U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

1 

31–578 

" ! HOUSE OF REPRESENTATIVES 115TH CONGRESS

2d Session 

REPORT

2018

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] 

SEPTEMBER 24, 2018.—Committed to the Committee of the Whole House 

on the State of the Union and ordered to be printed 


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(III) 

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 


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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. 


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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: 


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‘‘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. 


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‘‘(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’’. 


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(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’, 


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‘‘(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 


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‘‘(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. 


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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— 


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‘‘(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’’. 


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(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. 


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(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)’’. 


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(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). 


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(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 


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‘‘(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 


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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 INDEBTED- NESS.—Section 108(h)(2) is amended by striking ‘‘$1,000,000 ($500,000’’ and insert- ing ‘‘$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)’’. 


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(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 


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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). 


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(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. 


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1 31 Stat. 2054. 

2Sec. 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. 4Sec. 11001 of the TCJA and sec. 1 of the Code. 

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. 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. 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


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5Sec. 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. 6Sec. 11012 of the TCJA and sec. 461 of the Code. 

7Sec. 11021 of the TCJA and sec. 63 of the Code. 

8Sec. 11022 of the TCJA and sec. 24 of the Code. 

9Sec. 11023 of the TCJA and sec. 170(b)(1)(G) of the Code. 

10Sec. 11024 of the TCJA and sec. 529A of the Code. 11Sec. 11025 of the TCJA and secs. 529 and 529A 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

4. The TCJA limits the deduction for business losses to 

$500,000 for joint filers and $250,000 for other individuals.6

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. 

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. 

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

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. 

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. 


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12Sec. 11026 of the TCJA, affecting various Code sections. 13Sec. 11027 of the TCJA and sec. 213 of the Code. 14Sec. 11031 of the TCJA and sec. 108 of the Code. 15Sec. 11041 of the TCJA and sec. 151 of the Code. 16Sec. 11042 of the TCJA and sec. 164 of the Code. 17Sec. 11043 of the TCJA and sec. 163 of the Code. 18Sec. 11044 of the TCJA and sec. 165 of the Code. 19Sec. 11045 of the TCJA and sec. 67 of the Code. 20Sec. 11046 of the TCJA and sec. 68 of the Code. 21Sec. 11047 of the TCJA and sec. 132(f) 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

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

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. 

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. 

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). 

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. 

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

17. The TCJA suspends the deduction for miscellaneous 

itemized deductions.19

18. The TCJA suspends the overall limitation on itemized deductions (commonly referred to as the ‘‘Pease limitation’’).20

19. The TCJA suspends the exclusion from gross income and 

wages for qualified bicycle commuting reimbursements.21

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 


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22Sec. 11048 of the TCJA and sec. 132(g) of the Code. 23Sec. 11049 of the TCJA and sec. 217 of the Code. 24Sec. 11050 of the TCJA and sec. 165(d) of the Code. 25Sec. 11061 of the TCJA and sec. 2010 of the Code. 26Sec. 12001 of the TCJA and sec. 55 of the Code. 

States on active duty who move pursuant to a military order 

and incident to a permanent change of station.22

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

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

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. 

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

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. 


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23 

27Sec. 6012(a)(1)(A)(iv) of the Code. 

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

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. 


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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 ........... .............


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Representative Yea Nay Present Representative Yea Nay Present 

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: 


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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. Sa ́nchez 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 .............


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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 ........... .............


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28 

Representative Yea Nay Present Representative Yea Nay Present 

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 .............


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29 

Representative Yea Nay Present Representative Yea Nay Present 

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: 


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dlhill on DSK3GLQ082PROD with HEARINGInsert offset folio 40 here HR958.001
31 


dlhill on DSK3GLQ082PROD with HEARINGInsert offset folio 41 here HR958.002
32 


dlhill on DSK3GLQ082PROD with HEARINGInsert offset folio 42 here HR958.003
33 

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. 


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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 onbudget 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 


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1For 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. 

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. 


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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-Budget a .............................................. 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. a Off-budget revenues result from changes in Social Security payroll tax receipts. 


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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-asyou-go procedures are shown in the following table. Only on-budget 


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changes to outlays or revenues are subject to pay-as-you-go procedures. 


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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. a A positive sign for outlays indicates an increase in outlays. A negative sign for revenues indicates a reduction in revenues. 


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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 


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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 


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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 appliVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00048 Fmt 6659 Sfmt 6602 E:\HR\OC\HR958.XXX HR958

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cation 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 


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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. 


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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 

* * * * * * * 


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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: 

øIf 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: 

øIf 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. 


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øIf taxable income is: The tax is: 

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: 

øIf 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. 


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(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: 

øIf 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: 

øIf 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. 


dlhill on DSK3GLQ082PROD with HEARING
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(f) øPHASEOUT 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 ø1993¿ 

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— 

ø(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— 

ø(i) except as provided in clause (ii), by substituting 

‘‘1992’’ for ‘‘2016’’ in paragraph (3)(A)(ii), and 

ø(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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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) ø, 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. 

ø(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) ø(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. 

ø(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)— 

ø(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 

ø(B) the comparable taxable income amounts in the 

table contained in subsection (d) shall be 1⁄2 of the 

amounts determined under subparagraph (A).¿ 


dlhill on DSK3GLQ082PROD with HEARING
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ø(g) CERTAIN UNEARNED INCOME OF CHILDREN TAXED AS IF PAR- ENT’S INCOME.— ø(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— 

ø(A) the tax imposed by this section without regard to 

this subsection, or 

ø(B) the sum of— 

ø(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 

ø(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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 

ø(3) ALLOCABLE PARENTAL TAX.—For purposes of this subsection— 

ø(A) IN GENERAL.—The term ‘‘allocable parental tax’’ 

means the excess of— 

ø(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 

ø(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. 

ø(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. 

ø(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— 


dlhill on DSK3GLQ082PROD with HEARING
57 

(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 DIS- ABILITY 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) øSPECIAL RULES FOR DETERMINING PARENT TO WHOM SUB- SECTION APPLIES.—¿ SPECIAL RULES FOR DETERMINING PARENT

ELIGIBLE TO MAKE ELECTION.—øFor 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 øsection 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 


dlhill on DSK3GLQ082PROD with HEARING
58 

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 

ø25 percent¿ 22 percent, over 

(ii) the taxable income reduced by the adjusted net 

capital gain; 

(C) 15 percent of the lesser of— 


dlhill on DSK3GLQ082PROD with HEARING
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(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 øwhich 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 


dlhill on DSK3GLQ082PROD with HEARING
60 

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 PROP- ERTY.—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; 


dlhill on DSK3GLQ082PROD with HEARING
61 

(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 


dlhill on DSK3GLQ082PROD with HEARING
62 

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.— 


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(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. 

ø(i) RATE REDUCTIONS AFTER 2000.— 

ø(1) 10-percent rate bracket 

ø(A) IN GENERAL.—In the case of taxable years beginning after December 31, 2000— 

ø(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 

ø(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. 

ø(B) INITIAL BRACKET AMOUNT.—For purposes of this 

paragraph, the initial bracket amount is— 

ø(i) $14,000 in the case of subsection (a), 

ø(ii) $10,000 in the case of subsection (b), and 

ø(iii) 1/2 the amount applicable under clause (i) 

(after adjustment, if any, under subparagraph (C)) in 

the case of subsections (c) and (d). 

ø(C) INFLATION ADJUSTMENT.—In prescribing the tables 

under subsection (f) which apply with respect to taxable 

years beginning in calendar years after 2003— 

ø(i) the cost-of-living adjustment shall be determined under subsection (f)(3) by substituting ‘‘2002’’ 

for ‘‘2016’’ in subparagraph (A)(ii) thereof, and 

ø(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. 

ø(2) 25-, 28-, AND 33-PERCENT RATE BRACKETS.—The tables 

under subsections (a), (b), (c), (d), and (e) shall be applied— 

ø(A) by substituting ‘‘25%’’ for ‘‘28%’’ each place it appears (before the application of subparagraph (B)), 

ø(B) by substituting ‘‘28%’’ for ‘‘31%’’ each place it appears, and 

ø(C) by substituting ‘‘33%’’ for ‘‘36%’’ each place it appears. 

ø(3) MODIFICATIONS TO INCOME TAX BRACKETS FOR HIGH-IN- COME TAXPAYERS.— ø(A) 35-PERCENT RATE BRACKET.—In the case of taxable 

years beginning after December 31, 2012— 

ø(i) the rate of tax under subsections (a), (b), (c), and 

(d) on a taxpayer’s taxable income in the highest rate 


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bracket shall be 35 percent to the extent such income 

does not exceed an amount equal to the excess of— 

ø(I) the applicable threshold, over 

ø(II) the dollar amount at which such bracket 

begins, and 

ø(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. 

ø(B) APPLICABLE THRESHOLD.—For purposes of this 

paragraph, the term ‘‘applicable threshold’’ means— 

ø(i) $450,000 in the case of subsection (a), 

ø(ii) $425,000 in the case of subsection (b), 

ø(iii) $400,000 in the case of subsection (c), and 

ø(iv) 1⁄2 the amount applicable under clause (i) (after 

adjustment, if any, under subparagraph (C)) in the 

case of subsection (d). 

ø(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’’. 

ø(4) ADJUSTMENT OF TABLES.—The Secretary shall adjust the 

tables prescribed under subsection (f) to carry out this subsection. 

ø(j) MODIFICATIONS FOR TAXABLE YEARS 2018 THROUGH 2025.— 

ø(1) IN GENERAL.—In the case of a taxable year beginning 

after December 31, 2017, and before January 1, 2026— 

ø(A) subsection (i) shall not apply, and 

ø(B) this section (other than subsection (i)) shall be applied as provided in paragraphs (2) through (6). 

ø(2) RATE TABLES.— 

ø(A) MARRIED INDIVIDUALS FILING JOINT RETURNS AND

SURVIVING SPOUSES.—The following table shall be applied 

in lieu of the table contained in subsection (a): 

øIf 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. 

ø(B) HEADS OF HOUSEHOLDS.—The following table shall 

be applied in lieu of the table contained in subsection (b): 

øIf taxable income is: The tax is: 

Not over $13,600..................... 10% of taxable income. 


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øIf taxable income is: The tax is: 

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. 

ø(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): 

øIf 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. 

ø(D) MARRIED INDIVIDUALS FILING SEPARATE RETURNS.— The following table shall be applied in lieu of the table 

contained in subsection (d): 

øIf 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. 

ø(E) ESTATES AND TRUSTS.—The following table shall be 

applied in lieu of the table contained in subsection (e): 

øIf 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. 

ø(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 


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reference to the fourth lowest rate of tax under subparagraph (C). 

ø(3) ADJUSTMENTS.— ø(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. 

ø(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— 

ø(i) subsection (f)(3) shall be applied by substituting 

‘‘calendar year 2017’’ for ‘‘calendar year 2016’’ in subparagraph (A)(ii) thereof, 

ø(ii) subsection (f)(7)(B) shall apply to any unmarried individual other than a surviving spouse or head 

of household, and 

ø(iii) subsection (f)(8) shall not apply. 

ø(4) SPECIAL RULES FOR CERTAIN CHILDREN WITH UNEARNED

INCOME.— 

ø(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). 

ø(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: 

ø(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— 

ø(I) the earned taxable income of such child, 

plus 

ø(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. 

ø(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— 

ø(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. 

ø(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— 

ø(I) the earned taxable income of such child, 

plus 


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ø(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. 

ø(C) COORDINATION WITH CAPITAL GAINS RATES.—For 

purposes of applying section 1(h) (after the modifications 

under paragraph (5)(A))— 

ø(i) the maximum zero rate amount shall not be 

more than the sum of— 

ø(I) the earned taxable income of such child, 

plus 

ø(II) the amount in effect under paragraph 

(5)(B)(i)(IV) for the taxable year, and 

ø(ii) the maximum 15-percent rate amount shall not 

be more than the sum of— 

ø(I) the earned taxable income of such child, 

plus 

ø(II) the amount in effect under paragraph 

(5)(B)(ii)(IV) for the taxable year. 

ø(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. 

ø(5) APPLICATION OF CURRENT INCOME TAX BRACKETS TO CAP- ITAL GAINS BRACKETS.— ø(A) IN GENERAL.—Section 1(h)(1) shall be applied— 

ø(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 

ø(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). 

ø(B) MAXIMUM AMOUNTS DEFINED.—For purposes of applying section 1(h) with the modifications described in subparagraph (A)— 

ø(i) MAXIMUM ZERO RATE AMOUNT.—The maximum 

zero rate amount shall be— 

ø(I) in the case of a joint return or surviving 

spouse, $77,200, 

ø(II) in the case of an individual who is a head 

of household (as defined in section 2(b)), $51,700, 

ø(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 

ø(IV) in the case of an estate or trust, $2,600. 

ø(ii) MAXIMUM 15-PERCENT RATE AMOUNT.—The maximum 15- percent rate amount shall be— 

ø(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), 


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ø(II) in the case of an individual who is the 

head of a household (as defined in section 2(b)), 

$452,400, 

ø(III) in the case of any other individual (other than an estate or trust), $425,800, and 

ø(IV) in the case of an estate or trust, $12,700. 

ø(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— 

ø(i) such dollar amount, multiplied by 

ø(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. 

ø(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 øsection 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) øwith 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 


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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 

øsection 152(c)¿ section 7706(c), determined without 

regard to øsection 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 øsection 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, øif 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, øif 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 


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(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 øsection 152(d)(2)¿ section 

7706(d)(2), or 

(ii) paragraph (3) of øsection 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 

øSec. 15. Effect of changes.¿ 

Sec. 15. Effect of changes on corporations. 

SEC. 15. EFFECT OF CHANGES ON CORPORATIONS. 

(a) GENERAL RULE.—øIf 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. 


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ø(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). 

ø(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. 

ø(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-RE- LATED EXPENSES.—For purposes of this section— 

(1) QUALIFYING INDIVIDUAL.—The term ‘‘qualifying individual’’ means— 

(A) a dependent of the taxpayer (as defined in øsection 

152(a)(1)¿ section 7706(a)(1)) who has not attained age 13, 

(B) a dependent of the taxpayer (as defined in øsection 

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.— 


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(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 


dlhill on DSK3GLQ082PROD with HEARING
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(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) øsection 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 øsection 152(e)(4)(A)¿ section 7706(e)(4)(A)), and shall 

not be treated as a qualifying individual with respect to the 

noncustodial parent. 


dlhill on DSK3GLQ082PROD with HEARING
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(6) PAYMENTS TO RELATED INDIVIDUALS.—No credit shall be 

allowed under subsection (a) for any amount paid by the taxpayer to an individual— 

ø(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 øsection 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 


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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 ad- justed 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. 


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(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 øsection 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 øsection 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 


dlhill on DSK3GLQ082PROD with HEARING
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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. 

ø(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. 

ø(b) LIMITATIONS.— 

ø(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. 

ø(2) THRESHOLD AMOUNT.—For purposes of paragraph (1), 

the term ‘‘threshold amount’’ means— 

ø(A) $110,000 in the case of a joint return, 

ø(B) $75,000 in the case of an individual who is not married, and 

ø(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. 

ø(c) QUALIFYING CHILD.—For purposes of this section— 

ø(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. 


dlhill on DSK3GLQ082PROD with HEARING
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ø(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— 

ø(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), 


dlhill on DSK3GLQ082PROD with HEARING
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(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 ø$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.— 


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(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. 

ø(e) IDENTIFICATION REQUIREMENTS.— 

ø(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. 

ø(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 CRED- IT 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 


dlhill on DSK3GLQ082PROD with HEARING
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section for any subsequent taxable year unless the taxpayer 

provides such information as the Secretary may require to 

demonstrate eligibility for such credit. 

ø(h) SPECIAL RULES FOR TAXABLE YEARS 2018 THROUGH 2025.— 

ø(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). 

ø(2) CREDIT AMOUNT.—Subsection (a) shall be applied by 

substituting ‘‘$2,000’’ for ‘‘$1,000’’. 

ø(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). 

ø(4) PARTIAL CREDIT ALLOWED FOR CERTAIN OTHER DEPENDENTS.— 

ø(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). 

ø(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’’. 

ø(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. 

ø(5) MAXIMUM AMOUNT OF REFUNDABLE CREDIT.— 

ø(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. 

ø(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— 

ø(i) such dollar amount, multiplied by 

ø(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. 

ø(6) EARNED INCOME THRESHOLD FOR REFUNDABLE CREDIT.— 

Subsection (d)(1)(B)(i) shall be applied by substituting ‘‘$2,500’’ 

for ‘‘$3,000’’. 

ø(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 indiVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00087 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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vidual by the Social Security Administration, but only if the social security number is issued— 

ø(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 

ø(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 POSTSECONDARY 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 


dlhill on DSK3GLQ082PROD with HEARING
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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 subVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00089 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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section (a)(1) is allowed for the taxable year shall not be 

taken into account under this subsection. 

(B) EXPENSES ELIGIBLE FOR LIFETIME LEARNING CRED- IT.—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 øwith 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. 


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(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 


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(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.—øIf 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. 


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(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 


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(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) øany 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 øsection 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 ømade 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, 


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(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: 


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In the case of an eligible individual with: The credit percentage is: The phaseout percentage is: 

1 qualifying child 34 15.98 

2 qualifying children 40 21.06 

3 or more qualifying children 45 21.06 

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 eligible individual with: The earned income amount is: The phaseout amount is: 

1 qualifying child $6,330 $11,610 

2 or more qualifying children $8,890 $11,610 

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 øa 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 secVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00096 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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tion 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 


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(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 øsection 

152(c)¿ section 7706(c), determined without regard to paragraph (1)(D) thereof and øsection 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 øunless 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 øsection 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 


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(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 INVEST- MENT 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’’. 


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(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 CRED- IT 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. 

* * * * * * * 


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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 


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(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 øwith 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 øsection 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 øsection 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)). 


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(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. 


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(ii) NO IMPOSITION OF PREEXISTING CONDITION EX- CLUSION.—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 


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(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 


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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 


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(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 


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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 øsection 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 ASSIST- ANCE 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 of poverty line) within the following 

income tier: 

The initial premium percentage is-- The final premium percentage is-- 

Up to 133% 2.0% 2.0% 


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In the case of household income (expressed as 

a percent of poverty line) within the following 

income tier: 

The initial premium percentage is-- The final premium percentage is-- 

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 costsharing 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 


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(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) øunless 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. 


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(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 øwith 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). 


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(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 


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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 selfonly 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 øequal 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— 


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(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 ø1 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 


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(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 


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(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.— 


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(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). 


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(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 


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(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 

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closure) 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. 


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(B) BASIS OF PROPERTY IN COMMON AREAS, ETC., IN- CLUDED.—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 DE- TERMINING 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 

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itures 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. 


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(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. 


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(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 lowincome 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 


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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. 


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(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 


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(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 


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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 otherVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00128 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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wise 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 


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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 lowincome 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 


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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— 


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(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 


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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. 


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(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 HOUS- ING 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 


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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. 


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(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 BUILD- ING 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 


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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 LONGTERM 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 


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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.— 


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(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— 


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(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. 


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(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. 


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(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 FI- NANCING.—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 


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(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 øsection 

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 OWNEROCCUPIED.—In the case of a building to which clause 

(i) applies, any unit which is not rented for 90 days or 


dlhill on DSK3GLQ082PROD with HEARING
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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 


dlhill on DSK3GLQ082PROD with HEARING
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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 lowincome 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 subVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00145 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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section (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.— 


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(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 lowincome 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. 


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(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 lowincome 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 


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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 PE- RIOD.—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.— 


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(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, 


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(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 lowincome 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 SUB- SIDIES.—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. 


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(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. 


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(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 adVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00153 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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justment 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 fulltime 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 

øsection 152(d)(2)¿ section 7706(d)(2) to, or is a dependent described in øsection 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. 


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(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 


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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 firstyear 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). 


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(2) ON-THE-JOB TRAINING AND WORK SUPPLEMENTATION PAY- MENTS.— 

(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 


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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. 


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(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— 


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(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 COM- MUNITY.—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 


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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 


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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 DIS- CONNECTED 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— 


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(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 LONGTERM FAMILY ASSISTANCE RECIPIENTS.— 

(1) IN GENERAL.—With respect to the employment of a longterm 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. 


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(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 øsection 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 indiVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00164 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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vidual who bears any of the relationships described in subparagraphs (A) through (G) of øsection 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 øsection 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 PE- RIOD.— 

(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 EM- PLOYEES 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. 

* * * * * * * 


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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 


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(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) ø$78,750¿ $109,400 in the case of— 

(i) a joint return, or 

(ii) a surviving spouse, 

(B) ø$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— 


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(A) ø$150,000¿ $1,000,000 in the case of a taxpayer described in paragraph (1)(A), 

ø(B) $112,500 in the case of a taxpayer described in 

paragraph (1)(B), and 

ø(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). 

ø(3) INFLATION ADJUSTMENT.— ø(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— 

ø(i) such dollar amount, multiplied by 

ø(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. 

ø(B) AMOUNTS DESCRIBED.—The amounts described in 

this subparagraph are— 

ø(i) each of the dollar amounts contained in subsection (b)(1)(A), 

ø(ii) each of the dollar amounts contained in subparagraphs (A), (B), and (D) of paragraph (1), and 

ø(iii) each of the dollar amounts in subparagraphs 

(A) and (B) of paragraph (2). 

ø(C) ROUNDING.—Any increased amount determined 

under subparagraph (A) shall be rounded to the nearest 

multiple of $100. 

ø(4) SPECIAL RULE FOR TAXABLE YEARS BEGINNING AFTER 2017

AND BEFORE 2026.— 

ø(A) IN GENERAL.—In the case of any taxable year beginning after December 31, 2017, and before January 1, 

2026— 

ø(i) paragraph (1) shall be applied— 

ø(I) by substituting ‘‘$109,400’’ for ‘‘$78,750’’ in 

subparagraph (A), and 

ø(II) by substituting ‘‘$70,300’’ for ‘‘$50,600’’ in 

subparagraph (B), and 

ø(ii) paragraph (2) shall be applied— 

ø(I) by substituting ‘‘$1,000,000’’ for ‘‘$150,000’’ 

in subparagraph (A), 


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ø(II) by substituting ‘‘50 percent of the dollar 

amount applicable under subparagraph (A)’’ for 

‘‘$112,500’’ in subparagraph (B), and 

ø(III) in the case of a taxpayer described in 

paragraph (1)(D), without regard to the substitution under subclause (I). 

ø(B) INFLATION ADJUSTMENT.— ø(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— 

ø(I) such dollar amount, multiplied by 

ø(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. 

ø(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). 

ø(iii) ROUNDING.—Any increased amount determined 

under clause (i) shall be rounded to the nearest multiple of $100. 

ø(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): 


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(1) DEPRECIATION.— (A) IN GENERAL.— (i) PROPERTY OTHER THAN CERTAIN PERSONAL PROP- ERTY.—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 


dlhill on DSK3GLQ082PROD with HEARING
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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.— 

ø(A) IN GENERAL.—No deduction shall be allowed— 

ø(i) for any miscellaneous itemized deduction (as defined in section 67(b)), or 


dlhill on DSK3GLQ082PROD with HEARING
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ø(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. 

ø(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). 

ø(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). 

ø(D)¿ (C) TREATMENT OF CERTAIN RECOVERIES.—No recovery of any tax to which øsubparagraph (A)(ii)¿ subparagraph (A) applied shall be included in gross income for 

purposes of determining alternative minimum taxable income. 

ø(E)¿ (D) STANDARD DEDUCTION øAND DEDUCTION FOR

PERSONAL EXEMPTIONS¿ NOT ALLOWED.—The standard deduction under section 63(c)ø, the deduction for personal exemptions under section 151,¿ and the deduction under section 642(b) shall not be allowed. 

ø(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- 


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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— 


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(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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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 ø461(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 SHEL- TER 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 comVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00175 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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puting 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 

* * * * * * * 

øPART V—DEDUCTIONS FOR PERSONAL EXEMPTIONS 

* * * * * * * 

PART I—DEFINITION OF GROSS INCOME, ADJUSTED 

GROSS INCOME, TAXABLE INCOME, ETC 

Sec. 61. Gross income defined. 

* * * * * * * 

øSec. 67. 2-percent floor on miscellaneous itemized deductions.¿ 

Sec. 67. Denial of miscellaneous itemized deductions. 

øSec. 68. Overall limitation on itemized deductions.¿ 

* * * * * * * 

SEC. 62. ADJUSTED GROSS INCOME DEFINED. 

(a) GENERAL RULE.—For purposes of this øsubtitle¿ 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 EMPLOY- EES.— 

(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 


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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 SELFEMPLOYED 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 DEPOS- ITS.—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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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). 


dlhill on DSK3GLQ082PROD with HEARING
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(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 AR- RANGEMENTS.—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 


dlhill on DSK3GLQ082PROD with HEARING
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(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.). 


dlhill on DSK3GLQ082PROD with HEARING
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(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 

ø(2) the deduction for personal exemptions provided in section 151, and. 

ø(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) ø$4,400¿ $18,000 in the case of a head of household 

(as defined in section 2(b)), or 


dlhill on DSK3GLQ082PROD with HEARING
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(C) ø$3,000¿ $12,000 in any other case. 

ø(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). 

ø(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— 

ø(A) such dollar amount, multiplied by 

ø(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— 

ø(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 

ø(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. 

ø(5)¿ (4) LIMITATION ON BASIC STANDARD DEDUCTION IN THE

CASE OF øCERTAIN¿ DEPENDENTS.—In the case of an individual 

øwith 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. 

ø(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, 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 

ø(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— 

ø(A) INCREASE IN STANDARD DEDUCTION.—Paragraph (2) 

shall be applied— 

ø(i) by substituting ‘‘$18,000’’ for ‘‘$4,400’’ in subparagraph (B), and 

ø(ii) by substituting ‘‘$12,000’’ for ‘‘$3,000’’ in subparagraph (C). 

ø(B) ADJUSTMENT FOR INFLATION.— 

ø(i) IN GENERAL.—Paragraph (4) shall not apply to 

the dollar amounts contained in paragraphs (2)(B) and 

(2)(C). 

ø(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— 

ø(I) such dollar amount, multiplied by 

ø(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 

ø(2) the deduction for personal exemptions provided by section 151, and 

ø(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 taxVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00183 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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able 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. 

ø(f) AGED OR BLIND ADDITIONAL AMOUNTS.— 

ø(1) ADDITIONAL AMOUNTS FOR THE AGED.—The taxpayer 

shall be entitled to an additional amount of $600— 

ø(A) for himself if he has attained age 65 before the 

close of his taxable year, and 

ø(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). 

ø(2) ADDITIONAL AMOUNT FOR BLIND.—The taxpayer shall be 

entitled to an additional amount of $600— 

ø(A) for himself if he is blind at the close of the taxable 

year, and 

ø(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— 


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(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, øparagraphs (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. ø2-PERCENT FLOOR ON¿ DENIAL OF MISCELLANEOUS 

ITEMIZED DEDUCTIONS. 

ø(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, 


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(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 


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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). 

ø(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— 

ø(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 

ø(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). 

ø(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.¿ 

øSEC. 68. OVERALL LIMITATION ON ITEMIZED DEDUCTIONS. 

ø(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— 

ø(1) 3 percent of the excess of adjusted gross income over the 

applicable amount, or 

ø(2) 80 percent of the amount of the itemized deductions otherwise allowable for such taxable year. 

ø(b) APPLICABLE AMOUNT.— 

ø(1) IN GENERAL.—For purposes of this section, the term ‘‘applicable amount’’ means— 

ø(A) $300,000 in the case of a joint return or a surviving 

spouse (as defined in section 2(a)), 

ø(B) $275,000 in the case of a head of household (as defined in section 2(b)), 

ø(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 

ø(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. 

ø(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— 

ø(A) such dollar amount, multiplied by 


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ø(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. 

ø(c) EXCEPTION FOR CERTAIN ITEMIZED DEDUCTIONS.—For purposes of this section, the term ‘‘itemized deductions’’ does not include— 

ø(1) the deduction under section 213 (relating to medical, etc. 

expenses), 

ø(2) any deduction for investment interest (as defined in section 163(d)), and 

ø(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). 

ø(d) COORDINATION WITH OTHER LIMITATIONS.—This section shall 

be applied after the application of any other limitation on the allowance of any itemized deduction. 

ø(e) EXCEPTION FOR ESTATES AND TRUSTS.—This section shall not 

apply to any estate or trust. 

ø(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 


dlhill on DSK3GLQ082PROD with HEARING
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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— 


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(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, 


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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 annuity starting date is: The number of anticipated payments 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 


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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, 


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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. 


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(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 MA- TURITIES.—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, 


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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). 


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(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— 


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(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 EM- PLOYEE.—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. 


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(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. 


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(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 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 


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(5) SPECIAL RULES FOR LOANS, ETC., FROM CERTAIN CON- TRACTS.—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 


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(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 RE- CEIVED 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 paraVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00203 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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graph (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 


dlhill on DSK3GLQ082PROD with HEARING
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(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 exVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00205 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ceed 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 øsection 

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 


dlhill on DSK3GLQ082PROD with HEARING
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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 INDIVID- UALS 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. 


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(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 øsection 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)— 


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(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 firsttime 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 


dlhill on DSK3GLQ082PROD with HEARING
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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. 


dlhill on DSK3GLQ082PROD with HEARING
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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 inVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00211 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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creased 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. 

* * * * * * * 


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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 (øas 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 

øsection 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 

øsection 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 øsection 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). 


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(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. 


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(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 


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(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 paraVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00216 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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graph (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 OTHER- WISE.—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 INSOL- VENCY.—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 acVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00217 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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tivity 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). 


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(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. 


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(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 


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to the extent that payment of the liability would have given 

rise to a deduction. 

(3) ADJUSTMENTS FOR UNAMORTIZED PREMIUM AND DIS- COUNT.—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.— 


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(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

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FICATIONS.—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 INSTRU- MENT.— 

(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 

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nization 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) øafter 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 


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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 ‘‘ø$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 


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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 disVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00226 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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charge 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 reacquiVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00227 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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sition 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— 


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(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’’ ømeans 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 combatø.¿ , and 

(B) the Sinai Peninsula of Egypt. 

(3) Service is performed in a combat zone øonly 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 


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or before the date designated by the President by Executive Order as the date of the termination of combatant activities in such zoneø.¿ , 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 


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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 EDU- CATIONAL 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— 


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(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 øsection 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.— 


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(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 


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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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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 covVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00235 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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ered 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). 


dlhill on DSK3GLQ082PROD with HEARING
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(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— 

ø(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¿ 


dlhill on DSK3GLQ082PROD with HEARING
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(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 

øsection 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 


dlhill on DSK3GLQ082PROD with HEARING
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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 emVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00239 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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ployee 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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 

ø(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 parkingø, 

and¿. 

ø(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 ø(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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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 


dlhill on DSK3GLQ082PROD with HEARING
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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)). 

ø(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) 

øby 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. 

ø(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 


dlhill on DSK3GLQ082PROD with HEARING
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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 øsection 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 

øsection 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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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 overthe-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, 


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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. 


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(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. 


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(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 øsection 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 øsection 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 


dlhill on DSK3GLQ082PROD with HEARING
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of tribal culture shall not be treated as compensation for services. 

* * * * * * * 

øPART V—DEDUCTIONS FOR PERSONAL EXEMPTIONS 

øSEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS. 

ø(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. 

ø(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. 

ø(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. 

ø(d) EXEMPTION AMOUNT.—For purposes of this section— 

ø(1) IN GENERAL.—Except as otherwise provided in this subsection, the term ‘‘exemption amount’’ means $2,000. 

ø(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. 

ø(3) PHASEOUT.— 

ø(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. 

ø(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. 

ø(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. 

ø(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— 

ø(A) such dollar amount, multiplied by 


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ø(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. 

ø(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— 

ø(A) EXEMPTION AMOUNT.—The term ‘‘exemption 

amount’’ means zero. 

ø(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. 

ø(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. 

øSEC. 153. CROSS REFERENCES. 

ø(1) For deductions of estates and trusts, in lieu of the exemptions under section 151, see section 642(b). 

ø(2) For exemptions of nonresident aliens, see section 873(b)(3). 

ø(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 


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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 EM- PLOYEES.—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 


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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 expendiVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00253 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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tures 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 


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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, 


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(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— 


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(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 COMPA- NIES.—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 øsection 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 longterm 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). 


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(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’’ 


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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 applicaVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00259 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ble 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 


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(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. 


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(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 


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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, 


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(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 selfinsured 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 


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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.— 


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(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.— 


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(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. 


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(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.— 


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(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— 


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(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)). 


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(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 APPLICA- TION.—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.— 


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(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 øduring the 

taxable year on—¿ 

ø(i) acquisition indebtedness with respect to any 

qualified residence of the taxpayer, or 

ø(ii)¿ øhome 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. 

ø(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).¿ 


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(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)). 

ø(C) HOME EQUITY INDEBTEDNESS.— ø(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— 

ø(I) the fair market value of such qualified residence, reduced by 

ø(II) the amount of acquisition indebtedness 

with respect to such residence. 

ø(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 BE- FORE 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 


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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. 

ø(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. 

ø(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). 

ø(iv)¿ (iii) LIMITATION ON PERIOD OF REFINANCING.— 

Subclause (II) of øclause (iii)¿ clause (ii) shall not 

apply to any indebtedness after— 

(I) the expiration of the term of the indebtedness described in øclause (iii)(I)¿ clause (ii)(I), or 

(II) if the principal of the indebtedness described in øclause (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.— 


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(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. 

ø(F) SPECIAL RULES FOR TAXABLE YEARS 2018 THROUGH

2025.— ø(i) IN GENERAL.—In the case of taxable years beginning after December 31, 2017, and before January 1, 

2026— 

ø(I) DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST.—Subparagraph (A)(ii) shall not 

apply. 

ø(II) LIMITATION ON ACQUISITION INDEBTEDNESS.—Subparagraph (B)(ii) shall be applied by 

substituting ‘‘$750,000 ($375,000’’ for ‘‘$1,000,000 

($500,000’’. 

ø(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. 

ø(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’’. 

ø(ii) TREATMENT OF LIMITATION IN TAXABLE YEARS

AFTER DECEMBER 31, 2025.—In the case of taxable 


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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. 

ø(iii) TREATMENT OF REFINANCINGS OF INDEBTED- NESS.— 

ø(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. 

ø(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). 

ø(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 RE- TURNS.—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 


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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 tenantstockholder. 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— 


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(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 instruVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00278 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ments, 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 nonseparately 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. 


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(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 


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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 


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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). 


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(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 


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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 taxexempt 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. 


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(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— 


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(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 

ø(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 


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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. 

ø(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— 

ø(A) foreign real property taxes shall not be taken into 

account under subsection (a)(1), and 

ø(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— 


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(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 BUSI- NESS.—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.— 


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(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, øin 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— 


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(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 EX- CEEDS 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 COM- PUTING 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 


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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 øFOR 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 øin 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 øfor 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. 


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(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 


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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 INSTI- TUTIONS.— 

(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. 


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(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. 


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(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.—øAny 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 


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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 øto 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 

ø(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 


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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 ø(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 longterm capital gain. For purposes of the preceding sentence, any property which is property used in the 


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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 apVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00298 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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plied 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 


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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. 

ø(G) INCREASED LIMITATION FOR CASH CONTRIBUTIONS.— 

ø(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. 

ø(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. 

ø(iii) Coordination with subparagraphs (A) and (B) 

ø(I) IN GENERAL.—Contributions taken into account under this subparagraph shall not be taken 

into account under subparagraph (A). 

ø(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 


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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 CER- TAIN 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 CER- TAIN 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. 


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(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 


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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. 


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(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 longterm 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 


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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 


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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), 


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such contributions shall be treated as allowable 

under subsection (b)(2)(A). 

(iv) DETERMINATION OF BASIS FOR CERTAIN TAX- PAYERS.—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, 


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(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. 


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(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 


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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— 


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(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 CONTRIBU- TIONS.— 

(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 


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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— 


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(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 CHARI- TABLE 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 


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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 


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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— 


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(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 quali- fied 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 acknowledgeVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00316 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ment 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 


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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. 


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(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 


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(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 øsection 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 øsection 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.— 


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(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, 


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(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. 


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(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 AUTO- MOBILE.—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. 


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(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 CON- TRIBUTIONS.—Any increase under this subsection of the deVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00324 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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duction 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 pursuVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00325 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ant 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. 


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(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— 


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(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 preVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00328 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ceding 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. 

ø(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; 


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(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. 


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(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— 


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(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: 


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(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 


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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 GUARAN- TEED 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,’’) 


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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— 


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(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. 


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(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 PRODUC- TION 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 


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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— 


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(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 


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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 


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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. 

ø(i) TERMINATION.—This section shall not apply to taxable years 

beginning after December 31, 2025.¿ 


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PART VII—ADDITIONAL ITEMIZED DEDUCTIONS FOR 

INDIVIDUALS 

Sec. 211. Allowance of deductions. 

* * * * * * * 

øSec. 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 øsection 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 preVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00342 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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miums (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 øsection 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). 


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(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 taxable year of: The limitation is: 

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 adjustVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00344 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ment 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 øsection 

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 DE- PENDENTS.—Any expense allowed as a credit under section 21 shall 

not be treated as an expense paid for medical care. 

ø(f) SPECIAL RULES FOR 2013 THROUGH 2018.—In the case of any 

taxable year— 

ø(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 

ø(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. øMOVING EXPENSES¿ CERTAIN MOVING EXPENSES OF MEMBERS OF ARMED FORCES. 

ø(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. 


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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. 

ø(c) CONDITIONS FOR ALLOWANCE.—No deduction shall be allowed 

under this section unless— 

ø(1) the taxpayer’s new principal place of work— 

ø(A) is at least 50 miles farther from his former residence than was his former principal place of work, or 

ø(B) if he had no former principal place of work, is at 

least 50 miles from his former residence, and 

ø(2) either— 

ø(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 

ø(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. 

ø(d) RULES FOR APPLICATION OF SUBSECTION (C)(2).— 

ø(1) The condition of subsection (c)(2) shall not apply if the 

taxpayer is unable to satisfy such condition by reason of— 

ø(A) death or disability, or 

ø(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. 

ø(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). 

ø(3) If— 

ø(A) for any taxable year moving expenses have been deducted in accordance with the rule provided in paragraph 

(2), and 

ø(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. 


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ø(f) SELF-EMPLOYED INDIVIDUAL.—For purposes of this section, 

the term ‘‘self-employed individual’’ means an individual who performs personal services— 

ø(1) as the owner of the entire interest in an unincorporated 

trade or business, or 

ø(2) as a partner in a partnership carrying on a trade or 

business. 

ø(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— 

ø(1) the limitations under subsection (c) shall not apply; 

ø(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 

ø(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— 

ø(A) as if his spouse commenced work as an employee at 

a new principal place of work at such location; and 

ø(B) without regard to the limitations under subsection 

(c).¿ 

ø(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. 

ø(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 


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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. 

ø(j)¿ (f) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section. 

ø(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. 


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(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 


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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 øwith 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 


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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 an- nual deductible which is not less than $1,500 and not 

more than $2,250, 

(ii) in the case of family coverage, which has an an- nual 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 


dlhill on DSK3GLQ082PROD with HEARING
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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. 


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(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 øsection 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 


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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 


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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. 


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(ii) SPECIAL RULES.— (I) REDUCTION OF INCLUSION FOR PRE-DEATH EX- PENSES.—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 cutoff 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 


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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 cutoff 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— 


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(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.— 


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(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. 


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(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 


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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 øsection 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— 


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(i) in the case of a taxpayer whose adjusted gross in- come 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 in- come 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 øwith 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 


dlhill on DSK3GLQ082PROD with HEARING
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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 SEPA- RATE 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— 


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(A) in the case of an eligible individual who has selfonly 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: 

For taxable years beginning in: The additional contribution amount 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 


dlhill on DSK3GLQ082PROD with HEARING
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(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 øwith 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.— 


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(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 CER- TAIN 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 


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(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 DE- DUCTIBLE.—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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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 øsection 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). 


dlhill on DSK3GLQ082PROD with HEARING
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(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.— 


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(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. 


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(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 EX- PENSES.—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, 


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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— 


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(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— 


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(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)). 


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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, 


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(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— 


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(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 

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change 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). 


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(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 

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ly 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. 


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(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 øafter 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— 


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(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 


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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.— 


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(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 


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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— 


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(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, 


dlhill on DSK3GLQ082PROD with HEARING
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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 


dlhill on DSK3GLQ082PROD with HEARING
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(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 SecVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00388 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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retary 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 SETTLE- MENTS.—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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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.— 


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(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 


dlhill on DSK3GLQ082PROD with HEARING
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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 


dlhill on DSK3GLQ082PROD with HEARING
387 

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). 


dlhill on DSK3GLQ082PROD with HEARING
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(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 


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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. 


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(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 (eiVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00396 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ther 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 


dlhill on DSK3GLQ082PROD with HEARING
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(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.— 


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(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— 


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(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 

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cept 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


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Plan year to which subparagraph (C) applies: The applicable percentage is: 

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 


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(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 


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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, 


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(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 øsection 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 


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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 


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(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 


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(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 


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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— 


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(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. 


dlhill on DSK3GLQ082PROD with HEARING
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(E) TREATMENT OF MATCHING CONTRIBUTIONS FORFEITED

BY REASON OF EXCESS DEFERRAL OR CONTRIBUTION OR PER- MISSIBLE 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 


dlhill on DSK3GLQ082PROD with HEARING
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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 


dlhill on DSK3GLQ082PROD with HEARING
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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 


dlhill on DSK3GLQ082PROD with HEARING
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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 AR- RANGEMENTS 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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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)— 


dlhill on DSK3GLQ082PROD with HEARING
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(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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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)— 


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(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. 


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(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.— 


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(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). 


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(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 

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tribution percentages beginning with the highest of 

such percentages). 

(C) METHOD OF DISTRIBUTING EXCESS AGGREGATE CON- TRIBUTIONS.—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 

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dlhill on DSK3GLQ082PROD with HEARING
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tributions 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). 


dlhill on DSK3GLQ082PROD with HEARING
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(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-totrustee transfer to a qualified trust or to an annuity contract described in section 403(b) and such trust or contract 

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cludible 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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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 PROP- ERTY.—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 EX- CEEDS 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). 


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(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.— 


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(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 


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(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 CONTRIBU- TIONS.—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)), 


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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 IN- CLUDE 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 PAY- EES.—If any distribution or payment of the balance to 

the credit of an employee would be treated as a lumpsum distribution, then, for purposes of this paragraph, 

the payment under a qualified domestic relations 

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ance 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 ELIGI- BLE 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), 


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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 


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(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 


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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 CONTRIBU- TIONS.—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 

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ployee, 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.— 


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(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 


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for coverage for the eligible retired public safety officer, his 

spouse, and dependents (as defined in øsection 152¿ section 7706), by an accident or health plan or qualified longterm 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). 

* * * * * * * 

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. 


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(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)— 


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(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 øsection 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. 


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(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 


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(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 DUR- ING 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 subVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00442 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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section (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 EMPLOY- ER’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. 


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(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 


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(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 


dlhill on DSK3GLQ082PROD with HEARING
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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 

periodø, 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. 


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(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.— 


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(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 ømodified 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 ømodified taxable income¿ taxable income 

computed on the basis of the short period bears to the 

ømodified taxable income¿ taxable income for the 12- 

month period; or 

(ii) the tax computed on the ømodified 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. 

ø(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 


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the case of a short period, only the adjusted amount of the deductions for personal exemptions).¿ 

ø(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.¿ 

ø(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. 

ø(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 

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dlhill on DSK3GLQ082PROD with HEARING
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payer, 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. 


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(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 PER- FORMANCE.— (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. 


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(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. 


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(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 øsubsection (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). 

ø(j) LIMITATION ON EXCESS FARM LOSSES OF CERTAIN TAXPAYERS.— 

ø(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. 

ø(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. 


dlhill on DSK3GLQ082PROD with HEARING
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ø(3) APPLICABLE SUBSIDY.—For purposes of this subsection, 

the term ‘‘applicable subsidy’’ means— 

ø(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 

ø(B) any Commodity Credit Corporation loan. 

ø(4) EXCESS FARM LOSS.—For purposes of this subsection— 

ø(A) IN GENERAL.—The term ‘‘excess farm loss’’ means 

the excess of— 

ø(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 

ø(ii) the sum of— 

ø(I) the aggregate gross income or gain of such 

taxpayer for the taxable year which is attributable 

to such farming businesses, plus 

ø(II) the threshold amount for the taxable year. 

ø(B) THRESHOLD AMOUNT.— 

ø(i) IN GENERAL.—The term ‘‘threshold amount’’ 

means, with respect to any taxable year, the greater 

of— 

ø(I) $300,000 ($150,000 in the case of married 

individuals filing separately), or 

ø(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. 

ø(ii) SPECIAL RULES FOR DETERMINING AGGREGATE

AMOUNTS.—For purposes of clause (i)(II)— 

ø(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 

ø(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. 

ø(C) FARMING BUSINESS.— 

ø(i) IN GENERAL.—The term ‘‘farming business’’ has 

the meaning given such term in section 263A(e)(4). 

ø(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— 


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ø(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 

ø(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. 

ø(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. 

ø(5) APPLICATION OF SUBSECTION IN CASE OF PARTNERSHIPS

AND S CORPORATIONS.—In the case of a partnership or S corporation— 

ø(A) this subsection shall be applied at the partner or 

shareholder level, and 

ø(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. 

ø(6) ADDITIONAL REPORTING.—The Secretary may prescribe 

such additional reporting requirements as the Secretary determines appropriate to carry out the purposes of this subsection. 

ø(7) COORDINATION WITH SECTION 469.—This subsection shall 

be applied before the application of section 469.¿ 

ø(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. 


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(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. 

ø(l)¿ (k) LIMITATION ON EXCESS BUSINESS LOSSES OF NONCORPORATE TAXPAYERS.— 

ø(1) LIMITATION.— 

ø(A) subsection (j) (relating to limitation on excess farm 

losses of certain taxpayers) shall not apply, and 

ø(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 operVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00456 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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ating 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. 

* * * * * * * 


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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 øsection 461(k)(2)(E)¿ section 461(j)(2)(E) 

of a taxpayer described in clause (i) or (ii). 


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(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 


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(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 


dlhill on DSK3GLQ082PROD with HEARING
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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 øsection 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 


dlhill on DSK3GLQ082PROD with HEARING
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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 


dlhill on DSK3GLQ082PROD with HEARING
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(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 enVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00463 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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actment 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 


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(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 


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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). 


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(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 


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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. 


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(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 


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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— 


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(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— 


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(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-ofState) 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, 


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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), 


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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 cultiVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00474 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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vating land, harvesting crops or aquatic resources, or raising livestock. 

(h) EXPENDITURES BY PUBLIC CHARITIES TO INFLUENCE LEGISLA- TION.— 

(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), 


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(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 


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(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 ORGANIZA- TIONS.— 

(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 commercialtype insurance. 

(2) OTHER ORGANIZATIONS TAXED AS INSURANCE COMPANIES

ON INSURANCE BUSINESS.—In the case of an organization deVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00477 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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scribed 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 medVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00478 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ical 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. 


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(o) TREATMENT OF HOSPITALS PARTICIPATING IN PROVIDER-SPON- SORED 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, 


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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, 


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(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, 


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(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. 


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(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— 


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(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 nonpayment, 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— 


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(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 


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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 CONTRIBU- TORS.— 

(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 


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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.— 


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(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) øbefore 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. 


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(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; 


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(B) an individual who bears a relationship to such beneficiary which is described in subparagraphs (A) through 

(G) of øsection 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 


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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) øbefore 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 


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(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 


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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 


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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 


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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 øsection 152(d)(2)(B)¿ section 7706(d)(2)(B). For 

purposes of the preceding sentence, a rule similar to the rule 

of øsection 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, 


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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 

* * * * * * * 


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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. 


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(D) No amount shall be allowed under paragraph (1) or 

(2) of section 1211(b). 

ø(E)(i) Section 642(c) shall not apply. 

ø(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) øDEDUCTION 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. 


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(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 øthe exemption amount 

under section 151(d), determined—¿ the dollar amount 

in effect under section 7706(d)(1)(B). 

ø(I) by treating such trust as an individual described in section 

ø(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. 

ø(iii) YEARS WHEN PERSONAL EXEMPTION AMOUNT IS

ZERO.— 

ø(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)’’. 

ø(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).¿ 

ø(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 purVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00500 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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suant 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 


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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 


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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) øDEDUCTION FOR PERSONAL EXEMPTION¿ BASIC DEDUCTION.—No deduction shall be taken under section 642(b) ø(relating to deduction for personal exemptions)¿ (relating to basic 

deduction). 


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(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 taxexempt 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 


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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. 


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(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— 


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(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 

* * * * * * * 


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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: 

ø(A) the deductions for personal exemptions provided in 

section 151,¿ 

ø(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, 

ø(C)¿ (B) the deduction for charitable contributions provided in section 170, 

ø(D)¿ (C) the net operating loss deduction provided in 

section 172, 

ø(E)¿ (D) the additional itemized deductions for individuals provided in part VII of subchapter B (sec. 211 and following), and 

ø(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; 


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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. 

ø(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. 

ø(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.¿ 

ø(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 


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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 øunder 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.— 

ø(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 


dlhill on DSK3GLQ082PROD with HEARING
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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 AL- LOWED 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 


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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. 


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(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, 


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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 


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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 


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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. 


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(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, 


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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. 


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(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 


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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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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 immeVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00521 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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diately 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 


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(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— 


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(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 


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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 COR- PORATION HAS SMALL AMOUNT OF UNITED STATES SOURCE IN- COME.—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— 


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(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 Statesowned 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 


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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 

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clude 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— 

ø(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 øas 

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, propVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00528 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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erly 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 øas 

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 


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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 apVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00530 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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plied without regard to any amount treated as a shortterm 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 shortterm 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 longterm 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 

ø(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 


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(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— 


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(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 ATTRIB- UTABLE 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. 


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(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 


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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 øsection 

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 øsection 

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 


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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 secVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00536 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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tion 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 LIM- ITED 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. 


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(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. 


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(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 

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sidiary’’ 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 


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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 øsection 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. 


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(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 SHARE- HOLDER.—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. 


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(6) CERTAIN EXEMPT ORGANIZATIONS PERMITTED AS SHARE- HOLDERS.—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 COR- PORATION.—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, 


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(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)). 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 

* * * * * * * 


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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— 


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(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; 

ø(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 


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542 

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)— 


dlhill on DSK3GLQ082PROD with HEARING
543 

(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 selfemployment 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 selfemployment 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, adVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00549 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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justed 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 selfemployed 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 earn- ings 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 


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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). 


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(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 


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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 


dlhill on DSK3GLQ082PROD with HEARING
548 

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; 


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(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. 

* * * * * * * 


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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 ø(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— 


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(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 PARTNER- SHIPS 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 

* * * * * * * 


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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 is: The tentative tax 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 $1,000,000 $248,300, plus 39 percent of the 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, 


dlhill on DSK3GLQ082PROD with HEARING
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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. 

ø(g) MODIFICATIONS TO TAX PAYABLE.— 

ø(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— 

ø(A) the tax imposed by chapter 12 with respect to such 

gifts, and 

ø(B) the credit allowed against such tax under section 

2505, including in computing— 

ø(i) the applicable credit amount under section 

2505(a)(1), and 


dlhill on DSK3GLQ082PROD with HEARING
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ø(ii) the sum of the amounts allowed as a credit for 

all preceding periods under section 2505(a)(2). 

ø(2) MODIFICATIONS TO ESTATE TAX PAYABLE TO REFLECT DIF- FERENT 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— 

ø(A) the basic exclusion amount under section 2010(c)(3) 

applicable at the time of the decedent’s death, and 

ø(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 ø$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 


dlhill on DSK3GLQ082PROD with HEARING
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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. 

ø(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. 

* * * * * * * 


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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 


dlhill on DSK3GLQ082PROD with HEARING
557 

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 applyVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00563 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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ing 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 ES- TATE.—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 


dlhill on DSK3GLQ082PROD with HEARING
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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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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. 


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(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 øsection 

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 DIS- POSITION.—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 PER- MITTED.—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 


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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— 


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(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, 


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(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 


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(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. 


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(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— 


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(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 

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changed 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 


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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). 


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(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 onehalf 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 


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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). 


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(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 EM- PLOYER 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 FIDU- CIARY.—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 WITH- HELD.—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, 


dlhill on DSK3GLQ082PROD with HEARING
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(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). 


dlhill on DSK3GLQ082PROD with HEARING
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(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 


dlhill on DSK3GLQ082PROD with HEARING
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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 

(øother 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. 


dlhill on DSK3GLQ082PROD with HEARING
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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 BEN- EFITS.—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— 


dlhill on DSK3GLQ082PROD with HEARING
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(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 DIS- TRIBUTIONS 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 speciVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00583 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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fied 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 BENE- FITS.—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, 


dlhill on DSK3GLQ082PROD with HEARING
579 

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 øthird 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 PARI- MUTUEL 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 


dlhill on DSK3GLQ082PROD with HEARING
580 

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 øthe sum of— 

ø(A) the basic standard deduction (as defined in section 

63(c)) for an individual to whom section 63(c)(2)(C) applies, 

and 

ø(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 BEN- EFIT.— (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 


dlhill on DSK3GLQ082PROD with HEARING
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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. 


dlhill on DSK3GLQ082PROD with HEARING
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(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 øsection 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 


dlhill on DSK3GLQ082PROD with HEARING
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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 øthe 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), 


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(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 


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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 EM- PLOYEES.—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— 


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(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 


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(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 RESI- DENTS 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. 

* * * * * * * 

Subtitle F—Procedure and Administration 

* * * * * * * 

CHAPTER 61—INFORMATION AND RETURNS 

* * * * * * * 

Subchapter A—Returns and Records 

* * * * * * * 

PART II—TAX RETURNS OR STATEMENTS 

* * * * * * * 


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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: 

ø(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— 

ø(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, 

ø(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, 

ø(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 

ø(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). 

ø(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). 

ø(C) The exception under subparagraph (A) shall not 

apply to any individual— 

ø(i) who is described in section 63(c)(5) and who 

has— 

ø(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 

ø(II) total gross income in excess of the standard deduction, or 


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ø(ii) for whom the standard deduction is zero under 

section 63(c)(6). 

ø(D) For purposes of this subsection— 

ø(i) The terms ‘‘standard deduction’’, ‘‘basic standard 

deduction’’ and ‘‘additional standard deduction’’ have 

the respective meanings given such terms by section 

63(c). 

ø(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 øthe 

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); 


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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 CORPORA- TIONS.—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 RESI- DENCE.—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). 


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(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. 

ø(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— 

ø(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 

ø(2) an individual entitled to make a joint return if— 

ø(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, 

ø(B) such individual and such individual’s spouse have 

the same household as their home at the close of the taxable year, 

ø(C) such individual’s spouse does not make a separate 

return, and 

ø(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 exVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00597 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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ecutor 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.— 


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(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 øhad 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 øhad 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. 

øFor 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 


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(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 øsections 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. 


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(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 RESI- DENT 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 


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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 øsection 

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 

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retary 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 ø63(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. 


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(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— 


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(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, 


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(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. 


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(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— 


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(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 


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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 


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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 senVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00610 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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tence 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 IN- VESTIGATION 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 FI- NANCE, 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 

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turn 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 

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turn 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. 


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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, 

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lection 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 PRO- CEEDINGS.—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 


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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 ADMIN- ISTRATION OF FEDERAL LAWS NOT RELATING TO TAX ADMINISTRA- TION.— 

(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, 


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(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. 


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(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. 


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(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). 


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(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 


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615 

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 


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(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 


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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. 


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(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 


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Accountability Office for the purpose of, and to the extent necessary in, making such audit. 

(iii) REQUIREMENT OF NOTIFICATION UPON COMPLE- TION 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 


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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 


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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, 


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(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 INFORMA- TION 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 

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istrative 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. 


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(l) DISCLOSURE OF RETURNS AND RETURN INFORMATION FOR PUR- POSES OTHER THAN TAX ADMINISTRATION.— (1) DISCLOSURE OF CERTAIN RETURNS AND RETURN INFORMA- TION TO SOCIAL SECURITY ADMINISTRATION AND RAILROAD RE- TIREMENT 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, 


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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): 


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(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 AD- MINISTRATION.—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); 


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(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 


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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 AGEN- CY.—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 RE- QUESTING 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 


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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 


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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 


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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— 


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(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. 


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(17) DISCLOSURE TO NATIONAL ARCHIVES AND RECORDS AD- MINISTRATION.—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 DIS- COUNT 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. 


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(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 discloVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00640 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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sure 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, 

ø(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 


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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 ENHANC- ING 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 outVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00642 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

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standing 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, 


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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 


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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 


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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 


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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; 


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(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), 


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(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 COMP- TROLLER 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 


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(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. 

* * * * * * * 

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 


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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. 


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(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), 


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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 øsection 

21 (relating to expenses for household and dependent care 


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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— 


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(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). 

* * * * * * * 

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. 


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(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 


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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. 

ø(2) EXEMPT AMOUNT.—For purposes of paragraph (1), the 

term ‘‘exempt amount’’ means an amount equal to— 

ø(A) the sum of— 

ø(i) the standard deduction, and 

ø(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 


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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. 

ø(4) YEARS WHEN PERSONAL EXEMPTION AMOUNT IS ZERO.— ø(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— 

ø(i) the sum of the amount determined under subparagraph (B) and the standard deduction, divided by 

ø(ii) 52. 

ø(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. 

ø(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— 

ø(i) such dollar amount, multiplied by 

ø(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. 

ø(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 BUSI- NESS 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 


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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— 


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(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’’. 

ø(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) 


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(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 selfemployment 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 


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(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 


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(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. 


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(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. 


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(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, 


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(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 


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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— 


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(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— 


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(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 longterm 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 øsection 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 secVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00669 Fmt 6659 Sfmt 6601 E:\HR\OC\HR958.XXX HR958

dlhill on DSK3GLQ082PROD with HEARING
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tion 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 


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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 øpart 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 øsection 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. 

* * * * * * * 


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SEC. ø152.¿ 7706. DEPENDENT DEFINED. 

(a) IN GENERAL.—For purposes of øthis 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 


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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 øthe 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 


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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, motherin-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— 


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(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 


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(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. 


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(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— 


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(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— 

ø(i) the deduction under section 151(c),¿ 

ø(ii)¿ (i) the credit under section 24 (relating to child 

tax credit), 

ø(iii)¿ (ii) whether an individual is a surviving 

spouse or a head of a household (as such terms are defined in section 2), and 

ø(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.— 


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(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 belowmarket 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. 


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(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 incomeproducing 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. 


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(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 INTER- EST.—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 


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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. 

ø(11) TIME FOR DETERMINING RATE APPLICABLE TO EMPLOYEE

RELOCATION LOANS.— 

ø(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. 

ø(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 


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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. 


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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— 


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(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 

* * * * * * * 

øSEC. 11026. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING 

SERVICES IN THE SINAI PENINSULA OF EGYPT. 

ø(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): 

ø(1) Section 2(a)(3) (relating to special rule where deceased 

spouse was in missing status). 

ø(2) Section 112 (relating to the exclusion of certain combat 

pay of members of the Armed Forces). 

ø(3) Section 692 (relating to income taxes of members of 

Armed Forces on death). 

ø(4) Section 2201 (relating to members of the Armed Forces 

dying in combat zone or by reason of combat-zone-incurred 

wounds, etc.). 


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ø(5) Section 3401(a)(1) (defining wages relating to combat 

pay for members of the Armed Forces). 

ø(6) Section 4253(d) (relating to the taxation of phone service 

originating from a combat zone from members of the Armed 

Forces). 

ø(7) Section 6013(f)(1) (relating to joint return where individual is in missing status). 

ø(8) Section 7508 (relating to time for performing certain 

acts postponed by reason of service in combat zone). 

ø(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. 

ø(c) APPLICABLE PERIOD.— 

ø(1) IN GENERAL.—Except as provided in paragraph (2), the 

applicable period is— 

ø(A) the portion of the first taxable year ending after 

June 9, 2015, which begins on such date, and 

ø(B) any subsequent taxable year beginning before January 1, 2026. 

ø(2) WITHHOLDING.—In the case of subsection (a)(5), the applicable period is— 

ø(A) the portion of the first taxable year ending after the 

date of the enactment of this Act which begins on such 

date, and 

ø(B) any subsequent taxable year beginning before January 1, 2026. 

ø(d) EFFECTIVE DATE.— ø(1) IN GENERAL.—Except as provided in paragraph (2), the 

provisions of this section shall take effect on June 9, 2015. 

ø(2) WITHHOLDING.—Subsection (a)(5) shall apply to remuneration paid after the date of the enactment of this Act.¿ 

* * * * * * * 


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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 wellconnected 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. 


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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 prePublic 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 alVerDate Sep 11 2014 06:18 Sep 25, 2018 Jkt 031578 PO 00000 Frm 00688 Fmt 6604 Sfmt 6604 E:\HR\OC\HR958.XXX HR958

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ready 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. Sa ́nchez 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 


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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 


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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 deficitbusting 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. 

Æ 


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