuity is described in section 
                514(c)(5) (determined as if any amount paid in 
                cash in connection with such issuance were 
                property).
  (n) Charitable risk pools.--
          (1) In general.--For purposes of this title--
                  (A) a qualified charitable risk pool shall be 
                treated as an organization organized and 
                operated exclusively for charitable purposes, 
                and
                  (B) subsection (m) shall not apply to a 
                qualified charitable risk pool.
          (2) Qualified charitable risk pool.--For purposes of 
        this subsection, the term ``qualified charitable risk 
        pool'' means any organization--
                  (A) which is organized and operated solely to 
                pool insurable risks of its members (other than 
                risks related to medical malpractice) and to 
                provide information to its members with respect 
                to loss control and risk management,
                  (B) which is comprised solely of members that 
                are organizations described in subsection 
                (c)(3) and exempt from tax under subsection 
                (a), and
                  (C) which meets the organizational 
                requirements of paragraph (3).
          (3) Organizational requirements.--An organization 
        (hereinafter in this subsection referred to as the 
        ``risk pool'') meets the organizational requirements of 
        this paragraph if--
                  (A) such risk pool is organized as a 
                nonprofit organization under State law 
                provisions authorizing risk pooling 
                arrangements for charitable organizations,
                  (B) such risk pool is exempt from any income 
                tax imposed by the State (or will be so exempt 
                after such pool qualifies as an organization 
                exempt from tax under this title),
                  (C) such risk pool has obtained at least 
                $1,000,000 in startup capital from nonmember 
                charitable organizations,
                  (D) such risk pool is controlled by a board 
                of directors elected by its members, and
                  (E) the organizational documents of such risk 
                pool require that--
                          (i) each member of such pool shall at 
                        all times be an organization described 
                        in subsection (c)(3) and exempt from 
                        tax under subsection (a),
                          (ii) any member which receives a 
                        final determination that it no longer 
                        qualifies as an organization described 
                        in subsection (c)(3) shall immediately 
                        notify the pool of such determination 
                        and the effective date of such 
                        determination, and
                          (iii) each policy of insurance issued 
                        by the risk pool shall provide that 
                        such policy will not cover the insured 
                        with respect to events occurring after 
                        the date such final determination was 
                        issued to the insured.
        An organization shall not cease to qualify as a 
        qualified charitable risk pool solely by reason of the 
        failure of any of its members to continue to be an 
        organization described in subsection (c)(3) if, within 
        a reasonable period of time after such pool is notified 
        as required under subparagraph (E)(ii), such pool takes 
        such action as may be reasonably necessary to remove 
        such member from such pool.
          (4) Other definitions.--For purposes of this 
        subsection--
                  (A) Startup capital.--The term ``startup 
                capital'' means any capital contributed to, and 
                any program-related investments (within the 
                meaning of section 4944(c)) made in, the risk 
                pool before such pool commences operations.
                  (B) Nonmember charitable organization.--The 
                term ``nonmember charitable organization'' 
                means any organization which is described in 
                subsection (c)(3) and exempt from tax under 
                subsection (a) and which is not a member of the 
                risk pool and does not benefit (directly or 
                indirectly) from the insurance coverage 
                provided by the pool to its members.
  (o) Treatment of hospitals participating in provider-
sponsored organizations.--An organization shall not fail to be 
treated as organized and operated exclusively for a charitable 
purpose for purposes of subsection (c)(3) solely because a 
hospital which is owned and operated by such organization 
participates in a provider-sponsored organization (as defined 
in section 1855(d) of the Social Security Act), whether or not 
the provider-sponsored organization is exempt from tax. For 
purposes of subsection (c)(3), any person with a material 
financial interest in such a provider-sponsored organization 
shall be treated as a private shareholder or individual with 
respect to the hospital.
  (p) Suspension of tax-exempt status of terrorist 
organizations.--
          (1) In general.--The exemption from tax under 
        subsection (a) with respect to any organization 
        described in paragraph (2), and the eligibility of any 
        organization described in paragraph (2) to apply for 
        recognition of exemption under subsection (a), shall be 
        suspended during the period described in paragraph (3).
          (2) Terrorist organizations.--An organization is 
        described in this paragraph if such organization is 
        designated or otherwise individually identified--
                  (A) under section 212(a)(3)(B)(vi)(II) or 219 
                of the Immigration and Nationality Act as a 
                terrorist organization or foreign terrorist 
                organization,
                  (B) in or pursuant to an Executive order 
                which is related to terrorism and issued under 
                the authority of the International Emergency 
                Economic Powers Act or section 5 of the United 
                Nations Participation Act of 1945 for the 
                purpose of imposing on such organization an 
                economic or other sanction, or
                  (C) in or pursuant to an Executive order 
                issued under the authority of any Federal law 
                if--
                          (i) the organization is designated or 
                        otherwise individually identified in or 
                        pursuant to such Executive order as 
                        supporting or engaging in terrorist 
                        activity (as defined in section 
                        212(a)(3)(B) of the Immigration and 
                        Nationality Act) or supporting 
                        terrorism (as defined in section 
                        140(d)(2) of the Foreign Relations 
                        Authorization Act, Fiscal Years 1988 
                        and 1989); and
                          (ii) such Executive order refers to 
                        this subsection.
          (3) Period of suspension.--With respect to any 
        organization described in paragraph (2), the period of 
        suspension--
                  (A) begins on the later of--
                          (i) the date of the first publication 
                        of a designation or identification 
                        described in paragraph (2) with respect 
                        to such organization, or
                          (ii) the date of the enactment of 
                        this subsection, and (B) ends on the 
                        first date that all designations and 
                        identifications described in paragraph 
                        (2) with respect to such organization 
                        are rescinded pursuant to the law or 
                        Executive order under which such 
                        designation or identification was made.
          (4) Denial of deduction.--No deduction shall be 
        allowed under any provision of this title, including 
        sections 170, 545(b)(2), 642(c), 2055, 2106(a)(2), and 
        2522, with respect to any contribution to an 
        organization described in paragraph (2) during the 
        period described in paragraph (3).
          (5) Denial of administrative or judicial challenge of 
        suspension or denial of deduction.--Notwithstanding 
        section 7428 or any other provision of law, no 
        organization or other person may challenge a suspension 
        under paragraph (1), a designation or identification 
        described in paragraph (2), the period of suspension 
        described in paragraph (3), or a denial of a deduction 
        under paragraph (4) in any administrative or judicial 
        proceeding relating to the Federal tax liability of 
        such organization or other person.
          (6) Erroneous designation.--
                  (A) In general.--If--
                          (i) the tax exemption of any 
                        organization described in paragraph (2) 
                        is suspended under paragraph (1),
                          (ii) each designation and 
                        identification described in paragraph 
                        (2) which has been made with respect to 
                        such organization is determined to be 
                        erroneous pursuant to the law or 
                        Executive order under which such 
                        designation or identification was made, 
                        and
                          (iii) the erroneous designations and 
                        identifications result in an 
                        overpayment of income tax for any 
                        taxable year by such organization,
                credit or refund (with interest) with respect 
                to such overpayment shall be made.
                  (B) Waiver of limitations.--If the credit or 
                refund of any overpayment of tax described in 
                subparagraph (A)(iii) is prevented at any time 
                by the operation of any law or rule of law 
                (including res judicata), such credit or refund 
                may nevertheless be allowed or made if the 
                claim therefor is filed before the close of the 
                1-year period beginning on the date of the last 
                determination described in subparagraph 
                (A)(ii).
          (7) Notice of suspensions.--If the tax exemption of 
        any organization is suspended under this subsection, 
        the Internal Revenue Service shall update the listings 
        of tax-exempt organizations and shall publish 
        appropriate notice to taxpayers of such suspension and 
        of the fact that contributions to such organization are 
        not deductible during the period of such suspension.
  (q) Special rules for credit counseling organizations.--
          (1) In general.--An organization with respect to 
        which the provision of credit counseling services is a 
        substantial purpose shall not be exempt from tax under 
        subsection (a) unless such organization is described in 
        paragraph (3) or (4) of subsection (c) and such 
        organization is organized and operated in accordance 
        with the following requirements:
                  (A) The organization--
                          (i) provides credit counseling 
                        services tailored to the specific needs 
                        and circumstances of consumers,
                          (ii) makes no loans to debtors (other 
                        than loans with no fees or interest) 
                        and does not negotiate the making of 
                        loans on behalf of debtors,
                          (iii) provides services for the 
                        purpose of improving a consumer's 
                        credit record, credit history, or 
                        credit rating only to the extent that 
                        such services are incidental to 
                        providing credit counseling services, 
                        and
                          (iv) does not charge any separately 
                        stated fee for services for the purpose 
                        of improving any consumer's credit 
                        record, credit history, or credit 
                        rating.
                  (B) The organization does not refuse to 
                provide credit counseling services to a 
                consumer due to the inability of the consumer 
                to pay, the ineligibility of the consumer for 
                debt management plan enrollment, or the 
                unwillingness of the consumer to enroll in a 
                debt management plan.
                  (C) The organization establishes and 
                implements a fee policy which--
                          (i) requires that any fees charged to 
                        a consumer for services are reasonable,
                          (ii) allows for the waiver of fees if 
                        the consumer is unable to pay, and
                          (iii) except to the extent allowed by 
                        State law, prohibits charging any fee 
                        based in whole or in part on a 
                        percentage of the consumer's debt, the 
                        consumer's payments to be made pursuant 
                        to a debt management plan, or the 
                        projected or actual savings to the 
                        consumer resulting from enrolling in a 
                        debt management plan.
                  (D) At all times the organization has a board 
                of directors or other governing body--
                          (i) which is controlled by persons 
                        who represent the broad interests of 
                        the public, such as public officials 
                        acting in their capacities as such, 
                        persons having special knowledge or 
                        expertise in credit or financial 
                        education, and community leaders,
                          (ii) not more than 20 percent of the 
                        voting power of which is vested in 
                        persons who are employed by the 
                        organization or who will benefit 
                        financially, directly or indirectly, 
                        from the organization's activities 
                        (other than through the receipt of 
                        reasonable directors' fees or the 
                        repayment of consumer debt to creditors 
                        other than the credit counseling 
                        organization or its affiliates), and
                          (iii) not more than 49 percent of the 
                        voting power of which is vested in 
                        persons who are employed by the 
                        organization or who will benefit 
                        financially, directly or indirectly, 
                        from the organization's activities 
                        (other than through the receipt of 
                        reasonable directors' fees).
                  (E) The organization does not own more than 
                35 percent of--
                          (i) the total combined voting power 
                        of any corporation (other than a 
                        corporation which is an organization 
                        described in subsection (c)(3) and 
                        exempt from tax under subsection (a)) 
                        which is in the trade or business of 
                        lending money, repairing credit, or 
                        providing debt management plan 
                        services, payment processing, or 
                        similar services,
                          (ii) the profits interest of any 
                        partnership (other than a partnership 
                        which is an organization described in 
                        subsection (c)(3) and exempt from tax 
                        under subsection (a)) which is in the 
                        trade or business of lending money, 
                        repairing credit, or providing debt 
                        management plan services, payment 
                        processing, or similar services, and
                          (iii) the beneficial interest of any 
                        trust or estate (other than a trust 
                        which is an organization described in 
                        subsection (c)(3) and exempt from tax 
                        under subsection (a)) which is in the 
                        trade or business of lending money, 
                        repairing credit, or providing debt 
                        management plan services, payment 
                        processing, or similar services.
                  (F) The organization receives no amount for 
                providing referrals to others for debt 
                management plan services, and pays no amount to 
                others for obtaining referrals of consumers.
          (2) Additional requirements for organizations 
        described in subsection (c)(3)
                  (A) In general.--In addition to the 
                requirements under paragraph (1), an 
                organization with respect to which the 
                provision of credit counseling services is a 
                substantial purpose and which is described in 
                paragraph (3) of subsection (c) shall not be 
                exempt from tax under subsection (a) unless 
                such organization is organized and operated in 
                accordance with the following requirements:
                          (i) The organization does not solicit 
                        contributions from consumers during the 
                        initial counseling process or while the 
                        consumer is receiving services from the 
                        organization.
                          (ii) The aggregate revenues of the 
                        organization which are from payments of 
                        creditors of consumers of the 
                        organization and which are attributable 
                        to debt management plan services do not 
                        exceed the applicable percentage of the 
                        total revenues of the organization.
                  (B) Applicable percentage.--
                          (i) In general.--For purposes of 
                        subparagraph (A)(ii), the applicable 
                        percentage is 50 percent.
                          (ii) Transition rule.--
                        Notwithstanding clause (i), in the case 
                        of an organization with respect to 
                        which the provision of credit 
                        counseling services is a substantial 
                        purpose and which is described in 
                        paragraph (3) of subsection (c) and 
                        exempt from tax under subsection (a) on 
                        the date of the enactment of this 
                        subsection, the applicable percentage 
                        is--
                                  (I) 80 percent for the first 
                                taxable year of such 
                                organization beginning after 
                                the date which is 1 year after 
                                the date of the enactment of 
                                this subsection, and
                                  (II) 70 percent for the 
                                second such taxable year 
                                beginning after such date, and
                                  (III) 60 percent for the 
                                third such taxable year 
                                beginning after such date.
          (3) Additional requirement for organizations 
        described in subsection (c)(4).--In addition to the 
        requirements under paragraph (1), an organization with 
        respect to which the provision of credit counseling 
        services is a substantial purpose and which is 
        described in paragraph (4) of subsection (c) shall not 
        be exempt from tax under subsection (a) unless such 
        organization notifies the Secretary, in such manner as 
        the Secretary may by regulations prescribe, that it is 
        applying for recognition as a credit counseling 
        organization.
          (4) Credit counseling services; debt management plan 
        services.--For purposes of this subsection--
                  (A) Credit counseling services.--The term 
                ``credit counseling services'' means--
                          (i) the providing of educational 
                        information to the general public on 
                        budgeting, personal finance, financial 
                        literacy, saving and spending 
                        practices, and the sound use of 
                        consumer credit,
                          (ii) the assisting of individuals and 
                        families with financial problems by 
                        providing them with counseling, or
                          (iii) a combination of the activities 
                        described in clauses (i) and (ii).
                  (B) Debt management plan services.--The term 
                ``debt management plan services'' means 
                services related to the repayment, 
                consolidation, or restructuring of a consumer's 
                debt, and includes the negotiation with 
                creditors of lower interest rates, the waiver 
                or reduction of fees, and the marketing and 
                processing of debt management plans.
  (r) Additional requirements for certain hospitals.--
          (1) In general.--A hospital organization to which 
        this subsection applies shall not be treated as 
        described in subsection (c)(3) unless the 
        organization--
                  (A) meets the community health needs 
                assessment requirements described in paragraph 
                (3),
                  (B) meets the financial assistance policy 
                requirements described in paragraph (4),
                  (C) meets the requirements on charges 
                described in paragraph (5), and
                  (D) meets the billing and collection 
                requirement described in paragraph (6).
          (2) Hospital organizations to which subsection 
        applies.--
                  (A) In general.--This subsection shall apply 
                to--
                          (i) an organization which operates a 
                        facility which is required by a State 
                        to be licensed, registered, or 
                        similarly recognized as a hospital, and
                          (ii) any other organization which the 
                        Secretary determines has the provision 
                        of hospital care as its principal 
                        function or purpose constituting the 
                        basis for its exemption under 
                        subsection (c)(3) (determined without 
                        regard to this subsection).
                  (B) Organizations with more than 1 hospital 
                facility.--If a hospital organization operates 
                more than 1 hospital facility--
                          (i) the organization shall meet the 
                        requirements of this subsection 
                        separately with respect to each such 
                        facility, and
                          (ii) the organization shall not be 
                        treated as described in subsection 
                        (c)(3) with respect to any such 
                        facility for which such requirements 
                        are not separately met.
          (3) Community health needs assessments.--
                  (A) In general.--An organization meets the 
                requirements of this paragraph with respect to 
                any taxable year only if the organization--
                          (i) has conducted a community health 
                        needs assessment which meets the 
                        requirements of subparagraph (B) in 
                        such taxable year or in either of the 2 
                        taxable years immediately preceding 
                        such taxable year, and
                          (ii) has adopted an implementation 
                        strategy to meet the community health 
                        needs identified through such 
                        assessment.
                  (B) Community health needs assessment.--A 
                community health needs assessment meets the 
                requirements of this paragraph if such 
                community health needs assessment--
                          (i) takes into account input from 
                        persons who represent the broad 
                        interests of the community served by 
                        the hospital facility, including those 
                        with special knowledge of or expertise 
                        in public health, and
                          (ii) is made widely available to the 
                        public.
          (4) Financial assistance policy.--An organization 
        meets the requirements of this paragraph if the 
        organization establishes the following policies:
                  (A) Financial assistance policy.--A written 
                financial assistance policy which includes--
                          (i) eligibility criteria for 
                        financial assistance, and whether such 
                        assistance includes free or discounted 
                        care,
                          (ii) the basis for calculating 
                        amounts charged to patients,
                          (iii) the method for applying for 
                        financial assistance,
                          (iv) in the case of an organization 
                        which does not have a separate billing 
                        and collections policy, the actions the 
                        organization may take in the event of 
                        non-payment, including collections 
                        action and reporting to credit 
                        agencies, and
                          (v) measures to widely publicize the 
                        policy within the community to be 
                        served by the organization.
                  (B) Policy relating to emergency medical 
                care.--A written policy requiring the 
                organization to provide, without 
                discrimination, care for emergency medical 
                conditions (within the meaning of section 1867 
                of the Social Security Act (42 U.S.C. 1395dd)) 
                to individuals regardless of their eligibility 
                under the financial assistance policy described 
                in subparagraph (A).
          (5) Limitation on charges.--An organization meets the 
        requirements of this paragraph if the organization--
                  (A) limits amounts charged for emergency or 
                other medically necessary care provided to 
                individuals eligible for assistance under the 
                financial assistance policy described in 
                paragraph (4)(A) to not more than the amounts 
                generally billed to individuals who have 
                insurance covering such care, and
                  (B) prohibits the use of gross charges.
          (6) Billing and collection requirements.--An 
        organization meets the requirement of this paragraph 
        only if the organization does not engage in 
        extraordinary collection actions before the 
        organization has made reasonable efforts to determine 
        whether the individual is eligible for assistance under 
        the financial assistance policy described in paragraph 
        (4)(A).
          (7) Regulatory authority.--The Secretary shall issue 
        such regulations and guidance as may be necessary to 
        carry out the provisions of this subsection, including 
        guidance relating to what constitutes reasonable 
        efforts to determine the eligibility of a patient under 
        a financial assistance policy for purposes of paragraph 
        (6).

           *       *       *       *       *       *       *

PART VIII--CERTAIN SAVINGS ENTITIES

           *       *       *       *       *       *       *

SEC. 529. QUALIFIED TUITION PROGRAMS.

  (a) General rule.--A qualified tuition program shall be 
exempt from taxation under this subtitle. Notwithstanding the 
preceding sentence, such program shall be subject to the taxes 
imposed by section 511 (relating to imposition of tax on 
unrelated business income of charitable organizations).
  (b) Qualified tuition program.--For purposes of this 
section--
          (1) In general.--The term ``qualified tuition 
        program'' means a program established and maintained by 
        a State or agency or instrumentality thereof or by 1 or 
        more eligible educational institutions--
                  (A) under which a person--
                          (i) may purchase tuition credits or 
                        certificates on behalf of a designated 
                        beneficiary which entitle the 
                        beneficiary to the waiver or payment of 
                        qualified higher education expenses of 
                        the beneficiary, or
                          (ii) in the case of a program 
                        established and maintained by a State 
                        or agency or instrumentality thereof, 
                        may make contributions to an account 
                        which is established for the purpose of 
                        meeting the qualified higher education 
                        expenses of the designated beneficiary 
                        of the account, and
                  (B) which meets the other requirements of 
                this subsection.
        Except to the extent provided in regulations, a program 
        established and maintained by 1 or more eligible 
        educational institutions shall not be treated as a 
        qualified tuition program unless such program provides 
        that amounts are held in a qualified trust and such 
        program has received a ruling or determination that 
        such program meets the applicable requirements for a 
        qualified tuition program. For purposes of the 
        preceding sentence, the term ``qualified trust'' means 
        a trust which is created or organized in the United 
        States for the exclusive benefit of designated 
        beneficiaries and with respect to which the 
        requirements of paragraphs (2) and (5) of section 
        408(a) are met.
          (2) Cash contributions.--A program shall not be 
        treated as a qualified tuition program unless it 
        provides that purchases or contributions may only be 
        made in cash.
          (3) Separate accounting.--A program shall not be 
        treated as a qualified tuition program unless it 
        provides separate accounting for each designated 
        beneficiary.
          (4) Limited investment direction.--A program shall 
        not be treated as a qualified tuition program unless it 
        provides that any contributor to, or designated 
        beneficiary under, such program may, directly or 
        indirectly, direct the investment of any contributions 
        to the program (or any earnings thereon) no more than 2 
        times in any calendar year.
          (5) No pledging of interest as security.--A program 
        shall not be treated as a qualified tuition program if 
        it allows any interest in the program or any portion 
        thereof to be used as security for a loan.
          (6) Prohibition on excess contributions.--A program 
        shall not be treated as a qualified tuition program 
        unless it provides adequate safeguards to prevent 
        contributions on behalf of a designated beneficiary in 
        excess of those necessary to provide for the qualified 
        higher education expenses of the beneficiary.
  (c) Tax treatment of designated beneficiaries and 
contributors.--
          (1) In general.--Except as otherwise provided in this 
        subsection, no amount shall be includible in gross 
        income of--
                  (A) a designated beneficiary under a 
                qualified tuition program, or
                  (B) a contributor to such program on behalf 
                of a designated beneficiary,
        with respect to any distribution or earnings under such 
        program.
          (2) Gift tax treatment of contributions.--For 
        purposes of chapters 12 and 13--
                  (A) In general.--Any contribution to a 
                qualified tuition program on behalf of any 
                designated beneficiary--
                          (i) shall be treated as a completed 
                        gift to such beneficiary which is not a 
                        future interest in property, and
                          (ii) shall not be treated as a 
                        qualified transfer under section 
                        2503(e).
                  (B) Treatment of excess contributions.--If 
                the aggregate amount of contributions described 
                in subparagraph (A) during the calendar year by 
                a donor exceeds the limitation for such year 
                under section 2503(b), such aggregate amount 
                shall, at the election of the donor, be taken 
                into account for purposes of such section 
                ratably over the 5-year period beginning with 
                such calendar year.
          (3) Distributions.--
                  (A) In general.--Any distribution under a 
                qualified tuition program shall be includible 
                in the gross income of the distributee in the 
                manner as provided under section 72 to the 
                extent not excluded from gross income under any 
                other provision of this chapter.
                  (B) Distributions for qualified higher 
                education expenses.--For purposes of this 
                paragraph--
                          (i) In-kind distributions.--No amount 
                        shall be includible in gross income 
                        under subparagraph (A) by reason of a 
                        distribution which consists of 
                        providing a benefit to the distributee 
                        which, if paid for by the distributee, 
                        would constitute payment of a qualified 
                        higher education expense.
                          (ii) Cash distributions.--In the case 
                        of distributions not described in 
                        clause (i), if--
                                  (I) such distributions do not 
                                exceed the qualified higher 
                                education expenses (reduced by 
                                expenses described in clause 
                                (i)), no amount shall be 
                                includible in gross income, and
                                  (II) in any other case, the 
                                amount otherwise includible in 
                                gross income shall be reduced 
                                by an amount which bears the 
                                same ratio to such amount as 
                                such expenses bear to such 
                                distributions.
                          (iii) Exception for institutional 
                        programs.--In the case of any taxable 
                        year beginning before January 1, 2004, 
                        clauses (i) and (ii) shall not apply 
                        with respect to any distribution during 
                        such taxable year under a qualified 
                        tuition program established and 
                        maintained by 1 or more eligible 
                        educational institutions.
                          (iv) Treatment as distributions.--Any 
                        benefit furnished to a designated 
                        beneficiary under a qualified tuition 
                        program shall be treated as a 
                        distribution to the beneficiary for 
                        purposes of this paragraph.
                          (v) Coordination with American 
                        Opportunity and Lifetime Learning 
                        credits.--The total amount of qualified 
                        higher education expenses with respect 
                        to an individual for the taxable year 
                        shall be reduced--
                                  (I) as provided in section 
                                25A(g)(2), and
                                  (II) by the amount of such 
                                expenses which were taken into 
                                account in determining the 
                                credit allowed to the taxpayer 
                                or any other person under 
                                section 25A.
                          (vi) Coordination with Coverdell 
                        education savings accounts.--If, with 
                        respect to an individual for any 
                        taxable year--
                                  (I) the aggregate 
                                distributions to which clauses 
                                (i) and (ii) and section 
                                530(d)(2)(A) apply, exceed
                                  (II) the total amount of 
                                qualified higher education 
                                expenses otherwise taken into 
                                account under clauses (i) and 
                                (ii) (after the application of 
                                clause (v)) for such year,
                        the taxpayer shall allocate such 
                        expenses among such distributions for 
                        purposes of determining the amount of 
                        the exclusion under clauses (i) and 
                        (ii) and section 530(d)(2)(A).
                  (C) Change in beneficiaries or programs.--
                          (i) Rollovers.--Subparagraph (A) 
                        shall not apply to that portion of any 
                        distribution which, within 60 days of 
                        such distribution, is transferred--
                                  (I) to another qualified 
                                tuition program for the benefit 
                                of the designated beneficiary,
                                  (II) to the credit of another 
                                designated beneficiary under a 
                                qualified tuition program who 
                                is a member of the family of 
                                the designated beneficiary with 
                                respect to which the 
                                distribution was made, or
                                  (III) [before January 1, 
                                2026,] to an ABLE account (as 
                                defined in section 529A(e)(6)) 
                                of the designated beneficiary 
                                or a member of the family of 
                                the designated beneficiary.
                        Subclause (III) shall not apply to so 
                        much of a distribution which, when 
                        added to all other contributions made 
                        to the ABLE account for the taxable 
                        year, exceeds the limitation under 
                        section 529A(b)(2)(B)(i).
                          (ii) Change in designated 
                        beneficiaries.--Any change in the 
                        designated beneficiary of an interest 
                        in a qualified tuition program shall 
                        not be treated as a distribution for 
                        purposes of subparagraph (A) if the new 
                        beneficiary is a member of the family 
                        of the old beneficiary.
                          (iii) Limitation on certain 
                        rollovers.--Clause (i)(I) shall not 
                        apply to any transfer if such transfer 
                        occurs within 12 months from the date 
                        of a previous transfer to any qualified 
                        tuition program for the benefit of the 
                        designated beneficiary.
                  (D) Special rule for contributions of 
                refunded amounts.--In the case of a beneficiary 
                who receives a refund of any qualified higher 
                education expenses from an eligible educational 
                institution, subparagraph (A) shall not apply 
                to that portion of any distribution for the 
                taxable year which is recontributed to a 
                qualified tuition program of which such 
                individual is a beneficiary, but only to the 
                extent such recontribution is made not later 
                than 60 days after the date of such refund and 
                does not exceed the refunded amount.
          (4) Estate tax treatment.--
                  (A) In general.--No amount shall be 
                includible in the gross estate of any 
                individual for purposes of chapter 11 by reason 
                of an interest in a qualified tuition program.
                  (B) Amounts includible in estate of 
                designated beneficiary in certain cases.--
                Subparagraph (A) shall not apply to amounts 
                distributed on account of the death of a 
                beneficiary.
                  (C) Amounts includible in estate of donor 
                making excess contributions.--In the case of a 
                donor who makes the election described in 
                paragraph (2)(B) and who dies before the close 
                of the 5-year period referred to in such 
                paragraph, notwithstanding subparagraph (A), 
                the gross estate of the donor shall include the 
                portion of such contributions properly 
                allocable to periods after the date of death of 
                the donor.
          (5) Other gift tax rules.--For purposes of chapters 
        12 and 13--
                  (A) Treatment of distributions.--Except as 
                provided in subparagraph (B), in no event shall 
                a distribution from a qualified tuition program 
                be treated as a taxable gift.
                  (B) Treatment of designation of new 
                beneficiary.--The taxes imposed by chapters 12 
                and 13 shall apply to a transfer by reason of a 
                change in the designated beneficiary under the 
                program (or a rollover to the account of a new 
                beneficiary) unless the new beneficiary is--
                          (i) assigned to the same generation 
                        as (or a higher generation than) the 
                        old beneficiary (determined in 
                        accordance with section 2651), and
                          (ii) a member of the family of the 
                        old beneficiary.
          (6) Additional tax.--The tax imposed by section 
        530(d)(4) shall apply to any payment or distribution 
        from a qualified tuition program in the same manner as 
        such tax applies to a payment or distribution from a 
        Coverdell education savings account. This paragraph 
        shall not apply to any payment or distribution in any 
        taxable year beginning before January 1, 2004, which is 
        includible in gross income but used for qualified 
        higher education expenses of the designated 
        beneficiary.
          (7) Treatment of elementary and secondary tuition.--
        Any reference in this subsection to the term 
        ``qualified higher education expense'' shall include a 
        reference to expenses for tuition in connection with 
        enrollment or attendance at an elementary or secondary 
        public, private, or religious school.
  (d) Reports.--Each officer or employee having control of the 
qualified tuition program or their designee shall make such 
reports regarding such program to the Secretary and to 
designated beneficiaries with respect to contributions, 
distributions, and such other matters as the Secretary may 
require. The reports required by this subsection shall be filed 
at such time and in such manner and furnished to such 
individuals at such time and in such manner as may be required 
by the Secretary.
  (e) Other definitions and special rules.--For purposes of 
this section--
          (1) Designated beneficiary.--The term ``designated 
        beneficiary'' means--
                  (A) the individual designated at the 
                commencement of participation in the qualified 
                tuition program as the beneficiary of amounts 
                paid (or to be paid) to the program,
                  (B) in the case of a change in beneficiaries 
                described in subsection (c)(3)(C), the 
                individual who is the new beneficiary, and
                  (C) in the case of an interest in a qualified 
                tuition program purchased by a State or local 
                government (or agency or instrumentality 
                thereof) or an organization described in 
                section 501(c)(3) and exempt from taxation 
                under section 501(a) as part of a scholarship 
                program operated by such government or 
                organization, the individual receiving such 
                interest as a scholarship.
          (2) Member of family.--The term ``member of the 
        family'' means, with respect to any designated 
        beneficiary--
                  (A) the spouse of such beneficiary;
                  (B) an individual who bears a relationship to 
                such beneficiary which is described in 
                subparagraphs (A) through (G) of [section 
                152(d)(2)] section 7706(d)(2);
                  (C) the spouse of any individual described in 
                subparagraph (B); and
                  (D) any first cousin of such beneficiary.
          (3) Qualified higher education expenses.--
                  (A) In general.--The term ``qualified higher 
                education expenses'' means--
                          (i) tuition, fees, books, supplies, 
                        and equipment required for the 
                        enrollment or attendance of a 
                        designated beneficiary at an eligible 
                        educational institution,
                          (ii) expenses for special needs 
                        services in the case of a special needs 
                        beneficiary which are incurred in 
                        connection with such enrollment or 
                        attendance, and
                          (iii) expenses for the purchase of 
                        computer or peripheral equipment (as 
                        defined in section 168(i)(2)(B)), 
                        computer software (as defined in 
                        section 197(e)(3)(B)), or Internet 
                        access and related services, if such 
                        equipment, software, or services are to 
                        be used primarily by the beneficiary 
                        during any of the years the beneficiary 
                        is enrolled at an eligible educational 
                        institution.
                Clause (iii) shall not include expenses for 
                computer software designed for sports, games, 
                or hobbies unless the software is predominantly 
                educational in nature. The amount of cash 
                distributions from all qualified tuition 
                programs described in subsection (b)(1)(A)(ii) 
                with respect to a beneficiary during any 
                taxable year shall, in the aggregate, include 
                not more than $10,000 in expenses described in 
                subsection (c)(7) incurred during the taxable 
                year.
                  (B) Room and board included for students who 
                are at least half-time.--
                          (i) In general.--In the case of an 
                        individual who is an eligible student 
                        (as defined in section 25A(b)(3)) for 
                        any academic period, such term shall 
                        also include reasonable costs for such 
                        period (as determined under the 
                        qualified tuition program) incurred by 
                        the designated beneficiary for room and 
                        board while attending such institution. 
                        For purposes of subsection (b)(6), a 
                        designated beneficiary shall be treated 
                        as meeting the requirements of this 
                        clause.
                          (ii) Limitation.--The amount treated 
                        as qualified higher education expenses 
                        by reason of clause (i) shall not 
                        exceed--
                                  (I) the allowance (applicable 
                                to the student) for room and 
                                board included in the cost of 
                                attendance (as defined in 
                                section 472 of the Higher 
                                Education Act of 1965 (20 
                                U.S.C. 1087ll), as in effect on 
                                the date of the enactment of 
                                the Economic Growth and Tax 
                                Relief Reconciliation Act of 
                                2001) as determined by the 
                                eligible educational 
                                institution for such period, or
                                  (II) if greater, the actual 
                                invoice amount the student 
                                residing in housing owned or 
                                operated by the eligible 
                                educational institution is 
                                charged by such institution for 
                                room and board costs for such 
                                period.
          (4) Application of section 514.--An interest in a 
        qualified tuition program shall not be treated as debt 
        for purposes of section 514.
          (5) Eligible educational institution.--The term 
        ``eligible educational institution'' means an 
        institution--
                  (A) which is described in section 481 of the 
                Higher Education Act of 1965 (20 U.S.C. 1088), 
                as in effect on the date of the enactment of 
                this paragraph, and
                  (B) which is eligible to participate in a 
                program under title IV of such Act.
  (f) Regulations.--Notwithstanding any other provision of this 
section, the Secretary shall prescribe such regulations as may 
be necessary or appropriate to carry out the purposes of this 
section and to prevent abuse of such purposes, including 
regulations under chapters 11, 12, and 13 of this title.

SEC. 529A. QUALIFIED ABLE PROGRAMS.

  (a) General rule.--A qualified ABLE program shall be exempt 
from taxation under this subtitle. Notwithstanding the 
preceding sentence, such program shall be subject to the taxes 
imposed by section 511 (relating to imposition of tax on 
unrelated business income of charitable organizations).
  (b) Qualified ABLE program.--For purposes of this section--
          (1) In general.--The term ``qualified ABLE program'' 
        means a program established and maintained by a State, 
        or agency or instrumentality thereof--
                  (A) under which a person may make 
                contributions for a taxable year, for the 
                benefit of an individual who is an eligible 
                individual for such taxable year, to an ABLE 
                account which is established for the purpose of 
                meeting the qualified disability expenses of 
                the designated beneficiary of the account,
                  (B) which limits a designated beneficiary to 
                1 ABLE account for purposes of this section, 
                and
                  (C) which meets the other requirements of 
                this section.
          (2) Cash contributions.--A program shall not be 
        treated as a qualified ABLE program unless it provides 
        that no contribution will be accepted--
                  (A) unless it is in cash, or
                  (B) except in the case of contributions under 
                subsection (c)(1)(C), if such contribution to 
                an ABLE account would result in aggregate 
                contributions from all contributors to the ABLE 
                account for the taxable year exceeding the sum 
                of--
                          (i) the amount in effect under 
                        section 2503(b) for the calendar year 
                        in which the taxable year begins, plus
                          (ii) in the case of any contribution 
                        by a designated beneficiary described 
                        in paragraph (7) [before January 1, 
                        2026], the lesser of--
                                  (I) compensation (as defined 
                                by section 219(f)(1)) 
                                includible in the designated 
                                beneficiary's gross income for 
                                the taxable year, or
                                  (II) an amount equal to the 
                                poverty line for a one-person 
                                household, as determined for 
                                the calendar year preceding the 
                                calendar year in which the 
                                taxable year begins.
        For purposes of this paragraph, rules similar to the 
        rules of section 408(d)(4) (determined without regard 
        to subparagraph (B) thereof) shall apply. A designated 
        beneficiary (or a person acting on behalf of such 
        beneficiary) shall maintain adequate records for 
        purposes of ensuring, and shall be responsible for 
        ensuring, that the requirements of subparagraph (B)(ii) 
        are met.
          (3) Separate accounting.--A program shall not be 
        treated as a qualified ABLE program unless it provides 
        separate accounting for each designated beneficiary.
          (4) Limited investment direction.--A program shall 
        not be treated as a qualified ABLE program unless it 
        provides that any designated beneficiary under such 
        program may, directly or indirectly, direct the 
        investment of any contributions to the program (or any 
        earnings thereon) no more than 2 times in any calendar 
        year.
          (5) No pledging of interest as security.--A program 
        shall not be treated as a qualified ABLE program if it 
        allows any interest in the program or any portion 
        thereof to be used as security for a loan.
          (6) Prohibition on excess contributions.--A program 
        shall not be treated as a qualified ABLE program unless 
        it provides adequate safeguards to prevent aggregate 
        contributions on behalf of a designated beneficiary in 
        excess of the limit established by the State under 
        section 529(b)(6). For purposes of the preceding 
        sentence, aggregate contributions include contributions 
        under any prior qualified ABLE program of any State or 
        agency or instrumentality thereof.
          (7) Special rules related to contribution limit.--For 
        purposes of paragraph (2)(B)(ii)--
                  (A) Designated beneficiary.--A designated 
                beneficiary described in this paragraph is an 
                employee (including an employee within the 
                meaning of section 401(c)) with respect to 
                whom--
                          (i) no contribution is made for the 
                        taxable year to a defined contribution 
                        plan (within the meaning of section 
                        414(i)) with respect to which the 
                        requirements of section 401(a) or 
                        403(a) are met,
                          (ii) no contribution is made for the 
                        taxable year to an annuity contract 
                        described in section 403(b), and
                          (iii) no contribution is made for the 
                        taxable year to an eligible deferred 
                        compensation plan described in section 
                        457(b).
                  (B) Poverty line.--The term ``poverty line'' 
                has the meaning given such term by section 673 
                of the Community Services Block Grant Act (42 
                U.S.C. 9902).
  (c) Tax treatment.--
          (1) Distributions.--
                  (A) In general.--Any distribution under a 
                qualified ABLE program shall be includible in 
                the gross income of the distributee in the 
                manner as provided under section 72 to the 
                extent not excluded from gross income under any 
                other provision of this chapter.
                  (B) Distributions for qualified disability 
                expenses.--For purposes of this paragraph, if 
                distributions from a qualified ABLE program--
                          (i) do not exceed the qualified 
                        disability expenses of the designated 
                        beneficiary, no amount shall be 
                        includible in gross income, and
                          (ii) in any other case, the amount 
                        otherwise includible in gross income 
                        shall be reduced by an amount which 
                        bears the same ratio to such amount as 
                        such expenses bear to such 
                        distributions.
                  (C) Change in designated beneficiaries or 
                programs.--
                          (i) Rollovers from ABLE accounts.--
                        Subparagraph (A) shall not apply to any 
                        amount paid or distributed from an ABLE 
                        account to the extent that the amount 
                        received is paid, not later than the 
                        60th day after the date of such payment 
                        or distribution, into another ABLE 
                        account for the benefit of the same 
                        designated beneficiary or an eligible 
                        individual who is a member of the 
                        family of the designated beneficiary.
                          (ii) Change in designated 
                        beneficiaries.--Any change in the 
                        designated beneficiary of an interest 
                        in a qualified ABLE program during a 
                        taxable year shall not be treated as a 
                        distribution for purposes of 
                        subparagraph (A) if the new beneficiary 
                        is an eligible individual for such 
                        taxable year and a member of the family 
                        of the former beneficiary.
                          (iii) Limitation on certain 
                        rollovers.--Clause (i) shall not apply 
                        to any transfer if such transfer occurs 
                        within 12 months from the date of a 
                        previous transfer to any qualified ABLE 
                        program for the benefit of the 
                        designated beneficiary.
          (2) Gift tax rules.--For purposes of chapters 12 and 
        13--
                  (A) Contributions.--Any contribution to a 
                qualified ABLE program on behalf of any 
                designated beneficiary--
                          (i) shall be treated as a completed 
                        gift to such designated beneficiary 
                        which is not a future interest in 
                        property, and
                          (ii) shall not be treated as a 
                        qualified transfer under section 
                        2503(e).
                  (B) Treatment of distributions.--In no event 
                shall a distribution from an ABLE account to 
                such account's designated beneficiary be 
                treated as a taxable gift.
                  (C) Treatment of transfer to new designated 
                beneficiary.--The taxes imposed by chapters 12 
                and 13 shall not apply to a transfer by reason 
                of a change in the designated beneficiary under 
                subsection (c)(1)(C).
          (3) Additional tax for distributions not used for 
        disability expenses.--
                  (A) In general.--The tax imposed by this 
                chapter for any taxable year on any taxpayer 
                who receives a distribution from a qualified 
                ABLE program which is includible in gross 
                income shall be increased by 10 percent of the 
                amount which is so includible.
                  (B) Exception.--Subparagraph (A) shall not 
                apply if the payment or distribution is made to 
                a beneficiary (or to the estate of the 
                designated beneficiary) on or after the death 
                of the designated beneficiary.
                  (C) Contributions returned before certain 
                date.--Subparagraph (A) shall not apply to the 
                distribution of any contribution made during a 
                taxable year on behalf of the designated 
                beneficiary if--
                          (i) such distribution is received on 
                        or before the day prescribed by law 
                        (including extensions of time) for 
                        filing such designated beneficiary's 
                        return for such taxable year, and
                          (ii) such distribution is accompanied 
                        by the amount of net income 
                        attributable to such excess 
                        contribution.
                Any net income described in clause (ii) shall 
                be included in gross income for the taxable 
                year in which such excess contribution was 
                made.
          (4) Loss of ABLE account treatment.--If an ABLE 
        account is established for a designated beneficiary, no 
        account subsequently established for such beneficiary 
        shall be treated as an ABLE account. The preceding 
        sentence shall not apply in the case of an account 
        established for purposes of a rollover described in 
        paragraph (1)(C)(i) of this section if the transferor 
        account is closed as of the end of the 60th day 
        referred to in paragraph (1)(C)(i).
  (d) Reports.--
          (1) In general.--Each officer or employee having 
        control of the qualified ABLE program or their designee 
        shall make such reports regarding such program to the 
        Secretary and to designated beneficiaries with respect 
        to contributions, distributions, the return of excess 
        contributions, and such other matters as the Secretary 
        may require.
          (2) Certain aggregated information.--For research 
        purposes, the Secretary shall make available to the 
        public reports containing aggregate information, by 
        diagnosis and other relevant characteristics, on 
        contributions and distributions from the qualified ABLE 
        program. In carrying out the preceding sentence an item 
        may not be made available to the public if such item 
        can be associated with, or otherwise identify, directly 
        or indirectly, a particular individual.
          (3) Notice of establishment of ABLE account.--A 
        qualified ABLE program shall submit a notice to the 
        Secretary upon the establishment of an ABLE account. 
        Such notice shall contain the name of the designated 
        beneficiary and such other information as the Secretary 
        may require.
          (4) Electronic distribution statements.--For purposes 
        of section 103 of the Stephen Beck, Jr., ABLE Act of 
        2014, States shall submit electronically on a monthly 
        basis to the Commissioner of Social Security, in the 
        manner specified by the Commissioner, statements on 
        relevant distributions and account balances from all 
        ABLE accounts.
          (5) Requirements.--The reports and notices required 
        by paragraphs (1), (2), and (3) shall be filed at such 
        time and in such manner and furnished to such 
        individuals at such time and in such manner as may be 
        required by the Secretary.
  (e) Other definitions and special rules.--For purposes of 
this section--
          (1) Eligible individual.--An individual is an 
        eligible individual for a taxable year if during such 
        taxable year--
                  (A) the individual is entitled to benefits 
                based on blindness or disability under title II 
                or XVI of the Social Security Act, and such 
                blindness or disability occurred before the 
                date on which the individual attained age 26, 
                or
                  (B) a disability certification with respect 
                to such individual is filed with the Secretary 
                for such taxable year.
          (2) Disability certification.--
                  (A) In general.--The term ``disability 
                certification'' means, with respect to an 
                individual, a certification to the satisfaction 
                of the Secretary by the individual or the 
                parent or guardian of the individual that--
                          (i) certifies that--
                                  (I) the individual has a 
                                medically determinable physical 
                                or mental impairment, which 
                                results in marked and severe 
                                functional limitations, and 
                                which can be expected to result 
                                in death or which has lasted or 
                                can be expected to last for a 
                                continuous period of not less 
                                than 12 months, or is blind 
                                (within the meaning of section 
                                1614(a)(2) of the Social 
                                Security Act), and
                                  (II) such blindness or 
                                disability occurred before the 
                                date on which the individual 
                                attained age 26, and
                          (ii) includes a copy of the 
                        individual's diagnosis relating to the 
                        individual's relevant impairment or 
                        impairments, signed by a physician 
                        meeting the criteria of section 
                        1861(r)(1) of the Social Security Act.
                  (B) Restriction on use of certification.--No 
                inference may be drawn from a disability 
                certification for purposes of establishing 
                eligibility for benefits under title II, XVI, 
                or XIX of the Social Security Act.
          (3) Designated beneficiary.--The term ``designated 
        beneficiary'' in connection with an ABLE account 
        established under a qualified ABLE program means the 
        eligible individual who established an ABLE account and 
        is the owner of such account.
          (4) Member of family.--The term ``member of the 
        family'' means, with respect to any designated 
        beneficiary, an individual who bears a relationship to 
        such beneficiary which is described in [section 
        152(d)(2)(B)] section 7706(d)(2)(B). For purposes of 
        the preceding sentence, a rule similar to the rule of 
        [section 152(f)(1)(B)] section 7706(f)(1)(B) shall 
        apply.
          (5) Qualified disability expenses.--The term 
        ``qualified disability expenses'' means any expenses 
        related to the eligible individual's blindness or 
        disability which are made for the benefit of an 
        eligible individual who is the designated beneficiary, 
        including the following expenses: education, housing, 
        transportation, employment training and support, 
        assistive technology and personal support services, 
        health, prevention and wellness, financial management 
        and administrative services, legal fees, expenses for 
        oversight and monitoring, funeral and burial expenses, 
        and other expenses, which are approved by the Secretary 
        under regulations and consistent with the purposes of 
        this section.
          (6) ABLE account.--The term ``ABLE account'' means an 
        account established by an eligible individual, owned by 
        such eligible individual, and maintained under a 
        qualified ABLE program.
  (f) Transfer to State.--Subject to any outstanding payments 
due for qualified disability expenses, upon the death of the 
designated beneficiary, all amounts remaining in the qualified 
ABLE account not in excess of the amount equal to the total 
medical assistance paid for the designated beneficiary after 
the establishment of the account, net of any premiums paid from 
the account or paid by or on behalf of the beneficiary to a 
Medicaid Buy-In program under any State Medicaid plan 
established under title XIX of the Social Security Act, shall 
be distributed to such State upon filing of a claim for payment 
by such State. For purposes of this paragraph, the State shall 
be a creditor of an ABLE account and not a beneficiary. 
Subsection (c)(3) shall not apply to a distribution under the 
preceding sentence.
  (g) Regulations.--The Secretary shall prescribe such 
regulations or other guidance as the Secretary determines 
necessary or appropriate to carry out the purposes of this 
section, including regulations--
          (1) to enforce the 1 ABLE account per eligible 
        individual limit,
          (2) providing for the information required to be 
        presented to open an ABLE account,
          (3) to generally define qualified disability 
        expenses,
          (4) developed in consultation with the Commissioner 
        of Social Security, relating to disability 
        certifications and determinations of disability, 
        including those conditions deemed to meet the 
        requirements of subsection (e)(1)(B),
          (5) to prevent fraud and abuse with respect to 
        amounts claimed as qualified disability expenses,
          (6) under chapters 11, 12, and 13 of this title, and
          (7) to allow for transfers from one ABLE account to 
        another ABLE account.

Subchapter J--Estates, Trusts, Beneficiaries, and Decedents

           *       *       *       *       *       *       *

PART I--ESTATES, TRUSTS, AND BENEFICIARIES

           *       *       *       *       *       *       *

Subpart A--General Rules for Taxation of Estates and Trusts

           *       *       *       *       *       *       *

SEC. 641. IMPOSITION OF TAX.

  (a) Application of tax.--The tax imposed by section 1(e) 
shall apply to the taxable income of estates or of any kind of 
property held in trust, including--
          (1) income accumulated in trust for the benefit of 
        unborn or unascertained persons or persons with 
        contingent interests, and income accumulated or held 
        for future distribution under the terms of the will or 
        trust;
          (2) income which is to be distributed currently by 
        the fiduciary to the beneficiaries, and income 
        collected by a guardian of an infant which is to be 
        held or distributed as the court may direct;
          (3) income received by estates of deceased persons 
        during the period of administration or settlement of 
        the estate; and
          (4) income which, in the discretion of the fiduciary, 
        may be either distributed to the beneficiaries or 
        accumulated.
  (b) Computation and payment.--The taxable income of an estate 
or trust shall be computed in the same manner as in the case of 
an individual, except as otherwise provided in this part. The 
tax shall be computed on such taxable income and shall be paid 
by the fiduciary. For purposes of this subsection, a foreign 
trust or foreign estate shall be treated as a nonresident alien 
individual who is not present in the United States at any time.
  (c) Special rules for taxation of electing small business 
trusts.--
          (1) In general.--For purposes of this chapter--
                  (A) the portion of any electing small 
                business trust which consists of stock in 1 or 
                more S corporations shall be treated as a 
                separate trust, and
                  (B) the amount of the tax imposed by this 
                chapter on such separate trust shall be 
                determined with the modifications of paragraph 
                (2).
          (2) Modifications.--For purposes of paragraph (1), 
        the modifications of this paragraph are the following:
                  (A) Except as provided in section 1(h), the 
                amount of the tax imposed by section 1(e) shall 
                be determined by using the highest rate of tax 
                set forth in section 1(e).
                  (B) The exemption amount under section 55(d) 
                shall be zero.
                  (C) The only items of income, loss, 
                deduction, or credit to be taken into account 
                are the following:
                          (i) The items required to be taken 
                        into account under section 1366.
                          (ii) Any gain or loss from the 
                        disposition of stock in an S 
                        corporation.
                          (iii) To the extent provided in 
                        regulations, State or local income 
                        taxes or administrative expenses to the 
                        extent allocable to items described in 
                        clauses (i) and (ii).
                          (iv) Any interest expense paid or 
                        accrued on indebtedness incurred to 
                        acquire stock in an S corporation.
                No deduction or credit shall be allowed for any 
                amount not described in this paragraph, and no 
                item described in this paragraph shall be 
                apportioned to any beneficiary.
                  (D) No amount shall be allowed under 
                paragraph (1) or (2) of section 1211(b).
                  [(E)(i) Section 642(c) shall not apply.
                  [(ii) For purposes of section 170(b)(1)(G), 
                adjusted gross income shall be computed in the 
                same manner as in the case of an individual, 
                except that the deductions for costs which are 
                paid or incurred in connection with the 
                administration of the trust and which would not 
                have been incurred if the property were not 
                held in such trust shall be treated as 
                allowable in arriving at adjusted gross 
                income.]
                  (E) Section 642(c) shall not apply.
          (3) Treatment of remainder of trust and 
        distributions.--For purposes of determining--
                  (A) the amount of the tax imposed by this 
                chapter on the portion of any electing small 
                business trust not treated as a separate trust 
                under paragraph (1), and
                  (B) the distributable net income of the 
                entire trust, the items referred to in 
                paragraph (2)(C) shall be excluded. Except as 
                provided in the preceding sentence, this 
                subsection shall not affect the taxation of any 
                distribution from the trust.
          (4) Treatment of unused deductions where termination 
        of separate trust.--If a portion of an electing small 
        business trust ceases to be treated as a separate trust 
        under paragraph (1), any carryover or excess deduction 
        of the separate trust which is referred to in section 
        642(h) shall be taken into account by the entire trust.
          (5) Electing small business trust.--For purposes of 
        this subsection, the term ``electing small business 
        trust'' has the meaning given such term by section 
        1361(e)(1).
  (d) Computation of Adjusted Gross Income.--For purposes of 
this title, the adjusted gross income of an estate or trust 
shall be computed in the same manner as in the case of an 
individual, except that--
          (1) the deductions for costs which are paid or 
        incurred in connection with the administration of the 
        estate or trust and which would not have been incurred 
        if the property were not held in such trust or estate, 
        and
          (2) the deductions allowable under sections 642(b), 
        651, and 661,
shall be treated as allowable in arriving at adjusted gross 
income.

SEC. 642. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.

  (a) Foreign tax credit allowed.--An estate or trust shall be 
allowed the credit against tax for taxes imposed by foreign 
countries and possessions of the United States, to the extent 
allowed by section 901, only in respect of so much of the taxes 
described in such section as is not properly allocable under 
such section to the beneficiaries.
  (b)  [Deduction for personal exemption] Basic Deduction.--
          (1) Estates.--An estate shall be allowed a deduction 
        of $600.
          (2) Trusts.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, a trust shall be allowed a 
                deduction of $100.
                  (B) Trusts distributing income currently.--A 
                trust which, under its governing instrument, is 
                required to distribute all of its income 
                currently shall be allowed a deduction of $300.
                  (C) Disability trusts.--
                          (i) In general.--A qualified 
                        disability trust shall be allowed a 
                        deduction equal to [the exemption 
                        amount under section 151(d), 
                        determined--] the dollar amount in 
                        effect under section 7706(d)(1)(B).
                                  [(I) by treating such trust 
                                as an individual described in 
                                section
                                  [(II) by applying section 
                                67(e) (without the reference to 
                                section 642(b)) for purposes of 
                                determining the adjusted gross 
                                income of the trust.]
                          (ii) Qualified disability trust.--For 
                        purposes of clause (i), the term 
                        ``qualified disability trust'' means 
                        any trust if--
                                  (I) such trust is a 
                                disability trust described in 
                                subsection (c)(2)(B)(iv) of 
                                section 1917 of the Social 
                                Security Act (42 U.S.C. 1396p), 
                                and
                                  (II) all of the beneficiaries 
                                of the trust as of the close of 
                                the taxable year are determined 
                                by the Commissioner of Social 
                                Security to have been disabled 
                                (within the meaning of section 
                                1614(a)(3) of the Social 
                                Security Act, 42 U.S.C. 
                                1382c(a)(3)) for some portion 
                                of such year.
                        A trust shall not fail to meet the 
                        requirements of subclause (II) merely 
                        because the corpus of the trust may 
                        revert to a person who is not so 
                        disabled after the trust ceases to have 
                        any beneficiary who is so disabled.
                          [(iii) Years when personal exemption 
                        amount is zero.--
                                  [(I) In general.--In the case 
                                of any taxable year in which 
                                the exemption amount under 
                                section 151(d) is zero, clause 
                                (i) shall be applied by 
                                substituting ``$4,150'' for 
                                ``the exemption amount under 
                                section 151(d)''.
                                  [(II) Inflation adjustment.--
                                In the case of any taxable year 
                                beginning in a calendar year 
                                after 2018, the $4,150 amount 
                                in subparagraph (A) shall be 
                                increased in the same manner as 
                                provided in section 
                                6334(d)(4)(C).]
          [(3) Deductions in lieu of personal exemption.--The 
        deductions allowed by this subsection shall be in lieu 
        of the deductions allowed under section 151 (relating 
        to deduction for personal exemption).]
  (c) Deduction for amounts paid or permanently set aside for a 
charitable purpose.--
          (1) General rule.--In the case of an estate or trust 
        (other than a trust meeting the specifications of 
        subpart B), there shall be allowed as a deduction in 
        computing its taxable income (in lieu of the deduction 
        allowed by section 170(a), relating to deduction for 
        charitable, etc., contributions and gifts) any amount 
        of the gross income, without limitation, which pursuant 
        to the terms of the governing instrument is, during the 
        taxable year, paid for a purpose specified in section 
        170(c) (determined without regard to section 
        170(c)(2)(A)). If a charitable contribution is paid 
        after the close of such taxable year and on or before 
        the last day of the year following the close of such 
        taxable year, then the trustee or administrator may 
        elect to treat such contribution as paid during such 
        taxable year. The election shall be made at such time 
        and in such manner as the Secretary prescribes by 
        regulations.
          (2) Amounts permanently set aside.--In the case of an 
        estate, and in the case of a trust (other than a trust 
        meeting the specifications of subpart B) required by 
        the terms of its governing instrument to set aside 
        amounts which was--
                  (A) created on or before October 9, 1969, 
                if--
                          (i) an irrevocable remainder interest 
                        is transferred to or for the use of an 
                        organization described in section 
                        170(c), or
                          (ii) the grantor is at all times 
                        after October 9, 1969, under a mental 
                        disability to change the terms of the 
                        trust; or
                  (B) established by a will executed on or 
                before October 9, 1969, if--
                          (i) the testator dies before October 
                        9, 1972, without having republished the 
                        will after October 9, 1969, by codicil 
                        or otherwise,
                          (ii) the testator at no time after 
                        October 9, 1969, had the right to 
                        change the portions of the will which 
                        pertain to the trust, or
                          (iii) the will is not republished by 
                        codicil or otherwise before October 9, 
                        1972, and the testator is on such date 
                        and at all times thereafter under a 
                        mental disability to republish the will 
                        by codicil or otherwise,
        there shall also be allowed as a deduction in computing 
        its taxable income any amount of the gross income, 
        without limitation, which pursuant to the terms of the 
        governing instrument is, during the taxable year, 
        permanently set aside for a purpose specified in 
        section 170(c), or is to be used exclusively for 
        religious, charitable, scientific, literary, or 
        educational purposes, or for the prevention of cruelty 
        to children or animals, or for the establishment, 
        acquisition, maintenance, or operation of a public 
        cemetery not operated for profit. In the case of a 
        trust, the preceding sentence shall apply only to gross 
        income earned with respect to amounts transferred to 
        the trust before October 9, 1969, or transferred under 
        a will to which subparagraph (B) applies.
          (3) Pooled income funds.--In the case of a pooled 
        income fund (as defined in paragraph (5)), there shall 
        also be allowed as a deduction in computing its taxable 
        income any amount of the gross income attributable to 
        gain from the sale of a capital asset held for more 
        than 1 year, without limitation, which pursuant to the 
        terms of the governing instrument is, during the 
        taxable year, permanently set aside for a purpose 
        specified in section 170(c).
          (4) Adjustments.--To the extent that the amount 
        otherwise allowable as a deduction under this 
        subsection consists of gain described in section 
        1202(a), proper adjustment shall be made for any 
        exclusion allowable to the estate or trust under 
        section 1202. In the case of a trust, the deduction 
        allowed by this subsection shall be subject to section 
        681 (relating to unrelated business income).
          (5) Definition of pooled income fund.--For purposes 
        of paragraph (3), a pooled income fund is a trust--
                  (A) to which each donor transfers property, 
                contributing an irrevocable remainder interest 
                in such property to or for the use of an 
                organization described in section 170(b)(1)(A) 
                (other than in clauses (vii) or (viii)), and 
                retaining an income interest for the life of 
                one or more beneficiaries (living at the time 
                of such transfer),
                  (B) in which the property transferred by each 
                donor is commingled with property transferred 
                by other donors who have made or make similar 
                transfers,
                  (C) which cannot have investments in 
                securities which are exempt from the taxes 
                imposed by this subtitle,
                  (D) which includes only amounts received from 
                transfers which meet the requirements of this 
                paragraph,
                  (E) which is maintained by the organization 
                to which the remainder interest is contributed 
                and of which no donor or beneficiary of an 
                income interest is a trustee, and
                  (F) from which each beneficiary of an income 
                interest receives income, for each year for 
                which he is entitled to receive the income 
                interest referred to in subparagraph (A), 
                determined by the rate of return earned by the 
                trust for such year.
        For purposes of determining the amount of any 
        charitable contribution allowable by reason of a 
        transfer of property to a pooled fund, the value of the 
        income interest shall be determined on the basis of the 
        highest rate of return earned by the fund for any of 
        the 3 taxable years immediately preceding the taxable 
        year of the fund in which the transfer is made. In the 
        case of funds in existence less than 3 taxable years 
        preceding the taxable year of the fund in which a 
        transfer is made the rate of return shall be deemed to 
        be 6 percent per annum, except that the Secretary may 
        prescribe a different rate of return.
          (6) Taxable private foundations.--In the case of a 
        private foundation which is not exempt from taxation 
        under section 501(a) for the taxable year, the 
        provisions of this subsection shall not apply and the 
        provisions of section 170 shall apply.
  (d) Net operating loss deduction.--The benefit of the 
deduction for net operating losses provided by section 172 
shall be allowed to estates and trusts under regulations 
prescribed by the Secretary.
  (e) Deduction for depreciation and depletion.--An estate or 
trust shall be allowed the deduction for depreciation and 
depletion only to the extent not allowable to beneficiaries 
under section 167(d) and 611(b).
  (f) Amortization deductions.--The benefit of the deductions 
for amortization provided by sections 169 and 197 shall be 
allowed to estates and trusts in the same manner as in the case 
of an individual. The allowable deduction shall be apportioned 
between the income beneficiaries and the fiduciary under 
regulations prescribed by the Secretary.
  (g) Disallowance of double deductions.--Amounts allowable 
under section 2053 or 2054 as a deduction in computing the 
taxable estate of a decedent shall not be allowed as a 
deduction (or as an offset against the sales price of property 
in determining gain or loss) in computing the taxable income of 
the estate or of any other person, unless there is filed, 
within the time and in the manner and form prescribed by the 
Secretary, a statement that the amounts have not been allowed 
as deductions under section 2053 or 2054 and a waiver of the 
right to have such amounts allowed at any time as deductions 
under section 2053 or 2054. Rules similar to the rules of the 
preceding sentence shall apply to amounts which may be taken 
into account under section 2621(a)(2) or 2622(b). This 
subsection shall not apply with respect to deductions allowed 
under part II (relating to income in respect of decedents).
  (h) Unused loss carryovers and excess deductions on 
termination available to beneficiaries.--If on the termination 
of an estate or trust, the estate or trust has--
          (1) a net operating loss carryover under section 172 
        or a capital loss carryover under section 1212, or
          (2) for the last taxable year of the estate or trust 
        deductions (other than the deductions allowed under 
        subsections (b) or (c)) in excess of gross income for 
        such year,
then such carryover or such excess shall be allowed as a 
deduction, in accordance with regulations prescribed by the 
Secretary, to the beneficiaries succeeding to the property of 
the estate or trust.
  (i) Certain distributions by cemetery perpetual care funds.--
In the case of a cemetery perpetual care fund which--
          (1) was created pursuant to local law by a taxable 
        cemetery corporation for the care and maintenance of 
        cemetery property, and
          (2) is treated for the taxable year as a trust for 
        purposes of this subchapter,
any amount distributed by such fund for the care and 
maintenance of gravesites which have been purchased from the 
cemetery corporation before the beginning of the taxable year 
of the trust and with respect to which there is an obligation 
to furnish care and maintenance shall be considered to be a 
distribution solely for purposes of sections 651 and 661, but 
only to the extent that the aggregate amount so distributed 
during the taxable year does not exceed $5 multiplied by the 
aggregate number of such gravesites.

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

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

           *       *       *       *       *       *       *

Subchapter K--Partners and Partnerships

           *       *       *       *       *       *       *

PART I--DETERMINATION OF TAX LIABILITY

           *       *       *       *       *       *       *

SEC. 703. PARTNERSHIP COMPUTATIONS.

  (a) Income and deductions.--The taxable income of a 
partnership shall be computed in the same manner as in the case 
of an individual except that--
          (1) the items described in section 702(a) shall be 
        separately stated, and
          (2) the following deductions shall not be allowed to 
        the partnership:
                  [(A) the deductions for personal exemptions 
                provided in section 151,]
                  [(B)] (A) the deduction for taxes provided in 
                section 164(a) with respect to taxes, described 
                in section 901, paid or accrued to foreign 
                countries and to possessions of the United 
                States,
                  [(C)] (B) the deduction for charitable 
                contributions provided in section 170,
                  [(D)] (C) the net operating loss deduction 
                provided in section 172,
                  [(E)] (D) the additional itemized deductions 
                for individuals provided in part VII of 
                subchapter B (sec. 211 and following), and
                  [(F)] (E) the deduction for depletion under 
                section 611 with respect to oil and gas wells.
  (b) Elections of the partnership.--Any election affecting the 
computation of taxable income derived from a partnership shall 
be made by the partnership, except that any election under--
          (1) subsection (b)(5) or (c)(3) of section 108 
        (relating to income from discharge of indebtedness),
          (2) section 617 (relating to deduction and recapture 
        of certain mining exploration expenditures), or
          (3) section 901 (relating to taxes of foreign 
        countries and possessions of the United States),
shall be made by each partner separately.

 Subchapter N--Tax Based on Income From Sources Within or Without the 
United States

           *       *       *       *       *       *       *

PART II--NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

           *       *       *       *       *       *       *

Subpart A--Nonresident Alien Individuals

           *       *       *       *       *       *       *

SEC. 873. DEDUCTIONS.

  (a) General rule.--In the case of a nonresident alien 
individual, the deductions shall be allowed only for purposes 
of section 871(b) and (except as provided by subsection (b)) 
only if and to the extent that they are connected with income 
which is effectively connected with the conduct of a trade or 
business within the United States; and the proper apportionment 
and allocation of the deductions for this purpose shall be 
determined as provided in regulations prescribed by the 
Secretary.
  (b) Exceptions.--The following deductions shall be allowed 
whether or not they are connected with income which is 
effectively connected with the conduct of a trade or business 
within the United States:
          (1) Losses.--The deduction allowed by section 165 for 
        casualty or theft losses described in paragraph (2) or 
        (3) of section 165(c), but only if the loss is of 
        property located within the United States.
          (2) Charitable contributions.--The deduction for 
        charitable contributions and gifts allowed by section 
        170.
          [(3) Personal exemption.--The deduction for personal 
        exemptions allowed by section 151, except that only one 
        exemption shall be allowed under section 151 unless the 
        taxpayer is a resident of a contiguous country or is a 
        national of the United States.]
  (c) Cross reference.--For rule that certain foreign taxes are 
not to be taken into account in determining deduction or 
credit, see section 906(b)(1).

SEC. 874. ALLOWANCE OF DEDUCTIONS AND CREDITS.

  (a) Return prerequisite to allowance.--A nonresident alien 
individual shall receive the benefit of the deductions and 
credits allowed to him in this subtitle only by filing or 
causing to be filed with the Secretary a true and accurate 
return, in the manner prescribed in subtitle F (sec. 6001 and 
following, relating to procedure and administration), including 
therein all the information which the Secretary may deem 
necessary for the calculation of such deductions and credits. 
This subsection shall not be construed to deny the credits 
provided by sections 31 and 33 for tax withheld at source or 
the credit provided by section 34 for certain uses of gasoline 
and special fuels.
  [(b) Tax withheld at source.--The benefit of the deduction 
for exemptions under section 151 may, in the discretion of the 
Secretary, and under regulations prescribed by the Secretary, 
be received by a non-resident alien individual entitled 
thereto, by filing a claim therefor with the withholding 
agent.]
  [(c)] (b) Foreign tax credit.--Except as provided in section 
906, a nonresident alien individual shall not be allowed the 
credits against the tax for taxes of foreign countries and 
possessions of the United States allowed by section 901.

           *       *       *       *       *       *       *

Subpart D--Miscellaneous Provisions

           *       *       *       *       *       *       *

SEC. 891. DOUBLING OF RATES OF TAX ON CITIZENS AND CORPORATIONS OF 
                    CERTAIN FOREIGN COUNTRIES.

  Whenever the President finds that, under the laws of any 
foreign country, citizens or corporations of the United States 
are being subjected to discriminatory or extraterritorial 
taxes, the President shall so proclaim and the rates of tax 
imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 
shall, for the taxable year during which such proclamation is 
made and for each taxable year thereafter, be doubled in the 
case of each citizen and corporation of such foreign country; 
but the tax at such doubled rate shall be considered as imposed 
by such sections as the case may be. In no case shall this 
section operate to increase the taxes imposed by such sections 
(computed without regard to this section) to an amount in 
excess of 80 percent of the taxable income of the taxpayer 
(computed without regard to the deductions allowable [under 
section 151 and] under part VIII of subchapter B). Whenever the 
President finds that the laws of any foreign country with 
respect to which the President has made a proclamation under 
the preceding provisions of this section have been modified so 
that discriminatory and extraterritorial taxes applicable to 
citizens and corporations of the United States have been 
removed, he shall so proclaim, and the provisions of this 
section providing for doubled rates of tax shall not apply to 
any citizen or corporation of such foreign country with respect 
to any taxable year beginning after such proclamation is made.

           *       *       *       *       *       *       *

PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

           *       *       *       *       *       *       *

Subpart A--Foreign Tax Credit

           *       *       *       *       *       *       *

SEC. 904. LIMITATION ON CREDIT.

  (a) Limitation.--The total amount of the credit taken under 
section 901(a) shall not exceed the same proportion of the tax 
against which such credit is taken which the taxpayer's taxable 
income from sources without the United States (but not in 
excess of the taxpayer's entire taxable income) bears to his 
entire taxable income for the same taxable year.
  (b) Taxable income for purpose of computing limitation.--
          [(1) Personal exemptions.--For purposes of subsection 
        (a), the taxable income in the case of an individual, 
        estate, or trust shall be computed without any 
        deduction for personal exemptions under section 151 or 
        642(b).]
          (1) Deduction for estates and trusts.--For purposes 
        of subsection (a), the taxable income of an estate or 
        trust shall be computed without any deduction under 
        section 642(b).
          (2) Capital gains.--For purposes of this section--
                  (A) In general.--Taxable income from sources 
                outside the United States shall include gain 
                from the sale or exchange of capital assets 
                only to the extent of foreign source capital 
                gain net income.
                  (B) Special rules where capital gain rate 
                differential.--In the case of any taxable year 
                for which there is a capital gain rate 
                differential--
                          (i) in lieu of applying subparagraph 
                        (A), the taxable income from sources 
                        outside the United States shall include 
                        gain from the sale or exchange of 
                        capital assets only in an amount equal 
                        to foreign source capital gain net 
                        income reduced by the rate differential 
                        portion of foreign source net capital 
                        gain,
                          (ii) the entire taxable income shall 
                        include gain from the sale or exchange 
                        of capital assets only in an amount 
                        equal to capital gain net income 
                        reduced by the rate differential 
                        portion of net capital gain, and
                          (iii) for purposes of determining 
                        taxable income from sources outside the 
                        United States, any net capital loss 
                        (and any amount which is a short-term 
                        capital loss under section 1212(a)) 
                        from sources outside the United States 
                        to the extent taken into account in 
                        determining capital gain net income for 
                        the taxable year shall be reduced by an 
                        amount equal to the rate differential 
                        portion of the excess of net capital 
                        gain from sources within the United 
                        States over net capital gain.
                  (C) Coordination with capital gains rates.--
                The Secretary may by regulations modify the 
                application of this paragraph and paragraph (3) 
                to the extent necessary to properly reflect any 
                capital gain rate differential under section 
                1(h) and the computation of net capital gain.
          (3) Definitions.--For purposes of this subsection--
                  (A) Foreign source capital gain net income.--
                The term ``foreign source capital gain net 
                income'' means the lesser of--
                          (i) capital gain net income from 
                        sources without the United States, or
                          (ii) capital gain net income.
                  (B) Foreign source net capital gain.--The 
                term ``foreign source net capital gain'' means 
                the lesser of--
                          (i) net capital gain from sources 
                        without the United States, or
                          (ii) net capital gain.
                  (C) Section 1231 gains.--The term ``gain from 
                the sale or exchange of capital assets'' 
                includes any gain so treated under section 
                1231.
                  (D) Capital gain rate differential.--There is 
                a capital gain rate differential for any year 
                if subsection (h) of section 1 applies to such 
                taxable year.
                  (E) Rate differential portion.--The rate 
                differential portion of foreign source net 
                capital gain, net capital gain, or the excess 
                of net capital gain from sources within the 
                United States over net capital gain, as the 
                case may be, is the same proportion of such 
                amount as--
                          (i) the excess of--
                                  (I) the highest rate of tax 
                                set forth in subsection (a), 
                                (b), (c), (d), or (e) of 
                                section 1 (whichever applies), 
                                over
                                  (II) the alternative rate of 
                                tax determined under section 
                                1(h), bears to
                          (ii) that rate referred to in 
                        subclause (I).
          (4) Treatment of dividends for which deduction is 
        allowed under section 245a.--For purposes of subsection 
        (a), in the case of a domestic corporation which is a 
        United States shareholder with respect to a specified 
        10-percent owned foreign corporation, such 
        shareholder's taxable income from sources without the 
        United States (and entire taxable income) shall be 
        determined without regard to--
                  (A) the foreign-source portion of any 
                dividend received from such foreign 
                corporation, and
                  (B) any deductions properly allocable or 
                apportioned to--
                          (i) income (other than amounts 
                        includible under section 951(a)(1) or 
                        951A(a)) with respect to stock of such 
                        specified 10-percent owned foreign 
                        corporation, or
                          (ii) such stock to the extent income 
                        with respect to such stock is other 
                        than amounts includible under section 
                        951(a)(1) or 951A(a).
        Any term which is used in section 245A and in this 
        paragraph shall have the same meaning for purposes of 
        this paragraph as when used in such section.
  (c) Carryback and carryover of excess tax paid.--Any amount 
by which all taxes paid or accrued to foreign countries or 
possessions of the United States for any taxable year for which 
the taxpayer chooses to have the benefits of this subpart 
exceed the limitation under subsection (a) shall be deemed 
taxes paid or accrued to foreign countries or possessions of 
the United States in the first preceding taxable year and in 
any of the first 10 succeeding taxable years, in that order and 
to the extent not deemed taxes paid or accrued in a prior 
taxable year, in the amount by which the limitation under 
subsection (a) for such preceding or succeeding taxable year 
exceeds the sum of the taxes paid or accrued to foreign 
countries or possessions of the United States for such 
preceding or succeeding taxable year and the amount of the 
taxes for any taxable year earlier than the current taxable 
year which shall be deemed to have been paid or accrued in such 
preceding or subsequent taxable year (whether or not the 
taxpayer chooses to have the benefits of this subpart with 
respect to such earlier taxable year). Such amount deemed paid 
or accrued in any year may be availed of only as a tax credit 
and not as a deduction and only if the taxpayer for such year 
chooses to have the benefits of this subpart as to taxes paid 
or accrued for that year to foreign countries or possessions of 
the United States. This subsection shall not apply to taxes 
paid or accrued with respect to amounts described in subsection 
(d)(1)(A).
  (d) Separate application of section with respect to certain 
categories of income.--
          (1) In general.--The provisions of subsections (a), 
        (b), and (c) and sections 902, 907, and 960 shall be 
        applied separately with respect to--
                  (A) any amount includible in gross income 
                under section 951A (other than passive category 
                income),
                  (B) foreign branch income,
                  (C) passive category income, and
                  (D) general category income.
          (2) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Categories.--
                          (i) Passive category income.--The 
                        term ``passive category income'' means 
                        passive income and specified passive 
                        category income.
                          (ii) General category income.--The 
                        term ``general category income'' means 
                        income other than income described in 
                        paragraph (1)(A), foreign branch 
                        income, and passive category income.
                  (B) Passive income.--
                          (i) In general.--Except as otherwise 
                        provided in this subparagraph, the term 
                        ``passive income'' means any income 
                        received or accrued by any person which 
                        is of a kind which would be foreign 
                        personal holding company income (as 
                        defined in section 954(c)).
                          (ii) Certain amounts included.--
                        Except as provided in clause (iii), 
                        subparagraph (E)(ii), or paragraph 
                        (3)(H), the term ``passive income'' 
                        includes any amount includible in gross 
                        income under section 1293 (relating to 
                        certain passive foreign investment 
                        companies).
                          (iii) Exceptions.--The term ``passive 
                        income'' shall not include--
                                  (I) any export financing 
                                interest, and
                                  (II) any high-taxed income.
                          (iv) Clarification of application of 
                        section 864(d)(6).--In determining 
                        whether any income is of a kind which 
                        would be foreign personal holding 
                        company income, the rules of section 
                        864(d)(6) shall apply only in the case 
                        of income of a controlled foreign 
                        corporation.
                          (v) Specified passive category 
                        income.--The term ``specified passive 
                        category income'' means--
                                  (I) dividends from a DISC or 
                                former DISC (as defined in 
                                section 992(a)) to the extent 
                                such dividends are treated as 
                                income from sources without the 
                                United States, and
                                  (II) distributions from a 
                                former FSC (as defined in 
                                section 922) out of earnings 
                                and profits attributable to 
                                foreign trade income (within 
                                the meaning of section 923(b)) 
                                or interest or carrying charges 
                                (as defined in section 
                                927(d)(1)) derived from a 
                                transaction which results in 
                                foreign trade income (as 
                                defined in section 923(b)).
                        Any reference in subclause (II) to 
                        section 922, 923, or 927 shall be 
                        treated as a reference to such section 
                        as in effect before its repeal by the 
                        FSC Repeal and Extraterritorial Income 
                        Exclusion Act of 2000.
                  (C) Treatment of financial services income 
                and companies.--
                          (i) In general.--Financial services 
                        income shall be treated as general 
                        category income in the case of--
                                  (I) a member of a financial 
                                services group, and
                                  (II) any other person if such 
                                person is predominantly engaged 
                                in the active conduct of a 
                                banking, insurance, financing, 
                                or similar business.
                          (ii) Financial services group.--The 
                        term ``financial services group'' means 
                        any affiliated group (as defined in 
                        section 1504(a) without regard to 
                        paragraphs (2) and (3) of section 
                        1504(b)) which is predominantly engaged 
                        in the active conduct of a banking, 
                        insurance, financing, or similar 
                        business. In determining whether such a 
                        group is so engaged, there shall be 
                        taken into account only the income of 
                        members of the group that are--
                                  (I) United States 
                                corporations, or
                                  (II) controlled foreign 
                                corporations in which such 
                                United States corporations own, 
                                directly or indirectly, at 
                                least 80 percent of the total 
                                voting power and value of the 
                                stock.
                          (iii) Pass-thru entities.--The 
                        Secretary shall by regulation specify 
                        for purposes of this subparagraph the 
                        treatment of financial services income 
                        received or accrued by partnerships and 
                        by other pass-thru entities which are 
                        not members of a financial services 
                        group.
                  (D) Financial services income.--
                          (i) In general.--Except as otherwise 
                        provided in this subparagraph, the term 
                        ``financial services income'' means any 
                        income which is received or accrued by 
                        any person predominantly engaged in the 
                        active conduct of a banking, insurance, 
                        financing, or similar business, and 
                        which is--
                                  (I) described in clause (ii), 
                                or
                                  (II) passive income 
                                (determined without regard to 
                                subparagraph (B)(iii)(II)).
                          (ii) General description of financial 
                        services income.--Income is described 
                        in this clause if such income is--
                                  (I) derived in the active 
                                conduct of a banking, 
                                financing, or similar business,
                                  (II) derived from the 
                                investment by an insurance 
                                company of its unearned 
                                premiums or reserves ordinary 
                                and necessary for the proper 
                                conduct of its insurance 
                                business, or
                                  (III) of a kind which would 
                                be insurance income as defined 
                                in section 953(a) determined 
                                without regard to those 
                                provisions of paragraph (1)(A) 
                                of such section which limit 
                                insurance income to income from 
                                countries other than the 
                                country in which the 
                                corporation was created or 
                                organized.
                  (E) Noncontrolled section 902 corporation.--
                          (i) Noncontrolled 10-percent owned 
                        foreign corporation.--The term 
                        ``noncontrolled 10-percent owned 
                        foreign corporation'' means any foreign 
                        corporation which is--
                                  (I) a specified 10-percent 
                                owned foreign corporation (as 
                                defined in section 245A(b)), or
                                  (II) a passive foreign 
                                investment company (as defined 
                                in section 1297(a)) with 
                                respect to which the taxpayer 
                                meets the stock ownership 
                                requirements of section 902(a) 
                                (or, for purposes of applying 
                                paragraphs (3) and (4), the 
                                requirements of section 
                                902(b)).
                        A controlled foreign corporation shall 
                        not be treated as a noncontrolled 10-
                        percent owned foreign corporation with 
                        respect to any distribution out of its 
                        earnings and profits for periods during 
                        which it was a controlled foreign 
                        corporation. Any reference to section 
                        902 in this clause shall be treated as 
                        a reference to such section as in 
                        effect before its repeal.
                          (ii) Treatment of inclusions under 
                        section 1293.--If any foreign 
                        corporation is a noncontrolled 10-
                        percent owned foreign corporation with 
                        respect to the taxpayer, any inclusion 
                        under section 1293 with respect to such 
                        corporation shall be treated as a 
                        dividend from such corporation.
                  (F) High-taxed income.--The term ``high-taxed 
                income'' means any income which (but for this 
                subparagraph) would be passive income if the 
                sum of--
                          (i) the foreign income taxes paid or 
                        accrued by the taxpayer with respect to 
                        such income, and
                          (ii) the foreign income taxes deemed 
                        paid by the taxpayer with respect to 
                        such income under section 902 or 960,
                exceeds the highest rate of tax specified in 
                section 1 or 11 (whichever applies) multiplied 
                by the amount of such income (determined with 
                regard to section 78). For purposes of the 
                preceding sentence, the term ``foreign income 
                taxes'' means any income, war profits, or 
                excess profits tax imposed by any foreign 
                country or possession of the United States.
                  (G) Export financing interest.--For purposes 
                of this paragraph, the term ``export financing 
                interest'' means any interest derived from 
                financing the sale (or other disposition) for 
                use or consumption outside the United States of 
                any property--
                          (i) which is manufactured, produced, 
                        grown, or extracted in the United 
                        States by the taxpayer or a related 
                        person, and
                          (ii) not more than 50 percent of the 
                        fair market value of which is 
                        attributable to products imported into 
                        the United States.
                For purposes of clause (ii), the fair market 
                value of any property imported into the United 
                States shall be its appraised value, as 
                determined by the Secretary under section 402 
                of the Tariff Act of 1930 (19 U.S.C. 1401a) in 
                connection with its importation.
                  (H) Treatment of income tax base 
                differences.--
                          (i) In general.--In the case of 
                        taxable years beginning after December 
                        31, 2006, tax imposed under the law of 
                        a foreign country or possession of the 
                        United States on an amount which does 
                        not constitute income under United 
                        States tax principles shall be treated 
                        as imposed on income described in 
                        paragraph (1)(B).
                          (ii) Special rule for years before 
                        2007.--
                                  (I) In general.--In the case 
                                of taxes paid or accrued in 
                                taxable years beginning after 
                                December 31, 2004, and before 
                                January 1, 2007, a taxpayer may 
                                elect to treat tax imposed 
                                under the law of a foreign 
                                country or possession of the 
                                United States on an amount 
                                which does not constitute 
                                income under United States tax 
                                principles as tax imposed on 
                                income described in 
                                subparagraph (C) or (I) of 
                                paragraph (1).
                                  (II) Election irrevocable.--
                                Any such election shall apply 
                                to the taxable year for which 
                                made and all subsequent taxable 
                                years described in subclause 
                                (I) unless revoked with the 
                                consent of the Secretary.
                  (I) Related person.--For purposes of this 
                paragraph, the term ``related person'' has the 
                meaning given such term by section 954(d)(3), 
                except that such section shall be applied by 
                substituting ``the person with respect to whom 
                the determination is being made'' for 
                ``controlled foreign corporation'' each place 
                it appears.
                  (J) Foreign branch income.--
                          (i) In general.--The term ``foreign 
                        branch income'' means the business 
                        profits of such United States person 
                        which are attributable to 1 or more 
                        qualified business units (as defined in 
                        section 989(a)) in 1 or more foreign 
                        countries. For purposes of the 
                        preceding sentence, the amount of 
                        business profits attributable to a 
                        qualified business unit shall be 
                        determined under rules established by 
                        the Secretary.
                          (ii) Exception.--Such term shall not 
                        include any income which is passive 
                        category income.
                  (K) Transitional rules for 2007 changes.--For 
                purposes of paragraph (1)--
                          (i) taxes carried from any taxable 
                        year beginning before January 1, 2007, 
                        to any taxable year beginning on or 
                        after such date, with respect to any 
                        item of income, shall be treated as 
                        described in the subparagraph of 
                        paragraph (1) in which such income 
                        would be described were such taxes paid 
                        or accrued in a taxable year beginning 
                        on or after such date, and
                          (ii) the Secretary may by regulations 
                        provide for the allocation of any 
                        carryback of taxes with respect to 
                        income from a taxable year beginning on 
                        or after January 1, 2007, to a taxable 
                        year beginning before such date for 
                        purposes of allocating such income 
                        among the separate categories in effect 
                        for the taxable year to which carried.
          (3) Look-thru in case of controlled foreign 
        corporations.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, dividends, interest, rents, 
                and royalties received or accrued by the 
                taxpayer from a controlled foreign corporation 
                in which the taxpayer is a United States 
                shareholder shall not be treated as passive 
                category income.
                  (B) Subpart F inclusions.--Any amount 
                included in gross income under section 
                951(a)(1)(A) shall be treated as passive 
                category income to the extent the amount so 
                included is attributable to passive category 
                income.
                  (C) Interest, rents, and royalties.--Any 
                interest, rent, or royalty which is received or 
                accrued from a controlled foreign corporation 
                in which the taxpayer is a United States 
                shareholder shall be treated as passive 
                category income to the extent it is properly 
                allocable (under regulations prescribed by the 
                Secretary) to passive category income of the 
                controlled foreign corporation.
                  (D) Dividends.--Any dividend paid out of the 
                earnings and profits of any controlled foreign 
                corporation in which the taxpayer is a United 
                States shareholder shall be treated as passive 
                category income in proportion to the ratio of--
                          (i) the portion of the earnings and 
                        profits attributable to passive 
                        category income, to
                          (ii) the total amount of earnings and 
                        profits.
                  (E) Look-thru applies only where subpart F 
                applies.--If a controlled foreign corporation 
                meets the requirements of section 954(b)(3)(A) 
                (relating to de minimis rule) for any taxable 
                year, for purposes of this paragraph, none of 
                its foreign base company income (as defined in 
                section 954(a) without regard to section 
                954(b)(5)) and none of its gross insurance 
                income (as defined in section 954(b)(3)(C)) for 
                such taxable year shall be treated as passive 
                category income, except that this sentence 
                shall not apply to any income which (without 
                regard to this sentence) would be treated as 
                financial services income. Solely for purposes 
                of applying subparagraph (D), passive income of 
                a controlled foreign corporation shall not be 
                treated as passive category income if the 
                requirements of section 954(b)(4) are met with 
                respect to such income.
                  (F) Coordination with high-taxed income 
                provisions.--
                          (i) In determining whether any income 
                        of a controlled foreign corporation is 
                        passive category income, subclause (II) 
                        of paragraph (2)(B)(iii) shall not 
                        apply.
                          (ii) Any income of the taxpayer which 
                        is treated as passive category income 
                        under this paragraph shall be so 
                        treated notwithstanding any provision 
                        of paragraph (2); except that the 
                        determination of whether any amount is 
                        high-taxed income shall be made after 
                        the application of this paragraph.
                  (G) Dividend.--For purposes of this 
                paragraph, the term ``dividend'' includes any 
                amount included in gross income in section 
                951(a)(1)(B). Any amount included in gross 
                income under section 78 to the extent 
                attributable to amounts included in gross 
                income in section 951(a)(1)(A) shall not be 
                treated as a dividend but shall be treated as 
                included in gross income under section 
                951(a)(1)(A).
                  (H) Look-thru applies to passive foreign 
                investment company inclusion.--If--
                          (i) a passive foreign investment 
                        company is a controlled foreign 
                        corporation, and
                          (ii) the taxpayer is a United States 
                        shareholder in such controlled foreign 
                        corporation,
                any amount included in gross income under 
                section 1293 shall be treated as income in a 
                separate category to the extent such amount is 
                attributable to income in such category.
          (4) Look-thru applies to dividends from noncontrolled 
        10-percent owned foreign corporations.--
                  (A) In general.--For purposes of this 
                subsection, any dividend from a noncontrolled 
                10-percent owned foreign corporation with 
                respect to the taxpayer shall be treated as 
                income described in a subparagraph of paragraph 
                (1) in proportion to the ratio of--
                          (i) the portion of earnings and 
                        profits attributable to income 
                        described in such subparagraph, to
                          (ii) the total amount of earnings and 
                        profits.
                  (B) Earnings and profits of controlled 
                foreign corporations.--In the case of any 
                distribution from a controlled foreign 
                corporation to a United States shareholder, 
                rules similar to the rules of subparagraph (A) 
                shall apply in determining the extent to which 
                earnings and profits of the controlled foreign 
                corporation which are attributable to dividends 
                received from a noncontrolled 10-percent owned 
                foreign corporation may be treated as income in 
                a separate category.
                  (C) Special rules.--For purposes of this 
                paragraph--
                          (i) Earnings and profits.--
                                  (I) In general.--The rules of 
                                section 316 shall apply.
                                  (II) Regulations.--The 
                                Secretary may prescribe 
                                regulations regarding the 
                                treatment of distributions out 
                                of earnings and profits for 
                                periods before the taxpayer's 
                                acquisition of the stock to 
                                which the distributions relate.
                          (ii) Inadequate substantiation.--If 
                        the Secretary determines that the 
                        proper subparagraph of paragraph (1) in 
                        which a dividend is described has not 
                        been substantiated, such dividend shall 
                        be treated as income described in 
                        paragraph (1)(A).
                          (iii) Coordination with high-taxed 
                        income provisions.--Rules similar to 
                        the rules of paragraph (3)(F) shall 
                        apply for purposes of this paragraph.
                          (iv) Look-thru with respect to 
                        carryover of credit.--Rules similar to 
                        subparagraph (A) also shall apply to 
                        any carryforward under subsection (c) 
                        from a taxable year beginning before 
                        January 1, 2003, of tax allocable to a 
                        dividend from a noncontrolled 10-
                        percent owned foreign corporation with 
                        respect to the taxpayer. The Secretary 
                        may by regulations provide for the 
                        allocation of any carryback of tax 
                        allocable to a dividend from a 
                        noncontrolled 10-percent owned foreign 
                        corporation from a taxable year 
                        beginning on or after January 1, 2003, 
                        to a taxable year beginning before such 
                        date for purposes of allocating such 
                        dividend among the separate categories 
                        in effect for the taxable year to which 
                        carried.
          (5) Controlled foreign corporation; United States 
        shareholder.--For purposes of this subsection--
                  (A) Controlled foreign corporation.--The term 
                ``controlled foreign corporation'' has the 
                meaning given such term by section 957 (taking 
                into account section 953(c)).
                  (B) United States shareholder.--The term 
                ``United States shareholder'' has the meaning 
                given such term by section 951(b) (taking into 
                account section 953(c)).
          (6) Separate application to items resourced under 
        treaties.--
                  (A) In general.--If--
                          (i) without regard to any treaty 
                        obligation of the United States, any 
                        item of income would be treated as 
                        derived from sources within the United 
                        States,
                          (ii) under a treaty obligation of the 
                        United States, such item would be 
                        treated as arising from sources outside 
                        the United States, and
                          (iii) the taxpayer chooses the 
                        benefits of such treaty obligation,
                subsections (a), (b), and (c) of this section 
                and sections 907 and 960 shall be applied 
                separately with respect to each such item.
                  (B) Coordination with other provisions.--This 
                paragraph shall not apply to any item of income 
                to which subsection (h)(10) or section 865(h) 
                applies.
                  (C) Regulations.--The Secretary may issue 
                such regulations or other guidance as is 
                necessary or appropriate to carry out the 
                purposes of this paragraph, including 
                regulations or other guidance which provides 
                that related items of income may be aggregated 
                for purposes of this paragraph.
          (7) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate for the 
        purposes of this subsection, including regulations--
                  (A) for the application of paragraph (3) and 
                subsection (f)(5) in the case of income paid 
                (or loans made) through 1 or more entities or 
                between 2 or more chains of entities,
                  (B) preventing the manipulation of the 
                character of income the effect of which is to 
                avoid the purposes of this subsection, and
                  (C) providing that rules similar to the rules 
                of paragraph (3)(C) shall apply to interest, 
                rents, and royalties received or accrued from 
                entities which would be controlled foreign 
                corporations if they were foreign corporations.
  (f) Recapture of overall foreign loss.--
          (1) General rule.--For purposes of this subpart, in 
        the case of any taxpayer who sustains an overall 
        foreign loss for any taxable year, that portion of the 
        taxpayer's taxable income from sources without the 
        United States for each succeeding taxable year which is 
        equal to the lesser of--
                  (A) the amount of such loss (to the extent 
                not used under this paragraph in prior taxable 
                years), or
                  (B) 50 percent (or such larger percent as the 
                taxpayer may choose) of the taxpayer's taxable 
                income from sources without the United States 
                for such succeeding taxable year,
        shall be treated as income from sources within the 
        United States (and not as income from sources without 
        the United States).
          (2) Overall foreign loss defined.--For purposes of 
        this subsection, the term ``overall foreign loss'' 
        means the amount by which the gross income for the 
        taxable year from sources without the United States 
        (whether or not the taxpayer chooses the benefits of 
        this subpart for such taxable year) for such year is 
        exceeded by the sum of the deductions properly 
        apportioned or allocated thereto, except that there 
        shall not be taken into account--
                  (A) any net operating loss deduction 
                allowable for such year under section 172(a), 
                and
                  (B) any--
                          (i) foreign expropriation loss for 
                        such year, as defined in section 172(h) 
                        (as in effect on the day before the 
                        date of the enactment of the Revenue 
                        Reconciliation Act of 1990), or
                          (ii) loss for such year which arises 
                        from fire, storm, shipwreck, or other 
                        casualty, or from theft,
        to the extent such loss is not compensated for by 
        insurance or otherwise.
          (3) Dispositions.--
                  (A) In general.--For purposes of this 
                chapter, if property which has been used 
                predominantly without the United States in a 
                trade or business is disposed of during any 
                taxable year--
                          (i) the taxpayer, notwithstanding any 
                        other provision of this chapter (other 
                        than paragraph (1)), shall be deemed to 
                        have received and recognized taxable 
                        income from sources without the United 
                        States in the taxable year of the 
                        disposition, by reason of such 
                        disposition, in an amount equal to the 
                        lesser of the excess of the fair market 
                        value of such property over the 
                        taxpayer's adjusted basis in such 
                        property or the remaining amount of the 
                        overall foreign losses which were not 
                        used under paragraph (1) for such 
                        taxable year or any prior taxable year, 
                        and
                          (ii) paragraph (1) shall be applied 
                        with respect to such income by 
                        substituting ``100 percent'' for ``50 
                        percent''.
                In determining for purposes of this 
                subparagraph whether the predominant use of any 
                property has been without the United States, 
                there shall be taken into account use during 
                the 3-year period ending on the date of the 
                disposition (or, if shorter, the period during 
                which the property has been used in the trade 
                or business).
                  (B) Disposition defined and special rules.--
                          (i) For purposes of this subsection, 
                        the term ``disposition'' includes a 
                        sale, exchange, distribution, or gift 
                        of property whether or not gain or loss 
                        is recognized on the transfer.
                          (ii) Any taxable income recognized 
                        solely by reason of subparagraph (A) 
                        shall have the same characterization it 
                        would have had if the taxpayer had sold 
                        or exchanged the property.
                          (iii) The Secretary shall prescribe 
                        such regulations as he may deem 
                        necessary to provide for adjustments to 
                        the basis of property to reflect 
                        taxable income recognized solely by 
                        reason of subparagraph (A).
                  (C) Exceptions.--Notwithstanding subparagraph 
                (B), the term ``disposition'' does not 
                include--
                          (i) a disposition of property which 
                        is not a material factor in the 
                        realization of income by the taxpayer, 
                        or
                          (ii) a disposition of property to a 
                        domestic corporation in a distribution 
                        or transfer described in section 
                        381(a).
                  (D) Application to certain dispositions of 
                stock in controlled foreign corporation.--
                          (i) In general.--This paragraph shall 
                        apply to an applicable disposition in 
                        the same manner as if it were a 
                        disposition of property described in 
                        subparagraph (A), except that the 
                        exception contained in subparagraph 
                        (C)(i) shall not apply.
                          (ii) Applicable disposition.--For 
                        purposes of clause (i), the term 
                        ``applicable disposition'' means any 
                        disposition of any share of stock in a 
                        controlled foreign corporation in a 
                        transaction or series of transactions 
                        if, immediately before such transaction 
                        or series of transactions, the taxpayer 
                        owned more than 50 percent (by vote or 
                        value) of the stock of the controlled 
                        foreign corporation. Such term shall 
                        not include a disposition described in 
                        clause (iii) or (iv), except that 
                        clause (i) shall apply to any gain 
                        recognized on any such disposition.
                          (iii) Exception for certain exchanges 
                        where ownership percentage retained.--A 
                        disposition shall not be treated as an 
                        applicable disposition under clause 
                        (ii) if it is part of a transaction or 
                        series of transactions--
                                  (I) to which section 351 or 
                                721 applies, or under which the 
                                transferor receives stock in a 
                                foreign corporation in exchange 
                                for the stock in the controlled 
                                foreign corporation and the 
                                stock received is exchanged 
                                basis property (as defined in 
                                section 7701(a)(44)), and
                                  (II) immediately after which, 
                                the transferor owns (by vote or 
                                value) at least the same 
                                percentage of stock in the 
                                controlled foreign corporation 
                                (or, if the controlled foreign 
                                corporation is not in existence 
                                after such transaction or 
                                series of transactions, in 
                                another foreign corporation 
                                stock in which was received by 
                                the transferor in exchange for 
                                stock in the controlled foreign 
                                corporation) as the percentage 
                                of stock in the controlled 
                                foreign corporation which the 
                                taxpayer owned immediately 
                                before such transaction or 
                                series of transactions.
                          (iv) Exception for certain asset 
                        acquisitions.--A disposition shall not 
                        be treated as an applicable disposition 
                        under clause (ii) if it is part of a 
                        transaction or series of transactions 
                        in which the taxpayer (or any member of 
                        an affiliated group of corporations 
                        filing a consolidated return under 
                        section 1501 which includes the 
                        taxpayer) acquires the assets of a 
                        controlled foreign corporation in 
                        exchange for the shares of the 
                        controlled foreign corporation in a 
                        liquidation described in section 332 or 
                        a reorganization described in section 
                        368(a)(1).
                          (v) Controlled foreign corporation.--
                        For purposes of this subparagraph, the 
                        term ``controlled foreign corporation'' 
                        has the meaning given such term by 
                        section 957.
                          (vi) Stock ownership.--For purposes 
                        of this subparagraph, ownership of 
                        stock shall be determined under the 
                        rules of subsections (a) and (b) of 
                        section 958.
          (4) Accumulation distributions of foreign trust.--For 
        purposes of this chapter, in the case of amounts of 
        income from sources without the United States which are 
        treated under section 666 (without regard to 
        subsections (b) and (c) thereof if the taxpayer chose 
        to take a deduction with respect to the amounts 
        described in such subsections under section 
        667(d)(1)(B)) as having been distributed by a foreign 
        trust in a preceding taxable year, that portion of such 
        amounts equal to the amount of any overall foreign loss 
        sustained by the beneficiary in a year prior to the 
        taxable year of the beneficiary in which such 
        distribution is received from the trust shall be 
        treated as income from sources within the United States 
        (and not income from sources without the United States) 
        to the extent that such loss was not used under this 
        subsection in prior taxable years, or in the current 
        taxable year, against other income of the beneficiary.
          (5) Treatment of separate limitation losses.--
                  (A) In general.--The amount of the separate 
                limitation losses for any taxable year shall 
                reduce income from sources within the United 
                States for such taxable year only to the extent 
                the aggregate amount of such losses exceeds the 
                aggregate amount of the separate limitation 
                incomes for such taxable year.
                  (B) Allocation of losses.--The separate 
                limitation losses for any taxable year (to the 
                extent such losses do not exceed the separate 
                limitation incomes for such year) shall be 
                allocated among (and operate to reduce) such 
                incomes on a proportionate basis.
                  (C) Recharacterization of subsequent 
                income.--If--
                          (i) a separate limitation loss from 
                        any income category (hereinafter in 
                        this subparagraph referred to as ``the 
                        loss category'') was allocated to 
                        income from any other category under 
                        subparagraph (B), and
                          (ii) the loss category has income for 
                        a subsequent taxable year,
                such income (to the extent it does not exceed 
                the aggregate separate limitation losses from 
                the loss category not previously 
                recharacterized under this subparagraph) shall 
                be recharacterized as income from such other 
                category in proportion to the prior reductions 
                under subparagraph (B) in such other category 
                not previously taken into account under this 
                subparagraph. Nothing in the preceding sentence 
                shall be construed as recharacterizing any tax.
                  (D) Special rules for losses from sources in 
                the United States.--Any loss from sources in 
                the United States for any taxable year (to the 
                extent such loss does not exceed the separate 
                limitation incomes from such year) shall be 
                allocated among (and operate to reduce) such 
                incomes on a proportionate basis. This 
                subparagraph shall be applied after 
                subparagraph (B).
                  (E) Definitions.--For purposes of this 
                paragraph--
                          (i) Income category.--The term 
                        ``income category'' means each separate 
                        category of income described in 
                        subsection (d)(1).
                          (ii) Separate limitation income.--The 
                        term ``separate limitation income'' 
                        means, with respect to any income 
                        category, the taxable income from 
                        sources outside the United States, 
                        separately computed for such category.
                          (iii) Separate limitation loss.--The 
                        term ``separate limitation loss'' 
                        means, with respect to any income 
                        category, the loss from such category 
                        determined under the principles of 
                        section 907(c)(4)(B).
                  (F) Dispositions.--If any separate limitation 
                loss for any taxable year is allocated against 
                any separate limitation income for such taxable 
                year, except to the extent provided in 
                regulations, rules similar to the rules of 
                paragraph (3) shall apply to any disposition of 
                property if gain from such disposition would be 
                in the income category with respect to which 
                there was such separate limitation loss.
  (g) Recharacterization of overall domestic loss.--
          (1) General rule.--For purposes of this subpart and 
        section 936, in the case of any taxpayer who sustains 
        an overall domestic loss for any taxable year beginning 
        after December 31, 2006, that portion of the taxpayer's 
        taxable income from sources within the United States 
        for each succeeding taxable year which is equal to the 
        lesser of--
                  (A) the amount of such loss (to the extent 
                not used under this paragraph in prior taxable 
                years), or
                  (B) 50 percent of the taxpayer's taxable 
                income from sources within the United States 
                for such succeeding taxable year,
        shall be treated as income from sources without the 
        United States (and not as income from sources within 
        the United States).
          (2) Overall domestic loss.--For purposes of this 
        subsection--
                  (A) In general.--The term ``overall domestic 
                loss'' means--
                          (i) with respect to any qualified 
                        taxable year, the domestic loss for 
                        such taxable year to the extent such 
                        loss offsets taxable income from 
                        sources without the United States for 
                        the taxable year or for any preceding 
                        qualified taxable year by reason of a 
                        carryback, and
                          (ii) with respect to any other 
                        taxable year, the domestic loss for 
                        such taxable year to the extent such 
                        loss offsets taxable income from 
                        sources without the United States for 
                        any preceding qualified taxable year by 
                        reason of a carryback.
                  (B) Domestic loss.--For purposes of 
                subparagraph (A), the term ``domestic loss'' 
                means the amount by which the gross income for 
                the taxable year from sources within the United 
                States is exceeded by the sum of the deductions 
                properly apportioned or allocated thereto 
                (determined without regard to any carryback 
                from a subsequent taxable year).
                  (C) Qualified taxable year.--For purposes of 
                subparagraph (A), the term ``qualified taxable 
                year'' means any taxable year for which the 
                taxpayer chose the benefits of this subpart.
          (3) Characterization of subsequent income.--
                  (A) In general.--Any income from sources 
                within the United States that is treated as 
                income from sources without the United States 
                under paragraph (1) shall be allocated among 
                and increase the income categories in 
                proportion to the loss from sources within the 
                United States previously allocated to those 
                income categories.
                  (B) Income category.--For purposes of this 
                paragraph, the term ``income category'' has the 
                meaning given such term by subsection 
                (f)(5)(E)(i).
          (4) Coordination with subsection (f).--The Secretary 
        shall prescribe such regulations as may be necessary to 
        coordinate the provisions of this subsection with the 
        provisions of subsection (f).
          (5) Election to increase percentage of taxable income 
        treated as foreign source.--
                  (A) In general.--If any pre-2018 unused 
                overall domestic loss is taken into account 
                under paragraph (1) for any applicable taxable 
                year, the taxpayer may elect to have such 
                paragraph applied to such loss by substituting 
                a percentage greater than 50 percent (but not 
                greater than 100 percent) for 50 percent in 
                subparagraph (B) thereof.
                  (B) Pre-2018 unused overall domestic loss.--
                For purposes of this paragraph, the term ``pre-
                2018 unused overall domestic loss'' means any 
                overall domestic loss which--
                          (i) arises in a qualified taxable 
                        year beginning before January 1, 2018, 
                        and
                          (ii) has not been used under 
                        paragraph (1) for any taxable year 
                        beginning before such date.
                  (C) Applicable taxable year.--For purposes of 
                this paragraph, the term ``applicable taxable 
                year'' means any taxable year of the taxpayer 
                beginning after December 31, 2017, and before 
                January 1, 2028.
  (h) Source rules in case of United States-owned foreign 
corporations.--
          (1) In general.--The following amounts which are 
        derived from a United States-owned foreign corporation 
        and which would be treated as derived from sources 
        outside the United States without regard to this 
        subsection shall, for purposes of this section, be 
        treated as derived from sources within the United 
        States to the extent provided in this subsection:
                  (A) Any amount included in gross income 
                under--
                          (i) section 951(a) (relating to 
                        amounts included in gross income of 
                        United States shareholders), or
                          (ii) section 1293 (relating to 
                        current taxation of income from 
                        qualified funds).
                  (B) Interest.
                  (C) Dividends.
          (2) Subpart F and passive foreign investment company 
        inclusions.--Any amount described in subparagraph (A) 
        of paragraph (1) shall be treated as derived from 
        sources within the United States to the extent such 
        amount is attributable to income of the United States-
        owned foreign corporation from sources within the 
        United States.
          (3) Certain interest allocable to United States 
        source income.--Any interest which--
                  (A) is paid or accrued by a United States-
                owned foreign corporation during any taxable 
                year,
                  (B) is paid or accrued to a United States 
                shareholder (as defined in section 951(b)) or a 
                related person (within the meaning of section 
                267(b)) to such a shareholder, and
                  (C) is properly allocable (under regulations 
                prescribed by the Secretary) to income of such 
                foreign corporation for the taxable year from 
                sources within the United States,
        shall be treated as derived from sources within the 
        United States.
          (4) Dividends.--
                  (A) In general.--The United States source 
                ratio of any dividend paid or accrued by a 
                United States-owned foreign corporation shall 
                be treated as derived from sources within the 
                United States.
                  (B) United States source ratio.--For purposes 
                of subparagraph (A), the term ``United States 
                source ratio'' means, with respect to any 
                dividend paid out of the earnings and profits 
                for any taxable year, a fraction--
                          (i) the numerator of which is the 
                        portion of the earnings and profits for 
                        such taxable year from sources within 
                        the United States, and
                          (ii) the denominator of which is the 
                        total amount of earnings and profits 
                        for such taxable year.
          (5) Exception where United States-owned foreign 
        corporation has small amount of United States source 
        income.--Paragraph (3) shall not apply to interest paid 
        or accrued during any taxable year (and paragraph (4) 
        shall not apply to any dividends paid out of the 
        earnings and profits for such taxable year) if--
                  (A) the United States-owned foreign 
                corporation has earnings and profits for such 
                taxable year, and
                  (B) less than 10 percent of such earnings and 
                profits is attributable to sources within the 
                United States.
        For purposes of the preceding sentence, earnings and 
        profits shall be determined without any reduction for 
        interest described in paragraph (3) (determined without 
        regard to subparagraph (C) thereof).
          (6) United States-owned foreign corporation.--For 
        purposes of this subsection, the term ``United States-
        owned foreign corporation'' means any foreign 
        corporation if 50 percent or more of--
                  (A) the total combined voting power of all 
                classes of stock of such corporation entitled 
                to vote, or
                  (B) the total value of the stock of such 
                corporation, is held directly (or indirectly 
                through applying paragraphs (2) and (3) of 
                section 958(a) and paragraph (4) of section 
                318(a)) by United States persons (as defined in 
                section 7701(a)(30)).
          (7) Dividend.--For purposes of this subsection, the 
        term ``dividend'' includes any gain treated as a 
        dividend under section 1248.
          (8) Coordination with subsection (f).--This 
        subsection shall be applied before subsection (f).
          (9) Treatment of certain domestic corporations.--In 
        the case of any dividend treated as not from sources 
        within the United States under section 861(a)(2)(A), 
        the corporation paying such dividend shall be treated 
        for purposes of this subsection as a United States-
        owned foreign corporation.
          (10) Coordination with treaties.--
                  (A) In general.--If--
                          (i) any amount derived from a United 
                        States-owned foreign corporation would 
                        be treated as derived from sources 
                        within the United States under this 
                        subsection by reason of an item of 
                        income of such United States-owned 
                        foreign corporation,
                          (ii) under a treaty obligation of the 
                        United States (applied without regard 
                        to this subsection and by treating any 
                        amount included in gross income under 
                        section 951(a)(1) as a dividend), such 
                        amount would be treated as arising from 
                        sources outside the United States, and
                          (iii) the taxpayer chooses the 
                        benefits of this paragraph, this 
                        subsection shall not apply to such 
                        amount to the extent attributable to 
                        such item of income (but subsections 
                        (a), (b), and (c) of this section and 
                        sections 907 and 960 shall be applied 
                        separately with respect to such amount 
                        to the extent so attributable).
                  (B) Special rule.--Amounts included in gross 
                income under section 951(a)(1) shall be treated 
                as a dividend under subparagraph (A)(ii) only 
                if dividends paid by each corporation (the 
                stock in which is taken into account in 
                determining whether the shareholder is a United 
                States shareholder in the United States-owned 
                foreign corporation), if paid to the United 
                States shareholder, would be treated under a 
                treaty obligation of the United States as 
                arising from sources outside the United States 
                (applied without regard to this subsection).
          (11) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate for 
        purposes of this subsection, including--
                  (A) regulations for the application of this 
                subsection in the case of interest or dividend 
                payments through 1 or more entities, and
                  (B) regulations providing that this 
                subsection shall apply to interest paid or 
                accrued to any person (whether or not a United 
                States shareholder).
  (i) Limitation on use of deconsolidation to avoid foreign tax 
credit limitations.--If 2 or more domestic corporations would 
be members of the same affiliated group if--
          (1) section 1504(b) were applied without regard to 
        the exceptions contained therein, and
          (2) the constructive ownership rules of section 
        1563(e) applied for purposes of section 1504(a),
the Secretary may by regulations provide for resourcing the 
income of any of such corporations or for modifications to the 
consolidated return regulations to the extent that such 
resourcing or modifications are necessary to prevent the 
avoidance of the provisions of this subpart.
  (j) Certain individuals exempt.--
          (1) In general.--In the case of an individual to whom 
        this subsection applies for any taxable year--
                  (A) the limitation of subsection (a) shall 
                not apply,
                  (B) no taxes paid or accrued by the 
                individual during such taxable year may be 
                deemed paid or accrued under subsection (c) in 
                any other taxable year, and
                  (C) no taxes paid or accrued by the 
                individual during any other taxable year may be 
                deemed paid or accrued under subsection (c) in 
                such taxable year.
          (2) Individuals to whom subsection applies.--This 
        subsection shall apply to an individual for any taxable 
        year if--
                  (A) the entire amount of such individual's 
                gross income for the taxable year from sources 
                without the United States consists of qualified 
                passive income,
                  (B) the amount of the creditable foreign 
                taxes paid or accrued by the individual during 
                the taxable year does not exceed $300 ($600 in 
                the case of a joint return), and
                  (C) such individual elects to have this 
                subsection apply for the taxable year.
          (3) Definitions.--For purposes of this subsection--
                  (A) Qualified passive income.--The term 
                ``qualified passive income'' means any item of 
                gross income if--
                          (i) such item of income is passive 
                        income (as defined in subsection 
                        (d)(2)(B) without regard to clause 
                        (iii) thereof), and
                          (ii) such item of income is shown on 
                        a payee statement furnished to the 
                        individual.
                  (B) Creditable foreign taxes.--The term 
                ``creditable foreign taxes'' means any taxes 
                for which a credit is allowable under section 
                901; except that such term shall not include 
                any tax unless such tax is shown on a payee 
                statement furnished to such individual.
                  (C) Payee statement.--The term ``payee 
                statement'' has the meaning given to such term 
                by section 6724(d)(2).
                  (D) Estates and trusts not eligible.--This 
                subsection shall not apply to any estate or 
                trust.
  (k) Cross references.--For increase of limitation under 
subsection (a) for taxes paid with respect to amounts received 
which were included in the gross income of the taxpayer for a 
prior taxable year as a United States shareholder with respect 
to a controlled foreign corporation, see section 960(c).

           *       *       *       *       *       *       *

Subpart D--Possessions of the United States

           *       *       *       *       *       *       *

SEC. 931. INCOME FROM SOURCES WITHIN GUAM, AMERICAN SAMOA, OR THE 
                    NORTHERN MARIANA ISLANDS.

  (a) General rule.--In the case of an individual who is a bona 
fide resident of a specified possession during the entire 
taxable year, gross income shall not include--
          (1) income derived from sources within any specified 
        possession, and
          (2) income effectively connected with the conduct of 
        a trade or business by such individual within any 
        specified possession.
  (b) Deductions, etc. allocable to excluded amounts not 
allowable.--An individual shall not be allowed--
          [(1) as a deduction from gross income any deductions 
        (other than the deduction under section 151, relating 
        to personal exemptions), or]
          (1) any deduction from gross income, or
          (2) any credit, properly allocable or chargeable 
        against amounts excluded from gross income under this 
        section.
  (c) Specified possession.--For purposes of this section, the 
term ``specified possession'' means Guam, American Samoa, and 
the Northern Mariana Islands.
  (d) Employees of the United States.--Amounts paid for 
services performed as an employee of the United States (or any 
agency thereof) shall be treated as not described in paragraph 
(1) or (2) of subsection (a).

           *       *       *       *       *       *       *

SEC. 933. INCOME FROM SOURCES WITHIN PUERTO RICO.

   The following items shall not be included in gross income 
and shall be exempt from taxation under this subtitle:
          (1) Resident of Puerto Rico for entire taxable 
        year.--In the case of an individual who is a bona fide 
        resident of Puerto Rico during the entire taxable year, 
        income derived from sources within Puerto Rico (except 
        amounts received for services performed as an employee 
        of the United States or any agency thereof); but such 
        individual shall not be allowed [as a deduction from 
        his gross income any deductions (other than the 
        deduction under section 151, relating to personal 
        exemptions)] any deduction from gross income, or any 
        credit, properly allocable to or chargeable against 
        amounts excluded from gross income under this 
        paragraph.
          (2) Taxable year of change of residence from Puerto 
        Rico.--In the case of an individual citizen of the 
        United States who has been a bona fide resident of 
        Puerto Rico for a period of at least 2 years before the 
        date on which he changes his residence from Puerto 
        Rico, income derived from sources therein (except 
        amounts received for services performed as an employee 
        of the United States or any agency thereof) which is 
        attributable to that part of such period of Puerto 
        Rican residence before such date; but such individual 
        shall not be allowed [as a deduction from his gross 
        income any deductions (other than the deduction for 
        personal exemptions under section 151)] any deduction 
        from gross income, or any credit, properly allocable to 
        or chargeable against amounts excluded from gross 
        income under this paragraph.

Subchapter P--Capital Gains and Losses

           *       *       *       *       *       *       *

PART II--TREATMENT OF CAPITAL LOSSES

           *       *       *       *       *       *       *

SEC. 1212. CAPITAL LOSS CARRYBACKS AND CARRYOVERS.

  (a) Corporations.--
          (1) In general.--If a corporation has a net capital 
        loss for any taxable year (hereinafter in this 
        paragraph referred to as the ``loss year''), the amount 
        thereof shall be--
                  (A) a capital loss carryback to each of the 3 
                taxable years preceding the loss year, but only 
                to the extent--
                          (i) such loss is not attributable to 
                        a foreign expropriation capital loss, 
                        and
                          (ii) the carryback of such loss does 
                        not increase or produce a net operating 
                        loss (as defined in section 172(c)) for 
                        the taxable year to which it is being 
                        carried back;
                  (B) except as provided in subparagraph (C), a 
                capital loss carryover to each of the 5 taxable 
                years succeeding the loss year; and
                  (C) a capital loss carryover to each of the 
                10 taxable years succeeding the loss year, but 
                only to the extent such loss is attributable to 
                a foreign expropriation loss,
        and shall be treated as a short-term capital loss in 
        each such taxable year. The entire amount of the net 
        capital loss for any taxable year shall be carried to 
        the earliest of the taxable years to which such loss 
        may be carried, and the portion of such loss which 
        shall be carried to each of the other taxable years to 
        which such loss may be carried shall be the excess, if 
        any, of such loss over the total of the capital gain 
        net income for each of the prior taxable years to which 
        such loss may be carried. For purposes of the preceding 
        sentence, the capital gain net income for any such 
        prior taxable year shall be computed without regard to 
        the net capital loss for the loss year or for any 
        taxable year thereafter. In the case of any net capital 
        loss which cannot be carried back in full to a 
        preceding taxable year by reason of clause (ii) of 
        subparagraph (A), the capital gain net income for such 
        prior taxable year shall in no case be treated as 
        greater than the amount of such loss which can be 
        carried back to such preceding taxable year upon the 
        application of such clause (ii).
          (2) Definitions and special rules.--
                  (A) Foreign expropriation capital loss 
                defined.--For purposes of this subsection, the 
                term ``foreign expropriation capital loss'' 
                means, for any taxable year, the sum of the 
                losses taken into account in computing the net 
                capital loss for such year which are--
                          (i) losses sustained directly by 
                        reason of the expropriation, 
                        intervention, seizure, or similar 
                        taking of property by the government of 
                        any foreign country, any political 
                        subdivision thereof, or any agency or 
                        instrumentality of the foregoing, or
                          (ii) losses (treated under section 
                        165(g)(1) as losses from the sale or 
                        exchange of capital assets) from 
                        securities which become worthless by 
                        reason of the expropriation, 
                        intervention, seizure, or similar 
                        taking of property by the government of 
                        any foreign country, any political 
                        subdivision thereof, or any agency or 
                        instrumentality of the foregoing.
                  (B) Portion of loss attributable to foreign 
                expropriation capital loss.--For purposes of 
                paragraph (1), the portion of any net capital 
                loss for any taxable year attributable to a 
                foreign expropriation capital loss is the 
                amount of the foreign expropriation capital 
                loss for such year (but not in excess of the 
                net capital loss for such year).
                  (C) Priority of application.--For purposes of 
                paragraph (1), if a portion of a net capital 
                loss for any taxable year is attributable to a 
                foreign expropriation capital loss, such 
                portion shall be considered to be a separate 
                net capital loss for such year to be applied 
                after the other portion of such net capital 
                loss.
          (3) Regulated investment companies.--
                  (A) In general.--If a regulated investment 
                company has a net capital loss for any taxable 
                year--
                          (i) paragraph (1) shall not apply to 
                        such loss,
                          (ii) the excess of the net short-term 
                        capital loss over the net long-term 
                        capital gain for such year shall be a 
                        short-term capital loss arising on the 
                        first day of the next taxable year, and
                          (iii) the excess of the net long-term 
                        capital loss over the net short-term 
                        capital gain for such year shall be a 
                        long-term capital loss arising on the 
                        first day of the next taxable year.
                  (B) Coordination with general rule.--If a net 
                capital loss to which paragraph (1) applies is 
                carried over to a taxable year of a regulated 
                investment company--
                          (i) Losses to which this paragraph 
                        applies.--Clauses (ii) and (iii) of 
                        subparagraph (A) shall be applied 
                        without regard to any amount treated as 
                        a short-term capital loss under 
                        paragraph (1).
                          (ii) Losses to which general rule 
                        applies.--Paragraph (1) shall be 
                        applied by substituting ``net capital 
                        loss for the loss year or any taxable 
                        year thereafter (other than a net 
                        capital loss to which paragraph (3)(A) 
                        applies)'' for ``net capital loss for 
                        the loss year or any taxable year 
                        thereafter''.
          (4) Special rules on carrybacks.--A net capital loss 
        of a corporation shall not be carried back under 
        paragraph (1)(A) to a taxable year--
                  (A) for which it is a regulated investment 
                company (as defined in section 851), or
                  (B) for which it is a real estate investment 
                trust (as defined in section 856).
  (b) Other taxpayers.--
          (1) In general.--If a taxpayer other than a 
        corporation has a net capital loss for any taxable 
        year--
                  (A) the excess of the net short-term capital 
                loss over the net long-term capital gain for 
                such year shall be a short-term capital loss in 
                the succeeding taxable year, and
                  (B) the excess of the net long-term capital 
                loss over the net short-term capital gain for 
                such year shall be a long-term capital loss in 
                the succeeding taxable year.
          (2) Treatment of amounts allowed under section 
        1211(b)(1) or (2)
                  (A) In general.--For purposes of determining 
                the excess referred to in subparagraph (A) or 
                (B) of paragraph (1), there shall be treated as 
                a short-term capital gain in the taxable year 
                an amount equal to the lesser of--
                          (i) the amount allowed for the 
                        taxable year under paragraph (1) or (2) 
                        of section 1211(b), or
                          (ii) the adjusted taxable income for 
                        such taxable year.
                  (B) Adjusted taxable income.--For purposes of 
                subparagraph (A), the term ``adjusted taxable 
                income'' means taxable income increased by the 
                sum of--
                          (i) the amount allowed for the 
                        taxable year under paragraph (1) or (2) 
                        of section 1211(b), and
                          [(ii) the deduction allowed for such 
                        year under section 151 or any deduction 
                        in lieu thereof.]
                          (ii) in the case of an estate or 
                        trust, the deduction allowed for such 
                        year under section 642(b).
                For purposes of the preceding sentence, any 
                excess of the deductions allowed for the 
                taxable year over the gross income for such 
                year shall be taken into account as negative 
                taxable income.
  (c) Carryback of losses from section 1256 contracts to offset 
prior gains from such contracts.--
          (1) In general.--If a taxpayer (other than a 
        corporation) has a net section 1256 contracts loss for 
        the taxable year and elects to have this subsection 
        apply to such taxable year, the amount of such net 
        section 1256 contracts loss--
                  (A) shall be a carryback to each of the 3 
                taxable years preceding the loss year, and
                  (B) to the extent that, after the application 
                of paragraphs (2) and (3), such loss is allowed 
                as a carryback to any such preceding taxable 
                year--
                          (i) 40 percent of the amount so 
                        allowed shall be treated as a short-
                        term capital loss from section 1256 
                        contracts, and
                          (ii) 60 percent of the amount so 
                        allowed shall be treated as a long-term 
                        capital loss from section 1256 
                        contracts.
          (2) Amount carried to each taxable year.--The entire 
        amount of the net section 1256 contracts loss for any 
        taxable year shall be carried to the earliest of the 
        taxable years to which such loss may be carried back 
        under paragraph (1). The portion of such loss which 
        shall be carried to each of the 2 other taxable years 
        to which such loss may be carried back shall be the 
        excess (if any) of such loss over the portion of such 
        loss which, after the application of paragraph (3), was 
        allowed as a carryback for any prior taxable year.
          (3) Amount which may be used in any prior taxable 
        year.--An amount shall be allowed as a carryback under 
        paragraph (1) to any prior taxable year only to the 
        extent--
                  (A) such amount does not exceed the net 
                section 1256 contract gain for such year, and
                  (B) the allowance of such carryback does not 
                increase or produce a net operating loss (as 
                defined in section 172(c)) for such year.
          (4) Net section 1256 contracts loss.--For purposes of 
        paragraph (1), the term ``net section 1256 contracts 
        loss'' means the lesser of--
                  (A) the net capital loss for the taxable year 
                determined by taking into account only gains 
                and losses from section 1256 contracts, or
                  (B) the sum of the amounts which, but for 
                paragraph (6)(A), would be treated as capital 
                losses in the succeeding taxable year under 
                subparagraphs (A) and (B) of subsection (b)(1).
          (5) Net section 1256 contract gain.--For purposes of 
        paragraph (1)--
                  (A) In general.--The term ``net section 1256 
                contract gain'' means the lesser of--
                          (i) the capital gain net income for 
                        the taxable year determined by taking 
                        into account only gains and losses from 
                        section 1256 contracts, or
                          (ii) the capital gain net income for 
                        the taxable year.
                  (B) Special rule.--The net section 1256 
                contract gain for any taxable year before the 
                loss year shall be computed without regard to 
                the net section 1256 contracts loss for the 
                loss year or for any taxable year thereafter.
          (6) Coordination with carryforward provisions of 
        subsection (b)(1)
                  (A) Carryforward amount reduced by amount 
                used as carryback.--For purposes of applying 
                subsection (b)(1), if any portion of the net 
                section 1256 contracts loss for any taxable 
                year is allowed as a carryback under paragraph 
                (1) to any preceding taxable year--
                          (i) 40 percent of the amount allowed 
                        as a carryback shall be treated as a 
                        short-term capital gain for the loss 
                        year, and
                          (ii) 60 percent of the amount allowed 
                        as a carryback shall be treated as a 
                        long-term capital gain for the loss 
                        year.
                  (B) Carryover loss retains character as 
                attributable to section 1256 contract.--Any 
                amount carried forward as a short-term or long-
                term capital loss to any taxable year under 
                subsection (b)(1) (after the application of 
                subparagraph (A)) shall, to the extent 
                attributable to losses from section 1256 
                contracts, be treated as loss from section 1256 
                contracts for such taxable year.
          (7) Other definitions and special rules.--For 
        purposes of this subsection--
                  (A) Section 1256 contract.--The term 
                ``section 1256 contract'' means any section 
                1256 contract (as defined in section 1256(b)) 
                to which section 1256 applies.
                  (B) Exclusion for estates and trusts.--This 
                subsection shall not apply to any estate or 
                trust.

           *       *       *       *       *       *       *

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

           *       *       *       *       *       *       *

SEC. 1256. SECTION 1256 CONTRACTS MARKED TO MARKET.

  (a) General rule.--For purposes of this subtitle--
          (1) each section 1256 contract held by the taxpayer 
        at the close of the taxable year shall be treated as 
        sold for its fair market value on the last business day 
        of such taxable year (and any gain or loss shall be 
        taken into account for the taxable year),
          (2) proper adjustment shall be made in the amount of 
        any gain or loss subsequently realized for gain or loss 
        taken into account by reason of paragraph (1),
          (3) any gain or loss with respect to a section 1256 
        contract shall be treated as--
                  (A) short-term capital gain or loss, to the 
                extent of 40 percent of such gain or loss, and
                  (B) long-term capital gain or loss, to the 
                extent of 60 percent of such gain or loss, and
          (4) if all the offsetting positions making up any 
        straddle consist of section 1256 contracts to which 
        this section applies (and such straddle is not part of 
        a larger straddle), sections 1092 and 263(g) shall not 
        apply with respect to such straddle.
  (b) Section 1256 contract defined.--
          (1) In general.--For purposes of this section, the 
        term ``section 1256 contract'' means--
                  (A) any regulated futures contract,
                  (B) any foreign currency contract,
                  (C) any nonequity option,
                  (D) any dealer equity option, and
                  (E) any dealer securities futures contract.
          (2) Exceptions.--The term ``section 1256 contract'' 
        shall not include--
                  (A) any securities futures contract or option 
                on such a contract unless such contract or 
                option is a dealer securities futures contract, 
                or
                  (B) any interest rate swap, currency swap, 
                basis swap, interest rate cap, interest rate 
                floor, commodity swap, equity swap, equity 
                index swap, credit default swap, or similar 
                agreement.
  (c) Terminations, etc..--
          (1) In general.--The rules of paragraphs (1), (2), 
        and (3) of subsection (a) shall also apply to the 
        termination (or transfer) during the taxable year of 
        the taxpayer's obligation (or rights) with respect to a 
        section 1256 contract by offsetting, by taking or 
        making delivery, by exercise or being exercised, by 
        assignment or being assigned, by lapse, or otherwise.
          (2) Special rule where taxpayer takes delivery on or 
        exercises part of straddle.--If--
                  (A) 2 or more section 1256 contracts are part 
                of a straddle (as defined in section 1092(c)), 
                and
                  (B) the taxpayer takes delivery under or 
                exercises any of such contracts,
        then, for purposes of this section, each of the other 
        such contracts shall be treated as terminated on the 
        day on which the taxpayer took delivery.
          (3) Fair market value taken into account.--For 
        purposes of this subsection, fair market value at the 
        time of the termination (or transfer) shall be taken 
        into account.
  (d) Elections with respect to mixed straddles.--
          (1) Election.--The taxpayer may elect to have this 
        section not to apply to all section 1256 contracts 
        which are part of a mixed straddle.
          (2) Time and manner.--An election under paragraph (1) 
        shall be made at such time and in such manner as the 
        Secretary may by regulations prescribe.
          (3) Election revocable only with consent.--An 
        election under paragraph (1) shall apply to the 
        taxpayer's taxable year for which made and to all 
        subsequent taxable years, unless the Secretary consents 
        to a revocation of such election.
          (4) Mixed straddle.--For purposes of this subsection, 
        the term ``mixed straddle'' means any straddle (as 
        defined in section 1092(c))--
                  (A) at least 1 (but not all) of the positions 
                of which are section 1256 contracts, and
                  (B) with respect to which each position 
                forming part of such straddle is clearly 
                identified, before the close of the day on 
                which the first section 1256 contract forming 
                part of the straddle is acquired (or such 
                earlier time as the Secretary may prescribe by 
                regulations), as being part of such straddle.
  (e) Mark to market not to apply to hedging transactions.--
          (1) Section not to apply.--Subsection (a) shall not 
        apply in the case of a hedging transaction.
          (2) Definition of hedging transaction.--For purposes 
        of this subsection, the term ``hedging transaction'' 
        means any hedging transaction (as defined in section 
        1221(b)(2)(A)) if, before the close of the day on which 
        such transaction was entered into (or such earlier time 
        as the Secretary may prescribe by regulations), the 
        taxpayer clearly identifies such transaction as being a 
        hedging transaction.
          (3) Special rule for syndicates.--
                  (A) In general.--Notwithstanding paragraph 
                (2), the term ``hedging transaction'' shall not 
                include any transaction entered into by or for 
                a syndicate.
                  (B) Syndicate defined.--For purposes of 
                subparagraph (A), the term ``syndicate'' means 
                any partnership or other entity (other than a 
                corporation which is not an S corporation) if 
                more than 35 percent of the losses of such 
                entity during the taxable year are allocable to 
                limited partners or limited entrepreneurs 
                (within the meaning of [section 461(k)(4)] 
                section 461(j)(4)).
                  (C) Holdings attributable to active 
                management.--For purposes of subparagraph (B), 
                an interest in an entity shall not be treated 
                as held by a limited partner or a limited 
                entrepreneur (within the meaning of [section 
                461(k)(4)]section 461(j)(4))--
                          (i) for any period if during such 
                        period such interest is held by an 
                        individual who actively participates at 
                        all times during such period in the 
                        management of such entity,
                          (ii) for any period if during such 
                        period such interest is held by the 
                        spouse, children, grandchildren, and 
                        parents of an individual who actively 
                        participates at all times during such 
                        period in the management of such 
                        entity,
                          (iii) if such interest is held by an 
                        individual who actively participated in 
                        the management of such entity for a 
                        period of not less than 5 years,
                          (iv) if such interest is held by the 
                        estate of an individual who actively 
                        participated in the management of such 
                        entity or is held by the estate of an 
                        individual if with respect to such 
                        individual such interest was at any 
                        time described in clause (ii), or
                          (v) if the Secretary determines (by 
                        regulations or otherwise) that such 
                        interest should be treated as held by 
                        an individual who actively participates 
                        in the management of such entity, and 
                        that such entity and such interest are 
                        not used (or to be used) for tax-
                        avoidance purposes.
                For purposes of this subparagraph, a legally 
                adopted child of an individual shall be treated 
                as a child of such individual by blood.
          (4) Limitation on losses from hedging transactions.--
                  (A) In general.--
                          (i) Limitation.--Any hedging loss for 
                        a taxable year which is allocable to 
                        any limited partner or limited 
                        entrepreneur (within the meaning of 
                        paragraph (3)) shall be allowed only to 
                        the extent of the taxable income of 
                        such limited partner or entrepreneur 
                        for such taxable year attributable to 
                        the trade or business in which the 
                        hedging transactions were entered into. 
                        For purposes of the preceding sentence, 
                        taxable income shall be determined by 
                        not taking into account items 
                        attributable to hedging transactions.
                          (ii) Carryover of disallowed loss.--
                        Any hedging loss disallowed under 
                        clause (i) shall be treated as a 
                        deduction attributable to a hedging 
                        transaction allowable in the first 
                        succeeding taxable year.
                  (B) Exception where economic loss.--
                Subparagraph (A)(i) shall not apply to any 
                hedging loss to the extent that such loss 
                exceeds the aggregate unrecognized gains from 
                hedging transactions as of the close of the 
                taxable year attributable to the trade or 
                business in which the hedging transactions were 
                entered into.
                  (C) Exception for certain hedging 
                transactions.--In the case of any hedging 
                transaction relating to property other than 
                stock or securities, this paragraph shall apply 
                only in the case of a taxpayer described in 
                section 465(a)(1).
                  (D) Hedging loss.--The term ``hedging loss'' 
                means the excess of--
                          (i) the deductions allowable under 
                        this chapter for the taxable year 
                        attributable to hedging transactions 
                        (determined without regard to 
                        subparagraph (A)(i)), over
                          (ii) income received or accrued by 
                        the taxpayer during such taxable year 
                        from such transactions.
                  (E) Unrecognized gain.--The term 
                ``unrecognized gain'' has the meaning given to 
                such term by section 1092(a)(3).
  (f) Special rules.--
          (1) Denial of capital gains treatment for property 
        identified as part of a hedging transaction.--For 
        purposes of this title, gain from any property shall in 
        no event be considered as gain from the sale or 
        exchange of a capital asset if such property was at any 
        time personal property (as defined in section 
        1092(d)(1)) identified under subsection (e)(2) by the 
        taxpayer as being part of a hedging transaction.
          (2) Subsection (a)(3) not to apply to ordinary income 
        property.--Paragraph (3) of subsection (a) shall not 
        apply to any gain or loss which, but for such 
        paragraph, would be ordinary income or loss.
          (3) Capital gain treatment for traders in section 
        1256 contracts.--
                  (A) In general.--For purposes of this title, 
                gain or loss from trading of section 1256 
                contracts shall be treated as gain or loss from 
                the sale or exchange of a capital asset.
                  (B) Exception for certain hedging 
                transactions.--Subparagraph (A) shall not apply 
                to any section 1256 contract to the extent such 
                contract is held for purposes of hedging 
                property if any loss with respect to such 
                property in the hands of the taxpayer would be 
                ordinary loss.
                  (C) Treatment of underlying property.--For 
                purposes of determining whether gain or loss 
                with respect to any property is ordinary income 
                or loss, the fact that the taxpayer is actively 
                engaged in dealing in or trading section 1256 
                contracts related to such property shall not be 
                taken into account.
          (4) Special rule for dealer equity options and dealer 
        securities futures contracts of limited partners or 
        limited entrepreneurs.--In the case of any gain or loss 
        with respect to dealer equity options, or dealer 
        securities futures contracts, which are allocable to 
        limited partners or limited entrepreneurs (within the 
        meaning of subsection (e)(3))--
                  (A) paragraph (3) of subsection (a) shall not 
                apply to any such gain or loss, and
                  (B) all such gains or losses shall be treated 
                as short-term capital gains or losses, as the 
                case may be.
          (5) Special rule related to losses.--Section 1091 
        (relating to loss from wash sales of stock or 
        securities) shall not apply to any loss taken into 
        account by reason of paragraph (1) of subsection (a).
  (g) Definitions.--For purposes of this section--
          (1) Regulated futures contracts defined.--The term 
        ``regulated futures contract'' means a contract--
                  (A) with respect to which the amount required 
                to be deposited and the amount which may be 
                withdrawn depends on a system of marking to 
                market, and
                  (B) which is traded on or subject to the 
                rules of a qualified board or exchange.
          (2) Foreign currency contract defined.--
                  (A) Foreign currency contract.--The term 
                ``foreign currency contract'' means a 
                contract--
                          (i) which requires delivery of, or 
                        the settlement of which depends on the 
                        value of, a foreign currency which is a 
                        currency in which positions are also 
                        traded through regulated futures 
                        contracts,
                          (ii) which is traded in the interbank 
                        market, and
                          (iii) which is entered into at arm's 
                        length at a price determined by 
                        reference to the price in the interbank 
                        market.
                  (B) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                subparagraph (A), including regulations 
                excluding from the application of subparagraph 
                (A) any contract (or type of contract) if its 
                application thereto would be inconsistent with 
                such purposes.
          (3) Nonequity option.--The term ``nonequity option'' 
        means any listed option which is not an equity option.
          (4) Dealer equity option.--The term ``dealer equity 
        option'' means, with respect to an options dealer, any 
        listed option which--
                  (A) is an equity option,
                  (B) is purchased or granted by such options 
                dealer in the normal course of his activity of 
                dealing in options, and
                  (C) is listed on the qualified board or 
                exchange on which such options dealer is 
                registered.
          (5) Listed option.--The term ``listed option'' means 
        any option (other than a right to acquire stock from 
        the issuer) which is traded on (or subject to the rules 
        of) a qualified board or exchange.
          (6) Equity option.--The term ``equity option'' means 
        any option--
                  (A) to buy or sell stock, or
                  (B) the value of which is determined directly 
                or indirectly by reference to any stock or any 
                narrow-based security index (as defined in 
                section 3(a)(55) of the Securities Exchange Act 
                of 1934, as in effect on the date of the 
                enactment of this paragraph).
        The term ``equity option'' includes such an option on a 
        group of stocks only if such group meets the 
        requirements for a narrow-based security index (as so 
        defined). The Secretary may prescribe regulations 
        regarding the status of options the values of which are 
        determined directly or indirectly by reference to any 
        index which becomes (or ceases to be) a narrow-based 
        security index (as so defined).
          (7) Qualified board or exchange.--The term 
        ``qualified board or exchange'' means--
                  (A) a national securities exchange which is 
                registered with the Securities and Exchange 
                Commission,
                  (B) a domestic board of trade designated as a 
                contract market by the Commodity Futures 
                Trading Commission, or
                  (C) any other exchange, board of trade, or 
                other market which the Secretary determines has 
                rules adequate to carry out the purposes of 
                this section.
          (8) Options dealer.--
                  (A) In general.--The term ``options dealer'' 
                means any person registered with an appropriate 
                national securities exchange as a market maker 
                or specialist in listed options.
                  (B) Persons trading in other markets.--In any 
                case in which the Secretary makes a 
                determination under subparagraph (C) of 
                paragraph (7), the term ``options dealer'' also 
                includes any person whom the Secretary 
                determines performs functions similar to the 
                persons described in subparagraph (A). Such 
                determinations shall be made to the extent 
                appropriate to carry out the purposes of this 
                section.
          (9) Dealer securities futures contract.--
                  (A) In general.--The term ``dealer securities 
                futures contract'' means, with respect to any 
                dealer, any securities futures contract, and 
                any option on such a contract, which--
                          (i) is entered into by such dealer 
                        (or, in the case of an option, is 
                        purchased or granted by such dealer) in 
                        the normal course of his activity of 
                        dealing in such contracts or options, 
                        as the case may be, and
                          (ii) is traded on a qualified board 
                        or exchange.
                  (B) Dealer.--For purposes of subparagraph 
                (A), a person shall be treated as a dealer in 
                securities futures contracts or options on such 
                contracts if the Secretary determines that such 
                person performs, with respect to such contracts 
                or options, as the case may be, functions 
                similar to the functions performed by persons 
                described in paragraph (8)(A). Such 
                determination shall be made to the extent 
                appropriate to carry out the purposes of this 
                section.
                  (C) Securities futures contract.--The term 
                ``securities futures contract'' has the meaning 
                given to such term by section 1234B.

           *       *       *       *       *       *       *

Subchapter S--Tax Treatment of S Corporations and Their Shareholders

           *       *       *       *       *       *       *

PART I--IN GENERAL

           *       *       *       *       *       *       *

SEC. 1361. S CORPORATION DEFINED.

  (a) S corporation defined.--
          (1) In general.--For purposes of this title, the term 
        ``S corporation'' means, with respect to any taxable 
        year, a small business corporation for which an 
        election under section 1362(a) is in effect for such 
        year.
          (2) C corporation.--For purposes of this title, the 
        term ``C corporation'' means, with respect to any 
        taxable year, a corporation which is not an S 
        corporation for such year.
  (b) Small business corporation.--
          (1) In general.--For purposes of this subchapter, the 
        term ``small business corporation'' means a domestic 
        corporation which is not an ineligible corporation and 
        which does not--
                  (A) have more than 100 shareholders,
                  (B) have as a shareholder a person (other 
                than an estate, a trust described in subsection 
                (c)(2), or an organization described in 
                subsection (c)(6)) who is not an individual,
                  (C) have a nonresident alien as a 
                shareholder, and
                  (D) have more than 1 class of stock.
          (2) Ineligible corporation defined.--For purposes of 
        paragraph (1), the term ``ineligible corporation'' 
        means any corporation which is--
                  (A) a financial institution which uses the 
                reserve method of accounting for bad debts 
                described in section 585,
                  (B) an insurance company subject to tax under 
                subchapter L, or
                  (C) a DISC or former DISC.
          (3) Treatment of certain wholly owned subsidiaries.--
                  (A) In general.--Except as provided in 
                regulations prescribed by the Secretary, for 
                purposes of this title--
                          (i) a corporation which is a 
                        qualified subchapter S subsidiary shall 
                        not be treated as a separate 
                        corporation, and
                          (ii) all assets, liabilities, and 
                        items of income, deduction, and credit 
                        of a qualified subchapter S subsidiary 
                        shall be treated as assets, 
                        liabilities, and such items (as the 
                        case may be) of the S corporation.
                  (B) Qualified subchapter S subsidiary.--For 
                purposes of this paragraph, the term 
                ``qualified subchapter S subsidiary'' means any 
                domestic corporation which is not an ineligible 
                corporation (as defined in paragraph (2)), if--
                          (i) 100 percent of the stock of such 
                        corporation is held by the S 
                        corporation, and
                          (ii) the S corporation elects to 
                        treat such corporation as a qualified 
                        subchapter S subsidiary.
                  (C) Treatment of terminations of qualified 
                subchapter S subsidiary status.--
                          (i) In general.--For purposes of this 
                        title, if any corporation which was a 
                        qualified subchapter S subsidiary 
                        ceases to meet the requirements of 
                        subparagraph (B), such corporation 
                        shall be treated as a new corporation 
                        acquiring all of its assets (and 
                        assuming all of its liabilities) 
                        immediately before such cessation from 
                        the S corporation in exchange for its 
                        stock.
                          (ii) Termination by reason of sale of 
                        stock.--If the failure to meet the 
                        requirements of subparagraph (B) is by 
                        reason of the sale of stock of a 
                        corporation which is a qualified 
                        subchapter S subsidiary, the sale of 
                        such stock shall be treated as if--
                                  (I) the sale were a sale of 
                                an undivided interest in the 
                                assets of such corporation 
                                (based on the percentage of the 
                                corporation's stock sold), and
                                  (II) the sale were followed 
                                by an acquisition by such 
                                corporation of all of its 
                                assets (and the assumption by 
                                such corporation of all of its 
                                liabilities) in a transaction 
                                to which section 351 applies.
                  (D) Election after termination.--If a 
                corporation's status as a qualified subchapter 
                S subsidiary terminates, such corporation (and 
                any successor corporation) shall not be 
                eligible to make--
                          (i) an election under subparagraph 
                        (B)(ii) to be treated as a qualified 
                        subchapter S subsidiary, or
                          (ii) an election under section 
                        1362(a) to be treated as an S 
                        corporation,
                before its 5th taxable year which begins after 
                the 1st taxable year for which such termination 
                was effective, unless the Secretary consents to 
                such election.
                  (E) Information returns.--Except to the 
                extent provided by the Secretary, this 
                paragraph shall not apply to part III of 
                subchapter A of chapter 61 (relating to 
                information returns).
  (c) Special rules for applying subsection (b).--
          (1) Members of a family treated as 1 shareholder.--
                  (A) In general.--For purposes of subsection 
                (b)(1)(A), there shall be treated as one 
                shareholder--
                          (i) a husband and wife (and their 
                        estates), and
                          (ii) all members of a family (and 
                        their estates).
                  (B) Members of a family.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``members 
                        of a family'' means a common ancestor, 
                        any lineal descendant of such common 
                        ancestor, and any spouse or former 
                        spouse of such common ancestor or any 
                        such lineal descendant.
                          (ii) Common ancestor.--An individual 
                        shall not be considered to be a common 
                        ancestor if, on the applicable date, 
                        the individual is more than 6 
                        generations removed from the youngest 
                        generation of shareholders who would 
                        (but for this subparagraph) be members 
                        of the family. For purposes of the 
                        preceding sentence, a spouse (or former 
                        spouse) shall be treated as being of 
                        the same generation as the individual 
                        to whom such spouse is (or was) 
                        married.
                          (iii) Applicable date.--The term 
                        ``applicable date'' means the latest 
                        of--
                                  (I) the date the election 
                                under section 1362(a) is made,
                                  (II) the earliest date that 
                                an individual described in 
                                clause (i) holds stock in the S 
                                corporation, or
                                  (III) October 22, 2004.
                  (C) Effect of adoption, etc..--Any legally 
                adopted child of an individual, any child who 
                is lawfully placed with an individual for legal 
                adoption by the individual, and any eligible 
                foster child of an individual (within the 
                meaning of [section 152(f)(1)(C)] section 
                7706(f)(1)(C)), shall be treated as a child of 
                such individual by blood.
          (2) Certain trusts permitted as shareholders.--
                  (A) In general.--For purposes of subsection 
                (b)(1)(B), the following trusts may be 
                shareholders:
                          (i) A trust all of which is treated 
                        (under subpart E of part I of 
                        subchapter J of this chapter) as owned 
                        by an individual who is a citizen or 
                        resident of the United States.
                          (ii) A trust which was described in 
                        clause (i) immediately before the death 
                        of the deemed owner and which continues 
                        in existence after such death, but only 
                        for the 2-year period beginning on the 
                        day of the deemed owner's death.
                          (iii) A trust with respect to stock 
                        transferred to it pursuant to the terms 
                        of a will, but only for the 2-year 
                        period beginning on the day on which 
                        such stock is transferred to it.
                          (iv) A trust created primarily to 
                        exercise the voting power of stock 
                        transferred to it.
                          (v) An electing small business trust.
                          (vi) In the case of a corporation 
                        which is a bank (as defined in section 
                        581) or a depository institution 
                        holding company (as defined in section 
                        3(w)(1) of the Federal Deposit 
                        Insurance Act (12 U.S.C. 1813(w)(1)), a 
                        trust which constitutes an individual 
                        retirement account under section 
                        408(a), including one designated as a 
                        Roth IRA under section 408A, but only 
                        to the extent of the stock held by such 
                        trust in such bank or company as of the 
                        date of the enactment of this clause.
                This subparagraph shall not apply to any 
                foreign trust.
                  (B) Treatment as shareholders.--For purposes 
                of subsection (b)(1)--
                          (i) In the case of a trust described 
                        in clause (i) of subparagraph (A), the 
                        deemed owner shall be treated as the 
                        shareholder.
                          (ii) In the case of a trust described 
                        in clause (ii) of subparagraph (A), the 
                        estate of the deemed owner shall be 
                        treated as the shareholder.
                          (iii) In the case of a trust 
                        described in clause (iii) of 
                        subparagraph (A), the estate of the 
                        testator shall be treated as the 
                        shareholder.
                          (iv) In the case of a trust described 
                        in clause (iv) of subparagraph (A), 
                        each beneficiary of the trust shall be 
                        treated as a shareholder.
                          (v) In the case of a trust described 
                        in clause (v) of subparagraph (A), each 
                        potential current beneficiary of such 
                        trust shall be treated as a 
                        shareholder; except that, if for any 
                        period there is no potential current 
                        beneficiary of such trust, such trust 
                        shall be treated as the shareholder 
                        during such period. This clause shall 
                        not apply for purposes of subsection 
                        (b)(1)(C).
                          (vi) In the case of a trust described 
                        in clause (vi) of subparagraph (A), the 
                        individual for whose benefit the trust 
                        was created shall be treated as the 
                        shareholder.
          (3) Estate of individual in bankruptcy may be 
        shareholder.--For purposes of subsection (b)(1)(B), the 
        term ``estate'' includes the estate of an individual in 
        a case under title 11 of the United States Code.
          (4) Differences in common stock voting rights 
        disregarded.--For purposes of subsection (b)(1)(D), a 
        corporation shall not be treated as having more than 1 
        class of stock solely because there are differences in 
        voting rights among the shares of common stock.
          (5) Straight debt safe harbor.--
                  (A) In general.--For purposes of subsection 
                (b)(1)(D), straight debt shall not be treated 
                as a second class of stock.
                  (B) Straight debt defined.--For purposes of 
                this paragraph, the term ``straight debt'' 
                means any written unconditional promise to pay 
                on demand or on a specified date a sum certain 
                in money if--
                          (i) the interest rate (and interest 
                        payment dates) are not contingent on 
                        profits, the borrower's discretion, or 
                        similar factors,
                          (ii) there is no convertibility 
                        (directly or indirectly) into stock, 
                        and
                          (iii) the creditor is an individual 
                        (other than a nonresident alien), an 
                        estate, a trust described in paragraph 
                        (2), or a person which is actively and 
                        regularly engaged in the business of 
                        lending money.
                  (C) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to provide for the proper 
                treatment of straight debt under this 
                subchapter and for the coordination of such 
                treatment with other provisions of this title.
          (6) Certain exempt organizations permitted as 
        shareholders.--For purposes of subsection (b)(1)(B), an 
        organization which is--
                  (A) described in section 401(a) or 501(c)(3), 
                and
                  (B) exempt from taxation under section 
                501(a), may be a shareholder in an S 
                corporation.
  (d) Special rule for qualified subchapter S trust.--
          (1) In general.--In the case of a qualified 
        subchapter S trust with respect to which a beneficiary 
        makes an election under paragraph (2)--
                  (A) such trust shall be treated as a trust 
                described in subsection (c)(2)(A)(i),
                  (B) for purposes of section 678(a), the 
                beneficiary of such trust shall be treated as 
                the owner of that portion of the trust which 
                consists of stock in an S corporation with 
                respect to which the election under paragraph 
                (2) is made, and
                  (C) for purposes of applying sections 465 and 
                469 to the beneficiary of the trust, the 
                disposition of the S corporation stock by the 
                trust shall be treated as a disposition by such 
                beneficiary.
          (2) Election.--
                  (A) In general.--A beneficiary of a qualified 
                subchapter S trust (or his legal 
                representative) may elect to have this 
                subsection apply.
                  (B) Manner and time of election.--
                          (i) Separate election with respect to 
                        each corporation.--An election under 
                        this paragraph shall be made separately 
                        with respect to each corporation the 
                        stock of which is held by the trust.
                          (ii) Elections with respect to 
                        successive income beneficiaries.--If 
                        there is an election under this 
                        paragraph with respect to any 
                        beneficiary, an election under this 
                        paragraph shall be treated as made by 
                        each successive beneficiary unless such 
                        beneficiary affirmatively refuses to 
                        consent to such election.
                          (iii) Time, manner, and form of 
                        election.--Any election, or refusal, 
                        under this paragraph shall be made in 
                        such manner and form, and at such time, 
                        as the Secretary may prescribe.
                  (C) Election irrevocable.--An election under 
                this paragraph, once made, may be revoked only 
                with the consent of the Secretary.
                  (D) Grace period.--An election under this 
                paragraph shall be effective up to 15 days and 
                2 months before the date of the election.
          (3) Qualified subchapter S trust.--For purposes of 
        this subsection, the term ``qualified subchapter S 
        trust'' means a trust--
                  (A) the terms of which require that--
                          (i) during the life of the current 
                        income beneficiary, there shall be only 
                        1 income beneficiary of the trust,
                          (ii) any corpus distributed during 
                        the life of the current income 
                        beneficiary may be distributed only to 
                        such beneficiary,
                          (iii) the income interest of the 
                        current income beneficiary in the trust 
                        shall terminate on the earlier of such 
                        beneficiary's death or the termination 
                        of the trust, and
                          (iv) upon the termination of the 
                        trust during the life of the current 
                        income beneficiary, the trust shall 
                        distribute all of its assets to such 
                        beneficiary, and
                  (B) all of the income (within the meaning of 
                section 643(b)) of which is distributed (or 
                required to be distributed) currently to 1 
                individual who is a citizen or resident of the 
                United States.
        A substantially separate and independent share of a 
        trust within the meaning of section 663(c) shall be 
        treated as a separate trust for purposes of this 
        subsection and subsection (c).
          (4) Trust ceasing to be qualified.--
                  (A) Failure to meet requirements of paragraph 
                (3)(A).--If a qualified subchapter S trust 
                ceases to meet any requirement of paragraph 
                (3)(A), the provisions of this subsection shall 
                not apply to such trust as of the date it 
                ceases to meet such requirement.
                  (B) Failure to meet requirements of paragraph 
                (3)(B).--If any qualified subchapter S trust 
                ceases to meet any requirement of paragraph 
                (3)(B) but continues to meet the requirements 
                of paragraph (3)(A), the provisions of this 
                subsection shall not apply to such trust as of 
                the first day of the first taxable year 
                beginning after the first taxable year for 
                which it failed to meet the requirements of 
                paragraph (3)(B).
  (e) Electing small business trust defined.--
          (1) Electing small business trust.--For purposes of 
        this section--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``electing small 
                business trust'' means any trust if--
                          (i) such trust does not have as a 
                        beneficiary any person other than (I) 
                        an individual, (II) an estate, (III) an 
                        organization described in paragraph 
                        (2), (3), (4), or (5) of section 
                        170(c), or (IV) an organization 
                        described in section 170(c)(1) which 
                        holds a contingent interest in such 
                        trust and is not a potential current 
                        beneficiary,
                          (ii) no interest in such trust was 
                        acquired by purchase, and
                          (iii) an election under this 
                        subsection applies to such trust.
                  (B) Certain trusts not eligible.--The term 
                ``electing small business trust'' shall not 
                include--
                          (i) any qualified subchapter S trust 
                        (as defined in subsection (d)(3)) if an 
                        election under subsection (d)(2) 
                        applies to any corporation the stock of 
                        which is held by such trust,
                          (ii) any trust exempt from tax under 
                        this subtitle, and
                          (iii) any charitable remainder 
                        annuity trust or charitable remainder 
                        unitrust (as defined in section 
                        664(d)).
                  (C) Purchase.--For purposes of subparagraph 
                (A), the term ``purchase'' means any 
                acquisition if the basis of the property 
                acquired is determined under section 1012.
          (2) Potential current beneficiary.--For purposes of 
        this section, the term ``potential current 
        beneficiary'' means, with respect to any period, any 
        person who at any time during such period is entitled 
        to, or at the discretion of any person may receive, a 
        distribution from the principal or income of the trust 
        (determined without regard to any power of appointment 
        to the extent such power remains unexercised at the end 
        of such period). If a trust disposes of all of the 
        stock which it holds in an S corporation, then, with 
        respect to such corporation, the term ``potential 
        current beneficiary'' does not include any person who 
        first met the requirements of the preceding sentence 
        during the 1-year period ending on the date of such 
        disposition.
          (3) Election.--An election under this subsection 
        shall be made by the trustee. Any such election shall 
        apply to the taxable year of the trust for which made 
        and all subsequent taxable years of such trust unless 
        revoked with the consent of the Secretary.
          (4) Cross reference.--For special treatment of 
        electing small business trusts, see section 641(c).
  (f) Restricted bank director stock.--
          (1) In general.--Restricted bank director stock shall 
        not be taken into account as outstanding stock of the S 
        corporation in applying this subchapter (other than 
        section 1368(f)).
          (2) Restricted bank director stock.--For purposes of 
        this subsection, the term ``restricted bank director 
        stock'' means stock in a bank (as defined in section 
        581) or a depository institution holding company (as 
        defined in section 3(w)(1) of the Federal Deposit 
        Insurance Act (12 U.S.C. 1813(w)(1))), if such stock--
                  (A) is required to be held by an individual 
                under applicable Federal or State law in order 
                to permit such individual to serve as a 
                director, and
                  (B) is subject to an agreement with such bank 
                or company (or a corporation which controls 
                (within the meaning of section 368(c)) such 
                bank or company) pursuant to which the holder 
                is required to sell back such stock (at the 
                same price as the individual acquired such 
                stock) upon ceasing to hold the office of 
                director.
          (3) Cross reference.--For treatment of certain 
        distributions with respect to restricted bank director 
        stock, see section 1368(f).
  (g) Special rule for bank required to change from the reserve 
method of accounting on becoming S corporation.--In the case of 
a bank which changes from the reserve method of accounting for 
bad debts described in section 585 or 593 for its first taxable 
year for which an election under section 1362(a) is in effect, 
the bank may elect to take into account any adjustments under 
section 481 by reason of such change for the taxable year 
immediately preceding such first taxable year.

           *       *       *       *       *       *       *

CHAPTER 2--TAX ON SELF-EMPLOYMENT INCOME

           *       *       *       *       *       *       *

SEC. 1402. DEFINITIONS.

  (a) Net earnings from self-employment.--The term ``net 
earnings from self-employment'' means the gross income derived 
by an individual from any trade or business carried on by such 
individual, less the deductions allowed by this subtitle which 
are attributable to such trade or business, plus his 
distributive share (whether or not distributed) of income or 
loss described in section 702(a)(8) from any trade or business 
carried on by a partnership of which he is a member; except 
that in computing such gross income and deductions and such 
distributive share of partnership ordinary income or loss--
          (1) there shall be excluded rentals from real estate 
        and from personal property leased with the real estate 
        (including such rentals paid in crop shares, and 
        including payments under section 1233(a)(2) of the Food 
        Security Act of 1985 (16 U.S.C. 3833(a)(2)) to 
        individuals receiving benefits under section 202 or 223 
        of the Social Security Act) together with the 
        deductions attributable thereto, unless such rentals 
        are received in the course of a trade or business as a 
        real estate dealer; except that the preceding 
        provisions of this paragraph shall not apply to any 
        income derived by the owner or tenant of land if (A) 
        such income is derived under an arrangement, between 
        the owner or tenant and another individual, which 
        provides that such other individual shall produce 
        agricultural or horticultural commodities (including 
        livestock, bees, poultry, and fur-bearing animals and 
        wildlife) on such land, and that there shall be 
        material participation by the owner or tenant (as 
        determined without regard to any activities of an agent 
        of such owner or tenant) in the production or the 
        management of the production of such agricultural or 
        horticultural commodities, and (B) there is material 
        participation by the owner or tenant (as determined 
        without regard to any activities of an agent of such 
        owner or tenant) with respect to any such agricultural 
        or horticultural commodity;
          (2) there shall be excluded dividends on any share of 
        stock, and interest on any bond, debenture, note, or 
        certificate, or other evidence of indebtedness, issued 
        with interest coupons or in registered form by any 
        corporation (including one issued by a government or 
        political subdivision thereof), unless such dividends 
        and interest are received in the course of a trade or 
        business as a dealer in stocks or securities;
          (3) there shall be excluded any gain or loss--
                  (A) which is considered as gain or loss from 
                the sale or exchange of a capital asset,
                  (B) from the cutting of timber, or the 
                disposal of timber, coal, or iron ore, if 
                section 631 applies to such gain or loss, or
                  (C) from the sale, exchange, involuntary 
                conversion, or other disposition of property if 
                such property is neither--
                          (i) stock in trade or other property 
                        of a kind which would properly be 
                        includible in inventory if on hand at 
                        the close of the taxable year, nor
                          (ii) property held primarily for sale 
                        to customers in the ordinary course of 
                        the trade or business;
          (4) the deduction for net operating losses provided 
        in section 172 shall not be allowed;
          (5) if--
                  (A) any of the income derived from a trade or 
                business (other than a trade or business 
                carried on by a partnership) is community 
                income under community property laws applicable 
                to such income, the gross income and deductions 
                attributable to such trade or business shall be 
                treated as the gross income and deductions of 
                the spouse carrying on such trade or business 
                or, if such trade or business is jointly 
                operated, treated as the gross income and 
                deductions of each spouse on the basis of their 
                respective distributive share of the gross 
                income and deductions; and
                  (B) any portion of a partner's distributive 
                share of the ordinary income or loss from a 
                trade or business carried on by a partnership 
                is community income or loss under the community 
                property laws applicable to such share, all of 
                such distributive share shall be included in 
                computing the net earnings from self-employment 
                of such partner, and no part of such share 
                shall be taken into account in computing the 
                net earnings from self-employment of the spouse 
                of such partner;
          (6) a resident of Puerto Rico shall compute his net 
        earnings from self-employment in the same manner as a 
        citizen of the United States but without regard to 
        section 933;
          [(7) the deduction for personal exemptions provided 
        in section 151 shall not be allowed;]
          (8) an individual who is a duly ordained, 
        commissioned, or licensed minister of a church or a 
        member of a religious order shall compute his net 
        earnings from self-employment derived from the 
        performance of service described in subsection (c)(4) 
        without regard to section 107 (relating to rental value 
        of parsonages), section 119 (relating to meals and 
        lodging furnished for the convenience of the employer), 
        and section 911 (relating to citizens or residents of 
        the United States living abroad), but shall not include 
        in such net earnings from self-employment the rental 
        value of any parsonage or any parsonage allowance 
        (whether or not excludable under section 107) provided 
        after the individual retires, or any other retirement 
        benefit received by such individual from a church plan 
        (as defined in section 414(e)) after the individual 
        retires;
          (9) the exclusion from gross income provided by 
        section 931 shall not apply;
          (10) there shall be excluded amounts received by a 
        partner pursuant to a written plan of the partnership, 
        which meets such requirements as are prescribed by the 
        Secretary, and which provides for payments on account 
        of retirement, on a periodic basis, to partners 
        generally or to a class or classes of partners, such 
        payments to continue at least until such partner's 
        death, if--
                  (A) such partner rendered no services with 
                respect to any trade or business carried on by 
                such partnership (or its successors) during the 
                taxable year of such partnership (or its 
                successors), ending within or with his taxable 
                year, in which such amounts were received, and
                  (B) no obligation exists (as of the close of 
                the partnership's taxable year referred to in 
                subparagraph (A)) from the other partners to 
                such partner except with respect to retirement 
                payments under such plan, and
                  (C) such partner's share, if any, of the 
                capital of the partnership has been paid to him 
                in full before the close of the partnership's 
                taxable year referred to in subparagraph (A);
          (11) the exclusion from gross income provided by 
        section 911(a)(1) shall not apply;
          (12) in lieu of the deduction provided by section 
        164(f) (relating to deduction for one-half of self-
        employment taxes), there shall be allowed a deduction 
        equal to the product of--
                  (A) the taxpayer's net earnings from self-
                employment for the taxable year (determined 
                without regard to this paragraph), and
                  (B) one-half of the sum of the rates imposed 
                by subsections (a) and (b) of section 1401 for 
                such year (determined without regard to the 
                rate imposed under paragraph (2) of section 
                1401(b));
          (13) there shall be excluded the distributive share 
        of any item of income or loss of a limited partner, as 
        such, other than guaranteed payments described in 
        section 707(c) to that partner for services actually 
        rendered to or on behalf of the partnership to the 
        extent that those payments are established to be in the 
        nature of remuneration for those services;
          (14) in the case of church employee income, the 
        special rules of subsection (j)(1) shall apply;
          (15) in the case of a member of an Indian tribe, the 
        special rules of section 7873 (relating to income 
        derived by Indians from exercise of fishing rights) 
        shall apply;
          (16) the deduction provided by section 199 shall not 
        be allowed; and
          (17) notwithstanding the preceding provisions of this 
        subsection, each spouse's share of income or loss from 
        a qualified joint venture shall be taken into account 
        as provided in section 761(f) in determining net 
        earnings from self-employment of such spouse.
If the taxable year of a partner is different from that of the 
partnership, the distributive share which he is required to 
include in computing his net earnings from self-employment 
shall be based on the ordinary income or loss of the 
partnership for any taxable year of the partnership ending 
within or with his taxable year. In the case of any trade or 
business which is carried on by an individual or by a 
partnership and in which, if such trade or business were 
carried on exclusively by employees, the major portion of the 
services would constitute agricultural labor as defined in 
section 3121(g)--
          
                  
                          (i) in the case of an individual, if 
                        the gross income derived by him from 
                        such trade or business is not more than 
                        the upper limit, the net earnings from 
                        self-employment derived by him from 
                        such trade or business may, at his 
                        option, be deemed to be 66 2/3 percent 
                        of such gross income; or
                          (ii) in the case of an individual, if 
                        the gross income derived by him from 
                        such trade or business is more than the 
                        upper limit and the net earnings from 
                        self-employment derived by him from 
                        such trade or business (computed under 
                        this subsection without regard to this 
                        sentence) are less than the lower 
                        limit, the net earnings from self-
                        employment derived by him from such 
                        trade or business may, at his option, 
                        be deemed to be the lower limit; and
                          (iii) in the case of a member of a 
                        partnership, if his distributive share 
                        of the gross income of the partnership 
                        derived from such trade or business 
                        (after such gross income has been 
                        reduced by the sum of all payments to 
                        which section 707(c) applies) is not 
                        more than the upper limit, his 
                        distributive share of income described 
                        in section 702(a)(8) derived from such 
                        trade or business may, at his option, 
                        be deemed to be an amount equal to 66 
                        2/3 percent of his distributive share 
                        of such gross income (after such gross 
                        income has been so reduced); or
                          (iv) in the case of a member of a 
                        partnership, if his distributive share 
                        of the gross income of the partnership 
                        derived from such trade or business 
                        (after such gross income has been 
                        reduced by the sum of all payments to 
                        which section 707(c) applies) is more 
                        than the upper limit and his 
                        distributive share (whether or not 
                        distributed) of income described in 
                        section 702(a)(8) derived from such 
                        trade or business (computed under this 
                        subsection without regard to this 
                        sentence) is less than the lower limit, 
                        his distributive share of income 
                        described in section 702(a)(8) derived 
                        from such trade or business may, at his 
                        option, be deemed to be the lower 
                        limit.
For purposes of the preceding sentence, gross income means--
                          (v) in the case of any such trade or 
                        business in which the income is 
                        computed under a cash receipts and 
                        disbursements method, the gross 
                        receipts from such trade or business 
                        reduced by the cost or other basis of 
                        property which was purchased and sold 
                        in carrying on such trade or business, 
                        adjusted (after such reduction) in 
                        accordance with the provisions of 
                        paragraphs (1) through (7) and 
                        paragraph (9) of this subsection; and
                          (vi) in the case of any such trade or 
                        business in which the income is 
                        computed under an accrual method, the 
                        gross income from such trade or 
                        business, adjusted in accordance with 
                        the provisions of paragraphs (1) 
                        through (7) and paragraph (9) of this 
                        subsection;
and, for purposes of such sentence, if an individual (including 
a member of a partnership) derives gross income from more than 
one such trade or business, such gross income (including his 
distributive share of the gross income of any partnership 
derived from any such trade or business) shall be deemed to 
have been derived from one trade or business.
   The preceding sentence and clauses (i) through (iv) of the 
second preceding sentence shall also apply in the case of any 
trade or business (other than a trade or business specified in 
such second preceding sentence) which is carried on by an 
individual who is self-employed on a regular basis as defined 
in subsection (h), or by a partnership of which an individual 
is a member on a regular basis as defined in subsection (h), 
but only if such individual's net earnings from self-employment 
as determined without regard to this sentence in the taxable 
year are less than the lower limit and less than 66 2/3 percent 
of the sum (in such taxable year) of such individual's gross 
income derived from all trades or businesses carried on by him 
and his distributive share of the income or loss from all 
trades or businesses carried on by all the partnerships of 
which he is a member; except that this sentence shall not apply 
to more than 5 taxable years in the case of any individual, and 
in no case in which an individual elects to determine the 
amount of his net earnings from self-employment for a taxable 
year under the provisions of the two preceding sentences with 
respect to a trade or business to which the second preceding 
sentence applies and with respect to a trade or business to 
which this sentence applies shall such net earnings for such 
year exceed the lower limit.
  (b) Self-employment income.--The term ``self-employment 
income'' means the net earnings from self-employment derived by 
an individual (other than a nonresident alien individual, 
except as provided by an agreement under section 233 of the 
Social Security Act) during any taxable year; except that such 
term shall not include--
          (1) in the case of the tax imposed by section 
        1401(a), that part of the net earnings from self-
        employment which is in excess of (i) an amount equal to 
        the contribution and benefit base (as determined under 
        section 230 of the Social Security Act) which is 
        effective for the calendar year in which such taxable 
        year begins, minus (ii) the amount of the wages paid to 
        such individual during such taxable years; or
          (2) the net earnings from self-employment, if such 
        net earnings for the taxable year are less than $400.
For purposes of paragraph (1), the term ``wages'' (A) includes 
such remuneration paid to an employee for services included 
under an agreement entered into pursuant to the provisions of 
section 3121(l) (relating to coverage of citizens of the United 
States who are employees of foreign affiliates of American 
employers), as would be wages under section 3121(a) if such 
services constituted employment under section 3121(b), and (B) 
includes compensation which is subject to the tax imposed by 
section 3201 or 3211. An individual who is not a citizen of the 
United States but who is a resident of the Commonwealth of 
Puerto Rico, the Virgin Islands, Guam, or American Samoa shall 
not, for purposes of this chapter be considered to be a 
nonresident alien individual. In the case of church employee 
income, the special rules of subsection (j)(2) shall apply for 
purposes of paragraph (2).
  (c) Trade or business.--The term ``trade or business'', when 
used with reference to self-employment income or net earnings 
from self-employment, shall have the same meaning as when used 
in section 162 (relating to trade or business expenses), except 
that such term shall not include--
          (1) the performance of the functions of a public 
        office, other than the functions of a public office of 
        a State or a political subdivision thereof with respect 
        to fees received in any period in which the functions 
        are performed in a position compensated solely on a fee 
        basis and in which such functions are not covered under 
        an agreement entered into by such State and the 
        Commissioner of Social Security pursuant to section 218 
        of the Social Security Act;
          (2) the performance of service by an individual as an 
        employee, other than--
                  (A) service described in section 
                3121(b)(14)(B) performed by an individual who 
                has attained the age of 18,
                  (B) service described in section 3121(b)(16),
                  (C) service described in section 3121(b)(11), 
                (12), or (15) performed in the United States 
                (as defined in section 3121(e)(2)) by a citizen 
                of the United States, except service which 
                constitutes ``employment'' under section 
                3121(y),
                  (D) service described in paragraph (4) of 
                this subsection,
                  (E) service performed by an individual as an 
                employee of a State or a political subdivision 
                thereof in a position compensated solely on a 
                fee basis with respect to fees received in any 
                period in which such service is not covered 
                under an agreement entered into by such State 
                and the Commissioner of Social Security 
                pursuant to section 218 of the Social Security 
                Act,
                  (F) service described in section 3121(b) 
                (20), and
                  (G) service described in section 
                3121(b)(8)(B);
          (3) the performance of service by an individual as an 
        employee or employee representative as defined in 
        section 3231;
          (4) the performance of service by a duly ordained, 
        commissioned, or licensed minister of a church in the 
        exercise of his ministry or by a member of a religious 
        order in the exercise of duties required by such order;
          (5) the performance of service by an individual in 
        the exercise of his profession as a Christian Science 
        practitioner; or
          (6) the performance of service by an individual 
        during the period for which an exemption under 
        subsection (g) is effective with respect to him.
The provisions of paragraph (4) or (5) shall not apply to 
service (other than service performed by a member of a 
religious order who has taken a vow of poverty as a member of 
such order) performed by an individual unless an exemption 
under subsection (e) is effective with respect to him.
  (d) Employee and wages.--The term ``employee'' and the term 
``wages'' shall have the same meaning as when used in chapter 
21 (sec. 3101 and following, relating to Federal Insurance 
Contributions Act).
  (e) Ministers, members of religious orders, and Christian 
Science practitioners.--
          (1) Exemption.--Subject to paragraph (2), any 
        individual who is (A) a duly ordained, commissioned, or 
        licensed minister of a church or a member of a 
        religious order (other than a member of a religious 
        order who has taken a vow of poverty as a member of 
        such order) or (B) a Christian Science practitioner, 
        upon filing an application (in such form and manner, 
        and with such official, as may be prescribed by 
        regulations made under this chapter) together with a 
        statement that either he is conscientiously opposed to, 
        or because of religious principles he is opposed to, 
        the acceptance (with respect to services performed by 
        him as such minister, member, or practitioner) of any 
        public insurance which makes payments in the event of 
        death, disability, old age, or retirement or makes 
        payments toward the cost of, or provides services for, 
        medical care (including the benefits of any insurance 
        system established by the Social Security Act) and, in 
        the case of an individual described in subparagraph 
        (A), that he has informed the ordaining, commissioning, 
        or licensing body of the church or order that he is 
        opposed to such insurance, shall receive an exemption 
        from the tax imposed by this chapter with respect to 
        services performed by him as such minister, member, or 
        practitioner. Notwithstanding the preceding sentence, 
        an exemption may not be granted to an individual under 
        this subsection if he had filed an effective waiver 
        certificate under this section as it was in effect 
        before its amendment in 1967.
          (2) Verification of application.--The Secretary may 
        approve an application for an exemption filed pursuant 
        to paragraph (1) only if the Secretary has verified 
        that the individual applying for the exemption is aware 
        of the grounds on which the individual may receive an 
        exemption pursuant to this subsection and that the 
        individual seeks exemption on such grounds. The 
        Secretary (or the Commissioner of Social Security under 
        an agreement with the Secretary) shall make such 
        verification by such means as prescribed in 
        regulations.
          (3) Time for filing application.--Any individual who 
        desires to file an application pursuant to paragraph 
        (1) must file such application on or before the due 
        date of the return (including any extension thereof) 
        for the second taxable year for which he has net 
        earnings from self-employment (computed without regard 
        to subsections (c)(4) and (c)(5)) of $400 or more, any 
        part of which was derived from the performance of 
        service described in subsection (c)(4) or (c)(5).
          (4) Effective date of exemption.--An exemption 
        received by an individual pursuant to this subsection 
        shall be effective for the first taxable year for which 
        he has net earnings from self-employment (computed 
        without regard to subsections (c)(4) and (c)(5)) of 
        $400 or more, any part of which was derived from the 
        performance of service described in subsection (c)(4) 
        or (c)(5), and for all succeeding taxable years. An 
        exemption received pursuant to this subsection shall be 
        irrevocable.
  (f) Partner's taxable year ending as the result of death.--In 
computing a partner's net earnings from self-employment for his 
taxable year which ends as a result of his death (but only if 
such taxable year ends within, and not with, the taxable year 
of the partnership), there shall be included so much of the 
deceased partner's distributive share of the partnership's 
ordinary income or loss for the partnership taxable year as is 
not attributable to an interest in the partnership during any 
period beginning on or after the first day of the first 
calendar month following the month in which such partner died. 
For purposes of this subsection--
          (1) in determining the portion of the distributive 
        share which is attributable to any period specified in 
        the preceding sentence, the ordinary income or loss of 
        the partnership shall be treated as having been 
        realized or sustained ratably over the partnership 
        taxable year; and
          (2) the term ``deceased partner's distributive 
        share'' includes the share of his estate or of any 
        other person succeeding, by reason of his death, to 
        rights with respect to his partnership interest.
  (g) Members of certain religious faiths.--
          (1) Exemption.--Any individual may file an 
        application (in such form and manner, and with such 
        official, as may be prescribed by regulations under 
        this chapter) for an exemption from the tax imposed by 
        this chapter if he is a member of a recognized 
        religious sect or division thereof and is an adherent 
        of established tenets or teachings of such sect or 
        division by reason of which he is conscientiously 
        opposed to acceptance of the benefits of any private or 
        public insurance which makes payments in the event of 
        death, disability, old-age, or retirement or makes 
        payments toward the cost of, or provides services for, 
        medical care (including the benefits of any insurance 
        system established by the Social Security Act). Such 
        exemption may be granted only if the application 
        contains or is accompanied by--
                  (A) such evidence of such individual's 
                membership in, and adherence to the tenets or 
                teachings of, the sect or division thereof as 
                the Secretary may require for purposes of 
                determining such individual's compliance with 
                the preceding sentence, and
                  (B) his waiver of all benefits and other 
                payments under titles II and XVIII of the 
                Social Security Act on the basis of his wages 
                and self-employment income as well as all such 
                benefits and other payments to him on the basis 
                of the wages and self-employment income of any 
                other person,
        and only if the Commissioner of Social Security finds 
        that--
                  (C) such sect or division thereof has the 
                established tenets or teachings referred to in 
                the preceding sentence,
                  (D) it is the practice, and has been for a 
                period of time which he deems to be 
                substantial, for members of such sect or 
                division thereof to make provision for their 
                dependent members which in his judgment is 
                reasonable in view of their general level of 
                living, and
                  (E) such sect or division thereof has been in 
                existence at all times since December 31, 1950.
        An exemption may not be granted to any individual if 
        any benefit or other payment referred to in 
        subparagraph (B) became payable (or, but for section 
        203 or 222(b) of the Social Security Act, would have 
        become payable) at or before the time of the filing of 
        such waiver.
          (2) Period for which exemption effective.--An 
        exemption granted to any individual pursuant to this 
        subsection shall apply with respect to all taxable 
        years beginning after December 31, 1950, except that 
        such exemption shall not apply for any taxable year--
                  (A) beginning (i) before the taxable year in 
                which such individual first met the 
                requirements of the first sentence of paragraph 
                (1), or (ii) before the time as of which the 
                Commissioner of Social Security finds that the 
                sect or division thereof of which such 
                individual is a member met the requirements of 
                subparagraphs (C) and (D), or
                  (B) ending (i) after the time such individual 
                ceases to meet the requirements of the first 
                sentence of paragraph (1), or (ii) after the 
                time as of which the Commissioner of Social 
                Security finds that the sect or division 
                thereof of which he is a member ceases to meet 
                the requirements of subparagraph (C) or (D).
          (3) Subsection to apply to certain church 
        employees.--This subsection shall apply with respect to 
        services which are described in subparagraph (B) of 
        section 3121(b)(8) (and are not described in 
        subparagraph (A) of such section).
  (h) Regular basis.--An individual shall be deemed to be self-
employed on a regular basis in a taxable year, or to be a 
member of a partnership on a regular basis in such year, if he 
had net earnings from self-employment, as defined in the first 
sentence of subsection (a), of not less than $400 in at least 
two of the three consecutive taxable years immediately 
preceding such taxable year from trades or businesses carried 
on by such individual or such partnership.
  (i) Special rules for options and commodities dealers.--
          (1) In general.--Notwithstanding subsection 
        (a)(3)(A), in determining the net earnings from self-
        employment of any options dealer or commodities dealer, 
        there shall not be excluded any gain or loss (in the 
        normal course of the taxpayer's activity of dealing in 
        or trading section 1256 contracts) from section 1256 
        contracts or property related to such contracts.
          (2) Definitions.--For purposes of this subsection--
                  (A) Options dealer.--The term ``options 
                dealer'' has the meaning given such term by 
                section 1256(g)(8).
                  (B) Commodities dealer.--The term 
                ``commodities dealer'' means a person who is 
                actively engaged in trading section 1256 
                contracts and is registered with a domestic 
                board of trade which is designated as a 
                contract market by the Commodities Futures 
                Trading Commission.
                  (C) Section 1256 contracts.--The term 
                ``section 1256 contract'' has the meaning given 
                to such term by section 1256(b).
  (j) Special rules for certain church employee income.--
          (1) Computation of net earnings.--In applying 
        subsection (a)--
                  (A) church employee income shall not be 
                reduced by any deduction;
                  (B) church employee income and deductions 
                attributable to such income shall not be taken 
                into account in determining the amount of other 
                net earnings from self-employment.
          (2) Computation of self-employment income.--
                  (A) Separate application of subsection 
                (b)(2).--Paragraph (2) of subsection (b) shall 
                be applied separately--
                          (i) to church employee income, and
                          (ii) to other net earnings from self-
                        employment.
                  (B) $100 floor.--In applying paragraph (2) of 
                subsection (b) to church employee income, 
                ``$100'' shall be substituted for ``$400''.
          (3) Coordination with subsection (a)(12).--Paragraph 
        (1) shall not apply to any amount allowable as a 
        deduction under subsection (a)(12), and paragraph (1) 
        shall be applied before determining the amount so 
        allowable.
          (4) Church employee income defined.--For purposes of 
        this section, the term ``church employee income'' means 
        gross income for services which are described in 
        section 3121(b)(8)(B) (and are not described in section 
        3121(b)(8)(A)).
  (k) Codification of treatment of certain termination payments 
received by former insurance salesmen.--Nothing in subsection 
(a) shall be construed as including in the net earnings from 
self-employment of an individual any amount received during the 
taxable year from an insurance company on account of services 
performed by such individual as an insurance salesman for such 
company if--
          (1) such amount is received after termination of such 
        individual's agreement to perform such services for 
        such company,
          (2) such individual performs no services for such 
        company after such termination and before the close of 
        such taxable year,
          (3) such individual enters into a covenant not to 
        compete against such company which applies to at least 
        the 1-year period beginning on the date of such 
        termination, and
          (4) the amount of such payment--
                  (A) depends primarily on policies sold by or 
                credited to the account of such individual 
                during the last year of such agreement or the 
                extent to which such policies remain in force 
                for some period after such termination, or 
                both, and
                  (B) does not depend to any extent on length 
                of service or overall earnings from services 
                performed for such company (without regard to 
                whether eligibility for payment depends on 
                length of service).
  (l) Upper and lower limits.--For purposes of subsection (a)--
          (1) Lower limit.--The lower limit for any taxable 
        year is the sum of the amounts required under section 
        213(d) of the Social Security Act for a quarter of 
        coverage in effect with respect to each calendar 
        quarter ending with or within such taxable year.
          (2) Upper limit.--The upper limit for any taxable 
        year is the amount equal to 150 percent of the lower 
        limit for such taxable year.

           *       *       *       *       *       *       *

CHAPTER 2A--UNEARNED INCOME MEDICARE CONTRIBUTION

           *       *       *       *       *       *       *

SEC. 1411. IMPOSITION OF TAX.

  (a) In general.--Except as provided in subsection (e)--
          (1) Application to individuals.--In the case of an 
        individual, there is hereby imposed (in addition to any 
        other tax imposed by this subtitle) for each taxable 
        year a tax equal to 3.8 percent of the lesser of--
                  (A) net investment income for such taxable 
                year, or
                  (B) the excess (if any) of--
                          (i) the modified adjusted gross 
                        income for such taxable year, over
                          (ii) the threshold amount.
          (2) Application to estates and trusts.--In the case 
        of an estate or trust, there is hereby imposed (in 
        addition to any other tax imposed by this subtitle) for 
        each taxable year a tax of 3.8 percent of the lesser 
        of--
                  (A) the undistributed net investment income 
                for such taxable year, or
                  (B) the excess (if any) of--
                          (i) the adjusted gross income [(as 
                        defined in section 67(e))] for such 
                        taxable year, over
                          (ii) the dollar amount at which the 
                        highest tax bracket in section 1(e) 
                        begins for such taxable year.
  (b) Threshold amount.--For purposes of this chapter, the term 
``threshold amount'' means--
          (1) in the case of a taxpayer making a joint return 
        under section 6013 or a surviving spouse (as defined in 
        section 2(a)), $250,000,
          (2) in the case of a married taxpayer (as defined in 
        section 7703) filing a separate return, \1/2\ of the 
        dollar amount determined under paragraph (1), and
          (3) in any other case, $200,000.
  (c) Net investment income.--For purposes of this chapter--
          (1) In general.--The term ``net investment income'' 
        means the excess (if any) of--
                  (A) the sum of--
                          (i) gross income from interest, 
                        dividends, annuities, royalties, and 
                        rents, other than such income which is 
                        derived in the ordinary course of a 
                        trade or business not described in 
                        paragraph (2),
                          (ii) other gross income derived from 
                        a trade or business described in 
                        paragraph (2), and
                          (iii) net gain (to the extent taken 
                        into account in computing taxable 
                        income) attributable to the disposition 
                        of property other than property held in 
                        a trade or business not described in 
                        paragraph (2), over (B) the deductions 
                        allowed by this subtitle which are 
                        properly allocable to such gross income 
                        or net gain.
          (2) Trades and businesses to which tax applies.--A 
        trade or business is described in this paragraph if 
        such trade or business is--
                  (A) a passive activity (within the meaning of 
                section 469) with respect to the taxpayer, or
                  (B) a trade or business of trading in 
                financial instruments or commodities (as 
                defined in section 475(e)(2)).
          (3) Income on investment of working capital subject 
        to tax.--A rule similar to the rule of section 
        469(e)(1)(B) shall apply for purposes of this 
        subsection.
          (4) Exception for certain active interests in 
        partnerships and S corporations.--In the case of a 
        disposition of an interest in a partnership or S 
        corporation--
                  (A) gain from such disposition shall be taken 
                into account under clause (iii) of paragraph 
                (1)(A) only to the extent of the net gain which 
                would be so taken into account by the 
                transferor if all property of the partnership 
                or S corporation were sold for fair market 
                value immediately before the disposition of 
                such interest, and
                  (B) a rule similar to the rule of 
                subparagraph (A) shall apply to a loss from 
                such disposition.
          (5) Exception for distributions from qualified 
        plans.--The term ``net investment income'' shall not 
        include any distribution from a plan or arrangement 
        described in section 401(a), 403(a), 403(b), 408, 408A, 
        or 457(b).
          (6) Special rule.--Net investment income shall not 
        include any item taken into account in determining 
        self-employment income for such taxable year on which a 
        tax is imposed by section 1401(b).
  (d) Modified adjusted gross income.--For purposes of this 
chapter, the term ``modified adjusted gross income'' means 
adjusted gross income increased by the excess of--
          (1) the amount excluded from gross income under 
        section 911(a)(1), over
          (2) the amount of any deductions (taken into account 
        in computing adjusted gross income) or exclusions 
        disallowed under section 911(d)(6) with respect to the 
        amounts described in paragraph (1).
  (e) Nonapplication of section.--This section shall not apply 
to--
          (1) a nonresident alien, or
          (2) a trust all of the unexpired interests in which 
        are devoted to one or more of the purposes described in 
        section 170(c)(2)(B).

           *       *       *       *       *       *       *

Subtitle B--Estate and Gift Taxes

           *       *       *       *       *       *       *

CHAPTER 11--ESTATE TAX

           *       *       *       *       *       *       *

Subchapter A--Estates of Citizens or Residents

           *       *       *       *       *       *       *

PART I--TAX IMPOSED

           *       *       *       *       *       *       *

SEC. 2001. IMPOSITION AND RATE OF TAX.

  (a) Imposition.--A tax is hereby imposed on the transfer of 
the taxable estate of every decedent who is a citizen or 
resident of the United States.
  (b) Computation of tax.--The tax imposed by this section 
shall be the amount equal to the excess (if any) of--
          (1) a tentative tax computed under subsection (c) on 
        the sum of--
                  (A) the amount of the taxable estate, and
                  (B) the amount of the adjusted taxable gifts, 
                over
          (2) the aggregate amount of tax which would have been 
        payable under chapter 12 with respect to gifts made by 
        the decedent after December 31, 1976, if the 
        modifications described in subsection (g) had been 
        applicable at the time of such gifts.
For purposes of paragraph (1)(B), the term ``adjusted taxable 
gifts'' means the total amount of the taxable gifts (within the 
meaning of section 2503) made by the decedent after December 
31, 1976, other than gifts which are includible in the gross 
estate of the decedent.
  (c) Rate schedule

 
------------------------------------------------------------------------
If the amount with respect to which
  the tentative tax to be computed          The tentative tax is:
                is:
------------------------------------------------------------------------
Not over $10,000                     18 percent of such amount.
Over $10,000 but not over $20,000    $1,800, plus 20 percent of the
                                      excess of such amount over
                                      $10,000.
Over $20,000 but not over $40,000    $3,800, plus 22 percent of the
                                      excess of such amount over
                                      $20,000.
Over $40,000 but not over $60,000    $8,200 plus 24 percent of the
                                      excess of such amount over
                                      $40,000.
Over $60,000 but not over $80,000    $13,000, plus 26 percent of the
                                      excess of such amount over
                                      $60,000.
Over $80,000 but not over $100,000   $18,200, plus 28 percent of the
                                      excess of such amount over
                                      $80,000.
Over $100,000 but not over $150,000  $23,800, plus 30 percent of the
                                      excess of such amount over
                                      $100,000.
Over $150,000 but not over $250,000  $38,800, plus 32 percent of the
                                      excess of such amount over
                                      $150,000.
Over $250,000 but not over $500,000  $70,800, plus 34 percent of the
                                      excess of such amount over
                                      $250,000.
Over $500,000 but not over $750,000  $155,800, plus 37 percent of the
                                      excess of such amount over
                                      $500,000.
Over $750,000 but not over           $248,300, plus 39 percent of the
 $1,000,000                           excess of such amount over
                                      $750,000.
Over $1,000,000                      $345,800, plus 40 percent of the
                                      excess of such amount over
                                      $1,000,000.
------------------------------------------------------------------------

  (d) Adjustment for gift tax paid by spouse.--For purposes of 
subsection (b)(2), if--
          (1) the decedent was the donor of any gift one-half 
        of which was considered under section 2513 as made by 
        the decedent's spouse, and
          (2) the amount of such gift is includible in the 
        gross estate of the decedent,
any tax payable by the spouse under chapter 12 on such gift (as 
determined under section 2012(d)) shall be treated as a tax 
payable with respect to a gift made by the decedent.
  (e) Coordination of sections 2513 and 2035.--If--
          (1) the decedent's spouse was the donor of any gift 
        one-half of which was considered under section 2513 as 
        made by the decedent, and
          (2) the amount of such gift is includible in the 
        gross estate of the decedent's spouse by reason of 
        section 2035,
such gift shall not be included in the adjusted taxable gifts 
of the decedent for purposes of subsection (b)(1)(B), and the 
aggregate amount determined under subsection (b)(2) shall be 
reduced by the amount (if any) determined under subsection (d) 
which was treated as a tax payable by the decedent's spouse 
with respect to such gift.
  (f) Valuation of gifts.--
          (1) In general.--If the time has expired under 
        section 6501 within which a tax may be assessed under 
        chapter 12 (or under corresponding provisions of prior 
        laws) on--
                  (A) the transfer of property by gift made 
                during a preceding calendar period (as defined 
                in section 2502(b)); or
                  (B) an increase in taxable gifts required 
                under section 2701(d),
        the value thereof shall, for purposes of computing the 
        tax under this chapter, be the value as finally 
        determined for purposes of chapter 12.
          (2) Final determination.--For purposes of paragraph 
        (1), a value shall be treated as finally determined for 
        purposes of chapter 12 if--
                  (A) the value is shown on a return under such 
                chapter and such value is not contested by the 
                Secretary before the expiration of the time 
                referred to in paragraph (1) with respect to 
                such return;
                  (B) in a case not described in subparagraph 
                (A), the value is specified by the Secretary 
                and such value is not timely contested by the 
                taxpayer; or
                  (C) the value is determined by a court or 
                pursuant to a settlement agreement with the 
                Secretary.
        For purposes of subparagraph (A), the value of an item 
        shall be treated as shown on a return if the item is 
        disclosed in the return, or in a statement attached to 
        the return, in a manner adequate to apprise the 
        Secretary of the nature of such item.
  [(g) Modifications to tax payable.--
          [(1) Modifications to gift tax payable to reflect 
        different tax rates.--For purposes of applying 
        subsection (b)(2) with respect to 1 or more gifts, the 
        rates of tax under subsection (c) in effect at the 
        decedent's death shall, in lieu of the rates of tax in 
        effect at the time of such gifts, be used both to 
        compute--
                  [(A) the tax imposed by chapter 12 with 
                respect to such gifts, and
                  [(B) the credit allowed against such tax 
                under section 2505, including in computing--
                          [(i) the applicable credit amount 
                        under section 2505(a)(1), and
                          [(ii) the sum of the amounts allowed 
                        as a credit for all preceding periods 
                        under section 2505(a)(2).
          [(2) Modifications to estate tax payable to reflect 
        different basic exclusion amounts.--The Secretary shall 
        prescribe such regulations as may be necessary or 
        appropriate to carry out this section with respect to 
        any difference between--
                  [(A) the basic exclusion amount under section 
                2010(c)(3) applicable at the time of the 
                decedent's death, and
                  [(B) the basic exclusion amount under such 
                section applicable with respect to any gifts 
                made by the decedent.]
  (g) Modifications to Gift Tax Payable to Reflect Different 
Tax Rates.--For purposes of applying subsection (b)(2) with 
respect to 1 or more gifts, the rates of tax under subsection 
(c) in effect at the decedent's death shall, in lieu of the 
rates of tax in effect at the time of such gifts, be used both 
to compute--
          (1) the tax imposed by chapter 12 with respect to 
        such gifts, and
          (2) the credit allowed against such tax under section 
        2505, including in computing--
                  (A) the applicable credit amount under 
                section 2505(a)(1), and
                  (B) the sum of the amounts allowed as a 
                credit for all preceding periods under section 
                2505(a)(2).

           *       *       *       *       *       *       *

PART II--CREDITS AGAINST TAX

           *       *       *       *       *       *       *

SEC. 2010. UNIFIED CREDIT AGAINST ESTATE TAX.

  (a) General rule.--A credit of the applicable credit amount 
shall be allowed to the estate of every decedent against the 
tax imposed by section 2001.
  (b) Adjustment to credit for certain gifts made before 
1977.--The amount of the credit allowable under subsection (a) 
shall be reduced by an amount equal to 20 percent of the 
aggregate amount allowed as a specific exemption under section 
2521 (as in effect before its repeal by the Tax Reform Act of 
1976) with respect to gifts made by the decedent after 
September 8, 1976.
  (c) Applicable credit amount.--
          (1) In general.--For purposes of this section, the 
        applicable credit amount is the amount of the tentative 
        tax which would be determined under section 2001(c) if 
        the amount with respect to which such tentative tax is 
        to be computed were equal to the applicable exclusion 
        amount.
          (2) Applicable exclusion amount.--For purposes of 
        this subsection, the applicable exclusion amount is the 
        sum of--
                  (A) the basic exclusion amount, and
                  (B) in the case of a surviving spouse, the 
                deceased spousal unused exclusion amount.
          (3) Basic exclusion amount.--
                  (A) In general.--For purposes of this 
                subsection, the basic exclusion amount is 
                [$5,000,000] $10,000,000.
                  (B) Inflation adjustment.--In the case of any 
                decedent dying in a calendar year after 2011, 
                the dollar amount in subparagraph (A) shall be 
                increased by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        ``calendar year 2010'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                If any amount as adjusted under the preceding 
                sentence is not a multiple of $10,000, such 
                amount shall be rounded to the nearest multiple 
                of $10,000.
                  [(C) Increase in basic exclusion amount.--In 
                the case of estates of decedents dying or gifts 
                made after December 31, 2017, and before 
                January 1, 2026, subparagraph (A) shall be 
                applied by substituting ``$10,000,000'' for 
                ``$5,000,000''.]
          (4) Deceased spousal unused exclusion amount.--For 
        purposes of this subsection, with respect to a 
        surviving spouse of a deceased spouse dying after 
        December 31, 2010, the term ``deceased spousal unused 
        exclusion amount'' means the lesser of--
                  (A) the basic exclusion amount, or
                  (B) the excess of--
                          (i) the applicable exclusion amount 
                        of the last such deceased spouse of 
                        such surviving spouse, over
                          (ii) the amount with respect to which 
                        the tentative tax is determined under 
                        section 2001(b)(1) on the estate of 
                        such deceased spouse.
          (5) Special rules.--
                  (A) Election required.--A deceased spousal 
                unused exclusion amount may not be taken into 
                account by a surviving spouse under paragraph 
                (2) unless the executor of the estate of the 
                deceased spouse files an estate tax return on 
                which such amount is computed and makes an 
                election on such return that such amount may be 
                so taken into account. Such election, once 
                made, shall be irrevocable. No election may be 
                made under this subparagraph if such return is 
                filed after the time prescribed by law 
                (including extensions) for filing such return.
                  (B) Examination of prior returns after 
                expiration of period of limitations with 
                respect to deceased spousal unused exclusion 
                amount.--Notwithstanding any period of 
                limitation in section 6501, after the time has 
                expired under section 6501 within which a tax 
                may be assessed under chapter 11 or 12 with 
                respect to a deceased spousal unused exclusion 
                amount, the Secretary may examine a return of 
                the deceased spouse to make determinations with 
                respect to such amount for purposes of carrying 
                out this subsection.
          (6) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out this subsection.
  (d) Limitation based on amount of tax.--The amount of the 
credit allowed by subsection (a) shall not exceed the amount of 
the tax imposed by section 2001.

           *       *       *       *       *       *       *

PART III--GROSS ESTATE

           *       *       *       *       *       *       *

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

  (a) Value based on use under which property qualifies.--
          (1) General rule.--If--
                  (A) the decedent was (at the time of his 
                death) a citizen or resident of the United 
                States, and
                  (B) the executor elects the application of 
                this section and files the agreement referred 
                to in subsection (d)(2),
        then, for purposes of this chapter, the value of 
        qualified real property shall be its value for the use 
        under which it qualifies, under subsection (b), as 
        qualified real property.
          (2) Limitation on aggregate reduction in fair market 
        value.--The aggregate decrease in the value of 
        qualified real property taken into account for purposes 
        of this chapter which results from the application of 
        paragraph (1) with respect to any decedent shall not 
        exceed $750,000.
          (3) Inflation adjustment.--In the case of estates of 
        decedents dying in a calendar year after 1998, the 
        $750,000 amount contained in paragraph (2) shall be 
        increased by an amount equal to--
                  (A) $750,000, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for such calendar year by 
                substituting ``calendar year 1997'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.
  (b) Qualified real property.--
          (1) In general.--For purposes of this section, the 
        term ``qualified real property'' means real property 
        located in the United States which was acquired from or 
        passed from the decedent to a qualified heir of the 
        decedent and which, on the date of the decedent's 
        death, was being used for a qualified use by the 
        decedent or a member of the decedent's family, but only 
        if--
                  (A) 50 percent or more of the adjusted value 
                of the gross estate consists of the adjusted 
                value of real or personal property which--
                          (i) on the date of the decedent's 
                        death, was being used for a qualified 
                        use by the decedent or a member of the 
                        decedent's family, and
                          (ii) was acquired from or passed from 
                        the decedent to a qualified heir of the 
                        decedent.
                  (B) 25 percent or more of the adjusted value 
                of the gross estate consists of the adjusted 
                value of real property which meets the 
                requirements of subparagraphs (A)(ii) and (C),
                  (C) during the 8-year period ending on the 
                date of the decedent's death there have been 
                periods aggregating 5 years or more during 
                which--
                          (i) such real property was owned by 
                        the decedent or a member of the 
                        decedent's family and used for a 
                        qualified use by the decedent or a 
                        member of the decedent's family, and
                          (ii) there was material participation 
                        by the decedent or a member of the 
                        decedent's family in the operation of 
                        the farm or other business, and
                  (D) such real property is designated in the 
                agreement referred to in subsection (d)(2).
          (2) Qualified use.--For purposes of this section, the 
        term ``qualified use'' means the devotion of the 
        property to any of the following:
                  (A) use as a farm for farming purposes, or
                  (B) use in a trade or business other than the 
                trade or business of farming.
          (3) Adjusted value.--For purposes of paragraph (1), 
        the term ``adjusted value'' means--
                  (A) in the case of the gross estate, the 
                value of the gross estate for purposes of this 
                chapter (determined without regard to this 
                section), reduced by any amounts allowable as a 
                deduction under paragraph (4) of section 
                2053(a), or
                  (B) in the case of any real or personal 
                property, the value of such property for 
                purposes of this chapter (determined without 
                regard to this section), reduced by any amounts 
                allowable as a deduction in respect of such 
                property under paragraph (4) of section 
                2053(a).
          (4) Decedents who are retired or disabled.--
                  (A) In general.--If, on the date of the 
                decedent's death, the requirements of paragraph 
                (1)(C)(ii) with respect to the decedent for any 
                property are not met, and the decedent--
                          (i) was receiving old-age benefits 
                        under title II of the Social Security 
                        Act for a continuous period ending on 
                        such date, or
                          (ii) was disabled for a continuous 
                        period ending on such date,
                then paragraph (1)(C)(ii) shall be applied with 
                respect to such property by substituting ``the 
                date on which the longer of such continuous 
                periods began'' for ``the date of the 
                decedent's death'' in paragraph (1)(C).
                  (B) Disabled defined.--For purposes of 
                subparagraph (A), an individual shall be 
                disabled if such individual has a mental or 
                physical impairment which renders him unable to 
                materially participate in the operation of the 
                farm or other business.
                  (C) Coordination with recapture.--For 
                purposes of subsection (c)(6)(B)(i), if the 
                requirements of paragraph (1)(C)(ii) are met 
                with respect to any decedent by reason of 
                subparagraph (A), the period ending on the date 
                on which the continuous period taken into 
                account under subparagraph (A) began shall be 
                treated as the period immediately before the 
                decedent's death.
          (5) Special rules for surviving spouses.--
                  (A) In general.--If property is qualified 
                real property with respect to a decedent 
                (hereinafter in this paragraph referred to as 
                the ``first decedent'') and such property was 
                acquired from or passed from the first decedent 
                to the surviving spouse of the first decedent, 
                for purposes of applying this subsection and 
                subsection (c) in the case of the estate of 
                such surviving spouse, active management of the 
                farm or other business by the surviving spouse 
                shall be treated as material participation by 
                such surviving spouse in the operation of such 
                farm or business.
                  (B) Special rule.--For the purposes of 
                subparagraph (A), the determination of whether 
                property is qualified real property with 
                respect to the first decedent shall be made 
                without regard to subparagraph (D) of paragraph 
                (1) and without regard to whether an election 
                under this section was made.
                  (C) Coordination with paragraph (4).--In any 
                case in which to do so will enable the 
                requirements of paragraph (1)(C)(ii) to be met 
                with respect to the surviving spouse, this 
                subsection and subsection (c) shall be applied 
                by taking into account any application of 
                paragraph (4).
  (c) Tax treatment of dispositions and failures to use for 
qualified use.--
          (1) Imposition of additional estate tax.--If, within 
        10 years after the decedent's death and before the 
        death of the qualified heir--
                  (A) the qualified heir disposes of any 
                interest in qualified real property (other than 
                by a disposition to a member of his family), or
                  (B) the qualified heir ceases to use for the 
                qualified use the qualified real property which 
                was acquired (or passed) from the decedent,
        then, there is hereby imposed an additional estate tax.
          (2) Amount of additional tax.--
                  (A) In general.--The amount of the additional 
                tax imposed by paragraph (1) with respect to 
                any interest shall be the amount equal to the 
                lesser of--
                          (i) the adjusted tax difference 
                        attributable to such interest, or
                          (ii) the excess of the amount 
                        realized with respect to the interest 
                        (or, in any case other than a sale or 
                        exchange at arm's length, the fair 
                        market value of the interest) over the 
                        value of the interest determined under 
                        subsection (a).
                  (B) Adjusted tax difference attributable to 
                interest.--For purposes of subparagraph (A), 
                the adjusted tax difference attributable to an 
                interest is the amount which bears the same 
                ratio to the adjusted tax difference with 
                respect to the estate (determined under 
                subparagraph (C)) as--
                          (i) the excess of the value of such 
                        interest for purposes of this chapter 
                        (determined without regard to 
                        subsection (a)) over the value of such 
                        interest determined under subsection 
                        (a), bears to
                          (ii) a similar excess determined for 
                        all qualified real property.
                  (C) Adjusted tax difference with respect to 
                the estate.--For purposes of subparagraph (B), 
                the term ``adjusted tax difference with respect 
                to the estate'' means the excess of what would 
                have been the estate tax liability but for 
                subsection (a) over the estate tax liability. 
                For purposes of this subparagraph, the term 
                ``estate tax liability'' means the tax imposed 
                by section 2001 reduced by the credits 
                allowable against such tax.
                  (D) Partial dispositions.--For purposes of 
                this paragraph, where the qualified heir 
                disposes of a portion of the interest acquired 
                by (or passing to) such heir (or a predecessor 
                qualified heir) or there is a cessation of use 
                of such a portion--
                          (i) the value determined under 
                        subsection (a) taken into account under 
                        subparagraph (A)(ii) with respect to 
                        such portion shall be its pro rata 
                        share of such value of such interest, 
                        and
                          (ii) the adjusted tax difference 
                        attributable to the interest taken into 
                        account with respect to the transaction 
                        involving the second or any succeeding 
                        portion shall be reduced by the amount 
                        of the tax imposed by this subsection 
                        with respect to all prior transactions 
                        involving portions of such interest.
                  (E) Special rule for disposition of timber.--
                In the case of qualified woodland to which an 
                election under subsection (e)(13)(A) applies, 
                if the qualified heir disposes of (or severs) 
                any standing timber on such qualified 
                woodland--
                          (i) such disposition (or severance) 
                        shall be treated as a disposition of a 
                        portion of the interest of the 
                        qualified heir in such property, and
                          (ii) the amount of the additional tax 
                        imposed by paragraph (1) with respect 
                        to such disposition shall be an amount 
                        equal to the lesser of--
                                  (I) the amount realized on 
                                such disposition (or, in any 
                                case other than a sale or 
                                exchange at arm's length, the 
                                fair market value of the 
                                portion of the interest 
                                disposed or severed), or
                                  (II) the amount of additional 
                                tax determined under this 
                                paragraph (without regard to 
                                this subparagraph) if the 
                                entire interest of the 
                                qualified heir in the qualified 
                                woodland had been disposed of, 
                                less the sum of the amount of 
                                the additional tax imposed with 
                                respect to all prior 
                                transactions involving such 
                                woodland to which this 
                                subparagraph applied.
                For purposes of the preceding sentence, the 
                disposition of a right to sever shall be 
                treated as the disposition of the standing 
                timber. The amount of additional tax imposed 
                under paragraph (1) in any case in which a 
                qualified heir disposes of his entire interest 
                in the qualified woodland shall be reduced by 
                any amount determined under this subparagraph 
                with respect to such woodland.
          (3) Only 1 additional tax imposed with respect to any 
        1 portion.--In the case of an interest acquired from 
        (or passing from) any decedent, if subparagraph (A) or 
        (B) of paragraph (1) applies to any portion of an 
        interest, subparagraph (B) or (A), as the case may be, 
        of paragraph (1) shall not apply with respect to the 
        same portion of such interest.
          (4) Due date.--The additional tax imposed by this 
        subsection shall become due and payable on the day 
        which is 6 months after the date of the disposition or 
        cessation referred to in paragraph (1).
          (5) Liability for tax; furnishing of bond.--The 
        qualified heir shall be personally liable for the 
        additional tax imposed by this subsection with respect 
        to his interest unless the heir has furnished bond 
        which meets the requirements of subsection (e)(11).
          (6) Cessation of qualified use.--For purposes of 
        paragraph (1)(B), real property shall cease to be used 
        for the qualified use if--
                  (A) such property ceases to be used for the 
                qualified use set forth in subparagraph (A) or 
                (B) of subsection (b)(2) under which the 
                property qualified under subsection (b), or
                  (B) during any period of 8 years ending after 
                the date of the decedent's death and before the 
                date of the death of the qualified heir, there 
                had been periods aggregating more than 3 years 
                during which--
                          (i) in the case of periods during 
                        which the property was held by the 
                        decedent, there was no material 
                        participation by the decedent or any 
                        member of his family in the operation 
                        of the farm or other business, and
                          (ii) in the case of periods during 
                        which the property was held by any 
                        qualified heir, there was no material 
                        participation by such qualified heir or 
                        any member of his family in the 
                        operation of the farm or other 
                        business.
          (7) Special rules.--
                  (A) No tax if use begins within 2 years.--If 
                the date on which the qualified heir begins to 
                use the qualified real property (hereinafter in 
                this subparagraph referred to as the 
                commencement date) is before the date 2 years 
                after the decedent's death--
                          (i) no tax shall be imposed under 
                        paragraph (1) by reason of the failure 
                        by the qualified heir to so use such 
                        property before the commencement date, 
                        and
                          (ii) the 10-year period under 
                        paragraph (1) shall be extended by the 
                        period after the decedent's death and 
                        before the commencement date.
                  (B) Active management by eligible qualified 
                heir treated as material participation.--For 
                purposes of paragraph (6)(B)(ii), the active 
                management of a farm or other business by--
                          (i) an eligible qualified heir, or
                          (ii) a fiduciary of an eligible 
                        qualified heir described in clause (ii) 
                        or (iii) of subparagraph (C),
                shall be treated as material participation by 
                such eligible qualified heir in the operation 
                of such farm or business. In the case of an 
                eligible qualified heir described in clause 
                (ii), (iii), or (iv) of subparagraph (C), the 
                preceding sentence shall apply only during 
                periods during which such heir meets the 
                requirements of such clause.
                  (C) Eligible qualified heir.--For purposes of 
                this paragraph, the term ``eligible qualified 
                heir'' means a qualified heir who--
                          (i) is the surviving spouse of the 
                        decedent,
                          (ii) has not attained the age of 21,
                          (iii) is disabled (within the meaning 
                        of subsection (b)(4)(B)), or
                          (iv) is a student.
                  (D) Student.--For purposes of subparagraph 
                (C), an individual shall be treated as a 
                student with respect to periods during any 
                calendar year if (and only if) such individual 
                is a student (within the meaning of [section 
                152(f)(2)] section 7706(f)(2)) for such 
                calendar year.
                  (E) Certain rents treated as qualified use.--
                For purposes of this subsection, a surviving 
                spouse or lineal descendant of the decedent 
                shall not be treated as failing to use 
                qualified real property in a qualified use 
                solely because such spouse or descendant rents 
                such property to a member of the family of such 
                spouse or descendant on a net cash basis. For 
                purposes of the preceding sentence, a legally 
                adopted child of an individual shall be treated 
                as the child of such individual by blood.
          (8) Qualified conservation contribution is not a 
        disposition.--A qualified conservation contribution (as 
        defined in section 170(h)) by gift or otherwise shall 
        not be deemed a disposition under subsection (c)(1)(A).
  (d) Election; agreement.--
          (1) Election.--The election under this section shall 
        be made on the return of the tax imposed by section 
        2001. Such election shall be made in such manner as the 
        Secretary shall by regulations prescribe. Such an 
        election, once made, shall be irrevocable.
          (2) Agreement.--The agreement referred to in this 
        paragraph is a written agreement signed by each person 
        in being who has an interest (whether or not in 
        possession) in any property designated in such 
        agreement consenting to the application of subsection 
        (c) with respect to such property.
          (3) Modification of election and agreement to be 
        permitted.--The Secretary shall prescribe procedures 
        which provide that in any case in which the executor 
        makes an election under paragraph (1) (and submits the 
        agreement referred to in paragraph (2)) within the time 
        prescribed therefor, but--
                  (A) the notice of election, as filed, does 
                not contain all required information, or
                  (B) signatures of 1 or more persons required 
                to enter into the agreement described in 
                paragraph (2) are not included on the agreement 
                as filed, or the agreement does not contain all 
                required information,
        the executor will have a reasonable period of time (not 
        exceeding 90 days) after notification of such failures 
        to provide such information or signatures.
  (e) Definitions; special rules.--For purposes of this 
section--
          (1) Qualified heir.--The term ``qualified heir'' 
        means, with respect to any property, a member of the 
        decedent's family who acquired such property (or to 
        whom such property passed) from the decedent. If a 
        qualified heir disposes of any interest in qualified 
        real property to any member of his family, such member 
        shall thereafter be treated as the qualified heir with 
        respect to such interest.
          (2) Member of family.--The term ``member of the 
        family'' means, with respect to any individual, only--
                  (A) an ancestor of such individual,
                  (B) the spouse of such individual,
                  (C) a lineal descendant of such individual, 
                of such individual's spouse, or of a parent of 
                such individual, or
                  (D) the spouse of any lineal descendant 
                described in subparagraph (C).
        For purposes of the preceding sentence, a legally 
        adopted child of an individual shall be treated as the 
        child of such individual by blood.
          (3) Certain real property included.--In the case of 
        real property which meets the requirements of 
        subparagraph (C) of subsection (b)(1), residential 
        buildings and related improvements on such real 
        property occupied on a regular basis by the owner or 
        lessee of such real property or by persons employed by 
        such owner or lessee for the purpose of operating or 
        maintaining such real property, and roads, buildings, 
        and other structures and improvements functionally 
        related to the qualified use shall be treated as real 
        property devoted to the qualified use.
          (4) Farm.--The term ``farm'' includes stock, dairy, 
        poultry, fruit, furbearing animal, and truck farms, 
        plantations, ranches, nurseries, ranges, greenhouses or 
        other similar structures used primarily for the raising 
        of agricultural or horticultural commodities, and 
        orchards and woodlands.
          (5) Farming purposes.--The term ``farming purposes'' 
        means--
                  (A) cultivating the soil or raising or 
                harvesting any agricultural or horticultural 
                commodity (including the raising, shearing, 
                feeding, caring for, training, and management 
                of animals) on a farm;
                  (B) handling, drying, packing, grading, or 
                storing on a farm any agricultural or 
                horticultural commodity in its unmanufactured 
                state, but only if the owner, tenant, or 
                operator of the farm regularly produces more 
                than one-half of the commodity so treated; and
                  (C)
                          (i) the planting, cultivating, caring 
                        for, or cutting of trees, or
                          (ii) the preparation (other than 
                        milling) of trees for market.
          (6) Material participation.--Material participation 
        shall be determined in a manner similar to the manner 
        used for purposes of paragraph (1) of section 1402(a) 
        (relating to net earnings from self-employment).
          (7) Method of valuing farms.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the value of a farm for 
                farming purposes shall be determined by 
                dividing--
                          (i) the excess of the average annual 
                        gross cash rental for comparable land 
                        used for farming purposes and located 
                        in the locality of such farm over the 
                        average annual State and local real 
                        estate taxes for such comparable land, 
                        by
                          (ii) the average annual effective 
                        interest rate for all new Federal Land 
                        Bank loans.
                For purposes of the preceding sentence, each 
                average annual computation shall be made on the 
                basis of the 5 most recent calendar years 
                ending before the date of the decedent's death.
                  (B) Value based on net share rental in 
                certain cases.--
                          (i) In general.--If there is no 
                        comparable land from which the average 
                        annual gross cash rental may be 
                        determined but there is comparable land 
                        from which the average net share rental 
                        may be determined, subparagraph (A)(i) 
                        shall be applied by substituting 
                        ``average annual net share rental'' for 
                        ``average annual gross cash rental''.
                          (ii) Net share rental.--For purposes 
                        of this paragraph, the term ``net share 
                        rental'' means the excess of--
                                  (I) the value of the produce 
                                received by the lessor of the 
                                land on which such produce is 
                                grown, over
                                  (II) the cash operating 
                                expenses of growing such 
                                produce which, under the lease, 
                                are paid by the lessor.
                  (C) Exception.--The formula provided by 
                subparagraph (A) shall not be used--
                          (i) where it is established that 
                        there is no comparable land from which 
                        the average annual gross cash rental 
                        may be determined, or
                          (ii) where the executor elects to 
                        have the value of the farm for farming 
                        purposes determined and that there is 
                        no comparable land from which the 
                        average net share rental may be 
                        determined under paragraph (8).
          (8) Method of valuing closely held business 
        interests, etc..--In any case to which paragraph (7)(A) 
        does not apply, the following factors shall apply in 
        determining the value of any qualified real property:
                  (A) The capitalization of income which the 
                property can be expected to yield for farming 
                or closely held business purposes over a 
                reasonable period of time under prudent 
                management using traditional cropping patterns 
                for the area, taking into account soil 
                capacity, terrain configuration, and similar 
                factors,
                  (B) The capitalization of the fair rental 
                value of the land for farm land or closely held 
                business purposes,
                  (C) Assessed land values in a State which 
                provides a differential or use value assessment 
                law for farmland or closely held business,
                  (D) Comparable sales of other farm or closely 
                held business land in the same geographical 
                area far enough removed from a metropolitan or 
                resort area so that nonagricultural use is not 
                a significant factor in the sales price, and
                  (E) Any other factor which fairly values the 
                farm or closely held business value of the 
                property.
          (9) Property acquired from decedent.--Property shall 
        be considered to have been acquired from or to have 
        passed from the decedent if--
                  (A) such property is so considered under 
                section 1014(b) (relating to basis of property 
                acquired from a decedent),
                  (B) such property is acquired by any person 
                from the estate, or
                  (C) such property is acquired by any person 
                from a trust (to the extent such property is 
                includible in the gross estate of the 
                decedent).
          (10) Community property.--If the decedent and his 
        surviving spouse at any time held qualified real 
        property as community property, the interest of the 
        surviving spouse in such property shall be taken into 
        account under this section to the extent necessary to 
        provide a result under this section with respect to 
        such property which is consistent with the result which 
        would have obtained under this section if such property 
        had not been community property.
          (11) Bond in lieu of personal liability.--If the 
        qualified heir makes written application to the 
        Secretary for determination of the maximum amount of 
        the additional tax which may be imposed by subsection 
        (c) with respect to the qualified heir's interest, the 
        Secretary (as soon as possible, and in any event within 
        1 year after the making of such application) shall 
        notify the heir of such maximum amount. The qualified 
        heir, on furnishing a bond in such amount and for such 
        period as may be required, shall be discharged from 
        personal liability for any additional tax imposed by 
        subsection (c) and shall be entitled to a receipt or 
        writing showing such discharge.
          (12) Active management.--The term ``active 
        management'' means the making of the management 
        decisions of a business (other than the daily operating 
        decisions).
          (13) Special rules for woodlands.--
                  (A) In general.--In the case of any qualified 
                woodland with respect to which the executor 
                elects to have this subparagraph apply, trees 
                growing on such woodland shall not be treated 
                as a crop.
                  (B) Qualified woodland.--The term ``qualified 
                woodland'' means any real property which--
                          (i) is used in timber operations, and
                          (ii) is an identifiable area of land 
                        such as an acre or other area for which 
                        records are normally maintained in 
                        conducting timber operations.
                  (C) Timber operations.--The term ``timber 
                operations'' means--
                          (i) the planting, cultivating, caring 
                        for, or cutting of trees, or
                          (ii) the preparation (other than 
                        milling) of trees for market.
                  (D) Election.--An election under subparagraph 
                (A) shall be made on the return of the tax 
                imposed by section 2001. Such election shall be 
                made in such manner as the Secretary shall by 
                regulations prescribe. Such an election, once 
                made, shall be irrevocable.
          (14) Treatment of replacement property acquired in 
        section 1031 or 1033 transactions.--
                  (A) In general.--In the case of any qualified 
                replacement property, any period during which 
                there was ownership, qualified use, or material 
                participation with respect to the replaced 
                property by the decedent or any member of his 
                family shall be treated as a period during 
                which there was such ownership, use, or 
                material participation (as the case may be) 
                with respect to the qualified replacement 
                property.
                  (B) Limitation.--Subparagraph (A) shall not 
                apply to the extent that the fair market value 
                of the qualified replacement property (as of 
                the date of its acquisition) exceeds the fair 
                market value of the replaced property (as of 
                the date of its disposition).
                  (C) Definitions.--For purposes of this 
                paragraph--
                          (i) Qualified replacement property.--
                        The term ``qualified replacement 
                        property'' means any real property 
                        which is--
                                  (I) acquired in an exchange 
                                which qualifies under section 
                                1031, or
                                  (II) the acquisition of which 
                                results in the nonrecognition 
                                of gain under section 1033.
                        Such term shall only include property 
                        which is used for the same qualified 
                        use as the replaced property was being 
                        used before the exchange.
                          (ii) Replaced property.--The term 
                        "replaced property means--
                                  (I) the property transferred 
                                in the exchange which qualifies 
                                under section 1031, or
                                  (II) the property 
                                compulsorily or involuntarily 
                                converted (within the meaning 
                                of section 1033).
  (f) Statute of limitations.--If qualified real property is 
disposed of or ceases to be used for a qualified use, then--
          (1) the statutory period for the assessment of any 
        additional tax under subsection (c) attributable to 
        such disposition or cessation shall not expire before 
        the expiration of 3 years from the date the Secretary 
        is notified (in such manner as the Secretary may by 
        regulations prescribe) of such disposition or cessation 
        (or if later in the case of an involuntary conversion 
        or exchange to which subsection (h) or (i) applies, 3 
        years from the date the Secretary is notified of the 
        replacement of the converted property or of an 
        intention not to replace or of the exchange of 
        property), and
          (2) such additional tax may be assessed before the 
        expiration of such 3-year period notwithstanding the 
        provisions of any other law or rule of law which would 
        otherwise prevent such assessment.
  (g) Application of this section and section 6324B to 
interests in partnerships, corporations, and trusts.--The 
Secretary shall prescribe regulations setting forth the 
application of this section and section 6324B in the case of an 
interest in a partnership, corporation, or trust which, with 
respect to the decedent, is an interest in a closely held 
business (within the meaning of paragraph (1) of section 
6166(b)). For purposes of the preceding sentence, an interest 
in a discretionary trust all the beneficiaries of which are 
qualified heirs shall be treated as a present interest.
  (h) Special rules for involuntary conversions of qualified 
real property.--
          (1) Treatment of converted property.--
                  (A) In general.--If there is an involuntary 
                conversion of an interest in qualified real 
                property--
                          (i) no tax shall be imposed by 
                        subsection (c) on such conversion if 
                        the cost of the qualified replacement 
                        property equals or exceeds the amount 
                        realized on such conversion, or
                          (ii) if clause (i) does not apply, 
                        the amount of the tax imposed by 
                        subsection (c) on such conversion shall 
                        be the amount determined under 
                        subparagraph (B).
                  (B) Amount of tax where there is not complete 
                reinvestment.--The amount determined under this 
                subparagraph with respect to any involuntary 
                conversion is the amount of the tax which (but 
                for this subsection) would have been imposed on 
                such conversion reduced by an amount which--
                          (i) bears the same ratio to such tax, 
                        as
                          (ii) the cost of the qualified 
                        replacement property bears to the 
                        amount realized on the conversion.
          (2) Treatment of replacement property.--For purposes 
        of subsection (c)--
                  (A) any qualified replacement property shall 
                be treated in the same manner as if it were a 
                portion of the interest in qualified real 
                property which was involuntarily converted; 
                except that with respect to such qualified 
                replacement property the 10-year period under 
                paragraph (1) of subsection (c) shall be 
                extended by any period, beyond the 2-year 
                period referred to in section 1033(a)(2)(B)(i), 
                during which the qualified heir was allowed to 
                replace the qualified real property,
                  (B) any tax imposed by subsection (c) on the 
                involuntary conversion shall be treated as a 
                tax imposed on a partial disposition, and
                  (C) paragraph (6) of subsection (c) shall be 
                applied--
                          (i) by not taking into account 
                        periods after the involuntary 
                        conversion and before the acquisition 
                        of the qualified replacement property, 
                        and
                          (ii) by treating material 
                        participation with respect to the 
                        converted property as material 
                        participation with respect to the 
                        qualified replacement property.
          (3) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Involuntary conversion.--The term 
                ``involuntary conversion'' means a compulsory 
                or involuntary conversion within the meaning of 
                section 1033.
                  (B) Qualified replacement property.--The term 
                ``qualified replacement property'' means--
                          (i) in the case of an involuntary 
                        conversion described in section 
                        1033(a)(1), any real property into 
                        which the qualified real property is 
                        converted, or
                          (ii) in the case of an involuntary 
                        conversion described in section 
                        1033(a)(2), any real property purchased 
                        by the qualified heir during the period 
                        specified in section 1033(a)(2)(B) for 
                        purposes of replacing the qualified 
                        real property.
        Such term only includes property which is to be used 
        for the qualified use set forth in subparagraph (A) or 
        (B) of subsection (b)(2) under which the qualified real 
        property qualified under subsection (a).
          (4) Certain rules made applicable.--The rules of the 
        last sentence of section 1033(a)(2)(A) shall apply for 
        purposes of paragraph (3)(B)(ii).
  (i) Exchanges of qualified real property.--
          (1) Treatment of property exchanged.--
                  (A) Exchanges solely for qualified exchange 
                property.--If an interest in qualified real 
                property is exchanged solely for an interest in 
                qualified exchange property in a transaction 
                which qualifies under section 1031, no tax 
                shall be imposed by subsection (c) by reason of 
                such exchange.
                  (B) Exchanges where other property 
                received.--If an interest in qualified real 
                property is exchanged for an interest in 
                qualified exchange property and other property 
                in a transaction which qualifies under section 
                1031, the amount of the tax imposed by 
                subsection (c) by reason of such exchange shall 
                be the amount of tax which (but for this 
                subparagraph) would have been imposed on such 
                exchange under subsection (c)(1), reduced by an 
                amount which--
                          (i) bears the same ratio to such tax, 
                        as
                          (ii) the fair market value of the 
                        qualified exchange property bears to 
                        the fair market value of the qualified 
                        real property exchanged.
                For purposes of clause (ii) of the preceding 
                sentence, fair market value shall be determined 
                as of the time of the exchange.
          (2) Treatment of qualified exchange property.--For 
        purposes of subsection (c)--
                  (A) any interest in qualified exchange 
                property shall be treated in the same manner as 
                if it were a portion of the interest in 
                qualified real property which was exchanged,
                  (B) any tax imposed by subsection (c) by 
                reason of the exchange shall be treated as a 
                tax imposed on a partial disposition, and
                  (C) paragraph (6) of subsection (c) shall be 
                applied by treating material participation with 
                respect to the exchanged property as material 
                participation with respect to the qualified 
                exchange property.
          (3) Qualified exchange property.--For purposes of 
        this subsection, the term ``qualified exchange 
        property'' means real property which is to be used for 
        the qualified use set forth in subparagraph (A) or (B) 
        of subsection (b)(2) under which the real property 
        exchanged therefor originally qualified under 
        subsection (a).

           *       *       *       *       *       *       *

Subtitle C--Employment Taxes

           *       *       *       *       *       *       *

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

           *       *       *       *       *       *       *

SEC. 3402. INCOME TAX COLLECTED AT SOURCE.

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

           *       *       *       *       *       *       *

Subtitle D--Miscellaneous Excise Taxes

           *       *       *       *       *       *       *

         CHAPTER 48--MAINTENANCE OF MINIMUM ESSENTIAL COVERAGE

Sec. 5000A. Requirement to maintain minimum essential coverage.

SEC. 5000A. REQUIREMENT TO MAINTAIN MINIMUM ESSENTIAL COVERAGE.

  (a) Requirement to maintain minimum essential coverage.--An 
applicable individual shall for each month beginning after 2013 
ensure that the individual, and any dependent of the individual 
who is an applicable individual, is covered under minimum 
essential coverage for such month.
  (b) Shared responsibility payment.--
          (1) In general.--If a taxpayer who is an applicable 
        individual, or an applicable individual for whom the 
        taxpayer is liable under paragraph (3), fails to meet 
        the requirement of subsection (a) for 1 or more months, 
        then, except as provided in subsection (e), there is 
        hereby imposed on the taxpayer a penalty with respect 
        to such failures in the amount determined under 
        subsection (c).
          (2) Inclusion with return.--Any penalty imposed by 
        this section with respect to any month shall be 
        included with a taxpayer's return under chapter 1 for 
        the taxable year which includes such month.
          (3) Payment of penalty.--If an individual with 
        respect to whom a penalty is imposed by this section 
        for any month--
                  (A) is a dependent (as defined in [section 
                152] section 7706) of another taxpayer for the 
                other taxpayer's taxable year including such 
                month, such other taxpayer shall be liable for 
                such penalty, or
                  (B) files a joint return for the taxable year 
                including such month, such individual and the 
                spouse of such individual shall be jointly 
                liable for such penalty.
  (c) Amount of penalty.--
          (1) In general.--The amount of the penalty imposed by 
        this section on any taxpayer for any taxable year with 
        respect to failures described in subsection (b)(1) 
        shall be equal to the lesser of--
                  (A) the sum of the monthly penalty amounts 
                determined under paragraph (2) for months in 
                the taxable year during which 1 or more such 
                failures occurred, or
                  (B) an amount equal to the national average 
                premium for qualified health plans which have a 
                bronze level of coverage, provide coverage for 
                the applicable family size involved, and are 
                offered through Exchanges for plan years 
                beginning in the calendar year with or within 
                which the taxable year ends.
          (2) Monthly penalty amounts.--For purposes of 
        paragraph (1)(A), the monthly penalty amount with 
        respect to any taxpayer for any month during which any 
        failure described in subsection (b)(1) occurred is an 
        amount equal to \1/12\ of the greater of the following 
        amounts:
                  (A) Flat dollar amount.--An amount equal to 
                the lesser of--
                          (i) the sum of the applicable dollar 
                        amounts for all individuals with 
                        respect to whom such failure occurred 
                        during such month, or
                          (ii) 300 percent of the applicable 
                        dollar amount (determined without 
                        regard to paragraph (3)(C)) for the 
                        calendar year with or within which the 
                        taxable year ends.
                  (B) Percentage of income.--An amount equal to 
                the following percentage of the excess of the 
                taxpayer's household income for the taxable 
                year over the amount of gross income specified 
                in section 6012(a)(1) with respect to the 
                taxpayer for the taxable year:
                          (i) 1.0 percent for taxable years 
                        beginning in 2014.
                          (ii) 2.0 percent for taxable years 
                        beginning in 2015.
                          (iii) Zero percent for taxable years 
                        beginning after 2015.
          (3) Applicable dollar amount.--For purposes of 
        paragraph (1)--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), the applicable 
                dollar amount is $0.
                  (B) Phase in.--The applicable dollar amount 
                is $95 for 2014 and $325 for 2015.
                  (C) Special rule for individuals under age 
                18.--If an applicable individual has not 
                attained the age of 18 as of the beginning of a 
                month, the applicable dollar amount with 
                respect to such individual for the month shall 
                be equal to one-half of the applicable dollar 
                amount for the calendar year in which the month 
                occurs.
          (4) Terms relating to income and families.--For 
        purposes of this section--
                  (A) Family size.--The family size involved 
                with respect to any taxpayer shall be equal to 
                [the number of individuals for whom the 
                taxpayer is allowed a deduction under section 
                151 (relating to allowance of deduction for 
                personal exemptions) for the taxable year] the 
                sum of 1 (2 in the case of a joint return) plus 
                the number of the taxpayer's dependents for the 
                taxable year.
                  (B) Household income.--The term ``household 
                income'' means, with respect to any taxpayer 
                for any taxable year, an amount equal to the 
                sum of--
                          (i) the modified adjusted gross 
                        income of the taxpayer, plus
                          (ii) the aggregate modified adjusted 
                        gross incomes of all other individuals 
                        who--
                                  (I) were taken into account 
                                in determining the taxpayer's 
                                family size under paragraph 
                                (1), and
                                  (II) were required to file a 
                                return of tax imposed by 
                                section 1 for the taxable year.
                  (C) Modified adjusted gross income.--The term 
                ``modified adjusted gross income'' means 
                adjusted gross income increased by--
                          (i) any amount excluded from gross 
                        income under section 911, and
                          (ii) any amount of interest received 
                        or accrued by the taxpayer during the 
                        taxable year which is exempt from tax.
  (d) Applicable individual.--For purposes of this section--
          (1) In general.--The term ``applicable individual'' 
        means, with respect to any month, an individual other 
        than an individual described in paragraph (2), (3), or 
        (4).
          (2) Religious exemptions.--
                  (A) Religious conscience exemption.--Such 
                term shall not include any individual for any 
                month if such individual has in effect an 
                exemption under section 1311(d)(4)(H) of the 
                Patient Protection and Affordable Care Act 
                which certifies that such individual is--
                          (i) a member of a recognized 
                        religious sect or division thereof 
                        which is described in section 
                        1402(g)(1), and
                          (ii) an adherent of established 
                        tenets or teachings of such sect or 
                        division as described in such section.
                  (B) Health care sharing ministry.--
                          (i) In general.--Such term shall not 
                        include any individual for any month if 
                        such individual is a member of a health 
                        care sharing ministry for the month.
                          (ii) Health care sharing ministry.--
                        The term ``health care sharing 
                        ministry'' means an organization--
                                  (I) which is described in 
                                section 501(c)(3) and is exempt 
                                from taxation under section 
                                501(a),
                                  (II) members of which share a 
                                common set of ethical or 
                                religious beliefs and share 
                                medical expenses among members 
                                in accordance with those 
                                beliefs and without regard to 
                                the State in which a member 
                                resides or is employed,
                                  (III) members of which retain 
                                membership even after they 
                                develop a medical condition,
                                  (IV) which (or a predecessor 
                                of which) has been in existence 
                                at all times since December 31, 
                                1999, and medical expenses of 
                                its members have been shared 
                                continuously and without 
                                interruption since at least 
                                December 31, 1999, and
                                  (V) which conducts an annual 
                                audit which is performed by an 
                                independent certified public 
                                accounting firm in accordance 
                                with generally accepted 
                                accounting principles and which 
                                is made available to the public 
                                upon request.
          (3) Individuals not lawfully present.--Such term 
        shall not include an individual for any month if for 
        the month the individual is not a citizen or national 
        of the United States or an alien lawfully present in 
        the United States.
          (4) Incarcerated individuals.--Such term shall not 
        include an individual for any month if for the month 
        the individual is incarcerated, other than 
        incarceration pending the disposition of charges.
  (e) Exemptions.--No penalty shall be imposed under subsection 
(a) with respect to--
          (1) Individuals who cannot afford coverage.--
                  (A) In general.--Any applicable individual 
                for any month if the applicable individual's 
                required contribution (determined on an annual 
                basis) for coverage for the month exceeds 8 
                percent of such individual's household income 
                for the taxable year described in section 
                1412(b)(1)(B) of the Patient Protection and 
                Affordable Care Act. For purposes of applying 
                this subparagraph, the taxpayer's household 
                income shall be increased by any exclusion from 
                gross income for any portion of the required 
                contribution made through a salary reduction 
                arrangement.
                  (B) Required contribution.--For purposes of 
                this paragraph, the term ``required 
                contribution'' means--
                          (i) in the case of an individual 
                        eligible to purchase minimum essential 
                        coverage consisting of coverage through 
                        an eligible-employer-sponsored plan, 
                        the portion of the annual premium which 
                        would be paid by the individual 
                        (without regard to whether paid through 
                        salary reduction or otherwise) for 
                        self-only coverage, or
                          (ii) in the case of an individual 
                        eligible only to purchase minimum 
                        essential coverage described in 
                        subsection (f)(1)(C), the annual 
                        premium for the lowest cost bronze plan 
                        available in the individual market 
                        through the Exchange in the State in 
                        the rating area in which the individual 
                        resides (without regard to whether the 
                        individual purchased a qualified health 
                        plan through the Exchange), reduced by 
                        the amount of the credit allowable 
                        under section 36B for the taxable year 
                        (determined as if the individual was 
                        covered by a qualified health plan 
                        offered through the Exchange for the 
                        entire taxable year).
                  (C) Special rules for individuals related to 
                employees.--For purposes of subparagraph 
                (B)(i), if an applicable individual is eligible 
                for minimum essential coverage through an 
                employer by reason of a relationship to an 
                employee, the determination under subparagraph 
                (A) shall be made by reference to required 
                contribution of the employee.
                  (D) Indexing.--In the case of plan years 
                beginning in any calendar year after 2014, 
                subparagraph (A) shall be applied by 
                substituting for ``8 percent'' the percentage 
                the Secretary of Health and Human Services 
                determines reflects the excess of the rate of 
                premium growth between the preceding calendar 
                year and 2013 over the rate of income growth 
                for such period.
          (2) Taxpayers with income below filing threshold.--
        Any applicable individual for any month during a 
        calendar year if the individual's household income for 
        the taxable year described in section 1412(b)(1)(B) of 
        the Patient Protection and Affordable Care Act is the 
        amount of gross income specified in section 6012(a)(1) 
        with respect to the taxpayer.
          (3) Members of Indian tribes.--Any applicable 
        individual for any month during which the individual is 
        a member of an Indian tribe (as defined in section 
        45A(c)(6)).
          (4) Months during short coverage gaps.--
                  (A) In general.--Any month the last day of 
                which occurred during a period in which the 
                applicable individual was not covered by 
                minimum essential coverage for a continuous 
                period of less than 3 months.
                  (B) Special rules.--For purposes of applying 
                this paragraph--
                          (i) the length of a continuous period 
                        shall be determined without regard to 
                        the calendar years in which months in 
                        such period occur,
                          (ii) if a continuous period is 
                        greater than the period allowed under 
                        subparagraph (A), no exception shall be 
                        provided under this paragraph for any 
                        month in the period, and
                          (iii) if there is more than 1 
                        continuous period described in 
                        subparagraph (A) covering months in a 
                        calendar year, the exception provided 
                        by this paragraph shall only apply to 
                        months in the first of such periods.
                The Secretary shall prescribe rules for the 
                collection of the penalty imposed by this 
                section in cases where continuous periods 
                include months in more than 1 taxable year.
          (5) Hardships.--Any applicable individual who for any 
        month is determined by the Secretary of Health and 
        Human Services under section 1311(d)(4)(H) to have 
        suffered a hardship with respect to the capability to 
        obtain coverage under a qualified health plan.
  (f) Minimum essential coverage.--For purposes of this 
section--
          (1) In general.--The term ``minimum essential 
        coverage'' means any of the following:
                  (A) Government sponsored programs.--Coverage 
                under--
                          (i) the Medicare program under part A 
                        of title XVIII of the Social Security 
                        Act,
                          (ii) the Medicaid program under title 
                        XIX of the Social Security Act,
                          (iii) the CHIP program under title 
                        XXI of the Social Security Act or under 
                        a qualified CHIP look-alike program (as 
                        defined in section 2107(g) of the 
                        Social Security Act),
                          (iv) medical coverage under chapter 
                        55 of title 10, United States Code, 
                        including coverage under the TRICARE 
                        program;
                          (v) a health care program under 
                        chapter 17 or 18 of title 38, United 
                        States Code, as determined by the 
                        Secretary of Veterans Affairs, in 
                        coordination with the Secretary of 
                        Health and Human Services and the 
                        Secretary,
                          (vi) a health plan under section 
                        2504(e) of title 22, United States Code 
                        (relating to Peace Corps volunteers); 
                        or
                          (vii) the Nonappropriated Fund Health 
                        Benefits Program of the Department of 
                        Defense, established under section 349 
                        of the National Defense Authorization 
                        Act for Fiscal Year 1995 (Public Law 
                        103-337; 10 U.S.C. 1587 note).
                  (B) Employer-sponsored plan.--Coverage under 
                an eligible employer-sponsored plan.
                  (C) Plans in the individual market.--Coverage 
                under a health plan offered in the individual 
                market within a State.
                  (D) Grandfathered health plan.--Coverage 
                under a grandfathered health plan.
                  (E) Other coverage.--Such other health 
                benefits coverage, such as a State health 
                benefits risk pool, as the Secretary of Health 
                and Human Services, in coordination with the 
                Secretary, recognizes for purposes of this 
                subsection.
          (2) Eligible employer-sponsored plan.--The term 
        ``eligible employer-sponsored plan'' means, with 
        respect to any employee, a group health plan or group 
        health insurance coverage offered by an employer to the 
        employee which is--
                  (A) a governmental plan (within the meaning 
                of section 2791(d)(8) of the Public Health 
                Service Act), or
                  (B) any other plan or coverage offered in the 
                small or large group market within a State.
        Such term shall include a grandfathered health plan 
        described in paragraph (1)(D) offered in a group 
        market.
          (3) Excepted benefits not treated as minimum 
        essential coverage.--The term ``minimum essential 
        coverage'' shall not include health insurance coverage 
        which consists of coverage of excepted benefits--
                  (A) described in paragraph (1) of subsection 
                (c) of section 2791 of the Public Health 
                Service Act; or
                  (B) described in paragraph (2), (3), or (4) 
                of such subsection if the benefits are provided 
                under a separate policy, certificate, or 
                contract of insurance.
          (4) Individuals residing outside United States or 
        residents of territories.--Any applicable individual 
        shall be treated as having minimum essential coverage 
        for any month--
                  (A) if such month occurs during any period 
                described in subparagraph (A) or (B) of section 
                911(d)(1) which is applicable to the 
                individual, or
                  (B) if such individual is a bona fide 
                resident of any possession of the United States 
                (as determined under section 937(a)) for such 
                month.
          (5) Insurance-related terms.--Any term used in this 
        section which is also used in title I of the Patient 
        Protection and Affordable Care Act shall have the same 
        meaning as when used in such title.
  (g) Administration and procedure.--
          (1) In general.--The penalty provided by this section 
        shall be paid upon notice and demand by the Secretary, 
        and except as provided in paragraph (2), shall be 
        assessed and collected in the same manner as an 
        assessable penalty under subchapter B of chapter 68.
          (2) Special rules.--Notwithstanding any other 
        provision of law--
                  (A) Waiver of criminal penalties.--In the 
                case of any failure by a taxpayer to timely pay 
                any penalty imposed by this section, such 
                taxpayer shall not be subject to any criminal 
                prosecution or penalty with respect to such 
                failure.
                  (B) Limitations on liens and levies.--The 
                Secretary shall not--
                          (i) file notice of lien with respect 
                        to any property of a taxpayer by reason 
                        of any failure to pay the penalty 
                        imposed by this section, or
                          (ii) levy on any such property with 
                        respect to such failure.

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Subtitle F--Procedure and Administration

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CHAPTER 61--INFORMATION AND RETURNS

           *       *       *       *       *       *       *

Subchapter A--Returns and Records

           *       *       *       *       *       *       *

PART II--TAX RETURNS OR STATEMENTS

           *       *       *       *       *       *       *

Subpart B--Income Tax Returns

           *       *       *       *       *       *       *

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

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

SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

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

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

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

           *       *       *       *       *       *       *

Subchapter B--Miscellaneous Provisions

           *       *       *       *       *       *       *

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

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

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CHAPTER 63--ASSESSMENT

           *       *       *       *       *       *       *

  Subchapter B--Deficiency Procedures in the Case of Income, Estate, 
Gift, and Certain Excise Taxes

           *       *       *       *       *       *       *

SEC. 6213. RESTRICTIONS APPLICABLE TO DEFICIENCIES; PETITION TO TAX 
                    COURT.

  (a) Time for filing petition and restriction on assessment.--
Within 90 days, or 150 days if the notice is addressed to a 
person outside the United States, after the notice of 
deficiency authorized in section 6212 is mailed (not counting 
Saturday, Sunday, or a legal holiday in the District of 
Columbia as the last day), the taxpayer may file a petition 
with the Tax Court for a redetermination of the deficiency. 
Except as otherwise provided in section 6851, 6852, or 6861 no 
assessment of a deficiency in respect of any tax imposed by 
subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or 
proceeding in court for its collection shall be made, begun, or 
prosecuted until such notice has been mailed to the taxpayer, 
nor until the expiration of such 90-day or 150-day period, as 
the case may be, nor, if a petition has been filed with the Tax 
Court, until the decision of the Tax Court has become final. 
Notwithstanding the provisions of section 7421(a), the making 
of such assessment or the beginning of such proceeding or levy 
during the time such prohibition is in force may be enjoined by 
a proceeding in the proper court, including the Tax Court, and 
a refund may be ordered by such court of any amount collected 
within the period during which the Secretary is prohibited from 
collecting by levy or through a proceeding in court under the 
provisions of this subsection. The Tax Court shall have no 
jurisdiction to enjoin any action or proceeding or order any 
refund under this subsection unless a timely petition for a 
redetermination of the deficiency has been filed and then only 
in respect of the deficiency that is the subject of such 
petition. Any petition filed with the Tax Court on or before 
the last date specified for filing such petition by the 
Secretary in the notice of deficiency shall be treated as 
timely filed.
  (b) Exceptions to restrictions on assessment.--
          (1) Assessments arising out of mathematical or 
        clerical errors.--If the taxpayer is notified that, on 
        account of a mathematical or clerical error appearing 
        on the return, an amount of tax in excess of that shown 
        on the return is due, and that an assessment of the tax 
        has been or will be made on the basis of what would 
        have been the correct amount of tax but for the 
        mathematical or clerical error, such notice shall not 
        be considered as a notice of deficiency for the 
        purposes of subsection (a) (prohibiting assessment and 
        collection until notice of the deficiency has been 
        mailed), or of section 6212(c)(1) (restricting further 
        deficiency letters), or of section 6512(a) (prohibiting 
        credits or refunds after petition to the Tax Court), 
        and the taxpayer shall have no right to file a petition 
        with the Tax Court based on such notice, nor shall such 
        assessment or collection be prohibited by the 
        provisions of subsection (a) of this section. Each 
        notice under this paragraph shall set forth the error 
        alleged and an explanation thereof.
          (2) Abatement of assessment of mathematical or 
        clerical errors.--
                  (A) Request for abatement.--Notwithstanding 
                section 6404(b), a taxpayer may file with the 
                Secretary within 60 days after notice is sent 
                under paragraph (1) a request for an abatement 
                of any assessment specified in such notice, and 
                upon receipt of such request, the Secretary 
                shall abate the assessment. Any reassessment of 
                the tax with respect to which an abatement is 
                made under this subparagraph shall be subject 
                to the deficiency procedures prescribed by this 
                subchapter.
                  (B) Stay of collection.--In the case of any 
                assessment referred to in paragraph (1), 
                notwithstanding paragraph (1), no levy or 
                proceeding in court for the collection of such 
                assessment shall be made, begun, or prosecuted 
                during the period in which such assessment may 
                be abated under this paragraph.
          (3) Assessments arising out of tentative carryback or 
        refund adjustments.--If the Secretary determines that 
        the amount applied, credited, or refunded under section 
        6411 is in excess of the overassessment attributable to 
        the carryback or the amount described in section 
        1341(b)(1) with respect to which such amount was 
        applied, credited, or refunded, he may assess without 
        regard to the provisions of paragraph (2) the amount of 
        the excess as a deficiency as if it were due to a 
        mathematical or clerical error appearing on the return.
          (4) Assessment of amount paid.--Any amount paid as a 
        tax or in respect of a tax may be assessed upon the 
        receipt of such payment notwithstanding the provisions 
        of subsection (a). In any case where such amount is 
        paid after the mailing of a notice of deficiency under 
        section 6212, such payment shall not deprive the Tax 
        Court of jurisdiction over such deficiency determined 
        under section 6211 without regard to such assessment.
          (5) Certain orders of criminal restitution.--If the 
        taxpayer is notified that an assessment has been or 
        will be made pursuant to section 6201(a)(4)--
                  (A) such notice shall not be considered as a 
                notice of deficiency for the purposes of 
                subsection (a) (prohibiting assessment and 
                collection until notice of the deficiency has 
                been mailed), section 6212(c)(1) (restricting 
                further deficiency letters), or section 6512(a) 
                (prohibiting credits or refunds after petition 
                to the Tax Court), and
                  (B) subsection (a) shall not apply with 
                respect to the amount of such assessment.
  (c) Failure to file petition.--If the taxpayer does not file 
a petition with the Tax Court within the time prescribed in 
subsection (a), the deficiency, notice of which has been mailed 
to the taxpayer, shall be assessed, and shall be paid upon 
notice and demand from the Secretary.
  (d) Waiver of restrictions.--The taxpayer shall at any time 
(whether or not a notice of deficiency has been issued) have 
the right, by a signed notice in writing filed with the 
Secretary, to waive the restrictions provided in subsection (a) 
on the assessment and collection of the whole or any part of 
the deficiency.
  (e) Suspension of filing period for certain excise taxes.--
The running of the time prescribed by subsection (a) for filing 
a petition in the Tax Court with respect to the taxes imposed 
by section 4941 (relating to taxes on self-dealing), 4942 
(relating to taxes on failure to distribute income), 4943 
(relating to taxes on excess business holdings), 4944 (relating 
to investments which jeopardize charitable purpose), 4945 
(relating to taxes on taxable expenditures), 4951 (relating to 
taxes on self-dealing), or 4952 (relating to taxes on taxable 
expenditures), 4955 (relating to taxes on political 
expenditures), 4958 (relating to private excess benefit), 4971 
(relating to excise taxes on failure to meet minimum funding 
standard), 4975 (relating to excise taxes on prohibited 
transactions) shall be suspended for any period during which 
the Secretary has extended the time allowed for making 
correction under section 4963(e).
  (f) Coordination with title 11.--
          (1) Suspension of running of period for filing 
        petition in title 11 cases.--In any case under title 11 
        of the United States Code, the running of the time 
        prescribed by subsection (a) for filing a petition in 
        the Tax Court with respect to any deficiency shall be 
        suspended for the period during which the debtor is 
        prohibited by reason of such case from filing a 
        petition in the Tax Court with respect to such 
        deficiency, and for 60 days thereafter.
          (2) Certain action not taken into account.--For 
        purposes of the second and third sentences of 
        subsection (a), the filing of a proof of claim or 
        request for payment (or the taking of any other action) 
        in a case under title 11 of the United States Code 
        shall not be treated as action prohibited by such 
        second sentence.
  (g) Definitions.--For purposes of this section--
          (1) Return.--The term ``return'' includes any return, 
        statement, schedule, or list, and any amendment or 
        supplement thereto, filed with respect to any tax 
        imposed by subtitle A or B, or chapter 41, 42, 43, or 
        44.
          (2) Mathematical or clerical error.--The term 
        ``mathematical or clerical error'' means--
                  (A) an error in addition, subtraction, 
                multiplication, or division shown on any 
                return,
                  (B) an incorrect use of any table provided by 
                the Internal Revenue Service with respect to 
                any return if such incorrect use is apparent 
                from the existence of other information on the 
                return,
                  (C) an entry on a return of an item which is 
                inconsistent with another entry of the same or 
                another item on such return,
                  (D) an omission of information which is 
                required to be supplied on the return to 
                substantiate an entry on the return,
                  (E) an entry on a return of a deduction or 
                credit in an amount which exceeds a statutory 
                limit imposed by subtitle A or B, or chapter 
                41, 42, 43, or 44, if such limit is expressed--
                          (i) as a specified monetary amount, 
                        or
                          (ii) as a percentage, ratio, or 
                        fraction, and if the items entering 
                        into the application of such limit 
                        appear on such return,
                  (F) an omission of a correct taxpayer 
                identification number required under section 32 
                (relating to the earned income credit) to be 
                included on a return,
                  (G) an entry on a return claiming the credit 
                under section 32 with respect to net earnings 
                from self- employment described in section 
                32(c)(2)(A) to the extent the tax imposed by 
                section 1401 (relating to self-employment tax) 
                on such net earnings has not been paid,
                  (H) an omission of a correct TIN required 
                under [section 21 (relating to expenses for 
                household and dependent care services necessary 
                for gainful employment) or section 151 
                (relating to allowance of deductions for 
                personal exemptions)] subsection (a)(1)(B), 
                (b)(1)(A)(ii), or (b)(1)(B) of section 2 or 
                section 21, 35(d)(1)(B), 36B(b)(3)(B), or 
                63(f)(2)(B),
                  (I) an omission of a correct TIN required 
                under section 24(e) (relating to child tax 
                credit) to be included on a return,
                  (J) an omission of a correct TIN required 
                under section 5A(g)(1) (relating to higher 
                education tuition and related expenses) to be 
                included on a return,
                  (K) an omission of information required by 
                section 32(k)(2) (relating to taxpayers making 
                improper prior claims of earned income credit) 
                or an entry on the return claiming the credit 
                under section 32 for a taxable year for which 
                the credit is disallowed under subsection 
                (k)(1) thereof,
                  (L) the inclusion on a return of a TIN 
                required to be included on the return under 
                section 21, 24, or 32 if--
                          (i) such TIN is of an individual 
                        whose age affects the amount of the 
                        credit under such section, and
                          (ii) the computation of the credit on 
                        the return reflects the treatment of 
                        such individual as being of an age 
                        different from the individual's age 
                        based on such TIN,
                  (M) the entry on the return claiming the 
                credit under section 32 with respect to a child 
                if, according to the Federal Case Registry of 
                Child Support Orders established under section 
                453(h) of the Social Security Act, the taxpayer 
                is a noncustodial parent of such child,
                  (N) an omission of any increase required 
                under section 36(f) with respect to the 
                recapture of a credit allowed under section 36;
                  (O) the inclusion on a return of an 
                individual taxpayer identification number 
                issued under section 6109(i) which has expired, 
                been revoked by the Secretary, or is otherwise 
                invalid,
                  (P) an omission of information required by 
                section 24(g)(2) or an entry on the return 
                claiming the credit under section 24 for a 
                taxable year for which the credit is disallowed 
                under subsection (g)(1) thereof, and
                  (Q) an omission of information required by 
                section 25A(b)(4)(B) or an entry on the return 
                claiming the American Opportunity Tax Credit 
                for a taxable year for which such credit is 
                disallowed under section 25A(b)(4)(A).
        A taxpayer shall be treated as having omitted a correct 
        TIN for purposes of the preceding sentence if 
        information provided by the taxpayer on the return with 
        respect to the individual whose TIN was provided 
        differs from the information the Secretary obtains from 
        the person issuing the TIN.
  (h) Cross references.--
          (1) For assessment as if a mathematical error on the 
        return, in the case of erroneous claims for income tax 
        prepayment credits, see section 6201(a)(3).
          (2) For assessments without regard to restrictions 
        imposed by this section in the case of--
                  (A) Recovery of foreign income taxes, see 
                section 905(c).
                  (B) Recovery of foreign estate tax, see 
                section 2016.
          (3) For provisions relating to application of this 
        subchapter in the case of certain partnership items, 
        etc., see section 6230(a).

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CHAPTER 64--COLLECTION

           *       *       *       *       *       *       *

Subchapter D--Seizure of Property for Collection of Taxes

           *       *       *       *       *       *       *

PART II--LEVY

           *       *       *       *       *       *       *

SEC. 6334. PROPERTY EXEMPT FROM LEVY.

  (a) Enumeration.--There shall be exempt from levy--
          (1) Wearing apparel and school books.--Such items of 
        wearing apparel and such school books as are necessary 
        for the taxpayer or for members of his family;
          (2) Fuel, provisions, furniture, and personal 
        effects.--So much of the fuel, provisions, furniture, 
        and personal effects in the taxpayer's household, and 
        of the arms for personal use, livestock, and poultry of 
        the taxpayer, as does not exceed $6,250 in value;
          (3) Books and tools of a trade, business, or 
        profession.--So many of the books and tools necessary 
        for the trade, business, or profession of the taxpayer 
        as do not exceed in the aggregate $3,125 in value.
          (4) Unemployment benefits.--Any amount payable to an 
        individual with respect to his unemployment (including 
        any portion thereof payable with respect to dependents) 
        under an unemployment compensation law of the United 
        States, of any State, or of the District of Columbia or 
        of the Commonwealth of Puerto Rico.
          (5) Undelivered mail.--Mail, addressed to any person, 
        which has not been delivered to the addressee.
          (6) Certain annuity and pension payments.--Annuity or 
        pension payments under the Railroad Retirement Act, 
        benefits under the Railroad Unemployment Insurance Act, 
        special pension payments received by a person whose 
        name has been entered on the Army, Navy, Air Force, and 
        Coast Guard Medal of Honor roll (38 U.S.C. 1562), and 
        annuities based on retired or retainer pay under 
        chapter 73 of title 10 of the United States Code.
          (7) Workmen's compensation.--Any amount payable to an 
        individual as workmen's compensation (including any 
        portion thereof payable with respect to dependents) 
        under a workmen's compensation law of the United 
        States, any State, the District of Columbia, or the 
        Commonwealth of Puerto Rico.
          (8) Judgments for support of minor children.--If the 
        taxpayer is required by judgment of a court of 
        competent jurisdiction, entered prior to the date of 
        levy, to contribute to the support of his minor 
        children, so much of his salary, wages, or other income 
        as is necessary to comply with such judgment.
          (9) Minimum exemption for wages, salary, and other 
        income.--Any amount payable to or received by an 
        individual as wages or salary for personal services, or 
        as income derived from other sources, during any 
        period, to the extent that the total of such amounts 
        payable to or received by him during such period does 
        not exceed the applicable exempt amount determined 
        under subsection (d).
          (10) Certain service-connected disability payments.--
        Any amount payable to an individual as a service-
        connected (within the meaning of section 101(16) of 
        title 38, United States Code) disability benefit 
        under--
                  (A) subchapter II, III, IV, V, or VI of 
                chapter 11 of such title 38, or
                  (B) chapter 13, 21, 23, 31, 32, 34, 35, 37, 
                or 39 of such title 38.
          (11) Certain public assistance payments.--Any amount 
        payable to an individual as a recipient of public 
        assistance under--
                  (A) title IV or title XVI (relating to 
                supplemental security income for the aged, 
                blind, and disabled) of the Social Security 
                Act, or
                  (B) State or local government public 
                assistance or public welfare programs for which 
                eligibility is determined by a needs or income 
                test.
          (12) Assistance under Job Training Partnership Act.--
        Any amount payable to a participant under the Job 
        Training Partnership Act (29 U.S.C. 1501 et seq.) from 
        funds appropriated pursuant to such Act.
          (13) Residences exempt in small deficiency cases and 
        principal residences and certain business assets exempt 
        in absence of certain approval or jeopardy.--
                  (A) Residences in small deficiency cases.--If 
                the amount of the levy does not exceed $5,000--
                          (i) any real property used as a 
                        residence by the taxpayer; or
                          (ii) any real property of the 
                        taxpayer (other than real property 
                        which is rented) used by any other 
                        individual as a residence.
                  (B) Principal residences and certain business 
                assets.--Except to the extent provided in 
                subsection (e)--
                          (i) the principal residence of the 
                        taxpayer (within the meaning of section 
                        121); and
                          (ii) tangible personal property or 
                        real property (other than real property 
                        which is rented) used in the trade or 
                        business of an individual taxpayer.
  (b) Appraisal.--The officer seizing property of the type 
described in subsection (a) shall appraise and set aside to the 
owner the amount of such property declared to be exempt. If the 
taxpayer objects at the time of the seizure to the valuation 
fixed by the officer making the seizure, the Secretary shall 
summon three disinterested individuals who shall make the 
valuation.
  (c) No other property exempt.--Notwithstanding any other law 
of the United States (including section 207 of the Social 
Security Act), no property or rights to property shall be 
exempt from levy other than the property specifically made 
exempt by subsection (a).
  (d) Exempt amount of wages, salary, or other income.--
          (1) Individuals on weekly basis.--In the case of an 
        individual who is paid or receives all of his wages, 
        salary, and other income on a weekly basis, the amount 
        of the wages, salary, and other income payable to or 
        received by him during any week which is exempt from 
        levy under subsection (a)(9) shall be the exempt 
        amount.
          [(2) Exempt amount.--For purposes of paragraph (1), 
        the term ``exempt amount'' means an amount equal to--
                  [(A) the sum of--
                          [(i) the standard deduction, and
                          [(ii) the aggregate amount of the 
                        deductions for personal exemptions 
                        allowed the taxpayer under section 151 
                        in the taxable year in which such levy 
                        occurs, divided by (B) 52.
        Unless the taxpayer submits to the Secretary a written 
        and properly verified statement specifying the facts 
        necessary to determine the proper amount under 
        subparagraph (A), subparagraph (A) shall be applied as 
        if the taxpayer were a married individual filing a 
        separate return with only 1 personal exemption.]
          (2) Exempt amount.--
                  (A) In general.--For purposes of paragraph 
                (1), the term ``exempt amount'' means an amount 
                equal to--
                          (i) the sum of the amount determined 
                        under subparagraph (B) and the standard 
                        deduction, divided by
                          (ii) 52.
                  (B) Amount determined.--For purposes of 
                subparagraph (A), the amount determined under 
                this subparagraph is--
                          (i) the dollar amount in effect under 
                        section 7706(d)(1)(B), multiplied by
                          (ii) the number of the taxpayer's 
                        dependents for the taxable year in 
                        which the levy occurs.
                  (C) Verified statement.--Unless the taxpayer 
                submits to the Secretary a written and properly 
                verified statement specifying the facts 
                necessary to determine the proper amount under 
                subparagraph (A), subparagraph (A) shall be 
                applied as if the taxpayer were a married 
                individual filing a separate return with no 
                dependents.
          (3) Individuals on basis other than weekly.--In the 
        case of any individual not described in paragraph (1), 
        the amount of the wages, salary, and other income 
        payable to or received by him during any applicable pay 
        period or other fiscal period (as determined under 
        regulations prescribed by the Secretary) which is 
        exempt from levy under subsection (a)(9) shall be an 
        amount (determined under such regulations) which as 
        nearly as possible will result in the same total 
        exemption from levy for such individual over a period 
        of time as he would have under paragraph (1) if (during 
        such period of time) he were paid or received such 
        wages, salary, and other income on a regular weekly 
        basis.
          [(4) Years when personal exemption amount is zero.--
                  [(A) In general.--In the case of any taxable 
                year in which the exemption amount under 
                section 151(d) is zero, paragraph (2) shall not 
                apply and for purposes of paragraph (1) the 
                term ``exempt amount'' means an amount equal 
                to--
                          [(i) the sum of the amount determined 
                        under subparagraph (B) and the standard 
                        deduction, divided by
                          [(ii) 52.
                  [(B) Amount determined.--For purposes of 
                subparagraph (A), the amount determined under 
                this subparagraph is $4,150 multiplied by the 
                number of the taxpayer's dependents for the 
                taxable year in which the levy occurs.
                  [(C) Inflation adjustment.--In the case of 
                any taxable year beginning in a calendar year 
                after 2018, the $4,150 amount in subparagraph 
                (B) shall be increased by an amount equal to--
                          [(i) such dollar amount, multiplied 
                        by
                          [(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``2017'' for ``2016'' in subparagraph 
                        (A)(ii) thereof.
                If any increase determined under the preceding 
                sentence is not a multiple of $100, such 
                increase shall be rounded to the next lowest 
                multiple of $100.
                  [(D) Verified statement.--Unless the taxpayer 
                submits to the Secretary a written and properly 
                verified statement specifying the facts 
                necessary to determine the proper amount under 
                subparagraph (A), subparagraph (A) shall be 
                applied as if the taxpayer were a married 
                individual filing a separate return with no 
                dependents.]
  (e) Levy allowed on principal residences and certain business 
assets in certain circumstances.--
          (1) Principal residences.--
                  (A) Approval required.--A principal residence 
                shall not be exempt from levy if a judge or 
                magistrate of a district court of the United 
                States approves (in writing) the levy of such 
                residence.
                  (B) Jurisdiction.--The district courts of the 
                United States shall have exclusive jurisdiction 
                to approve a levy under subparagraph (A).
          (2) Certain business assets.--Property (other than a 
        principal residence) described in subsection (a)(13)(B) 
        shall not be exempt from levy if--
                  (A) a district director or assistant district 
                director of the Internal Revenue Service 
                personally approves (in writing) the levy of 
                such property; or
                  (B) the Secretary finds that the collection 
                of tax is in jeopardy.
        An official may not approve a levy under subparagraph 
        (A) unless the official determines that the taxpayer's 
        other assets subject to collection are insufficient to 
        pay the amount due, together with expenses of the 
        proceedings.
  (f) Levy allowed on certain specified payments.--Any payment 
described in subparagraph (B) or (C) of section 6331(h)(2) 
shall not be exempt from levy if the Secretary approves the 
levy thereon under section 6331(h).
  (g) Inflation adjustment.--
          (1) In general.--In the case of any calendar year 
        beginning after 1999, each dollar amount referred to in 
        paragraphs (2) and (3) of subsection (a) shall be 
        increased by an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for such calendar year, 
                by substituting ``calendar year 1998'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
          (2) Rounding.--If any dollar amount after being 
        increased under paragraph (1) is not a multiple of $10, 
        such dollar amount shall be rounded to the nearest 
        multiple of $10.

           *       *       *       *       *       *       *

 CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
PENALTIES

           *       *       *       *       *       *       *

Subchapter A--Additions to the Tax and Additional Amounts

           *       *       *       *       *       *       *

PART I--GENERAL PROVISIONS

           *       *       *       *       *       *       *

SEC. 6654. FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME TAX.

  (a) Addition to the tax.--Except as otherwise provided in 
this section, in the case of any underpayment of estimated tax 
by an individual, there shall be added to the tax under chapter 
1, the tax under chapter 2, and the tax under chapter 2A for 
the taxable year an amount determined by applying--
          (1) the underpayment rate established under section 
        6621,
          (2) to the amount of the underpayment,
          (3) for the period of the underpayment.
  (b) Amount of underpayment; period of underpayment.--For 
purposes of subsection (a)--
          (1) Amount.--The amount of the underpayment shall be 
        the excess of--
                  (A) the required installment, over
                  (B) the amount (if any) of the installment 
                paid on or before the due date for the 
                installment.
          (2) Period of underpayment.--The period of the 
        underpayment shall run from the due date for the 
        installment to whichever of the following dates is the 
        earlier--
                  (A) the 15th day of the 4th month following 
                the close of the taxable year, or
                  (B) with respect to any portion of the 
                underpayment, the date on which such portion is 
                paid.
          (3) Order of crediting payments.--For purposes of 
        paragraph (2)(B), a payment of estimated tax shall be 
        credited against unpaid required installments in the 
        order in which such installments are required to be 
        paid.
  (c) Number of required installments; due dates.--For purposes 
of this section--
          (1) Payable in 4 installments.--There shall be 4 
        required installments for each taxable year.
          (2) Time for payment of installments

 
------------------------------------------------------------------------
  In the case of the following required
              installments:                      The due date is:
------------------------------------------------------------------------
1st                                       April 15
2nd                                       June 15
3rd                                       September 15
4th                                       January 15 of the following
                                           taxable year.
------------------------------------------------------------------------

  (d) Amount of required installments.--For purposes of this 
section--
          (1) Amount.--
                  (A) In general.--Except as provided in 
                paragraph (2), the amount of any required 
                installment shall be 25 percent of the required 
                annual payment.
                  (B) Required annual payment.--For purposes of 
                subparagraph (A), the term ``required annual 
                payment'' means the lesser of--
                          (i) 90 percent of the tax shown on 
                        the return for the taxable year (or, if 
                        no return is filed, 90 percent of the 
                        tax for such year), or
                          (ii) 100 percent of the tax shown on 
                        the return of the individual for the 
                        preceding taxable year.
                Clause (ii) shall not apply if the preceding 
                taxable year was not a taxable year of 12 
                months or if the individual did not file a 
                return for such preceding taxable year.
                  (C) Limitation on use of preceding year's 
                tax.--
                          (i) In general.--If the adjusted 
                        gross income shown on the return of the 
                        individual for the preceding taxable 
                        year beginning in any calendar year 
                        exceeds $150,000, clause (ii) of 
                        subparagraph (B) shall be applied by 
                        substituting ``110 percent'' for ``100 
                        percent''.
                          (ii) Separate returns.--In the case 
                        of a married individual (within the 
                        meaning of section 7703) who files a 
                        separate return for the taxable year 
                        for which the amount of the installment 
                        is being determined, clause (i) shall 
                        be applied by substituting ``$75,000'' 
                        for ``$150,000''.
                          [(iii) Special rule.--In the case of 
                        an estate or trust, adjusted gross 
                        income shall be determined as provided 
                        in section 67(e).]
          (2) Lower required installment where annualized 
        income installment is less than amount determined under 
        paragraph (1)
                  (A) In general.--In the case of any required 
                installment, if the individual establishes that 
                the annualized income installment is less than 
                the amount determined under paragraph (1)--
                          (i) the amount of such required 
                        installment shall be the annualized 
                        income installment, and
                          (ii) any reduction in a required 
                        installment resulting from the 
                        application of this subparagraph shall 
                        be recaptured by increasing the amount 
                        of the next required installment 
                        determined under paragraph (1) by the 
                        amount of such reduction (and by 
                        increasing subsequent required 
                        installments to the extent that the 
                        reduction has not previously been 
                        recaptured under this clause).
                  (B) Determination of annualized income 
                installment.--In the case of any required 
                installment, the annualized income installment 
                is the excess (if any) of--
                          (i) an amount equal to the applicable 
                        percentage of the tax for the taxable 
                        year computed by placing on an 
                        annualized basis the taxable income, 
                        alternative minimum taxable income, and 
                        adjusted self-employment income for 
                        months in the taxable year ending 
                        before the due date for the 
                        installment, over
                          (ii) the aggregate amount of any 
                        prior required installments for the 
                        taxable year.
                  (C) Special rules.--For purposes of this 
                paragraph--
                          (i) Annualization.--The taxable 
                        income, alternative minimum taxable 
                        income, and adjusted self-employment 
                        income shall be placed on an annualized 
                        basis under regulations prescribed by 
                        the Secretary.
                          (ii) Applicable percentage.--

 
------------------------------------------------------------------------
In the case of the following required
            installments:                The applicable percentage is:
------------------------------------------------------------------------
1st                                    22.5
2nd                                    45
3rd                                    67.5
4th                                    90.
------------------------------------------------------------------------

                          (iii) Adjusted self-employment 
                        income.--The term ``adjusted self-
                        employment income'' means self-
                        employment income (as defined in 
                        section 1402(b)); except that section 
                        1402(b) shall be applied by placing 
                        wages (within the meaning of section 
                        1402(b)) for months in the taxable year 
                        ending before the due date for the 
                        installment on an annualized basis 
                        consistent with clause (i).
                  (D) Treatment of subpart F income.--
                          (i) In general.--Any amounts required 
                        to be included in gross income under 
                        section 951(a) (and credits properly 
                        allocable thereto) shall be taken into 
                        account in computing any annualized 
                        income installment under subparagraph 
                        (B) in a manner similar to the manner 
                        under which partnership income 
                        inclusions (and credits properly 
                        allocable thereto) are taken into 
                        account.
                          (ii) Prior year safe harbor.--If a 
                        taxpayer elects to have this clause 
                        apply to any taxable year--
                                  (I) clause (i) shall not 
                                apply, and
                                  (II) for purposes of 
                                computing any annualized income 
                                installment for such taxable 
                                year, the taxpayer shall be 
                                treated as having received 
                                ratably during such taxable 
                                year items of income and credit 
                                described in clause (i) in an 
                                amount equal to the amount of 
                                such items shown on the return 
                                of the taxpayer for the 
                                preceding taxable year (the 
                                second preceding taxable year 
                                in the case of the first and 
                                second required installments 
                                for such taxable year).
  (e) Exceptions.--
          (1) Where tax is small amount.--No addition to tax 
        shall be imposed under subsection (a) for any taxable 
        year if the tax shown on the return for such taxable 
        year (or, if no return is filed, the tax), reduced by 
        the credit allowable under section 31, is less than 
        $1,000.
          (2) Where no tax liability for preceding taxable 
        year.--No addition to tax shall be imposed under 
        subsection (a) for any taxable year if--
                  (A) the preceding taxable year was a taxable 
                year of 12 months,
                  (B) the individual did not have any liability 
                for tax for the preceding taxable year, and
                  (C) the individual was a citizen or resident 
                of the United States throughout the preceding 
                taxable year.
          (3) Waiver in certain cases.--
                  (A) In general.--No addition to tax shall be 
                imposed under subsection (a) with respect to 
                any underpayment to the extent the Secretary 
                determines that by reason of casualty, 
                disaster, or other unusual circumstances the 
                imposition of such addition to tax would be 
                against equity and good conscience.
                  (B) Newly retired or disabled individuals.--
                No addition to tax shall be imposed under 
                subsection (a) with respect to any underpayment 
                if the Secretary determines that--
                          (i) the taxpayer--
                                  (I) retired after having 
                                attained age 62, or
                                  (II) became disabled,
                        in the taxable year for which estimated 
                        payments were required to be made or in 
                        the taxable year preceding such taxable 
                        year, and
                          (ii) such underpayment was due to 
                        reasonable cause and not to willful 
                        neglect.
  (f) Tax computed after application of credits against tax.--
For purposes of this section, the term ``tax'' means--
          (1) the tax imposed by chapter 1 (other than any 
        increase in such tax by reason of section 143(m)), plus
          (2) the tax imposed by chapter 2, plus
          (3) the tax imposed by chapter 2A, minus
  (g) Application of section in case of tax withheld on 
wages.--
          (1) In general.--For purposes of applying this 
        section, the amount of the credit allowed under section 
        31 for the taxable year shall be deemed a payment of 
        estimated tax, and an equal part of such amount shall 
        be deemed paid on each due date for such taxable year, 
        unless the taxpayer establishes the dates on which all 
        amounts were actually withheld, in which case the 
        amounts so withheld shall be deemed payments of 
        estimated tax on the dates on which such amounts were 
        actually withheld.
          (2) Separate application.--The taxpayer may apply 
        paragraph (1) separately with respect to--
                  (A) wage withholding, and
                  (B) all other amounts withheld for which 
                credit is allowed under section 31.
  (h) Special rule where return filed on or before January 
31.--If, on or before January 31 of the following taxable year, 
the taxpayer files a return for the taxable year and pays in 
full the amount computed on the return as payable, then no 
addition to tax shall be imposed under subsection (a) with 
respect to any underpayment of the 4th required installment for 
the taxable year.
  (i) Special rules for farmers and fishermen.--For purposes of 
this section--
          (1) In general.--If an individual is a farmer or 
        fisherman for any taxable year--
                  (A) there shall be only 1 required 
                installment for the taxable year,
                  (B) the due date for such installment shall 
                be January 15 of the following taxable year,
                  (C) the amount of such installment shall be 
                equal to the required annual payment determined 
                under subsection (d)(1)(B) by substituting ``66 
                2/3 percent'' for ``90 percent'' and without 
                regard to subparagraph (C) of subsection 
                (d)(1), and
                  (D) subsection (h) shall be applied--
                          (i) by substituting ``March 1'' for 
                        ``January 31'', and
                          (ii) by treating the required 
                        installment described in subparagraph 
                        (A) of this paragraph as the 4th 
                        required installment.
          (2) Farmer or fisherman defined.--An individual is a 
        farmer or fisherman for any taxable year if--
                  (A) the individual's gross income from 
                farming or fishing (including oyster farming) 
                for the taxable year is at least 66 2/3 percent 
                of the total gross income from all sources for 
                the taxable year, or
                  (B) such individual's gross income from 
                farming or fishing (including oyster farming) 
                shown on the return of the individual for the 
                preceding taxable year is at least 66 2/3 
                percent of the total gross income from all 
                sources shown on such return.
  (j) Special rules for nonresident aliens.--In the case of a 
nonresident alien described in section 6072(c):
          (1) Payable in 3 installments.--There shall be 3 
        required installments for the taxable year.
          (2) Time for payment of installments.--The due dates 
        for required installments under this subsection shall 
        be determined under the following table:

 
------------------------------------------------------------------------
  In the case of the following required
              installments:                      The due date is:
------------------------------------------------------------------------
1st                                       June 15
2nd                                       September 15
3rd                                       January 15 of the following
                                           taxable year.
------------------------------------------------------------------------

          (3) Amount of required installments.--
                  (A) First required installment.--In the case 
                of the first required installment, subsection 
                (d) shall be applied by substituting ``50 
                percent'' for ``25 percent'' in subsection 
                (d)(1)(A).
                  (B) Determination of applicable percentage.--
                The applicable percentage for purposes of 
                subsection (d)(2) shall be determined under the 
                following table:

 
------------------------------------------------------------------------
In the case of the following required
            installments:                The applicable percentage is:
------------------------------------------------------------------------
1st                                    45
2nd                                    67.5
3rd                                    90.
------------------------------------------------------------------------

  (k) Fiscal years and short years.--
          (1) Fiscal years.--In applying this section to a 
        taxable year beginning on any date other than January 
        1, there shall be substituted, for the months specified 
        in this section, the months which correspond thereto.
          (2) Short taxable year.--This section shall be 
        applied to taxable years of less than 12 months in 
        accordance with regulations prescribed by the 
        Secretary.
  (l) Estates and trusts.--
          (1) In general.--Except as otherwise provided in this 
        subsection, this section shall apply to any estate or 
        trust.
          (2) Exception for estates and certain trusts.--With 
        respect to any taxable year ending before the date 2 
        years after the date of the decedent's death, this 
        section shall not apply to--
                  (A) the estate of such decedent, or
                  (B) any trust--
                          (i) all of which was treated (under 
                        subpart E of part I of subchapter J of 
                        chapter 1) as owned by the decedent, 
                        and
                          (ii) to which the residue of the 
                        decedent's estate will pass under his 
                        will (or, if no will is admitted to 
                        probate, which is the trust primarily 
                        responsible for paying debts, taxes, 
                        and expenses of administration).
          (3) Exception for charitable trusts and private 
        foundations.--This section shall not apply to any trust 
        which is subject to the tax imposed by section 511 or 
        which is a private foundation.
          (4) Special rule for annualizations.--In the case of 
        any estate or trust to which this section applies, 
        subsection (d)(2)(B)(i) shall be applied by 
        substituting ``ending before the date 1 month before 
        the due date for the installment'' for ``ending before 
        the due date for the installment''.
  (m) Special rule for Medicare tax.--For purposes of this 
section, the tax imposed under section 3101(b)(2) (to the 
extent not withheld) shall be treated as a tax imposed under 
chapter 2.
  (n) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.

           *       *       *       *       *       *       *

                        CHAPTER 79--DEFINITIONS

Sec. 7701. Definitions.
     * * * * * * *
Sec. 7706. Dependent defined.

           *       *       *       *       *       *       *

SEC. 7702B. TREATMENT OF QUALIFIED LONG-TERM CARE INSURANCE.

  (a) In general.--For purposes of this title--
          (1) a qualified long-term care insurance contract 
        shall be treated as an accident and health insurance 
        contract,
          (2) amounts (other than policyholder dividends, as 
        defined in section 808, or premium refunds) received 
        under a qualified long-term care insurance contract 
        shall be treated as amounts received for personal 
        injuries and sickness and shall be treated as 
        reimbursement for expenses actually incurred for 
        medical care (as defined in section 213(d)),
          (3) any plan of an employer providing coverage under 
        a qualified long-term care insurance contract shall be 
        treated as an accident and health plan with respect to 
        such coverage,
          (4) except as provided in subsection (e)(3), amounts 
        paid for a qualified long-term care insurance contract 
        providing the benefits described in subsection 
        (b)(2)(A) shall be treated as payments made for 
        insurance for purposes of section 213(d)(1)(D), and
          (5) a qualified long-term care insurance contract 
        shall be treated as a guaranteed renewable contract 
        subject to the rules of section 816(e).
  (b) Qualified long-term care insurance contract.--For 
purposes of this title--
          (1) In general.--The term ``qualified long-term care 
        insurance contract'' means any insurance contract if--
                  (A) the only insurance protection provided 
                under such contract is coverage of qualified 
                long-term care services,
                  (B) such contract does not pay or reimburse 
                expenses incurred for services or items to the 
                extent that such expenses are reimbursable 
                under title XVIII of the Social Security Act or 
                would be so reimbursable but for the 
                application of a deductible or coinsurance 
                amount,
                  (C) such contract is guaranteed renewable,
                  (D) such contract does not provide for a cash 
                surrender value or other money that can be--
                          (i) paid, assigned, or pledged as 
                        collateral for a loan, or
                          (ii) borrowed, other than as provided 
                        in subparagraph (E) or paragraph 
                        (2)(C),
                  (E) all refunds of premiums, and all 
                policyholder dividends or similar amounts, 
                under such contract are to be applied as a 
                reduction in future premiums or to increase 
                future benefits, and
                  (F) such contract meets the requirements of 
                subsection (g).
          (2) Special rules.--
                  (A) Per diem, etc. payments permitted.--A 
                contract shall not fail to be described in 
                subparagraph (A) or (B) of paragraph (1) by 
                reason of payments being made on a per diem or 
                other periodic basis without regard to the 
                expenses incurred during the period to which 
                the payments relate.
                  (B) Special rules relating to medicare.--
                          (i) Paragraph (1)(B) shall not apply 
                        to expenses which are reimbursable 
                        under title XVIII of the Social 
                        Security Act only as a secondary payor.
                          (ii) No provision of law shall be 
                        construed or applied so as to prohibit 
                        the offering of a qualified long-term 
                        care insurance contract on the basis 
                        that the contract coordinates its 
                        benefits with those provided under such 
                        title.
                  (C) Refunds of premiums.--Paragraph (1)(E) 
                shall not apply to any refund on the death of 
                the insured, or on a complete surrender or 
                cancellation of the contract, which cannot 
                exceed the aggregate premiums paid under the 
                contract. Any refund on a complete surrender or 
                cancellation of the contract shall be 
                includible in gross income to the extent that 
                any deduction or exclusion was allowable with 
                respect to the premiums.
  (c) Qualified long-term care services.--For purposes of this 
section--
          (1) In general.--The term ``qualified long-term care 
        services'' means necessary diagnostic, preventive, 
        therapeutic, curing, treating, mitigating, and 
        rehabilitative services, and maintenance or personal 
        care services, which--
                  (A) are required by a chronically ill 
                individual, and
                  (B) are provided pursuant to a plan of care 
                prescribed by a licensed health care 
                practitioner.
          (2) Chronically ill individual.--
                  (A) In general.--The term ``chronically ill 
                individual'' means any individual who has been 
                certified by a licensed health care 
                practitioner as--
                          (i) being unable to perform (without 
                        substantial assistance from another 
                        individual) at least 2 activities of 
                        daily living for a period of at least 
                        90 days due to a loss of functional 
                        capacity,
                          (ii) having a level of disability 
                        similar (as determined under 
                        regulations prescribed by the Secretary 
                        in consultation with the Secretary of 
                        Health and Human Services) to the level 
                        of disability described in clause (i), 
                        or
                          (iii) requiring substantial 
                        supervision to protect such individual 
                        from threats to health and safety due 
                        to severe cognitive impairment.
                Such term shall not include any individual 
                otherwise meeting the requirements of the 
                preceding sentence unless within the preceding 
                12-month period a licensed health care 
                practitioner has certified that such individual 
                meets such requirements.
                  (B) Activities of daily living.--For purposes 
                of subparagraph (A), each of the following is 
                an activity of daily living:
                          (i) Eating.
                          (ii) Toileting.
                          (iii) Transferring.
                          (iv) Bathing.
                          (v) Dressing.
                          (vi) Continence.
                A contract shall not be treated as a qualified 
                long-term care insurance contract unless the 
                determination of whether an individual is a 
                chronically ill individual described in 
                subparagraph (A)(i) takes into account at least 
                5 of such activities.
          (3) Maintenance or personal care services.--The term 
        ``maintenance or personal care services'' means any 
        care the primary purpose of which is the provision of 
        needed assistance with any of the disabilities as a 
        result of which the individual is a chronically ill 
        individual (including the protection from threats to 
        health and safety due to severe cognitive impairment).
          (4) Licensed health care practitioner.--The term 
        ``licensed health care practitioner'' means any 
        physician (as defined in section 1861(r)(1) of the 
        Social Security Act) and any registered professional 
        nurse, licensed social worker, or other individual who 
        meets such requirements as may be prescribed by the 
        Secretary.
  (d) Aggregate payments in excess of limits.--
          (1) In general.--If the aggregate of--
                  (A) the periodic payments received for any 
                period under all qualified long-term care 
                insurance contracts which are treated as made 
                for qualified long-term care services for an 
                insured, and
                  (B) the periodic payments received for such 
                period which are treated under section 101(g) 
                as paid by reason of the death of such insured,
        exceeds the per diem limitation for such period, such 
        excess shall be includible in gross income without 
        regard to section 72. A payment shall not be taken into 
        account under subparagraph (B) if the insured is a 
        terminally ill individual (as defined in section 
        101(g)) at the time the payment is received.
          (2) Per diem limitation.--For purposes of paragraph 
        (1), the per diem limitation for any period is an 
        amount equal to the excess (if any) of--
                  (A) the greater of--
                          (i) the dollar amount in effect for 
                        such period under paragraph (4), or
                          (ii) the costs incurred for qualified 
                        long- term care services provided for 
                        the insured for such period, over (B) 
                        the aggregate payments received as 
                        reimbursements (through insurance or 
                        otherwise) for qualified long-term care 
                        services provided for the insured 
                        during such period.
          (3) Aggregation rules.--For purposes of this 
        subsection--
                  (A) all persons receiving periodic payments 
                described in paragraph (1) with respect to the 
                same insured shall be treated as 1 person, and
                  (B) the per diem limitation determined under 
                paragraph (2) shall be allocated first to the 
                insured and any remaining limitation shall be 
                allocated among the other such persons in such 
                manner as the Secretary shall prescribe.
          (4) Dollar amount.--The dollar amount in effect under 
        this subsection shall be $175 per day (or the 
        equivalent amount in the case of payments on another 
        periodic basis).
          (5) Inflation adjustment.--In the case of a calendar 
        year after 1997, the dollar amount contained in 
        paragraph (4) shall be increased at the same time and 
        in the same manner as amounts are increased pursuant to 
        section 213(d)(10).
          (6) Periodic payments.--For purposes of this 
        subsection, the term ``periodic payment'' means any 
        payment (whether on a periodic basis or otherwise) made 
        without regard to the extent of the costs incurred by 
        the payee for qualified long-term care services.
  (e) Treatment of coverage provided as part of a life 
insurance or annuity contract.--Except as otherwise provided in 
regulations prescribed by the Secretary, in the case of any 
long-term care insurance coverage (whether or not qualified) 
provided by a rider on or as part of a life insurance contract 
or an annuity contract--
          (1) In general.--This title shall apply as if the 
        portion of the contract providing such coverage is a 
        separate contract.
          (2) Denial of deduction under section 213.--No 
        deduction shall be allowed under section 213(a) for any 
        payment made for coverage under a qualified long-term 
        care insurance contract if such payment is made as a 
        charge against the cash surrender value of a life 
        insurance contract or the cash value of an annuity 
        contract.
          (3) Portion defined.--For purposes of this 
        subsection, the term ``portion'' means only the terms 
        and benefits under a life insurance contract or annuity 
        contract that are in addition to the terms and benefits 
        under the contract without regard to long-term care 
        insurance coverage.
          (4) Annuity contracts to which paragraph (1) does not 
        apply.--For purposes of this subsection, none of the 
        following shall be treated as an annuity contract:
                  (A) A trust described in section 401(a) which 
                is exempt from tax under section 501(a).
                  (B) A contract--
                          (i) purchased by a trust described in 
                        subparagraph (A),
                          (ii) purchased as part of a plan 
                        described in section 403(a),
                          (iii) described in section 403(b),
                          (iv) provided for employees of a life 
                        insurance company under a plan 
                        described in section 818(a)(3), or
                          (v) from an individual retirement 
                        account or an individual retirement 
                        annuity.
                  (C) A contract purchased by an employer for 
                the benefit of the employee (or the employee's 
                spouse).
        Any dividend described in section 404(k) which is 
        received by a participant or beneficiary shall, for 
        purposes of this paragraph, be treated as paid under a 
        separate contract to which subparagraph (B)(i) applies.
  (f) Treatment of certain state-maintained plans.--
          (1) In general.--If--
                  (A) an individual receives coverage for 
                qualified long-term care services under a State 
                long-term care plan, and
                  (B) the terms of such plan would satisfy the 
                requirements of subsection (b) were such plan 
                an insurance contract,
        such plan shall be treated as a qualified long-term 
        care insurance contract for purposes of this title.
          (2) State long-term care plan.--For purposes of 
        paragraph (1), the term ``State long-term care plan'' 
        means any plan--
                  (A) which is established and maintained by a 
                State or an instrumentality of a State,
                  (B) which provides coverage only for 
                qualified long-term care services, and
                  (C) under which such coverage is provided 
                only to--
                          (i) employees and former employees of 
                        a State (or any political subdivision 
                        or instrumentality of a State),
                          (ii) the spouses of such employees, 
                        and
                          (iii) individuals bearing a 
                        relationship to such employees or 
                        spouses which is described in any of 
                        subparagraphs (A) through (G) of 
                        [section 152(d)(2)] section 7706(d)(2).
  (g) Consumer protection provisions.--
          (1) In general.--The requirements of this subsection 
        are met with respect to any contract if the contract 
        meets--
                  (A) the requirements of the model regulation 
                and model Act described in paragraph (2),
                  (B) the disclosure requirement of paragraph 
                (3), and
                  (C) the requirements relating to 
                nonforfeitability under paragraph (4).
          (2) Requirements of model regulation and act.--
                  (A) In general.--The requirements of this 
                paragraph are met with respect to any contract 
                if such contract meets--
                          (i) Model regulation.--The following 
                        requirements of the model regulation:
                                  (I) Section 7A (relating to 
                                guaranteed renewal or 
                                noncancellability), and the 
                                requirements of section 6B of 
                                the model Act relating to such 
                                section 7A.
                                  (II) Section 7B (relating to 
                                prohibitions on limitations and 
                                exclusions).
                                  (III) Section 7C (relating to 
                                extension of benefits).
                                  (IV) Section 7D (relating to 
                                continuation or conversion of 
                                coverage).
                                  (V) Section 7E (relating to 
                                discontinuance and replacement 
                                of policies).
                                  (VI) Section 8 (relating to 
                                unintentional lapse).
                                  (VII) Section 9 (relating to 
                                disclosure), other than section 
                                9F thereof.
                                  (VIII) Section 10 (relating 
                                to prohibitions against post-
                                claims underwriting).
                                  (IX) Section 11 (relating to 
                                minimum standards).
                                  (X) Section 12 (relating to 
                                requirement to offer inflation 
                                protection), except that any 
                                requirement for a signature on 
                                a rejection of inflation 
                                protection shall permit the 
                                signature to be on an 
                                application or on a separate 
                                form.
                                  (XI) Section 23 (relating to 
                                prohibition against preexisting 
                                conditions and probationary 
                                periods in replacement policies 
                                or certificates).
                          (ii) Model Act.--The following 
                        requirements of the model Act:
                                  (I) Section 6C (relating to 
                                preexisting conditions).
                                  (II) Section 6D (relating to 
                                prior hospitalization).
                  (B) Definitions.--For purposes of this 
                paragraph--
                          (i) Model provisions.--The terms 
                        ``model regulation'' and ``model Act'' 
                        mean the long-term care insurance model 
                        regulation, and the long-term care 
                        insurance model Act, respectively, 
                        promulgated by the National Association 
                        of Insurance Commissioners (as adopted 
                        as of January 1993).
                          (ii) Coordination.--Any provision of 
                        the model regulation or model Act 
                        listed under clause (i) or (ii) of 
                        subparagraph (A) shall be treated as 
                        including any other provision of such 
                        regulation or Act necessary to 
                        implement the provision.
                          (iii) Determination.--For purposes of 
                        this section and section 4980C, the 
                        determination of whether any 
                        requirement of a model regulation or 
                        the model Act has been met shall be 
                        made by the Secretary.
          (3) Disclosure requirement.--The requirement of this 
        paragraph is met with respect to any contract if such 
        contract meets the requirements of section 4980C(d).
          (4) Nonforfeiture requirements.--
                  (A) In general.--The requirements of this 
                paragraph are met with respect to any level 
                premium contract, if the issuer of such 
                contract offers to the policyholder, including 
                any group policyholder, a nonforfeiture 
                provision meeting the requirements of 
                subparagraph (B).
                  (B) Requirements of provision.--The 
                nonforfeiture provision required under 
                subparagraph (A) shall meet the following 
                requirements:
                          (i) The nonforfeiture provision shall 
                        be appropriately captioned.
                          (ii) The nonforfeiture provision 
                        shall provide for a benefit available 
                        in the event of a default in the 
                        payment of any premiums and the mount 
                        of the benefit may be adjusted 
                        subsequent to being initially granted 
                        only as necessary to reflect changes in 
                        claims, persistency, and interest as 
                        reflected in changes in rates for 
                        premium paying contracts approved by 
                        the appropriate State regulatory agency 
                        for the same contract form.
                          (iii) The nonforfeiture provision 
                        shall provide at least one of the 
                        following:
                                  (I) Reduced paid-up 
                                insurance.
                                  (II) Extended term insurance.
                                  (III) Shortened benefit 
                                period.
                                  (IV) Other similar offerings 
                                approved by the appropriate 
                                State regulatory agency.
          (5) Cross reference.--For coordination of the 
        requirements of this subsection with State 
        requirements, see section 4980C(f).

SEC. 7703. DETERMINATION OF MARITAL STATUS.

  (a) General rule.--For purposes of [part V of subchapter B of 
chapter 1 and] those provisions of this title which refer to 
this subsection--
          (1) the determination of whether an individual is 
        married shall be made as of the close of his taxable 
        year; except that if his spouse dies during his taxable 
        year such determination shall be made as of the time of 
        such death; and
          (2) an individual legally separated from his spouse 
        under a decree of divorce or of separate maintenance 
        shall not be considered as married.
  (b) Certain married individuals living apart.--For purposes 
of those provisions of this title which refer to this 
subsection, if--
          (1) an individual who is married (within the meaning 
        of subsection (a)) and who files a separate return 
        maintains as his home a household which constitutes for 
        more than one-half of the taxable year the principal 
        place of abode of a child (within the meaning of 
        [section 152(f)(1)) with respect to whom such 
        individual is entitled to a deduction for the taxable 
        year under section 151 (or would be so entitled but for 
        section 152(e)),] section 7706(f)(1)) who is a 
        dependent of such individual for the taxable year (or 
        would be but for section 7706(e)),
          (2) such individual furnishes over one-half of the 
        cost of maintaining such household during the taxable 
        year, and
          (3) during the last 6 months of the taxable year, 
        such individual's spouse is not a member of such 
        household,
such individual shall not be considered as married.

           *       *       *       *       *       *       *

SEC. [152.]  7706. DEPENDENT DEFINED.

  (a) In general.--For purposes of [this subtitle] subtitle A, 
the term ``dependent'' means--
          (1) a qualifying child, or
          (2) a qualifying relative.
  (b) Exceptions.--For purposes of this section--
          (1) Dependents ineligible.--If an individual is a 
        dependent of a taxpayer for any taxable year of such 
        taxpayer beginning in a calendar year, such individual 
        shall be treated as having no dependents for any 
        taxable year of such individual beginning in such 
        calendar year.
          (2) Married dependents.--An individual shall not be 
        treated as a dependent of a taxpayer under subsection 
        (a) if such individual has made a joint return with the 
        individual's spouse under section 6013 for the taxable 
        year beginning in the calendar year in which the 
        taxable year of the taxpayer begins.
          (3) Citizens or nationals of other countries.--
                  (A) In general.--The term ``dependent'' does 
                not include an individual who is not a citizen 
                or national of the United States unless such 
                individual is a resident of the United States 
                or a country contiguous to the United States.
                  (B) Exception for adopted child.--
                Subparagraph (A) shall not exclude any child of 
                a taxpayer (within the meaning of subsection 
                (f)(1)(B)) from the definition of ``dependent'' 
                if--
                          (i) for the taxable year of the 
                        taxpayer, the child has the same 
                        principal place of abode as the 
                        taxpayer and is a member of the 
                        taxpayer's household, and
                          (ii) the taxpayer is a citizen or 
                        national of the United States.
  (c) Qualifying child.--For purposes of this section--
          (1) In general.--The term ``qualifying child'' means, 
        with respect to any taxpayer for any taxable year, an 
        individual--
                  (A) who bears a relationship to the taxpayer 
                described in paragraph (2),
                  (B) who has the same principal place of abode 
                as the taxpayer for more than one-half of such 
                taxable year,
                  (C) who meets the age requirements of 
                paragraph (3),
                  (D) who has not provided over one-half of 
                such individual's own support for the calendar 
                year in which the taxable year of the taxpayer 
                begins, and
                  (E) who has not filed a joint return (other 
                than only for a claim of refund) with the 
                individual's spouse under section 6013 for the 
                taxable year beginning in the calendar year in 
                which the taxable year of the taxpayer begins.
          (2) Relationship.--For purposes of paragraph (1)(A), 
        an individual bears a relationship to the taxpayer 
        described in this paragraph if such individual is--
                  (A) a child of the taxpayer or a descendant 
                of such a child, or
                  (B) a brother, sister, stepbrother, or 
                stepsister of the taxpayer or a descendant of 
                any such relative.
          (3) Age requirements.--
                  (A) In general.--For purposes of paragraph 
                (1)(C), an individual meets the requirements of 
                this paragraph if such individual is younger 
                than the taxpayer claiming such individual as a 
                qualifying child and--
                          (i) has not attained the age of 19 as 
                        of the close of the calendar year in 
                        which the taxable year of the taxpayer 
                        begins, or
                          (ii) is a student who has not 
                        attained the age of 24 as of the close 
                        of such calendar year.
                  (B) Special rule for disabled.--In the case 
                of an individual who is permanently and totally 
                disabled (as defined in section 22(e)(3)) at 
                any time during such calendar year, the 
                requirements of subparagraph (A) shall be 
                treated as met with respect to such individual.
          (4) Special rule relating to 2 or more who can claim 
        the same qualifying child.--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), if (but for this 
                paragraph) an individual may be claimed as a 
                qualifying child by 2 or more taxpayers for a 
                taxable year beginning in the same calendar 
                year, such individual shall be treated as the 
                qualifying child of the taxpayer who is--
                          (i) a parent of the individual, or
                          (ii) if clause (i) does not apply, 
                        the taxpayer with the highest adjusted 
                        gross income for such taxable year.
                  (B) More than 1 parent claiming qualifying 
                child.--If the parents claiming any qualifying 
                child do not file a joint return together, such 
                child shall be treated as the qualifying child 
                of--
                          (i) the parent with whom the child 
                        resided for the longest period of time 
                        during the taxable year, or
                          (ii) if the child resides with both 
                        parents for the same amount of time 
                        during such taxable year, the parent 
                        with the highest adjusted gross income.
                  (C) No parent claiming qualifying child.--If 
                the parents of an individual may claim such 
                individual as a qualifying child but no parent 
                so claims the individual, such individual may 
                be claimed as the qualifying child of another 
                taxpayer but only if the adjusted gross income 
                of such taxpayer is higher than the highest 
                adjusted gross income of any parent of the 
                individual.
  (d) Qualifying relative.--For purposes of this section--
          (1) In general.--The term ``qualifying relative'' 
        means, with respect to any taxpayer for any taxable 
        year, an individual--
                  (A) who bears a relationship to the taxpayer 
                described in paragraph (2),
                  (B) whose gross income for the calendar year 
                in which such taxable year begins is less than 
                [the exemption amount (as defined in section 
                151(d))] $4,150,
                  (C) with respect to whom the taxpayer 
                provides over one-half of the individual's 
                support for the calendar year in which such 
                taxable year begins, and
                  (D) who is not a qualifying child of such 
                taxpayer or of any other taxpayer for any 
                taxable year beginning in the calendar year in 
                which such taxable year begins.
          (2) Relationship.--For purposes of paragraph (1)(A), 
        an individual bears a relationship to the taxpayer 
        described in this paragraph if the individual is any of 
        the following with respect to the taxpayer:
                  (A) A child or a descendant of a child.
                  (B) A brother, sister, stepbrother, or 
                stepsister.
                  (C) The father or mother, or an ancestor of 
                either.
                  (D) A stepfather or stepmother.
                  (E) A son or daughter of a brother or sister 
                of the taxpayer.
                  (F) A brother or sister of the father or 
                mother of the taxpayer.
                  (G) A son-in-law, daughter-in-law, father-in-
                law, mother-in-law, brother-in-law, or sister-
                in-law.
                  (H) An individual (other than an individual 
                who at any time during the taxable year was the 
                spouse, determined without regard to section 
                7703, of the taxpayer) who, for the taxable 
                year of the taxpayer, has the same principal 
                place of abode as the taxpayer and is a member 
                of the taxpayer's household.
          (3) Special rule relating to multiple support 
        agreements.--For purposes of paragraph (1)(C), over 
        one-half of the support of an individual for a calendar 
        year shall be treated as received from the taxpayer 
        if--
                  (A) no one person contributed over one-half 
                of such support,
                  (B) over one-half of such support was 
                received from 2 or more persons each of whom, 
                but for the fact that any such person alone did 
                not contribute over one-half of such support, 
                would have been entitled to claim such 
                individual as a dependent for a taxable year 
                beginning in such calendar year,
                  (C) the taxpayer contributed over 10 percent 
                of such support, and
                  (D) each person described in subparagraph (B) 
                (other than the taxpayer) who contributed over 
                10 percent of such support files a written 
                declaration (in such manner and form as the 
                Secretary may by regulations prescribe) that 
                such person will not claim such individual as a 
                dependent for any taxable year beginning in 
                such calendar year.
          (4) Special rule relating to income of handicapped 
        dependents.--
                  (A) In general.--For purposes of paragraph 
                (1)(B), the gross income of an individual who 
                is permanently and totally disabled (as defined 
                in section 22(e)(3)) at any time during the 
                taxable year shall not include income 
                attributable to services performed by the 
                individual at a sheltered workshop if--
                          (i) the availability of medical care 
                        at such workshop is the principal 
                        reason for the individual's presence 
                        there, and
                          (ii) the income arises solely from 
                        activities at such workshop which are 
                        incident to such medical care.
                  (B) Sheltered workshop defined.--For purposes 
                of subparagraph (A), the term ``sheltered 
                workshop'' means a school--
                          (i) which provides special 
                        instruction or training designed to 
                        alleviate the disability of the 
                        individual, and
                          (ii) which is operated by an 
                        organization described in section 
                        501(c)(3) and exempt from tax under 
                        section 501(a), or by a State, a 
                        possession of the United States, any 
                        political subdivision of any of the 
                        foregoing, the United States, or the 
                        District of Columbia.
          (5) Special rules for support.--
                  (A) In general.--For purposes of this 
                subsection--
                          (i) payments to a spouse of alimony 
                        or separate maintenance payments shall 
                        not be treated as a payment by the 
                        payor spouse for the support of any 
                        dependent, and
                          (ii) in the case of the remarriage of 
                        a parent, support of a child received 
                        from the parent's spouse shall be 
                        treated as received from the parent.
                  (B) Alimony or separate maintenance 
                payment.--For purposes of subparagraph (A), the 
                term ``alimony or separate maintenance 
                payment'' means any payment in cash if--
                          (i) such payment is received by (or 
                        on behalf of) a spouse under a divorce 
                        or separation instrument (as defined in 
                        section 121(d)(3)(C)),
                          (ii) in the case of an individual 
                        legally separated from the individual's 
                        spouse under a decree of divorce or of 
                        separate maintenance, the payee spouse 
                        and the payor spouse are not members of 
                        the same household at the time such 
                        payment is made, and
                          (iii) there is no liability to make 
                        any such payment for any period after 
                        the death of the payee spouse and there 
                        is no liability to make any payment (in 
                        cash or property) as a substitute for 
                        such payments after the death of the 
                        payee spouse.
          (6) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year beginning after 2018, 
        the $4,150 amount in paragraph (1)(B) shall be 
        increased by an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(c)(2)(A) for the calendar year 
                in which such taxable year begins, determined 
                by substituting ``calendar year 2017'' for 
                ``calendar year 2016'' in clause (ii) thereof.
        If any increase determined under the preceding sentence 
        is not a multiple of $50, such increase shall be 
        rounded to the next lowest multiple of $50.
  (e) Special rule for divorced parents, etc..--
          (1) In general.--Notwithstanding subsection 
        (c)(1)(B), (c)(4), or (d)(1)(C), if--
                  (A) a child receives over one-half of the 
                child's support during the calendar year from 
                the child's parents--
                          (i) who are divorced or legally 
                        separated under a decree of divorce or 
                        separate maintenance,
                          (ii) who are separated under a 
                        written separation agreement, or
                          (iii) who live apart at all times 
                        during the last 6 months of the 
                        calendar year, and--
                  (B) such child is in the custody of 1 or both 
                of the child's parents for more than one-half 
                of the calendar year, such child shall be 
                treated as being the qualifying child or 
                qualifying relative of the noncustodial parent 
                for a calendar year if the requirements 
                described in paragraph (2) or (3) are met.
          (2) Exception where custodial parent releases claim 
        to exemption for the year.--For purposes of paragraph 
        (1), the requirements described in this paragraph are 
        met with respect to any calendar year if--
                  (A) the custodial parent signs a written 
                declaration (in such manner and form as the 
                Secretary may by regulations prescribe) that 
                such custodial parent will not claim such child 
                as a dependent for any taxable year beginning 
                in such calendar year, and
                  (B) the noncustodial parent attaches such 
                written declaration to the noncustodial 
                parent's return for the taxable year beginning 
                during such calendar year.
          (3) Exception for certain pre-1985 instruments.--
                  (A) In general.--For purposes of paragraph 
                (1), the requirements described in this 
                paragraph are met with respect to any calendar 
                year if--
                          (i) a qualified pre-1985 instrument 
                        between the parents applicable to the 
                        taxable year beginning in such calendar 
                        year provides that the noncustodial 
                        parent shall be entitled to any 
                        deduction allowable under section 151 
                        (as in effect before its repeal) for 
                        such child, and
                          (ii) the noncustodial parent provides 
                        at least $600 for the support of such 
                        child during such calendar year.
                For purposes of this subparagraph, amounts 
                expended for the support of a child or children 
                shall be treated as received from the 
                noncustodial parent to the extent that such 
                parent provided amounts for such support.
                  (B) Qualified pre-1985 instrument.--For 
                purposes of this paragraph, the term 
                ``qualified pre-1985 instrument'' means any 
                decree of divorce or separate maintenance or 
                written agreement--
                          (i) which is executed before January 
                        1, 1985,
                          (ii) which on such date contains the 
                        provision described in subparagraph 
                        (A)(i), and
                          (iii) which is not modified on or 
                        after such date in a modification which 
                        expressly provides that this paragraph 
                        shall not apply to such decree or 
                        agreement.
          (4) Custodial parent and noncustodial parent.--For 
        purposes of this subsection--
                  (A) Custodial parent.--The term ``custodial 
                parent'' means the parent having custody for 
                the greater portion of the calendar year.
                  (B) Noncustodial parent.--The term 
                ``noncustodial parent'' means the parent who is 
                not the custodial parent.
          (5) Exception for multiple-support agreement.--This 
        subsection shall not apply in any case where over one-
        half of the support of the child is treated as having 
        been received from a taxpayer under the provision of 
        subsection (d)(3).
          (6) Special rule for support received from new spouse 
        of parent.--For purposes of this subsection, in the 
        case of the remarriage of a parent, support of a child 
        received from the parent's spouse shall be treated as 
        received from the parent.
  (f) Other definitions and rules.--For purposes of this 
section--
          (1) Child defined.--
                  (A) In general.--The term ``child'' means an 
                individual who is--
                          (i) a son, daughter, stepson, or 
                        stepdaughter of the taxpayer, or
                          (ii) an eligible foster child of the 
                        taxpayer.
                  (B) Adopted child.--In determining whether 
                any of the relationships specified in 
                subparagraph (A)(i) or paragraph (4) exists, a 
                legally adopted individual of the taxpayer, or 
                an individual who is lawfully placed with the 
                taxpayer for legal adoption by the taxpayer, 
                shall be treated as a child of such individual 
                by blood.
                  (C) Eligible foster child.--For purposes of 
                subparagraph (A)(ii), the term ``eligible 
                foster child'' means an individual who is 
                placed with the taxpayer by an authorized 
                placement agency or by judgment, decree, or 
                other order of any court of competent 
                jurisdiction.
          (2) Student defined.--The term ``student'' means an 
        individual who during each of 5 calendar months during 
        the calendar year in which the taxable year of the 
        taxpayer begins--
                  (A) is a full-time student at an educational 
                organization described in section 
                170(b)(1)(A)(ii), or
                  (B) is pursuing a full-time course of 
                institutional on-farm training under the 
                supervision of an accredited agent of an 
                educational organization described in section 
                170(b)(1)(A)(ii) or of a State or political 
                subdivision of a State.
          (3) Determination of household status.--An individual 
        shall not be treated as a member of the taxpayer's 
        household if at any time during the taxable year of the 
        taxpayer the relationship between such individual and 
        the taxpayer is in violation of local law.
          (4) Brother and sister.--The terms ``brother'' and 
        ``sister'' include a brother or sister by the half 
        blood.
          (5) Special support test in case of students.--For 
        purposes of subsections (c)(1)(D) and (d)(1)(C), in the 
        case of an individual who is--
                  (A) a child of the taxpayer, and
                  (B) a student, amounts received as 
                scholarships for study at an educational 
                organization described in section 
                170(b)(1)(A)(ii) shall not be taken into 
                account.
          (6) Treatment of missing children.--
                  (A) In general.--Solely for the purposes 
                referred to in subparagraph (B), a child of the 
                taxpayer--
                          (i) who is presumed by law 
                        enforcement authorities to have been 
                        kidnapped by someone who is not a 
                        member of the family of such child or 
                        the taxpayer, and
                          (ii) who had, for the taxable year in 
                        which the kidnapping occurred, the same 
                        principal place of abode as the 
                        taxpayer for more than one-half of the 
                        portion of such year before the date of 
                        the kidnapping,
                shall be treated as meeting the requirement of 
                subsection (c)(1)(B) with respect to a taxpayer 
                for all taxable years ending during the period 
                that the child is kidnapped.
                  (B) Purposes.--Subparagraph (A) shall apply 
                solely for purposes of determining--
                          [(i) the deduction under section 
                        151(c),]
                          [(ii)] (i) the credit under section 
                        24 (relating to child tax credit),
                          [(iii)] (ii) whether an individual is 
                        a surviving spouse or a head of a 
                        household (as such terms are defined in 
                        section 2), and
                          [(iv)] (iii) the earned income credit 
                        under section 32.
                  (C) Comparable treatment of certain 
                qualifying relatives.--For purposes of this 
                section, a child of the taxpayer--
                          (i) who is presumed by law 
                        enforcement authorities to have been 
                        kidnapped by someone who is not a 
                        member of the family of such child or 
                        the taxpayer, and
                          (ii) who was (without regard to this 
                        paragraph) a qualifying relative of the 
                        taxpayer for the portion of the taxable 
                        year before the date of the kidnapping,
                shall be treated as a qualifying relative of 
                the taxpayer for all taxable years ending 
                during the period that the child is kidnapped.
                  (D) Termination of treatment.--Subparagraphs 
                (A) and (C) shall cease to apply as of the 
                first taxable year of the taxpayer beginning 
                after the calendar year in which there is a 
                determination that the child is dead (or, if 
                earlier, in which the child would have attained 
                age 18).
          (7) Cross references.--For provision treating child 
        as dependent of both parents for purposes of certain 
        provisions, see sections 105(b), 132(h)(2)(B), and 
        213(d)(5).

CHAPTER 80--GENERAL RULES

           *       *       *       *       *       *       *

Subchapter C--Provisions Affecting More Than One Subtitle

           *       *       *       *       *       *       *

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

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

           *       *       *       *       *       *       *

                              ----------                              

                           PUBLIC LAW 115-97

TITLE I

           *       *       *       *       *       *       *

Subtitle A--Individual Tax Reform

           *       *       *       *       *       *       *

PART III--TAX BENEFITS FOR FAMILIES AND INDIVIDUALS

           *       *       *       *       *       *       *

[SEC. 11026. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING SERVICES IN 
                    THE SINAI PENINSULA OF EGYPT.

  [(a) In general.--For purposes of the following provisions of 
the Internal Revenue Code of 1986, with respect to the 
applicable period, a qualified hazardous duty area shall be 
treated in the same manner as if it were a combat zone (as 
determined under section 112 of such Code):
          [(1) Section 2(a)(3) (relating to special rule where 
        deceased spouse was in missing status).
          [(2) Section 112 (relating to the exclusion of 
        certain combat pay of members of the Armed Forces).
          [(3) Section 692 (relating to income taxes of members 
        of Armed Forces on death).
          [(4) Section 2201 (relating to members of the Armed 
        Forces dying in combat zone or by reason of combat-
        zone-incurred wounds, etc.).
          [(5) Section 3401(a)(1) (defining wages relating to 
        combat pay for members of the Armed Forces).
          [(6) Section 4253(d) (relating to the taxation of 
        phone service originating from a combat zone from 
        members of the Armed Forces).
          [(7) Section 6013(f)(1) (relating to joint return 
        where individual is in missing status).
          [(8) Section 7508 (relating to time for performing 
        certain acts postponed by reason of service in combat 
        zone).
  [(b) Qualified Hazardous Duty Area.--For purposes of this 
section, the term ``qualified hazardous duty area'' means the 
Sinai Peninsula of Egypt, if as of the date of the enactment of 
this section any member of the Armed Forces of the United 
States is entitled to special pay under section 310 of title 
37, United States Code (relating to special pay; duty subject 
to hostile fire or imminent danger), for services performed in 
such location. Such term includes such location only during the 
period such entitlement is in effect.
  [(c) Applicable Period.--
          [(1) In general.--Except as provided in paragraph 
        (2), the applicable period is--
                  [(A) the portion of the first taxable year 
                ending after June 9, 2015, which begins on such 
                date, and
                  [(B) any subsequent taxable year beginning 
                before January 1, 2026.
          [(2) Withholding.--In the case of subsection (a)(5), 
        the applicable period is--
                  [(A) the portion of the first taxable year 
                ending after the date of the enactment of this 
                Act which begins on such date, and
                  [(B) any subsequent taxable year beginning 
                before January 1, 2026.
  [(d) Effective Date.--
          [(1) In general.--Except as provided in paragraph 
        (2), the provisions of this section shall take effect 
        on June 9, 2015.
          [(2) Withholding.--Subsection (a)(5) shall apply to 
        remuneration paid after the date of the enactment of 
        this Act.]

           *       *       *       *       *       *       *

                         VII. DISSENTING VIEWS

    It has been eight months since the Republicans enacted 
their massive, unpaid-for tax cut law (Public Law 115-97) 
without a single Democratic vote or a single hearing. At the 
time, Democrats and independent experts warned that a so-called 
tax reform plan that was not paid for and that was so heavily 
skewed to the wealthy and big corporations would harm our 
economy and damage important programs like Medicare and Social 
Security. Eight months later, we are beginning to see what many 
of us feared is coming true. Health insurance companies in 
state after state are announcing higher premiums for next year, 
while health coverage for those living with pre-existing 
conditions is on the chopping block. To make matters worse, the 
Medicare Trustees cut three years off the life of the Medicare 
Trust Fund because of the Republican tax bill.
    Despite all of this, Republicans are doubling down and 
moving forward with another round of tax cuts for the well-off 
and well-connected with this Tax Scam 2.0, the ``Protecting 
Family and Small Business Tax Cuts Act of 2018'' (H.R. 6760).
    After Republicans showered corporations with trillions of 
dollars in tax cuts and promised that it would lead to more 
jobs and higher wages, we are seeing that corporations across 
the country are instead pocketing their money, laying off 
workers, and shipping operations to other countries. In one 
particularly egregious case, an executive at a well-known 
company stated that the savings the company received from the 
Republican tax law allowed them to restructure and lay off 
hundreds of workers.
    H.R. 6760 extended the section 199A pass-through deduction, 
which Republicans claimed would benefit small business and spur 
economic growth. Instead, section 199A is a massive giveaway to 
millionaires. In fact, 58 percent of the benefit of the 
Republicans' so-called small business tax benefit goes to 
millionaires.
    At the same time, the Republicans have doubled down on 
their attack on the middle class by attempting to make 
permanent the limits to the State and Local Tax deduction, the 
mortgage interest deduction, and casualty loss deductions. And 
by eliminating personal exemptions alone, 290 million 
individuals will no longer be able to claim $1.14 trillion in 
tax savings. Tax Scam 2.0 targets these and many other tax 
incentives that help middle class families get ahead, while 
lavishing benefits on the wealthy and well-connected 
corporations.
    The Republicans call themselves fiscal conservatives but 
nothing could be further from the truth. History doesn't lie 
and now we're seeing it again with the addition of more than $3 
trillion to the nation's debt.
    Tax Scam 2.0, like Tax Scam 1.0 before it, was jammed 
through the Committee with no hearings and no input from 
stakeholders. The rushed and lopsided process late last year 
resulted in the disastrous tax law. Unsurprisingly, the 
Democratic staff has identified over 100 mistakes and other 
problems with the Republicans' tax law. Instead of seeking 
expert opinions, high-quality data, and a reasoned review of 
the performance to date of last year's law, Republicans 
repeated the careless, partisan process of last year and again 
aimed at partisan priorities instead of evidence-based reforms. 
Furthermore, there was no reason for them to abandon regular 
order, given that these bills are guaranteed to be dead-on-
arrival in the Senate.
    Democrats on the Committee gave Republicans the opportunity 
to demonstrate their priorities, offering seven fiscally-
responsible amendments that truly help middle-class families 
and protect seniors from tax hikes and cuts to Social Security 
and Medicare without adding to the deficit. In a manner 
consistent with their habit of putting the wealthy and 
corporations ahead of working Americans, Republicans rejected 
every amendment.
    Republicans rejected an amendment I offered to curb one of 
the worst excesses of last year's tax scam, which is made 
permanent in H.R. 6760. My amendment would have restored the 
top marginal income tax rate to pre-Public Law 115-97 levels 
and used the proceeds to support three key priorities that 
actually help hardworking Americans: expanding the Earned 
Income Tax Credit (EITC) to offer support to low-income workers 
without children, making the Adoption Tax Credit refundable, 
and enhancing the child and dependent care credit. Instead of 
offering support to ordinary families, H.R. 6760 makes 
permanent a reduction to the pre-Public Law 115-97 top marginal 
income tax rate, which was already cut in half compared to the 
Reagan era. A top marginal rate of 39.6 has previously won the 
support not only of Presidents Obama and Clinton, but also John 
Boehner and Mitch McConnell. That top rate is not too high--a 
broad bipartisan group of lawmakers and presidents were all 
willing to support it. There is no compelling reason why it 
should be lowered. My amendment offered Republicans an 
opportunity to change H.R. 6760 to provide meaningful support 
to low-wage workers, adoptive parents, and those with 
dependents in need of care, just by asking some of the most 
affluent people in our society to give up a small part of their 
tax cut--an opportunity Republicans resoundingly rejected.
    Republicans also rejected an amendment offered by Rep. 
Pascrell that would have removed the cap on the deduction for 
state and local taxes (``SALT''), a provision that prevents 
individual taxpayers from owing federal taxes on the income 
they pay in taxes to state and local governments. Ironically, 
Tax Scam 1.0 allowed corporations to continue deducting state 
and local taxes, while eliminating much of the benefit for 
individuals and families. State and local tax payments are not 
disposable income, and it is unfair to treat them as such. 
Currently, more than 100 million Americans in 45 million 
households claim the SALT deduction. Almost 40 percent of 
taxpayers earning between $50,000 and $75,000 claim SALT, and 
over 70 percent of taxpayers making $100,000 to $200,000 use 
it. Over one-half the value of the deduction went to households 
with incomes below $200,000. In 2016, the most recent year for 
which data are available, the average SALT deduction nationwide 
was already above $12,500, and inflation will cause a growing 
number of households to experience double taxation. In fact, in 
2016, the average SALT deduction was over $10,000 in 23 states 
and the District of Columbia: Michigan, Missouri, Kentucky, 
Hawaii, Iowa, New Hampshire, Ohio, Nebraska, Pennsylvania, 
Maine, Virginia, Wisconsin, Illinois, Rhode Island, Vermont, 
Oregon, Maryland, Minnesota, Massachusetts, DC, New Jersey, 
California, Connecticut, and New York. With average SALT 
deductions exceeding $9,000, ten more states won't be far 
behind: South Carolina, Arkansas, Georgia, Idaho, West 
Virginia, Colorado, Montana, Delaware, Kansas, and North 
Carolina.
    People living in every congressional district in every 
state in the country use the SALT deduction, and it benefits 
taxpayers of all income levels, directly or indirectly. State 
and local government tax revenues support essential public 
services and investments, like schools, local law enforcement, 
fire fighters, road construction and maintenance, and health 
care. Nearly everyone who itemizes claims the SALT deduction; 
therefore, repealing SALT would raise the cost of state and 
local services on a wide swath of taxpayers. Because this 
provision effectively raises the cost of state and local taxes, 
state and local governments would be pressured to reduce 
revenues and cut crucial public investments. Republicans 
rejected the opportunity to restore fairness in our tax system 
for more taxpayers that are now facing double taxation as a 
result of Republican tax policy choices.
    Republicans rejected an amendment offered by Rep. Thompson 
that would have provided fairness and certainty to taxpayers 
that are victims of natural disasters. The amendment would have 
repealed the limitations in Public Law 115-97 that restricted 
eligibility for itemized deductions related to casualty losses 
to taxpayers in certain disaster areas, and extended a suite of 
provisions to help victims of natural disasters nationwide, 
including: penalty-free access to retirement funds, an employer 
wage tax credit in core disaster areas, a suspension of the 
limitations on deduction for charitable contributions 
associated with disasters, a relaxation of rules associated 
with the deduction for personal casualty losses, a special rule 
for income calculations with respect to the EITC and Child Tax 
Credit, and special rules for application of disaster tax 
relief for possessions of the United States. This is nothing 
more than the same relief the Chairman provided to his 
constituents that were victims of Hurricane Harvey last year. 
It is unconscionable for Republicans to support the notion that 
only those taxpayers that are fortunate enough to reside in the 
district of the Chairman are entitled to tax relief following 
such a tragedy. Republicans rejected the opportunity to provide 
fairness and certainty to all taxpayers facing tragedy.
    Republicans rejected an amendment offered by Rep. Sanchez 
that would have made permanent the reduction of the adjusted 
gross income threshold for deductibility of certain medical 
expenses. The deduction for medical expenses is an important 
backstop for individuals with expensive health care needs. H.R. 
6760 only extended this important tax relief for two years, 
while making permanent all of the other individual provisions, 
including billions in tax relief for millionaires. Republicans 
have done nothing to lower prescription drug costs for seniors, 
address long-term care needs, or stabilize the individual 
market to stem the skyrocketing premiums caused by Republican 
sabotage. Republicans rejected the opportunity to make 
permanent tax relief for millions of Americans facing 
significant health costs, choosing to shower the wealthy in tax 
benefits over middle-class Americans struggling with high out-
of-pocket health care costs.
    Republicans rejected an amendment offered by Rep. Doggett 
that would have compelled the Chairman of the Ways and Means 
Committee to submit a written request to the Secretary of the 
Treasury for federal tax returns filed by or on behalf of the 
President for the last ten years. There are few matters the 
Ways and Means Committee could consider more important than the 
integrity of our tax code, and the faith that the American 
people have in our democracy. The amendment would have 
contained a list of Congressional findings that raised 
questions about the Trump Administration and would have 
demanded Congressional oversight by the Committee on Ways and 
Means.
    Republicans rejected an amendment offered by Rep. Larson 
that would have suspended the Republicans' misguided tax policy 
until it was certified that their billions of dollars in tax 
cuts for the wealthy would not do harm to the Social Security 
and Medicare trust funds. When looking at the ballooning 
deficit, Republicans shift blame away from the $3 trillion 
their policies have added and, instead, blame programs that 
people have worked their entire lives for and have planned for 
in retirement--Medicare and Social Security. These programs are 
the cornerstone of the American middle class, and yet the 
Republicans continue to attack them. Republican actions 
threaten health care for 58 million seniors and individuals 
with disabilities. Since the Republican Tax Scam 1.0 was signed 
into law, the Medicare Trust Fund's solvency has been slashed 
by three years. The Republican's health care repeal bill would 
have cut three years from Medicare's Trust Fund. In contrast, 
the Affordable Care Act added 12 years to the Medicare Trust 
Fund. It is clear that enactment of these tax cut giveaways are 
part of the two-step Republican strategy to cut Social Security 
and Medicare: First, the Republicans explode the deficit by 
cutting taxes for the rich. Second, the Republicans use the 
deficits created by their tax cuts as an excuse to cut Social 
Security and Medicare benefits. Republicans rejected the 
opportunity to demonstrate to their constituents a real 
commitment to ensuring that benefits earned by hardworking 
Americans would not be cut at the expense of tax cuts for the 
wealthy.
    Republicans rejected an amendment offered by Rep. Doggett 
that would have put the American worker first--ahead of 
billions in tax relief for multinational corporations. The 
amendment would have suspended the preferential tax rates on 
money that multinational corporations stashed offshore until 
the Joint Committee on Taxation certified that Americans' 
average household income had increased by $4,000, a promise 
made by President Trump and Congressional Republicans. It is 
clear that, consistent with their record of offering lip 
service to the middle class while lavishing corporations and 
wealthy individuals with tax relief, Republicans were never 
going to keep that promise to American workers. Republicans 
rejected this opportunity to put the American worker first.
    I said it when Republicans rammed through their first 
deficit-busting tax cuts, and I'll say it again: American 
families should not be forced to watch as the rich get richer, 
and they fall further and further behind. H.R. 6760 would do 
just that.
                                           Richard E. Neal,
                                                    Ranking Member.
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