II

104TH CONGRESS

1ST SESSION S. 722

To amend the Internal Revenue Code of 1986 to restructure and replace

the income tax system of the United States to meet national priorities,

and for other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 25 (legislative day, APRIL 24), 1995

Mr. DOMENICI (for himself, Mr. NUNN, and Mr. KERREY) introduced the

following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to restructure

and replace the income tax system of the United States

to meet national priorities, and for other purposes.

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

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE;

4 TABLE OF CONTENTS

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

6 ‘‘USA Tax Act of 1995’’.

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

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

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

3 thereof.

4 (c) TABLE OF CONTENTS.—

Sec. 1. Short title; amendment of 1986 Code; table of contents.

TITLE I—FINDINGS; NEED TO REPLACE THE INCOME TAX

Sec. 101. Restructuring and replacing the income tax of the United States.

TITLE II—USA TAX FOR INDIVIDUALS

Sec. 201. Unlimited savings allowance tax for individuals.

Sec. 202. Reorganization of the Code.

TITLE III—NEW BUSINESS TAX

Sec. 301. Repeal of present corporate income tax; new tax paid by corporations

and other businesses.

Sec. 302. Repeal of chapter 6.

TITLE IV—DEFERRED COMPENSATION PLANS

Sec. 401. Provisions saved.

TITLE V—TECHNICAL AND ADMINISTRATIVE CHANGES

Sec. 501. USA Tax Code.

Sec. 502. Revisions to the Code.

Sec. 503. Application of subtitle F.

Sec. 504. Clerical amendment.

5 TITLE I—FINDINGS; NEED TO

6 REPLACE THE INCOME TAX

7 SEC. 101. RESTRUCTURING AND REPLACING THE INCOME

8 TAX OF THE UNITED STATES.

9 (a) FINDINGS.—The Congress finds that—

10 (1) to provide for the prosperity of future gen11 erations, the United States must achieve higher lev12 els of saving and investment, which will in turn in13 crease productivity, economic growth, and living

14 standards;
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1 (2) the Tax Code is an important element of

2 our national saving policy;

3 (3) the current Tax Code is irreparably flawed

4 and should be replaced with a new progressive sys5 tem which promotes saving and investment, and

6 thus more rapid economic growth, while ensuring

7 fairness through progressive taxation;

8 (4) all individuals at all income levels should be

9 given a fair opportunity to save, invest, and raise

10 their standard of living and that of their children;

11 (5) future economic growth requires a tax sys12 tem that facilitates successful competition in the

13 global marketplace;

14 (6) the tax system of the United States must

15 be as simple and efficient as possible; and

16 (7) to ensure that national saving is increased,

17 reform of the tax system must not increase the Fed18 eral budget deficit.

19 (b) MAIN FEATURES OF USA TAX SYSTEM.—

20 (1) REPLACEMENT OF OLD TAX SYSTEM.—

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

22 the Code is repealed and replaced for years begin23 ning after 1995.

24 (2) NEW TAX SYSTEM.—The USA Tax consists

25 of—
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1 (A) a simplified tax collected from individ2 uals, that for years after 1995 replaces the in3 come tax imposed on individuals by section 1 of

4 the Code, and

5 (B) a simplified tax collected from corpora6 tions and other businesses, that for years after

7 1995 replaces the income tax imposed on cor8 porations by section 11 of the Code.

9 (3) USA TAX ON GROSS PROFITS.—Corpora10 tions and other businesses pay tax on their annual

11 gross profits from business conducted in the United

12 States, except that—

13 (A) export revenues are excluded, and

14 (B) imports are taxed.

15 (4) USA TAX ON INCOME.—Individuals pay tax

16 on their annual income from wages, dividends, inter17 est, and other financial income (including sales of

18 property), except that—

19 (A) tax is deferred on income the con20 sumption of which is deferred and added to the

21 national stock of savings,

22 (B) a portion of each family’s income is ex23 empt from tax, and

24 (C) deductions are allowed for—

25 (i) education costs,
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1 (ii) religious, charitable, and other

2 philanthropic donations, and

3 (iii) home mortgage interest pay4 ments.

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

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

7 that is—

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

9 from wages, or

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

11 business, paid by the employer.

12 (c) CONCEPTS AND STRUCTURE OF NEW TAX SYS13 TEM.—

14 (1) GUIDING PRINCIPLES OF THE USA TAX SYS15 TEM.—The USA Tax is based on the following prin16 ciples:

17 (A) National wealth and well-being depend

18 on the work, skill, and savings and investment

19 of people.

20 (B) Businesses are people and their capital

21 working together.

22 (C) Capital makes people more productive.

23 (D) Everyone benefits from a growing

24 stock of national savings which in turn allows
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1 for a growing stock of physical and human

2 capital.

3 (E) Under the USA Tax, the deferral of

4 taxation on investments in physical and human

5 capital represents an investment by the Federal

6 Government in the Nation’s capital stock and

7 the Federal Government shares in the return on

8 its investment in the form of higher economic

9 output and revenues in the future.

10 (2) SINGLE TAX IN 2 PARTS.—The USA Tax is

11 composed of a business tax and an individual tax

12 which are 2 parts of a single tax system that sub13 jects all income produced and received to taxation

14 once and only once. The 2 parts are as follows:

15 (A) BUSINESS TAX AT THE SOURCE OF IN16 COME.—Tax is paid by corporations and other

17 businesses which produce and sell goods and

18 services that are—

19 (i) the source of nearly all the gross

20 domestic product of the United States, and

21 (ii) the ultimate source of income re22 ceived by individuals.

23 (B) INDIVIDUAL TAX ON INCOME RE24 CEIVED.—Tax is paid by individuals—
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1 (i) when they receive wages and sala2 ries as compensation for gross domestic

3 product created by their work, and

4 (ii) when they receive interest, divi5 dends, and other financial income as com6 pensation for gross domestic product cre7 ated by their savings and investment.

8 (3) SAVING AND INVESTMENT.—The USA Tax

9 allows people to save and businesses to invest as fol10 lows:

11 (A) FAIR OPPORTUNITY FOR PEOPLE TO

12 SAVE.—

13 (i) NO PREPAYMENT OF TAX.—When

14 a person defers receipt of income by add15 ing it to the national stock of savings—

16 (I) a deduction is allowed for the

17 amount saved, and

18 (II) tax is deferred.

19 (ii) WITHDRAWAL OF SAVINGS AND

20 EARNINGS.—When withdrawn from sav21 ings, both the principal amount saved and

22 the earnings on savings are included in

23 gross income subject to tax.

24 (iii) ANALOGY TO INDIVIDUAL RE25 TIREMENT ACCOUNTS.—The deduction for
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1 saving is the equivalent of allowing a de2 duction for the contribution a person

3 makes to an individual retirement account

4 (IRA), except that—

5 (I) savers have greater control

6 and flexibility,

7 (II) no specially designated ac8 count is required,

9 (III) savings are not limited to

10 retirement purposes,

11 (IV) the deduction for saving is

12 unlimited in amount, and

13 (V) savings can be withdrawn at

14 any time for any purpose.

15 (B) FAIR OPPORTUNITY FOR BUSINESSES

16 TO INVEST.—

17 (i) NO PREPAYMENT OF TAX.—When

18 a business invests in plant and equip19 ment—

20 (I) a deduction is allowed for the

21 cost, and

22 (II) tax is deferred.

23 (ii) TAX ON EARNINGS AND RECOVERY

24 OF COST.—When recovered out of business

25 revenues, both the cost of the investment
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1 and the earnings on the investment are in2 cluded in gross profit subject to tax.

3 (iii) EXPENSING.—The deduction for

4 investment is the equivalent of allowing the

5 cost of plant and equipment to be expensed

6 instead of depreciated.

7 (4) FAIR OPPORTUNITY TO COMPETE IN THE

8 GLOBAL MARKETPLACE.—The USA Tax serves the

9 strategic interests of the United States in inter10 national markets as follows:

11 (A) BORDER ADJUSTABLE TAX.—

12 (i) AMERICAN-MADE EXPORTS.—

13 Goods and services produced in the United

14 States can be sold into world markets free

15 of tax.

16 (ii) FOREIGN-MADE IMPORTS.—Goods

17 and services imported into the United

18 States bear a fair and proportionate share

19 of the tax burden in the United States.

20 (iii) LEVELING THE INTERNATIONAL

21 PLAYING FIELD.—Border adjustments for

22 exports and imports are consistent with

23 international standards and practice.
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1 (5) SIMPLER AND MORE UNDERSTANDABLE

2 TAX.—Compared to the income tax it replaces, the

3 USA Tax for individuals—

4 (A) is written in a simpler, more under5 standable form, and

6 (B) contains only a few exemptions, deduc7 tions, and credits.

8 (6) USA TAX IS REVENUE NEUTRAL.—The

9 USA Tax is designed to neither increase nor de10 crease the total amount of tax paid and collected

11 under the current Code.

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

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

16 USA Tax for individuals is a graduated tax.

17 (B) FAMILY LIVING ALLOWANCE.—The

18 USA Tax recognizes that every family’s budget

19 includes necessities. The USA Tax provides a

20 family living allowance that exempts from tax21 ation the first dollars earned and spent to

22 maintain a basic standard of living.

23 (C) INDIVIDUAL TAX BURDEN BY INCOME

24 LEVEL.—The tax burden across income classes
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1 ranging from low income to high income is

2 about the same as under the current Code.

3 (8) BUSINESS AND INDIVIDUAL PORTIONS OF

4 TAX BURDEN.—

5 (A) BUSINESS PORTION OF TAX BUR6 DEN.—Corporations and other businesses pay

7 about the same portion of the total tax as

8 under the current Code.

9 (B) INDIVIDUAL PORTION OF TAX BUR10 DEN.—Individuals pay about the same portion

11 of the total tax as under the current Code.

12 (9) EMPHASIZING PERSONAL INDEPENDENCE

13 AND RESPONSIBILITY.—

14 (A) REINFORCING A CULTURE OF WORK

15 AND THRIFT.—Instead of being solely a calcula16 tion of how much they must pay to the govern17 ment, the USA Tax converts the income tax

18 into an annual calculation of—

19 (i) how much people produce and con20 tribute to the economy,

21 (ii) how much they take out of the

22 economy, and

23 (iii) how much they save and put back

24 into the economy for their own and the na25 tion’s future.
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1 (B) GREATER CONTROL AND RESPONSIBIL2 ITY.—Because people are allowed to defer tax

3 on income through saving, they have—

4 (i) more control over their own income

5 and taxes,

6 (ii) a greater ability to plan and pro7 vide for their own future, and

8 (iii) a fair opportunity to do so.

9 (10) MORE OPPORTUNITY FOR WAGE EARNERS

10 AT LOWER INCOME LEVELS.—

11 (A) REFUNDABLE CREDIT FOR EMPLOYEE

12 PAYROLL TAX.—The amount of the payroll tax

13 paid or withheld under the Code from an em14 ployee’s wages (and paid into the Social Secu15 rity and Hospital Insurance Trust Funds) is—

16 (i) credited against the employee’s in17 come tax, and

18 (ii) refunded to the employee to the

19 extent in excess of the employee’s income

20 tax.

21 (B) REFUNDABLE INCOME TAX CREDIT

22 FOR THE WORKING POOR.—The USA Tax—

23 (i) increases the credit allowed by sec24 tion 32 of the current Code, and
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1 (ii) concentrates the credit on families

2 with children.

3 (C) NO EFFECT ON TRUST FUND OR BEN4 EFITS.—The income tax credit allowed for pay5 roll taxes deposited in the Social Security Trust

6 Fund does not—

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

8 (ii) reduce the payment of any per9 son’s benefits from the fund.

10 TITLE II—USA TAX FOR

11 INDIVIDUALS

12 SEC. 201. UNLIMITED SAVINGS ALLOWANCE TAX FOR INDI13 VIDUALS.

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

15 to read as follows:

16 ‘‘CHAPTER 1—UNLIMITED SAVINGS

17 ALLOWANCE TAX FOR INDIVIDUALS

‘‘Subchapter A. Basic rules.

‘‘Subchapter B. Unlimited Savings Allowance and deferred income adjustment.

‘‘Subchapter C. Basis, business transactions, and nonrecognition transactions.

‘‘Subchapter D. Rules for exclusions from gross income.

‘‘Subchapter E. Rules relating to deductions.

‘‘Subchapter F. Special business activities.

‘‘Subchapter G. Accounting methods.

‘‘Subchapter H. Nonresident aliens.

‘‘Subchapter I. Trusts and estates.

‘‘Subchapter J. Definitions and rules of application.

18 ‘‘Subchapter A—Basic Rules

‘‘Sec. 1. USA income tax.

‘‘Sec. 2. Persons liable for the USA income tax.
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‘‘Sec. 3. Gross income.

‘‘Sec. 4. Exclusions from gross income.

‘‘Sec. 5. Alimony and child support deductions.

‘‘Sec. 6. Personal and dependency deduction.

‘‘Sec. 7. Family Living Allowance.

‘‘Sec. 8. USA deductions.

‘‘Sec. 9. Homeowner deduction.

‘‘Sec. 10. Education deduction.

‘‘Sec. 11. Philanthropic transfer deduction.

‘‘Sec. 12. Transition basis deduction.

‘‘Sec. 13. Limitation on deductions.

‘‘Sec. 15. Tax rates.

‘‘Sec. 16. Kiddie tax.

‘‘Sec. 17. Rules for filing status and rate tables.

‘‘Sec. 20. USA tax credits.

‘‘Sec. 21. Payroll tax credit.

‘‘Sec. 22. Earned income tax credit.

‘‘Sec. 23. Taxes-paid tax credit.

‘‘Sec. 24. Indexing for inflation.

1 ‘‘SEC. 1. USA INCOME TAX.

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

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

4 shall equal the amount determined by applying the tax

5 schedules in section 15 to the taxable income of the tax6 payer for the taxable year and reducing the tax so deter7 mined by the USA tax credits for the taxable year.

8 ‘‘(b) TAXABLE INCOME.—‘Taxable income’ means

9 adjusted gross income, reduced by—

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

11 ‘‘(2) the Family Living Allowance,

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

13 ‘‘(A) the homeowner deduction,

14 ‘‘(B) the education deduction, and

15 ‘‘(C) the philanthropic transfer deduction,

16 and
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1 ‘‘(4) the transition basis deduction.

2 ‘‘(c) ADJUSTED GROSS INCOME.—‘Adjusted gross in3 come’ means the sum of current-year gross income and

4 deferred income, reduced by the alimony and child support

5 deductions and the Unlimited Savings Allowance.

6 ‘‘(d) CURRENT-YEAR GROSS INCOME.—‘Current-year

7 gross income’ means gross income for the taxable year

8 other than deferred income.

9 ‘‘(e) DEFERRED INCOME.—‘Deferred income’ means

10 income attributable to withdrawals of previously saved

11 gross income as determined under sections 51 and 52.

12 ‘‘(f) NAME.—The tax imposed by this chapter shall

13 be known as the ‘USA Income Tax’.

14 ‘‘SEC. 2. PERSONS LIABLE FOR THE USA INCOME TAX.

15 ‘‘(a) INDIVIDUALS ONLY.—The USA Income Tax

16 shall apply only to individuals.

17 ‘‘(b) CITIZENS AND RESIDENT ALIENS.—The USA

18 Income Tax shall apply to all citizens of the United States

19 and to all resident aliens of the United States. Except as

20 specifically provided in this chapter, the USA Income Tax

21 shall not apply to nonresident aliens.

22 ‘‘(c) NONRESIDENT ALIENS.—For rules applicable to

23 the compensation income of nonresident aliens, see sub24 chapter H (sections 131 and 132). For rules on the with-
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1 holding of tax on nonresident aliens, see chapter 5 (sec2 tions 1441–1464).

3 ‘‘(d) TAXPAYER.—For purposes of this chapter, ‘tax4 payer’ means an individual, or, in the case of a joint re5 turn, the husband and the wife.

6 ‘‘SEC. 3. GROSS INCOME.

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

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

9 year’ means all income from whatever source derived by

10 a taxpayer during the taxable year, including (but not lim11 ited to) the following items:

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

13 not limited to)—

14 ‘‘(A) salaries,

15 ‘‘(B) wages,

16 ‘‘(C) commissions,

17 ‘‘(D) tips, and

18 ‘‘(E) distributions from business entities

19 (as defined in section 151).

20 ‘‘(2) Fringe benefits (except as specifically ex21 cluded by section 4(a)), including (but not limited

22 to)—

23 ‘‘(A) the cost of health, disability, or other

24 similar insurance paid by an employer if the

25 taxpayer is indirectly or directly the beneficiary
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1 of the policy or has the right to name the bene2 ficiary of the policy,

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

4 employee uses the automobile parked in the

5 space regularly on employer business),

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

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

8 housing provided for the convenience of the em9 ployer),

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

11 meals provided for the convenience of the em12 ployer or reimbursement for the reasonable cost

13 of meals incurred on overnight travel),

14 ‘‘(F) amounts contributed by an employer

15 on behalf of an employee to a group legal serv16 ices plan, and

17 ‘‘(G) dependent care assistance received

18 from an employer.

19 ‘‘(3) Distributions from business entities (as de20 fined in section 151) constituting—

21 ‘‘(A) compensation for use of capital, in22 cluding interest,

23 ‘‘(B) shares of profits (including divi24 dends), or
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1 ‘‘(C) return of capital including accumu2 lated but undistributed profits.

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

4 ‘‘(5) Rents.

5 ‘‘(6) Royalties.

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

7 maintenance payments.

8 ‘‘(8) Pensions and other retirement plan pay9 ments (except to the extent taken into account in de10 termining deferred income).

11 ‘‘(9) Includible social security benefits.

12 ‘‘(10) Income from the discharge of indebted13 ness.

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

15 (other than savings assets).

16 ‘‘(12) Amounts stolen or embezzled.

17 ‘‘(b) DEFINITIONS.—For purposes of subsection (a)

18 and section 4—

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

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

21 services for a partnership, the partnership,

22 ‘‘(B) in the case of a proprietor, the pro23 prietorship, and
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1 ‘‘(C) in the case of an independent con2 tractor, any business or individual that hires

3 the independent contractor.

4 ‘‘(2) SOCIAL SECURITY BENEFITS.—

5 ‘‘(A) IN GENERAL.—‘Social Security bene6 fits’ means any amount received by the tax7 payer by reason of entitlement to—

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

9 the Social Security Act, or

10 ‘‘(ii) a tier 1 railroad retirement bene11 fit.

12 The amount received by a taxpayer shall be deter13 mined as if the Social Security Act did not contain

14 section 203(i) thereof.

15 ‘‘(B) TIER 1 RAILROAD RETIREMENT BEN16 EFIT.—‘Tier 1 railroad retirement benefit’

17 means—

18 ‘‘(i) the amount of the annuity under

19 the Railroad Retirement Act of 1974 equal

20 to the amount of the benefit to which the

21 taxpayer would have been entitled under

22 the Social Security Act if all of the service

23 after December 31, 1936, of the employee

24 (on whose record the annuity is being

25 paid) has been included in the term ‘em-
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1 ployment’ as defined in the Social Security

2 Act, and

3 ‘‘(ii) a monthly annuity amount under

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

5 Act of 1974.

6 ‘‘(C) WORKERS’ COMPENSATION SUB7 STITUTES.—If by reason of section 224 of the

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

9 Railroad Retirement Act of 1974, any social se10 curity benefit is reduced because of the receipt

11 of a benefit under a workers’ compensation act,

12 the term ‘social security benefit’ includes that

13 portion of such benefit which equals such reduc14 tion.

15 ‘‘(D) EFFECT OF EARLY PAYMENT.—If so16 cial security benefits checks are delivered before

17 the end of the calendar month for which they

18 are issued and are not deposited until the

19 month for which they are issued, they will be

20 treated as received in the month for which they

21 are issued.

22 ‘‘(3) INCLUDIBLE SOCIAL SECURITY BENE23 FITS.—‘Includible social security benefits’ means the

24 portion of social security benefits that would be in25 cluded in gross income under section 86(a) of the
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1 Internal Revenue Code of 1986, except that for pur2 poses of applying such section, the term ‘modified

3 adjusted gross income’ means adjusted gross income

4 (as defined in section 1(c)), determined without re5 gard to the inclusion of any social security benefits.

6 ‘‘(c) CROSS REFERENCES.—

7 ‘‘(1) SPECIFICALLY EXCLUDED ITEMS.—For

8 items specifically excluded from gross income, see

9 section 4 and sections 91 through 97.

10 ‘‘(2) DEFERRED INCOME.—For rules relating to

11 deferred income as a result of the Unlimited Savings

12 Allowance, see subchapter B (sections 50 through

13 58).

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

15 ‘‘(a) GENERAL RULE.—Gross income for the taxable

16 year does not include:

17 ‘‘(1) RETURNS OR BENEFITS FROM PRE18 VIOUSLY TAXED INCOME.—

19 ‘‘(A) Social security benefits (as defined in

20 section 3(b)(2)), other than includible social se21 curity benefits (as defined in section 3(b)(3)).

22 ‘‘(B) Amounts received under accident or

23 health benefit plans (but only if the cost of such

24 plans was paid by the employee or included in

25 gross income of the employee).
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1 ‘‘(C) Value of services provided pursuant

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

3 cost of such services was paid by the employee

4 or paid by the employer and included in the

5 gross income of the employee).

6 ‘‘(D) Amounts received under an insurance

7 contract for certain living expenses in the case

8 of an individual whose principal residence is

9 damaged or destroyed or who is denied access

10 because of the threat of such occurrence.

11 ‘‘(E) In the case of amounts or property

12 received for property in which the taxpayer has

13 a basis, an amount equal to the basis.

14 ‘‘(2) COMPENSATION FOR SPECIAL KINDS OF

15 SERVICE.—

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

17 gospel—

18 ‘‘(i) the rental value of a home fur19 nished to him, or

20 ‘‘(ii) the rental allowance paid to him

21 as part of his compensation, to the extent

22 used by him to rent or provide a home.

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

24 the Armed Forces of the United States (as pro25 vided in section 92).
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1 ‘‘(C) Certain reduced uniform services re2 tirement pay (as defined in section 122 of the

3 Internal Revenue Code of 1986).

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

5 in section 93).

6 ‘‘(E) Moving allowances for active military

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

8 Internal Revenue Code of 1986).

9 ‘‘(F) Certain foster care payments (as de10 fined in section 94).

11 ‘‘(3) GRATUITOUS, CHARITABLE, AND GOVERN12 MENTAL TRANSFERS.—

13 ‘‘(A) Gifts.

14 ‘‘(B) Inheritances.

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

16 families with dependent children, food stamps,

17 Section 8 Low Income Rental Assistance, bene18 fits under the low income home energy assist19 ance program, and benefits under other similar

20 Federal and State assistance programs for low21 income individuals and families.

22 ‘‘(D) Benefits or assistance received from

23 a charitable organization as the result of a dis24 aster or by reason of financial need.
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1 ‘‘(4) TAX-EXEMPT BOND INTEREST.—Interest

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

3 ‘‘(5) COMPENSATION FOR INJURY AND SICK4 NESS.—

5 ‘‘(A) Amounts received as compensation

6 for personal injury or sickness (as provided in

7 section 95).

8 ‘‘(B) Reimbursement and direct payments

9 under Medicare and Medicaid.

10 ‘‘(6) BENEFITS PRIMARILY FOR THE CONVEN11 IENCE OF THE EMPLOYER AND CERTAIN FRINGE

12 BENEFITS THAT ARE DIFFICULT TO VALUE.—

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

14 convenience of the employer (as provided in sec15 tion 96).

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

17 uses the car parked in the space regularly on

18 company business.

19 ‘‘(C) A fringe benefit that is a no-addi20 tional-cost service (as defined in section 97(b)),

21 subject to rules prohibiting discrimination in

22 favor of the highly compensated.

23 ‘‘(D) A qualified employee discount (as de24 fined in section 97(c)), subject to rules prohibit-
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1 ing discrimination in favor of the highly com2 pensated.

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

4 an employee to the extent that if the employee

5 were treated as a business and the business

6 paid for those services, the employee could de7 duct the cost of such property or services under

8 the business tax.

9 ‘‘(F) A de minimis fringe benefit (as de10 fined in section 97(d)).

11 ‘‘(G) Transportation in a commuter high12 way vehicle if such transportation is in connec13 tion with travel between the employee’s resi14 dence and place of employment.

15 ‘‘(H) Any amount received directly or indi16 rectly by an individual from an employer for

17 moving expenses if—

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

19 change in job locations for the same em20 ployer, and

21 ‘‘(ii) the expenses of such move would

22 have been deductible under the rules under

23 section 217 of the Internal Revenue Code

24 of 1986 if paid directly by the employee.
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1 ‘‘(7) REPAYABLE RECEIPTS.—The proceeds of

2 borrowing or any other amounts legally received that

3 the taxpayer is legally obligated to return (except

4 that the imputed interest rules of section 7872 may

5 apply if there is inadequate stated interest).

6 ‘‘(8) CERTAIN INCOME EARNED ABROAD.—Cer7 tain income and housing costs of citizens and resi8 dents of the United States living outside the United

9 States in accordance with the rules under section

10 911 of the Internal Revenue Code of 1986.

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

12 amount of indebtedness discharged unless the dis13 charge is for services, property, or other valuable

14 right.

15 ‘‘(10) ROLLOVER RULES.—Amounts to which

16 the like-kind exchange rule of section 56(b) or the

17 residence rollover rule of section 76 applies.

18 ‘‘(11) CERTAIN AMOUNTS IMMEDIATELY

19 SAVED.—Certain amounts that would be treated as

20 gross income but which are saved by the payor on

21 behalf of the employee, including—

22 ‘‘(A) employer contributions to retirement

23 and severance plans qualified under chapter 3

24 (relating to deferred compensation plans);
27

•S 722 IS

1 ‘‘(B) bonuses and compensation paid in

2 the form of stock or stock options in the em3 ployer; and

4 ‘‘(C) life insurance premiums paid by an

5 employer.

6 ‘‘(12) TAXABLE RECEIPTS OF A BUSINESS EN7 TITY.—Amounts that are treated as taxable receipts

8 of a business entity under the business tax.

9 ‘‘(13) CERTAIN INSURANCE PROCEEDS.—Pro10 ceeds of casualty, property damage, theft, or loss in11 surance.

12 ‘‘(b) SPECIAL RULES.—

13 ‘‘(1) LIMITED APPLICATION OF IMMEDIATE

14 SAVINGS EXCLUSION.—The exclusion contained in

15 paragraph (11) of subsection (a) shall not apply to

16 compensation of officers, directors, partners, or pro17 prietors of business entities unless such amounts are

18 paid pursuant to plans that are qualified under

19 chapter 3 (relating to deferred compensation plans).

20 If the immediate savings exclusion does not apply to

21 an individual because of this paragraph, the amount

22 not excluded shall be treated as an addition to sav23 ings.

24 ‘‘(2) AMOUNTS TAKEN INTO ACCOUNT IN DE25 TERMINING DEFERRED INCOME.—Any amount
28

•S 722 IS

1 which is to be taken into account in determining

2 withdrawals from savings under section 54 shall not

3 also be taken into account in determining current4 year gross income.

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

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

7 an alimony and child support deductions for an amount

8 equal to the alimony, child support, or separate mainte9 nance payments paid during the taxpayer’s taxable year.

10 ‘‘(b) DEFINITION OF ALIMONY, CHILD SUPPORT,

11 AND SEPARATE MAINTENANCE PAYMENTS.—‘Alimony,

12 child support, and separate maintenance payments’ means

13 any alimony, child support, or separate maintenance pay14 ment which is includible in gross income under section 3.

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

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

17 dependency deduction for an individual shall equal the

18 number of exemptions multiplied by $2,550.

19 ‘‘(b) NUMBER OF EXEMPTIONS.—

20 ‘‘(1) TAXPAYER.—One exemption shall be al21 lowed for the taxpayer unless the taxpayer files a

22 joint return with a spouse, in which case 1 exemp23 tion shall be allowed for the husband and 1 for the

24 wife.
29

•S 722 IS

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

2 shall be allowed for each eligible dependent.

3 ‘‘(c) DEPENDENT.—

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

5 the following individuals over half of whose support,

6 for the calendar year in which the calendar year of

7 the taxpayer begins, was received from the taxpayer

8 or is treated as received from the taxpayer:

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

10 a descendant of either.

11 ‘‘(B) A stepson, stepdaughter, stepfather,

12 or stepmother of the taxpayer.

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

14 stepsister of the taxpayer.

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

16 or an ancestor of either.

17 ‘‘(E) A son or daughter of a brother or sis18 ter of the taxpayer.

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

20 father of the taxpayer.

21 ‘‘(G) A son-in-law, daughter-in-law, father22 in-law, mother-in-law, brother-in-law, or sister23 in-law of the taxpayer.

24 ‘‘(H) An individual (other than an individ25 ual who at any time during the taxable year
30

•S 722 IS

1 was the spouse, determined without regard to

2 section 7703, of a taxpayer) who, for the tax3 able year of the taxpayer, has as his principal

4 place of abode the home of the taxpayer and is

5 a member of the taxpayer’s household.

6 ‘‘(2) RULES RELATING TO THE GENERAL DEFI7 NITION.—The Secretary shall prescribe rules similar

8 to the rules under section 152 of the Internal Reve9 nue Code of 1986 that shall apply to the general

10 definition of ‘dependent’, including definitional rules,

11 rules relating to multiple support agreements, and

12 support tests in cases of children of divorced par13 ents.

14 ‘‘(d) ELIGIBLE DEPENDENT.—

15 ‘‘(1) IN GENERAL.—The term ‘eligible depend16 ent’ means a dependent—

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

18 year in which the taxable year of the taxpayer

19 begins is less than the exemption amount, or

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

21 who—

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

23 the close of the calendar year in which the

24 taxable year of the taxpayer begins, or
31

•S 722 IS

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

2 the age of 24 at the close of such calendar

3 year.

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

5 joint return with a spouse for the calendar year in

6 which the taxable year of the taxpayer begins is not

7 an eligible dependent.

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

9 Secretary shall prescribe rules similar to those in10 cluded in or applicable under the Internal Revenue

11 Code of 1986 relating to this subsection, including

12 rules defining ‘child’ and ‘student’ and rules relating

13 to the income of handicapped dependents.

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

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

16 beginning with calendar year 1997 in accordance with pro17 cedures of the section 24.

18 ‘‘SEC. 7. FAMILY LIVING ALLOWANCE.

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

20 Allowance for a taxpayer shall be determined in accord21 ance with the following schedule:

‘‘Form of Return: Family Living Allowance:

Taxpayers filing joint return ......... $7,400.

Surviving spouse ............................ $7,400.

Head of household ......................... $5,400.

Individual who is not married or a

head of household.

$4,400.

Married filing separate return ....... $3,700.
32

•S 722 IS

1 ‘‘(b) LIMITATION IN THE CASE OF CERTAIN DE2 PENDENTS.—In the case of an individual for whom an3 other taxpayer can claim an exemption under section 6,

4 the Family Living Allowance for such individual shall not

5 exceed the greater of $650 or such individual’s earned in6 come (as defined in section 22(c)(2)).

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

8 amounts contained in subsections (a) and (b) shall be ad9 justed for inflation beginning with calendar year 1997 in

10 accordance with the procedures of section 24.

11 ‘‘SEC. 8. USA DEDUCTIONS.

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

13 entitled to the following deductions:

14 ‘‘(1) The homeowner deduction described in

15 section 9.

16 ‘‘(2) The education deduction described in sec17 tion 10.

18 ‘‘(3) The philanthropic transfer deduction de19 scribed in section 11.

20 ‘‘SEC. 9. HOMEOWNER DEDUCTION.

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

22 equal the amount of interest paid by the taxpayer during

23 the taxable year on acquisition indebtedness with respect

24 to any qualified residence of the taxpayer.

25 ‘‘(b) DEFINITIONS.—
33

•S 722 IS

1 ‘‘(1) ACQUISITION INDEBTEDNESS.—‘Acquisi2 tion indebtedness’ means any indebtedness that is

3 secured by a qualified residence and that—

4 ‘‘(A) was incurred in acquiring, construct5 ing, or substantially improving the qualified res6 idence, or

7 ‘‘(B) was incurred to refinance any indebt8 edness that is described in subparagraph (A) or

9 this subparagraph (B) but only to the extent

10 that the refinancing does not exceed the

11 amount refinanced.

12 The aggregate amount treated as acquisition indebt13 edness shall not exceed $1,000,000 ($500,000 in the

14 case of a married individual filing separately).

15 ‘‘(2) QUALIFIED RESIDENCE.—‘Qualified resi16 dence’ means the principal residence of the taxpayer

17 and 1 other residence of the taxpayer that is des18 ignated by the taxpayer and which—

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

20 for more than 14 days during such year for

21 which such unit is rented, and

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

23 during such year.

24 ‘‘(c) COOPERATIVE HOUSING CORPORATION TEN25 ANT.—Any indebtedness secured by stock held by a tax-
34

•S 722 IS

1 payer as a tenant-stockholder in a cooperative housing cor2 poration shall be treated as secured by the house or apart3 ment which the taxpayer is entitled to occupy as a tenant4 stockholder. If such stock cannot be used to secure indebt5 edness, the indebtedness will be treated as so secured if

6 the taxpayer establishes that such indebtedness was in7 curred to acquire stock.

8 ‘‘SEC. 10. EDUCATION DEDUCTION.

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

10 equal the sum of the qualified educational expenses for

11 each eligible student.

12 ‘‘(b) QUALIFIED EDUCATION EXPENSES.—

13 ‘‘(1) IN GENERAL.—‘Qualified education ex14 penses’ means with respect to an eligible student the

15 lesser of—

16 ‘‘(A) $2,000, or

17 ‘‘(B) the qualified higher education ex18 penses of the eligible student paid by the tax19 payer during the taxable year.

20 ‘‘(2) QUALIFIED HIGHER EDUCATION EX21 PENSES.—

22 ‘‘(A) IN GENERAL.—‘Qualified higher edu23 cation expenses’ means tuition and fees re24 quired for the enrollment of an eligible student

25 at an eligible education institution. Such term
35

•S 722 IS

1 shall not include expenses with respect to any

2 course or other education involving sports,

3 games, or hobbies other than as part of a de4 gree program.

5 ‘‘(B) ELIGIBLE EDUCATIONAL INSTITU6 TION.—‘Eligible educational institution’

7 means—

8 ‘‘(i) an institution described in section

9 1201(a) or section 481(a)(1)(C) or (D) of

10 the Higher Education Act of 1965 (as in

11 effect on October 21, 1988),

12 ‘‘(ii) an area vocational education

13 school as defined in section 521(3)(C) or

14 (D) of the Carl D. Perkins Vocational

15 Educational Act, and

16 ‘‘(iii) in the case of a student who has

17 attained the age of 18 before the beginning

18 of the taxable year, and not graduated

19 from high school before the beginning of

20 the taxable year, an accredited school pro21 viding remedial education.

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

23 means—

24 ‘‘(A) the taxpayer, but only if no other tax25 payer treats the taxpayer as a dependent for
36

•S 722 IS

1 which an exemption is allowed in computing the

2 dependency deduction under section 6,

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

4 is filed, and

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

6 whom the taxpayer is allowed an exemption in

7 computing the dependency deduction under sec8 tion 6.

9 ‘‘(c) LIMITATION.—The maximum education deduc10 tion in a taxable year is $8,000 ($4,000 in the case of

11 married individuals filing separate returns).

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

13 amounts contained in subsections (b)(1)(A) and (c) shall

14 be adjusted for inflation beginning with calendar year

15 1997 in accordance with section 24.

16 ‘‘SEC. 11. PHILANTHROPIC TRANSFER DEDUCTION.

17 ‘‘(a) IN GENERAL.—The philanthropic transfer de18 duction shall equal the amount of charitable contributions

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

20 limitations in subsection (b). A deduction shall be allow21 able as a deduction only if verified under regulations pre22 scribed by the Secretary.

23 ‘‘(b) LIMITATION ON AMOUNT.—

24 ‘‘(1) GENERAL RULE.—A deduction for con25 tributions to regular charities in any taxable year
37

•S 722 IS

1 shall be allowed only to the extent that such con2 tributions do not exceed 50 percent of the taxpayer’s

3 adjusted gross income. Other charitable contribu4 tions shall be allowed only to the extent that such

5 contributions do not exceed the lesser of—

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

7 gross income, or

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

9 the taxpayer’s adjusted gross income over the

10 amount of charitable contributions to regular

11 charities.

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

13 contributions made in a taxable year exceeds the

14 amount which can be deducted in such year, the ex15 cess shall be carried over for a period of up to 5

16 years in accordance with rules to be prescribed by

17 the Secretary.

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

19 subsection, ‘regular charity’ means an organization

20 described in section 101, that is not a private foun21 dation (other than a private operating foundation)

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

23 ‘‘(c) CHARITABLE CONTRIBUTION.—‘Charitable con24 tribution’ means a contribution or gift to or for the use
38

•S 722 IS

1 of a governmental or charitable recipient (as defined in

2 section 101).

3 ‘‘(d) CONTRIBUTIONS OF SAVINGS ASSETS AND

4 OTHER PROPERTY.—

5 ‘‘(1) GENERAL RULE.—In the case of a chari6 table contribution of property, the amount of the

7 contribution shall equal the lesser of the fair market

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

9 property.

10 ‘‘(2) FAIR MARKET VALUE DEDUCTIONS IN

11 CERTAIN CASES.—Notwithstanding paragraph (1),

12 in the case of a charitable contribution (other than

13 a contribution to a private foundation that is not a

14 private operating foundation) of—

15 ‘‘(A) real property,

16 ‘‘(B) tangible property if the use by the

17 donee is related to its purpose or function con18 stituting the basis for its exemption from the

19 business tax or in the case of a governmental

20 unit, to any governmental unit, and

21 ‘‘(C) stocks, bonds, or other savings assets

22 acquired before 1996 and not subject to amorti23 zation under section 12, the amount of the

24 charitable contribution shall equal the fair mar25 ket value of the property reduced by the
39

•S 722 IS

1 amount of gain that would not have been long2 term capital gain (under principles of the Inter3 nal Revenue Code of 1986) if the property had

4 been sold by the taxpayer at its fair market

5 value.

6 ‘‘(3) CONTRIBUTIONS OF STOCK FOR WHICH

7 MARKET QUOTATIONS ARE READILY AVAILABLE.—

8 ‘‘(A) IN GENERAL.—In the case of con9 tributions of qualified appreciated stock—

10 ‘‘(i) paragraph (2) shall apply without

11 regard to whether the stock is contributed

12 to a private foundation, and

13 ‘‘(ii) if the acquisition of the stock

14 was treated as savings or the taxpayer’s

15 basis in the stock was amortized under sec16 tion 12, the amount of the charitable con17 tribution shall equal the excess, if any, of

18 the fair market value of the stock over the

19 cost of the stock to the purchaser (or if re20 ceived by gratuitous transfer, the acquirer

21 of the stock).

22 ‘‘(B) QUALIFIED APPRECIATED STOCK.—

23 ‘Qualified appreciated stock’ means any stock

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

25 contribution) market quotations are readily
40

•S 722 IS

1 available on an established securities market,

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

3 foundation, the term does not include stock to

4 the extent that the amount so contributed,

5 when increased by prior contributions by the

6 donor of stock in the same corporation, exceeds

7 10 percent in value of the outstanding stock of

8 such corporation.

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

10 rules limiting the availability of the philanthropic transfer

11 deduction in certain cases, including rules for—

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

13 ‘‘(2) contributions of partial interests in prop14 erty,

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

16 assumed,

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

18 charity to influence legislation,

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

20 $250,

21 ‘‘(6) contributions designated for lobbying activ22 ity,

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

24 as members of taxpayer’s household,

25 ‘‘(8) qualified conservation contributions, and
41

•S 722 IS

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

2 a charity where there is a significant element of per3 sonal pleasure.

4 ‘‘SEC. 12. TRANSITION BASIS DEDUCTION.

5 ‘‘(a) IN GENERAL.—The transition basis deduction

6 in any year is equal to the lesser of—

7 ‘‘(1) the taxpayer’s taxable income determined

8 without the transition basis deduction, and

9 ‘‘(2) the transition carryover, if any, from the

10 preceding year plus, in the case of a transition year,

11 one-third of the transition basis.

12 If the amount determined under paragraph (2) exceeds

13 the amount determined under paragraph (1), the excess

14 will constitute the transition carryover to the following

15 taxable year.

16 ‘‘(b) TRANSITION YEARS.—‘Transition years’ means

17 1996, 1997, and 1998.

18 ‘‘(c) TRANSITION BASIS.—A taxpayer’s transition

19 basis shall be—

20 ‘‘(1) zero, if the taxpayer’s aggregate basis in

21 his qualified savings assets as of January 1, 1996,

22 exceeds $50,000 ($25,000 in the case of married

23 persons filing separately for 1996), or

24 ‘‘(2) the taxpayer’s aggregate basis in qualified

25 savings assets as of January 1, 1996, if such basis
42

•S 722 IS

1 is $50,000 ($25,000 in the case of married persons

2 filing separately for 1996) or less.

3 A married couple filing a joint return shall be considered

4 a single taxpayer for purposes of this subsection.

5 ‘‘(d) QUALIFIED SAVINGS ASSETS.—‘Qualified sav6 ings assets’ means savings assets as defined in section

7 53(b), except—

8 ‘‘(1) a taxpayer may elect to exclude retirement

9 accounts from qualified saving assets for purposes of

10 application of this section, and

11 ‘‘(2) ‘qualified savings assets’ do not include the

12 taxpayer’s ownership in any business entity to which

13 he regularly provides services (other than publicly

14 traded stock of any such entity).

15 ‘‘(e) EFFECT OF CLAIMING DEDUCTIONS.—If this

16 section applies to a taxpayer, the taxpayer shall have no

17 basis as of January 1, 1996, in the qualified savings assets

18 whose bases are amortized pursuant to this section. The

19 sale or disposition of a qualified savings asset after Janu20 ary 1, 1996, shall have no effect on the taxpayer’s transi21 tion basis deduction.

22 ‘‘(f) NEGATIVE BASIS.—In determining a taxpayer’s

23 basis in qualified savings assets, negative basis determined

24 under section 73 for interests in partnerships and propri25 etorships shall be taken into account.
43

•S 722 IS

1 ‘‘(g) ELECTION TO FORGO APPLICATION OF DEDUC2 TION.—A taxpayer may elect to forgo application of this

3 section by not claiming a transition basis deduction for

4 1996.

5 ‘‘SEC. 13. LIMITATION ON DEDUCTIONS.

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

7 not reduce the taxpayer’s taxable income below zero. Ex8 cept as provided in section 11(b) (relating to the limitation

9 on the philanthropic transfer deduction) and section 12(a)

10 (relating to transition basis), a taxpayer shall not be enti11 tled to carry over any unused deductions.

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

13 ‘deductions’ means—

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

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

16 ‘‘(3) the Family Living Allowance,

17 ‘‘(4) the USA deductions, and

18 ‘‘(5) the transition basis deduction.

19 ‘‘SEC. 15. TAX RATES.

20 ‘‘(a) MARRIED INDIVIDUALS FILING JOINT RETURNS

21 AND SURVIVING SPOUSES.—The tax schedule for every

22 married individual who files a joint return with a spouse

23 and for every surviving spouse (as defined in section

24 17(a)) is—
44

•S 722 IS

1 ‘‘(1) FOR TAXABLE YEARS BEGINNING IN

2 1996.—

‘‘If taxable income is: The tax is:

Not over $5,400 ............................ 19% of taxable income.

Between $5,400, but not over

$24,000.

$1,026, plus 27% of the excess over

$5,400.

Over $24,000 ................................. $6,048, plus 40% of the excess over

$24,000.

3 ‘‘(2) FOR TAXABLE YEARS BEGINNING IN

4 1997.—

‘‘If taxable income is: The tax is:

Not over $5,400 ............................ 15% of taxable income.

Between $5,400, but not over

$24,000.

$810, plus 26% of the excess over

$5,400.

Over $24,000 ................................. $5,646, plus 40% of the excess over

$24,000.

5 ‘‘(3) FOR TAXABLE YEARS BEGINNING IN

6 1998.—

‘‘If taxable income is: The tax is:

Not over $5,400 ............................ 13% of taxable income.

Between $5,400, but not over

$24,000.

$702, plus 25% of the excess over

$5,400.

Over $24,000 ................................. $5,352, plus 40% of the excess over

$24,000.

7 ‘‘(4) FOR TAXABLE YEARS BEGINNING IN

8 1999.—

‘‘If taxable income is: The tax is:

Not over $5,400 ............................ 10% of taxable income.

Between $5,400, but not over

$24,000.

$540, plus 20% of the excess over

$5,400.

Over $24,000 ................................. $4,260, plus 40% of the excess over

$24,000.

9 ‘‘(5) FOR TAXABLE YEARS BEGINNING AFTER

10 1999.—

‘‘If taxable income is: The tax is:

Not over $5,400 ............................ 8% of taxable income.

Between $5,400, but not over

$24,000.

$432, plus 19% of the excess over

$5,400.

Over $24,000 ................................. $3,966, plus 40% of the excess over

$24,000.
45

•S 722 IS

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

2 every head of household (as defined in section 17(b)) is—

3 ‘‘(1) FOR TAXABLE YEARS BEGINNING IN

4 1996.—

‘‘If taxable income is: The tax is:

Not over $4,750 ............................ 19% of taxable income.

Between $4,750, but not over

$21,100.

$902.50, plus 27% of the excess over

$4,750.

Over $21,100 ................................. $5,317, plus 40% of the excess over

$21,100.

5 ‘‘(2) FOR TAXABLE YEARS BEGINNING IN

6 1997.—

‘‘If taxable income is: The tax is:

Not over $4,750 ............................ 15% of taxable income.

Between $4,750, but not over

$21,100.

$712.50, plus 26% of the excess over

$4,750.

Over $21,100 ................................. $4,963.50, plus 40% of the excess

over $21,100.

7 ‘‘(3) FOR TAXABLE YEARS BEGINNING IN

8 1998.—

‘‘If taxable income is: The tax is:

Not over $4,750 ............................ 13% of taxable income.

Between $4,750, but not over

$21,100.

$617.50, plus 25% of the excess over

$4,750.

Over $21,100 ................................. $4,705, plus 40% of the excess over

$21,100.

9 ‘‘(4) FOR TAXABLE YEARS BEGINNING IN

10 1999.—

‘‘If taxable income is: The tax is:

Not over $4,750 ............................ 10% of taxable income.

Between $4,750, but not over

$21,100.

$475, plus 20% of the excess over

$4,750.

Over $21,100 ................................. $3,745, plus 40% of the excess over

$21,100.

11 ‘‘(5) FOR TAXABLE YEARS BEGINNING AFTER

12 1999.—

‘‘If taxable income is: The tax is:

Not over $4,750 ............................ 8% of taxable income.
46

•S 722 IS

‘‘If taxable income is: The tax is:

Between $4,750, but not over

$21,100.

$380, plus 19% of the excess over

$4,750.

Over $21,100 ................................. $3,486.50, plus 40% of the excess

over $21,100.

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

2 for an unmarried individual who is not a head of a house3 hold or a surviving spouse is—

4 ‘‘(1) FOR TAXABLE YEARS BEGINNING IN

5 1996.—

‘‘If taxable income is: The tax is:

Not over $3,200 ............................ 19% of taxable income.

Between $3,200, but not over

$14,400.

$608, plus 27% of the excess over

$3,200.

Over $14,400 ................................. $3,632, plus 40% of the excess over

$14,400.

6 ‘‘(2) FOR TAXABLE YEARS BEGINNING IN

7 1997.—

‘‘If taxable income is: The tax is:

Not over $3,200 ............................ 15% of taxable income.

Between $3,200, but not over

$14,400.

$480, plus 26% of the excess over

$3,200.

Over $14,400 ................................. $3,392, plus 40% of the excess over

$14,400.

8 ‘‘(3) FOR TAXABLE YEARS BEGINNING IN

9 1998.—

‘‘If taxable income is: The tax is:

Not over $3,200 ............................ 13% of taxable income.

Between $3,200, but not over

$14,400.

$416, plus 25% of the excess over

$3,200.

Over $14,400 ................................. $3,216, plus 40% of the excess over

$14,400.

10 ‘‘(4) FOR TAXABLE YEARS BEGINNING IN

11 1999.—

‘‘If taxable income is: The tax is:

Not over $3,200 ............................ 10% of taxable income.

Between $3,200, but not over

$14,400.

$320, plus 20% of the excess over

$3,200.
47

•S 722 IS

‘‘If taxable income is: The tax is:

Over $14,400 ................................. $2,560, plus 40% of the excess over

$14,400.

1 ‘‘(5) FOR TAXABLE YEARS BEGINNING AFTER

2 1999.—

‘‘If taxable income is: The tax is:

Not over $3,200 ............................ 8% of taxable income.

Between $3,200, but not over

$14,400.

$256, plus 19% of the excess over

$3,200.

Over $14,400 ................................. $2,384, plus 40% of the excess over

$14,400.

3 ‘‘(d) MARRIED INDIVIDUALS FILING SEPARATE RE4 TURNS.—The tax schedule for a married individual filing

5 a separate return is—

6 ‘‘(1) FOR TAXABLE YEARS BEGINNING IN

7 1996.—

‘‘If taxable income is: The tax is:

Not over $2,700 ............................ 19% of taxable income.

Between $2,700, but not over

$12,000.

$513, plus 27% of the excess over

$2,700.

Over $12,000 ................................. $3,024, plus 40% of the excess over

$12,000.

8 ‘‘(2) FOR TAXABLE YEARS BEGINNING IN

9 1997.—

‘‘If taxable income is: The tax is:

Between $2,700, but not over

$12,000.

$405, plus 26% of the excess over

$2,700.

Over $12,000 ................................. $2,823, plus 40% of the excess over

$12,000.

10 ‘‘(3) FOR TAXABLE YEARS BEGINNING IN

11 1998.—

‘‘If taxable income is: The tax is:

Not over $2,700 ............................ 13% of taxable income.

Between $2,700, but not over

$12,000.

$351, plus 25% of the excess over

$2,700.

Over $12,000 ................................. $2,676, plus 40% of the excess over

$12,000.
48

•S 722 IS

1 ‘‘(4) FOR TAXABLE YEARS BEGINNING IN

2 1999.—

‘‘If taxable income is: The tax is:

Not over $2,700 ............................ 10% of taxable income.

Between $2,700, but not over

$12,000.

$270, plus 20% of the excess over

$2,700.

Over $12,000 ................................. $2,130, plus 40% of the excess over

$12,000.

3 ‘‘(5) FOR TAXABLE YEARS BEGINNING AFTER

4 1999.—

‘‘If taxable income is: The tax is:

Not over $2,700 ............................ 8% of taxable income.

Between $2,700, but not over

$12,000.

$216, plus 19% of the excess over

$2,700.

Over $12,000 ................................. $1,983, plus 40% of the excess over

$12,000.

5 ‘‘(e) ADJUSTMENTS FOR INFLATION.—For taxable

6 years beginning on or after January 1, 1997, the tax

7 schedules in subsections (a) through (d) shall be adjusted

8 so that inflation will not result in tax increases in accord9 ance with the procedures under section 24.

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

11 status.

12 ‘‘SEC. 16. KIDDIE TAX.

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

14 and net unearned income and the child has not attained

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

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

17 be included in the taxable income of the eligible par18 ent for purposes of determining the parent’s tax li19 ability, or
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•S 722 IS

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

2 schedules for the child as a separate taxpayer shall

3 not be less than the sum of—

4 ‘‘(A) the tax which would have been deter5 mined under the rate schedule if the taxable in6 come of the child were reduced by the net un7 earned income of the child, plus

8 ‘‘(B) such child’s share of the allocable pa9 rental tax.

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

11 TAX.—

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

13 parental tax’ means the excess of—

14 ‘‘(A) the tax that would have been deter15 mined under the rate schedules on the eligible

16 parent’s taxable income if such income included

17 the net unearned income of all of the eligible

18 parent’s children to which this section applies,

19 over

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

21 rate schedules without regard to this section.

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

23 allocable parental tax is equal to the amount that

24 bears the same ratio to the total allocable parental

25 tax as the child’s net unearned income bears to the
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•S 722 IS

1 aggregate net unearned income of all children to

2 whom this section applies for whom the eligible par3 ent is the eligible parent.

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

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

6 a joint return,

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

8 has only 1 surviving parent,

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

10 are not married, or

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

12 if the parents are married and filing separate re13 turns.

14 ‘‘(d) NET UNEARNED INCOME.—‘Net unearned in15 come’ means the excess, if any, of—

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

17 over

18 ‘‘(2) the sum of—

19 ‘‘(A) the earned income (as defined in sec20 tion 22(c)(2)) of the child, and

21 ‘‘(B) an amount equal to the Family Liv22 ing Allowance for a dependent child.

23 ‘‘SEC. 17. RULES FOR FILING STATUS AND RATE TABLES.

24 ‘‘(a) DEFINITION OF SURVIVING SPOUSE.—
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•S 722 IS

1 ‘‘(1) IN GENERAL.—For purposes of section 15,

2 ‘surviving spouse’ means an individual—

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

4 his 2 taxable years immediately preceding the

5 taxable year, and

6 ‘‘(B) who maintains as his home a house7 hold which constitutes for the taxable year the

8 principal place of abode (as a member of such

9 household) of a dependent,

10 ‘‘(i) who (within the meaning of sec11 tion 6) is a son, stepson, daughter, or step12 daughter of the taxpayer, and

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

14 treat as an exemption for purposes of com15 puting the personal dependency deduction

16 for the taxable year under section 6.

17 For purposes of this paragraph, an individual shall

18 be considered as maintaining a household only if

19 over half of the cost of maintaining the household

20 during the taxable year is furnished by such individ21 ual.

22 ‘‘(2) LIMITATIONS.—Notwithstanding para23 graph (1), for purposes of section 15, an individual

24 shall not be considered to be a surviving spouse—
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•S 722 IS

1 ‘‘(A) if the individual has remarried at any

2 time before the close of the taxable year, or

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

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

6 of section 6013 (without regard to subsection

7 (a)(3) thereof).

8 ‘‘(3) SPECIAL RULE WHERE DECEASED SPOUSE

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

10 missing status (within the meaning of section

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

12 and if such individual remains in such status until

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

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

15 which such individual died shall be treated as the

16 earlier of the date determined under subparagraph

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

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

19 is made under section 556 of title 37 of the

20 United States Code or under section 5566 of

21 title 5 of such Code (whichever is applicable)

22 that such individual died while in such missing

23 status, or

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

25 date designated under section 292 (relating to
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•S 722 IS

1 exemption for combat zones) as the date of ter2 mination of combatant activities in that zone.

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

4 ‘‘(1) IN GENERAL.—For purposes of this chap5 ter, an individual shall be considered a head of a

6 household if, and only if, such individual is not mar7 ried at the close of his taxable year, is not a surviv8 ing spouse (as defined in subsection (a)), and ei9 ther—

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

11 which constitutes for more than one-half of

12 such taxable year the principal place of abode,

13 as a member of such household, of—

14 ‘‘(i) a son, stepson, daughter, or step15 daughter of the taxpayer, or a descendant

16 of a son or daughter of the taxpayer, but

17 if such son, stepson, daughter, step18 daughter, or descendant is married at the

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

20 the taxpayer is entitled to claim such per21 son as an exemption for the taxable year

22 for purposes of computing the dependency

23 deduction under section 6 (or would be so

24 entitled but for the release of a claim to

25 such exemption by the custodial parent),
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•S 722 IS

1 ‘‘(ii) any other person who is a de2 pendent of the taxpayer, if the taxpayer is

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

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

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

10 dependency deduction for the taxable year for

11 such father or mother.

12 For purposes of this paragraph, an individual shall

13 be considered as maintaining a household only if

14 over half of the cost of maintaining the household

15 during the taxable year is furnished by such individ16 ual.

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

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

20 shall be considered a child of such person by

21 blood;

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

23 from his spouse under a decree of divorce or of

24 separate maintenance shall not be considered as

25 married;
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•S 722 IS

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

2 married at the close of his taxable year if at

3 any time during the taxable year his spouse is

4 a nonresident alien; and

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

6 married at the close of his taxable year if his

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

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

11 shall not be considered to be a head of a house12 hold—

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

14 he is a nonresident alien; or

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

16 not be a dependent for the taxable year but

17 for—

18 ‘‘(i) subparagraph (H) of section

19 6(c)(1) or

20 ‘‘(ii) multiple support rules prescribed

21 by the Secretary.

22 ‘‘(c) CERTAIN MARRIED INDIVIDUALS LIVING

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

24 treated as not married at the close of the taxable year
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•S 722 IS

1 if such individual is so treated under the provisions of sec2 tion 7703(b).

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

5 shall not apply.

6 ‘‘SEC. 20. USA TAX CREDITS.

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

8 shall be applied in the following order:

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

10 Secretary under rules similar to the rules of subpart

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

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

14 in the gross income of the taxpayer.

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

16 ‘‘(3) The earned income tax credit under sec17 tion 22.

18 ‘‘(4) The taxes-paid tax credit under section 23.

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

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

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

22 (before application of the USA tax credits (other than the

23 foreign tax credit)), the taxpayer shall be entitled to a re24 fund for such excess. The taxpayer may elect in lieu of
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•S 722 IS

1 a refund to apply such excess as a tax paid for the follow2 ing taxable year.

3 ‘‘SEC. 21. PAYROLL TAX CREDIT.

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

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

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

7 tax,

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

9 railroad retirement tax, and

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

11 with respect to the taxpayer’s compensation or earn12 ings during the taxable year.

13 ‘‘(b) DEFINITIONS.—

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

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

16 means the old-age, survivors and disability insurance

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

18 the hospital insurance tax imposed by section

19 3101(b) that is attributable to the wage base on

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

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

22 RAILROAD RETIREMENT TAX.—‘Employee’s share of

23 the basic Tier 1 railroad retirement tax’ means—

24 ‘‘(A) the portion of the tax imposed by sec25 tion 3201 with respect to compensation below
58

•S 722 IS

1 the applicable base (as defined in section

2 3231(e)(2)); and

3 ‘‘(B) the portion of the tax imposed by sec4 tion 3211(a)(1) on railroad employee represent5 atives attributable to the tax imposed by section

6 3101(a) and the portion of the hospital insur7 ance tax imposed by section 3101(b) that is at8 tributable to the wage base on which the section

9 3101(a) tax is imposed.

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

11 means the old-age, survivors and disability insurance

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

13 income and the portion of the hospital insurance tax

14 imposed by section 1401(b) on self-employment in15 come that is attributable to the amount of self-em16 ployment income (as determined under section

17 1402(b)) on which the section 1401(a) tax is im18 posed.

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

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

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

22 because of overpayment of tax on the applicable wage

23 base.

24 ‘‘SEC. 22. EARNED INCOME TAX CREDIT.

25 ‘‘(a) ALLOWANCE OF CREDIT.—
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•S 722 IS

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

2 individual, there shall be allowed as a credit against

3 the tax imposed by this chapter for the taxable year

4 an amount equal to the credit percentage of so much

5 of the taxpayer’s earned income for the taxable year

6 as does not exceed the earned income amount.

7 ‘‘(2) LIMITATION.—The amount of the credit

8 allowable to a taxpayer under paragraph (1) for any

9 taxable year shall not exceed the excess (if any) of—

10 ‘‘(A) the credit percentage of the earned

11 income amount, over

12 ‘‘(B) the phaseout percentage of so much

13 of the adjusted gross income (or, if greater, the

14 earned income) of the taxpayer for the taxable

15 year as exceeds the phaseout amount.

16 ‘‘(b) PERCENTAGES AND AMOUNTS.—For purposes

17 of subsection (a)—

18 ‘‘(1) CREDIT PERCENTAGES.—The credit per19 centage shall be determined as follows:

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

1 qualifying child ..................................................................... 34

2 or more qualifying children .................................................. 40.

20 ‘‘(2) PHASEOUT PERCENTAGE.—In the case of

21 an eligible individual, the phaseout percentage is

22 equal to the difference between the highest marginal

23 tax rate and the second highest marginal tax rate
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•S 722 IS

1 for such individual under the applicable subsection

2 of section 15.

3 ‘‘(3) AMOUNTS.—

4 ‘‘(A) IN GENERAL.—Except as provided in

5 subparagraphs (B) and (C), the earned income

6 amount and the phaseout amount shall be de7 termined as follows:

‘‘In the case of an unmarried eligible individual

with:

The earned income

amount is:

The phaseout

amount is:

1 qualifying child .............. $8,641 $9,000

2 or more qualifying children ............................... $8,175 $9,000

‘‘In the case of a married

eligible individual with:

The earned income

amount is:

The phaseout

amount is:

1 qualifying child .............. $10,726 $11,000

2 or more qualifying children ............................... $10,000 $10,831

8 ‘‘(B) INFLATION ADJUSTMENTS FOR

9 EARNED INCOME AMOUNT.—

10 ‘‘(i) IN GENERAL.—In the case of any

11 taxable year beginning after 1996, each

12 earned income amount contained in sub13 paragraph (A) shall be adjusted for infla14 tion in accordance with section 24, except

15 that the rounding rules of clause (ii) shall

16 apply.

17 ‘‘(ii) ROUNDING.—If any earned in18 come amount after being increased under

19 section 24 is not a multiple of $10, such
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•S 722 IS

1 amount shall be rounded to the nearest

2 multiple of $10.

3 ‘‘(C) PHASEOUT AMOUNTS FOR TAXABLE

4 YEARS BEGINNING AFTER 1996.—In the case of

5 taxable years beginning after 1996, the phase6 out amount with respect to any eligible individ7 ual shall equal—

8 ‘‘(i) the sum of—

9 ‘‘(I) the dollar amount of the

10 floor of the second tax bracket for

11 such individual under the applicable

12 subsection of section 15 for such year,

13 ‘‘(II) the Family Living Allow14 ance for such individual for such year,

15 and

16 ‘‘(III) the number of exemptions

17 (not to exceed 4) allowed under sec18 tion 6 for such individual for such

19 year, reduced by

20 ‘‘(ii) the earned income amount multi21 plied by the ratio of the credit percentage

22 to the phaseout percentage for such indi23 vidual for such year.

24 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur25 poses of this section—
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•S 722 IS

1 ‘‘(1) ELIGIBLE INDIVIDUAL.—

2 ‘‘(A) IN GENERAL.—‘Eligible individual’

3 means any individual who has a qualifying child

4 for the taxable year.

5 ‘‘(B) QUALIFYING CHILD INELIGIBLE.—If

6 an individual is the qualifying child of a tax7 payer for any taxable year of such taxpayer be8 ginning in a calendar year, such individual shall

9 not be treated as an eligible individual for any

10 taxable year of such individual beginning in

11 such calendar year.

12 ‘‘(C) 2 OR MORE ELIGIBLE INDIVIDUALS.—

13 If 2 or more individuals would (but for this

14 subparagraph and after application of subpara15 graph (B)) be treated as eligible individuals

16 with respect to the same qualifying child for

17 taxable years beginning in the same calendar

18 year, only the individual with the highest ad19 justed gross income for such taxable years shall

20 be treated as an eligible individual with respect

21 to such qualifying child. year, only the individ22 ual with the highest adjusted gross income for

23 such taxable years shall be treated as an eligible

24 individual with respect to such qualifying child.
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•S 722 IS

1 ‘‘(D) EXCEPTION FOR INDIVIDUAL CLAIM2 ING PARTIAL EXCLUSION FOR LIVING

3 ABROAD.—An individual who claims the partial

4 exclusion from income for persons living abroad

5 for the taxable year is an eligible individual for

6 such taxable year.

7 ‘‘(E) LIMITATION ON ELIGIBILITY OF NON8 RESIDENT ALIENS.—An individual who is a

9 nonresident alien individual for any portion of

10 the taxable year is not an eligible individual un11 less such individual is treated for such taxable

12 year as a resident of the United States for pur13 poses of this chapter by reason of an election

14 under subsection (g) or (h) of section 6013.

15 ‘‘(2) EARNED INCOME.—

16 ‘‘(A) The term ‘earned income’ means—

17 ‘‘(i) wages, salaries, tips, and other

18 employee compensation, plus

19 ‘‘(ii) the amount of the taxpayer’s net

20 earnings from self-employment for the tax21 able year (within the meaning of section

22 1402(a)), plus any credit received under

23 section 280 with respect to such self-em24 ployment income.

25 ‘‘(B) For purposes of subparagraph (A)—
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•S 722 IS

1 ‘‘(i) the earned income of an individ2 ual shall be computed without regard to

3 any community property laws,

4 ‘‘(ii) no amount received as a pension

5 or annuity shall be taken into account,

6 ‘‘(iii) no income of nonresident alien

7 individuals not connected with United

8 States business shall be taken into ac9 count, and

10 ‘‘(iv) no amount received for services

11 provided by an individual while the individ12 ual is an inmate at a penal institution shall

13 be taken into account.

14 ‘‘(3) QUALIFYING CHILD.—

15 ‘‘(A) IN GENERAL.—‘Qualifying child’

16 means, with respect to any taxpayer for any

17 taxable year, an individual—

18 ‘‘(i) who bears a relationship to the

19 taxpayer described in subparagraph (B),

20 ‘‘(ii) except as provided in subpara21 graph (B)(iii), who has the same principal

22 place of abode as the taxpayer for more

23 than one-half of such taxable year,

24 ‘‘(iii) who meets the age requirements

25 of subparagraph (C), and
65

•S 722 IS

1 ‘‘(iv) with respect to whom the tax2 payer meets the identification requirements

3 of subparagraph (D).

4 ‘‘(B) RELATIONSHIP TEST.—

5 ‘‘(i) IN GENERAL.—An individual

6 bears a relationship to the taxpayer de7 scribed in this subparagraph if such indi8 vidual is—

9 ‘‘(I) a son or daughter of the tax10 payer, or a descendant of either,

11 ‘‘(II) a stepson or stepdaughter

12 of the taxpayer, or

13 ‘‘(III) an eligible foster child of

14 the taxpayer.

15 ‘‘(ii) MARRIED CHILDREN.—Clause (i)

16 shall not apply to any individual who is

17 married as of the close of the taxpayer’s

18 taxable year unless the taxpayer is entitled

19 to claim such individual as an exemption in

20 computing the dependency deduction under

21 section 6 for such taxable year.

22 ‘‘(iii) ELIGIBLE FOSTER CHILD.—For

23 purposes of clause (i)(III), the term ‘eligi24 ble foster child’ means an individual not

25 described in clause (i) (I) or (II) who—
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•S 722 IS

1 ‘‘(I) the taxpayer cares for as the

2 taxpayer’s own child, and

3 ‘‘(II) has the same principal

4 place of abode as the taxpayer for the

5 taxpayer’s entire taxable year.

6 ‘‘(iv) ADOPTION.—For purposes of

7 this subparagraph, a child who is legally

8 adopted, or who is placed with the tax9 payer by an authorized placement agency

10 for adoption by the taxpayer, shall be

11 treated as a child by blood.

12 ‘‘(C) AGE REQUIREMENTS.—An individual

13 meets the requirements of this subparagraph if

14 such individual—

15 ‘‘(i) has not attained the age of 19 as

16 of the close of the calendar year in which

17 the taxable year of the taxpayer begins,

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

19 the age of 24 as of the close of such cal20 endar year, or

21 ‘‘(iii) is permanently and totally dis22 abled at any time during the taxable year.

23 ‘‘(D) IDENTIFICATION REQUIREMENTS.—

24 ‘‘(i) IN GENERAL.—The requirements

25 of this subparagraph are met if the tax-
67

•S 722 IS

1 payer includes the name, age, and TIN of

2 each qualifying child (without regard to

3 this subparagraph) on the return of tax for

4 the taxable year.

5 ‘‘(ii) OTHER METHODS.—The Sec6 retary may prescribe other methods for

7 providing the information described in

8 clause (i).

9 ‘‘(E) ABODE MUST BE IN THE UNITED

10 STATES.—The requirements of subparagraphs

11 (A)(ii) and (B)(iii)(II) shall be met only if the

12 principal place of abode is in the United States.

13 ‘‘(4) TREATMENT OF MILITARY PERSONNEL

14 STATIONED OUTSIDE THE UNITED STATES.—For

15 purposes of this subsection, the principal place of

16 abode of a member of the Armed Forces of the Unit17 ed States shall be treated as in the United States

18 during any period during which such member is sta19 tioned outside the United States while serving on ex20 tended active duty with the Armed Forces of the

21 United States.

22 ‘‘(d) MARRIED INDIVIDUALS.—In the case of an indi23 vidual who is married (within the meaning of section

24 7703), this section shall apply only if a joint return is filed

25 for the taxable year under section 6013.
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•S 722 IS

1 ‘‘(e) TAXABLE YEAR MUST BE FULL TAXABLE

2 YEAR.—Except in the case of a taxable year closed by rea3 son of the death of the taxpayer, no credit shall be allow4 able under this section in the case of a taxable year cover5 ing a period of less than 12 months.

6 ‘‘(f) AMOUNT OF CREDIT TO BE DETERMINED

7 UNDER TABLES.—

8 ‘‘(1) IN GENERAL.—The amount of the credit

9 allowed by this section shall be determined under ta10 bles prescribed by the Secretary.

11 ‘‘(2) REQUIREMENTS FOR TABLES.—The tables

12 prescribed under paragraph (1) shall reflect the pro13 visions of subsections (a) and (b) and shall have in14 come brackets of not greater than $50 each—

15 ‘‘(A) for earned income between $0 and

16 the amount of earned income at which the cred17 it is phased out under subsection (b), and

18 ‘‘(B) for adjusted gross income between

19 the dollar amount at which the phaseout begins

20 under subsection (b) and the amount of ad21 justed gross income at which the credit is

22 phased out under subsection (b).

23 ‘‘(g) COORDINATION WITH ADVANCE PAYMENTS OF

24 EARNED INCOME CREDIT.—
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•S 722 IS

1 ‘‘(1) RECAPTURE OF EXCESS ADVANCE PAY2 MENTS.—If any payment is made to the individual

3 by an employer under section 3507 during any cal4 endar year, then the tax imposed by this chapter for

5 the individual’s last taxable year beginning in such

6 calendar year shall be increased by the aggregate

7 amount of such payments.

8 ‘‘(2) RECONCILIATION OF PAYMENTS AD9 VANCED AND CREDIT ALLOWED.—Any increase in

10 tax under paragraph (1) shall not be treated as tax

11 imposed by this chapter for purposes of determining

12 the amount of any credit (other than the credit al13 lowed by subsection (a)) allowable under this sub14 part.

15 ‘‘(h) COORDINATION WITH CERTAIN MEANS-TESTED

16 PROGRAMS.—For purposes of—

17 ‘‘(1) the United States Housing Act of 1937,

18 ‘‘(2) title V of the Housing Act of 1949,

19 ‘‘(3) section 101 of the Housing and Urban De20 velopment Act of 1965,

21 ‘‘(4) sections 221(d)(3), 235, and 236 of the

22 National Housing Act, and

23 ‘‘(5) the Food Stamp Act of 1977,

24 any refund made to an individual (or the spouse of an

25 individual) by reason of this section, and any payment
70

•S 722 IS

1 made to such individual (or such spouse) by an employer

2 under section 3507, shall not be treated as income (and

3 shall not be taken into account in determining resources

4 for the month of its receipt and the following month).

5 ‘‘SEC. 23. TAXES-PAID TAX CREDIT.

6 ‘‘The taxes-paid tax credit shall equal the sum of—

7 ‘‘(1) WAGE WITHHOLDING.—The amount with8 held as tax under chapter 24.

9 ‘‘(2) SPECIAL REFUNDS OF SOCIAL SECURITY

10 TAX WHEN WAGES EARNED FROM MORE THAN 1 EM11 PLOYER.—The amount allowable under section

12 6413(c) as a special refund of taxes imposed on

13 wages.

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

15 Any overpayment of a prior tax obligation that the

16 taxpayer or the Secretary applies to the tax for the

17 taxable year.

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

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

20 tax liability for the taxable year which are treated as

21 payment on account of income tax for purposes of

22 section 6315 (relating to estimated taxes).

23 ‘‘SEC. 24. INDEXING FOR INFLATION.

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

25 later than December 15 of 1996, and each subsequent cal-
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•S 722 IS

1 endar year, the Secretary shall prescribe tables and dollar

2 amounts which shall apply in the immediately following

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

4 are required to be adjusted for inflation in accordance with

5 this section.

6 ‘‘(b) METHOD OF ADJUSTMENT.—

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

8 are required to be adjusted pursuant to this section

9 for a calendar year shall be the dollar amounts as

10 stated in this chapter multiplied by the cost of living

11 adjustment for such calendar year, rounded as pro12 vided in subsection (d).

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

14 rate table, the dollar amounts to be adjusted in ac15 cordance with paragraph (1) are the minimum and

16 maximum dollar amounts for each rate bracket for

17 which a tax is imposed. The amounts setting forth

18 the bottom tax for each bracket shall be adjusted to

19 the extent necessary to reflect the adjustments in

20 the rate brackets.

21 ‘‘(c) COST-OF-LIVING ADJUSTMENT.—

22 ‘‘(1) IN GENERAL.—The cost-of-living adjust23 ment for any calendar year is the percentage (if any)

24 by which—
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•S 722 IS

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

2 year, exceeds

3 ‘‘(B) the CPI for the calendar year 1995.

4 ‘‘(2) CPI FOR ANY CALENDAR YEAR.—For pur5 poses of paragraph (1), the CPI for any calendar

6 year is the average of the Consumer Price Index as

7 of the close of the 12-month period ending on Au8 gust 31 of such calendar year.

9 ‘‘(3) CONSUMER PRICE INDEX.—For purposes

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

11 last Consumer Price Index for all-urban consumers

12 published by the Department of Labor. For pur13 poses of the preceding sentence, the revision of the

14 Consumer Price Index which is most consistent with

15 the Consumer Price Index for calendar year 1995

16 shall be used.

17 ‘‘(d) ROUNDING.—

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

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

20 increase shall be rounded to the next lowest multiple

21 of $50.

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

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

24 of—
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•S 722 IS

1 ‘‘(A) amounts for married individuals filing

2 separately, and

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

4 adjusted for inflation if that dollar amount is

5 less than $1,000.

6 ‘‘Subchapter B—Unlimited Savings Allowance

7 and Deferred Income Adjustment

‘‘Sec. 50. Unlimited savings allowance.

‘‘Sec. 51. Deferred income.

‘‘Sec. 52. Basic computation rules.

‘‘Sec. 53. Additions to savings; savings assets.

‘‘Sec. 54. Withdrawals.

‘‘Sec. 55. Net nonexempt borrowing.

‘‘Sec. 56. Special rules.

‘‘Sec. 57. General basis account.

‘‘Sec. 58. Anti-abuse rules.

8 ‘‘SEC. 50. UNLIMITED SAVINGS ALLOWANCE.

9 ‘‘(a) EXPLANATION.—The Unlimited Savings Allow10 ance reflects the amount of current-year gross income that

11 is deferred because it has been placed in the national pool

12 of savings. The Unlimited Savings Allowance is intended

13 to reflect the amount of net new savings other than new

14 savings attributable to borrowing or to tax-exempt inter15 est.

16 ‘‘(b) AMOUNT.—The Unlimited Savings Allowance

17 for a taxable year shall equal the deductible net savings

18 determined in accordance with section 52(a).

19 ‘‘SEC. 51. DEFERRED INCOME.

20 ‘‘(a) EXPLANATION.—Deferred income is the amount

21 of gross income that was previously deferred through the
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•S 722 IS

1 Unlimited Savings Allowance and that is treated as with2 drawn from savings in the taxable year thereby terminat3 ing the deferral.

4 ‘‘(b) AMOUNT.—The amount of deferred income for

5 a taxable year is equal to the net includible withdrawal

6 income determined in accordance with section 52(b).

7 ‘‘SEC. 52. BASIC COMPUTATION RULES.

8 ‘‘(a) SAVINGS DEDUCTION.—

9 ‘‘(1) NET SAVINGS.—‘Net savings’ equals the

10 excess, if any, of—

11 ‘‘(A) additions to savings (as defined in

12 section 53) in the taxable year, over

13 ‘‘(B) taxable withdrawals from savings (as

14 defined in section 54) in the taxable year.

15 ‘‘(2) DEDUCTIBLE NET SAVINGS.—‘Deductible

16 net savings’ equals the excess, if any of—

17 ‘‘(A) net savings in the taxable year, over

18 ‘‘(B) the sum of the following ‘nontaxable

19 sources of funds’:

20 ‘‘(i) Net nonexempt borrowing in the

21 taxable year.

22 ‘‘(ii) Income received in the taxable

23 year which is exempt under section 91 (re24 lating to interest on tax-exempt bonds).
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•S 722 IS

1 ‘‘(iii) The basis of savings withdrawn

2 in the taxable year.

3 ‘‘(b) NET INCLUDIBLE WITHDRAWAL INCOME.—

4 ‘‘(1) NET WITHDRAWAL.—‘Net withdrawal’

5 equals the excess, if any, of—

6 ‘‘(A) taxable withdrawals from savings (as

7 defined in section 54) in the taxable year, over

8 ‘‘(B) additions to savings (as defined in

9 section 53) in the taxable year.

10 ‘‘(2) NET INCLUDIBLE WITHDRAWAL IN11 COME.—‘Net includible withdrawal income’ equals

12 the excess, if any, of—

13 ‘‘(A) the net withdrawal in the taxable

14 year, over

15 ‘‘(B) the balance in the taxpayer’s general

16 basis account.

17 ‘‘SEC. 53. ADDITIONS TO SAVINGS; SAVINGS ASSETS.

18 ‘‘(a) IN GENERAL.—‘Additions to savings’ means—

19 ‘‘(1) the acquisition of savings assets,

20 ‘‘(2) the amount determined to be the net addi21 tion to each savings, money market, checking, credit

22 union, brokerage, or other similar account during

23 the taxable year in accordance with section 56(a)(1),

24 ‘‘(3) payments of premiums on life insurance

25 policies, and
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•S 722 IS

1 ‘‘(4) contributions to retirement accounts.

2 ‘‘(b) SAVINGS ASSETS.—Savings assets include

3 stocks, bonds, securities, certificates of deposits, invest4 ments in partnerships and proprietorships, shares of mu5 tual funds, life insurance policies, annuities, and other

6 similar savings or investment assets.

7 ‘‘(c) CERTAIN ITEMS NOT CONSTITUTING SAVINGS

8 ASSETS.—Savings assets do not include—

9 ‘‘(1) investments in land, whether made di10 rectly, or through investments in business entities

11 whose primary purpose is the investment in land,

12 ‘‘(2) cash on hand,

13 ‘‘(3) any collectible, such as—

14 ‘‘(A) any work of art,

15 ‘‘(B) any rug or antique,

16 ‘‘(C) any metal or gem,

17 ‘‘(D) stamps and coins,

18 ‘‘(E) any alcoholic beverage, and

19 ‘‘(F) any other tangible personal property

20 specified by the Secretary, and

21 ‘‘(4) the investment in any business entity, the

22 purpose of which is to hold collectibles for apprecia23 tion.

24 ‘‘(d) PERSONAL USE PROPERTY.—See sections 75

25 and 111 for special rules relating to personal-use property.
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•S 722 IS

1 ‘‘SEC. 54. WITHDRAWALS.

2 ‘‘(a) WITHDRAWALS.—‘Withdrawals’ means—

3 ‘‘(1) the sale, exchange, or other disposition of

4 a savings asset,

5 ‘‘(2) the net amount, if any, withdrawn from

6 each savings, money market, checking, credit union,

7 brokerage, or other similar account during the tax8 able year as determined in accordance with section

9 56(a)(1),

10 ‘‘(3) amounts paid to the taxpayer under life in11 surance or annuity policies, and

12 ‘‘(4) amounts withdrawn from retirement ac13 counts and amounts paid pursuant to defined con14 tribution plans.

15 ‘‘(b) TAXABLE WITHDRAWALS.—‘Taxable withdraw16 als’ means the portion of a withdrawal in excess of the

17 basis of the savings withdrawn. See section 78 for rules

18 relating to losses.

19 ‘‘(c) BASIS OF SAVINGS WITHDRAWN.—The basis of

20 savings withdrawn shall take into account any basis that

21 the taxpayer may have in an asset or account by reason

22 of its acquisition prior to January 1, 1996, or its acquisi23 tion by gift or inheritance. Under regulations prescribed

24 by the Secretary, rules similar to the rules under section

25 72 of the Internal Revenue Code of 1986 shall apply for

26 purposes of determining the basis of assets withdrawn in
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•S 722 IS

1 the case of payments under annuities, retirement plans,

2 life insurance contracts, and any other arrangements for

3 which the taxpayer acquired rights in part by payment of

4 amounts that were included in income and not deducted

5 when paid.

6 ‘‘SEC. 55. NET NONEXEMPT BORROWING.

7 ‘‘(a) NET NONEXEMPT BORROWING.—A taxpayer’s

8 ‘net nonexempt borrowing’ for a taxable year equals the

9 excess, if any, of—

10 ‘‘(1) the taxpayer’s nonexempt debt as of the

11 end of the taxable year, over

12 ‘‘(2) the taxpayer’s nonexempt debt at the be13 ginning of the taxable year.

14 ‘‘(b) NONEXEMPT DEBT.—‘Nonexempt debt’ means

15 the principal amount of and accrued interest on any in16 debtedness to the extent such indebtedness is not exempt

17 indebtedness.

18 ‘‘(c) EXEMPT INDEBTEDNESS.—‘Exempt indebted19 ness’ means the following:

20 ‘‘(1) MORTGAGE DEBT ON PRINCIPAL RESI21 DENCE.—Any indebtedness with respect to the tax22 payer’s principal residence the interest on which

23 would be deductible under section 9, as applied with24 out regard to the $1,000,000 limitation contained

25 therein.
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1 ‘‘(2) DEBT TO ACQUIRE A CONSUMER DURA2 BLE.—So much of indebtedness directly related and

3 traceable to the acquisition of a consumer durable,

4 such as furniture, appliances, or a family auto5 mobile, that does not exceed $25,000.

6 ‘‘(3) CHARGES FOR PURCHASES OF GOODS AND

7 SERVICES.—Amounts billed or to be billed to the

8 taxpayer for purchases of goods and services if such

9 amounts are paid within the billing cycle in which

10 such amounts are first billed.

11 ‘‘(4) $10,000 OF OTHER DEBT.—Not more than

12 $10,000 of indebtedness which is not exempt under

13 another paragraph of this subsection.

14 ‘‘SEC. 56. SPECIAL RULES.

15 ‘‘(a) SPECIAL RULES FOR BANK AND BROKERAGE

16 ACCOUNTS.—

17 ‘‘(1) IN GENERAL.—In the case of a brokerage

18 account or a bank account, for a taxable year—

19 ‘‘(A) ‘Withdrawal’ mean the excess, if any,

20 of—

21 ‘‘(i) Taxpayer withdrawals from the

22 account during the taxable year, over

23 ‘‘(ii) Taxpayer deposits to the account

24 during the taxable year.
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•S 722 IS

1 ‘‘(B) ‘Addition to savings’ means the ex2 cess, if any, of—

3 ‘‘(i) Taxpayer deposits to the account

4 during the taxable year, over

5 ‘‘(ii) Taxpayer withdrawals from the

6 account during the taxable year.

7 ‘‘(C) Any earnings on assets in the account

8 (including interest, dividends, and the proceeds

9 from the sale of stock or other savings assets)

10 that are credited to the account shall not be

11 taken into account in determining gross income

12 or additions to saving, except to the extent

13 taken into account in subparagraph (A) or (B)

14 because such earnings are withdrawn.

15 ‘‘(D) For purposes of this paragraph, if

16 savings assets are transferred to a brokerage

17 account, such assets shall not be treated as ‘de18 posits’ to the accounts.

19 ‘‘(2) BASIS.—

20 ‘‘(A) INITIAL BASIS.—A taxpayer’s initial

21 basis in a bank or brokerage account held on

22 January 1, 1996, shall be the sum of the basis

23 of the assets held in the account except—
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•S 722 IS

1 ‘‘(i) assets whose basis is amortized

2 pursuant to section 12 shall have no basis

3 in such assets for these purposes, and

4 ‘‘(ii) a bank account shall have no

5 basis if the taxpayer elects to treat the

6 basis of his bank account as an addition to

7 his general basis account in accordance

8 with section 57(d).

9 ‘‘(B) ADDITIONS TO BASIS.—The basis in

10 a bank account or brokerage account shall in11 crease by the amount of—

12 ‘‘(i) interest on tax-exempt bonds

13 credited to the account, and

14 ‘‘(ii) the transferor’s basis in any sav15 ings assets transferred to a brokerage ac16 count.

17 ‘‘(C) REDUCTIONS IN BASIS.—Basis in a

18 bank account or brokerage account will be re19 duced by the amount by which the withdrawal

20 for the year (as determined under paragraph

21 (1)) exceeds the taxable withdrawal for the year

22 (as determined under paragraph (3)).

23 ‘‘(D) BASIS IN CLOSED ACCOUNT.—If a

24 taxpayer closes a bank account or a brokerage

25 account and the taxpayer has basis remaining
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•S 722 IS

1 in the account after application of subpara2 graph (C) for the year of withdrawal, the re3 maining basis shall be added to the taxpayer’s

4 general basis account.

5 ‘‘(3) TAXABLE WITHDRAWALS.—The basis in

6 an account shall be allocated to the last withdrawals

7 from a bank account or brokerage account. Accord8 ingly, if a taxpayer has a withdrawal (as defined in

9 paragraph (1)) from a bank account or a brokerage

10 account in a taxable year, the amount of such with11 drawal that constitutes a taxable withdrawal equals

12 the excess of—

13 ‘‘(A) the amount of the withdrawal, over

14 ‘‘(B) the amount by which the basis of the

15 account exceeds the value of the account as of

16 the end of taxable year.

17 ‘‘(4) DEFINITIONS.—For purposes of this sub18 section—

19 ‘‘(A) BANK ACCOUNT.—‘Bank account’

20 means a checking, savings, or money market

21 account with a bank, credit union, or other fi22 nancial institution.

23 ‘‘(B) BROKERAGE ACCOUNT.—‘Brokerage

24 account’ means an account with a brokerage

25 firm which holds savings assets on behalf of the
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•S 722 IS

1 taxpayer and reports transactions with respect

2 to such assets in periodical reports to the tax3 payer.

4 ‘‘(C) VALUE OF AN ACCOUNT.—

5 ‘‘(i) VALUE OF BANK ACCOUNT.—The

6 value of a bank account is the cash held in

7 the account as of the last day of the tax8 able year.

9 ‘‘(ii) VALUE OF A BROKERAGE AC10 COUNT.—The value of a brokerage account

11 is the sum of the amount of cash in any

12 cash account or account whose value is

13 regularly denominated in dollar value, plus

14 the cost of other savings assets held in the

15 account.

16 ‘‘(iii) COST OF SAVINGS ASSET.—The

17 cost of a savings asset held in a brokerage

18 account—

19 ‘‘(I) on January 1, 1996, is the

20 taxpayer’s basis in such asset if the

21 basis is reported to the brokerage firm

22 in accordance with regulations pre23 scribed by the Secretary,

24 ‘‘(II) transferred to the broker25 age account after January 1, 1996, is
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•S 722 IS

1 the taxpayer’s basis in the savings

2 asset at the time of transfer,

3 ‘‘(III) acquired through the bro4 kerage account, is the cost of such

5 asset (less commissions), and

6 ‘‘(IV) in all other cases, the fair

7 market value of the asset as deter8 mined by the brokerage firm.

9 ‘‘(D) WITHDRAWALS FROM AN AC10 COUNT.—Withdrawals from an account include

11 service charges, brokerage commissions, and

12 other fees charged to the account.

13 ‘‘(5) PROVISIONS NOT APPLICABLE TO SOME

14 ACCOUNTS.—The provisions of this subsection shall

15 not apply to a bank account or a brokerage ac16 count—

17 ‘‘(A) if a taxpayer elects in accordance

18 with regulations prescribed by the Secretary not

19 to have the provisions apply, or

20 ‘‘(B) the bank, brokerage firm, or other fi21 nancial institution with which the account is

22 held fails to provide annual reports to the tax23 payer in sufficient detail for the taxpayer to

24 make the determinations required by this sub25 section.
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•S 722 IS

1 ‘‘(b) ROLLOVER OF BASIS IN CERTAIN CASES.—If a

2 taxpayer sells a savings asset in which it has a basis and

3 within 2 weeks of the sale acquires 1 or more savings as4 sets, the taxpayer may elect to—

5 ‘‘(1) roll over its basis from the asset sold to

6 the asset purchased,

7 ‘‘(2) not treat so much of the proceeds of the

8 sale of the savings asset as equals the cost of new

9 savings assets as a withdrawal, and

10 ‘‘(3) not treat so much of the cost of the new

11 savings asset as equals the proceeds of the sale of

12 the old savings asset as new savings.

13 Such election shall be made on the tax return for the tax14 able year of the sale of the old asset.

15 ‘‘(c) RULES FOR GRATUITOUS TRANSFERS.—

16 ‘‘(1) NO WITHDRAWAL FOR DONOR.—If a donor

17 transfers a savings asset other than cash (or a bank

18 account or other similar account with a balance de19 nominated in cash) to a donee, whether during the

20 donor’s life or by reason of the donor’s death, the

21 donor shall not be treated as withdrawing the

22 amount so transferred.

23 ‘‘(2) ANTI-ABUSE RULE.—Under regulations to

24 be prescribed by the Secretary, paragraph (1) shall

25 not apply to any inter vivos transfer if the transfer
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•S 722 IS

1 is made primarily to effect a transfer of tax liability

2 to a taxpayer in a lower tax bracket. The Secretary

3 may presume that a transfer was made primarily to

4 effect a transfer of tax liability if the savings asset

5 (or any savings asset acquired with the proceeds of

6 such asset) is sold, disposed of, or withdrawn within

7 the 3-year period following the transfer and the pro8 ceeds are used to pay expenses that the transferor

9 is likely to have paid but for the transfer.

10 ‘‘(3) TRANSFER OF CASH OR BANK ACCOUNT.—

11 If a donor transfers cash (or a bank account or

12 other similar account with a balance denominated in

13 cash) to a donee, the donor will be treated as having

14 withdrawn the amount so transferred. The donee

15 will be treated as making an addition to savings to

16 the extent that the donee makes an addition to sav17 ings with cash or maintains the account so trans18 ferred.

19 ‘‘SEC. 57. GENERAL BASIS ACCOUNT.

20 ‘‘(a) EXPLANATION.—The general basis account is

21 intended to allow the taxpayer to withdraw from savings

22 an amount of savings equal to the amount which had pre23 viously been included in income because the amount was

24 saved before the Unlimited Savings Allowance became ap25 plicable or because no savings deduction was allowed be-
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•S 722 IS

1 cause the savings was treated as made with borrowed

2 funds, tax-exempt income, or from withdrawals of pre3 viously taxed savings.

4 ‘‘(b) IN GENERAL.—Each taxpayer shall have a gen5 eral basis account, which shall start with a balance of zero,

6 which balance shall—

7 ‘‘(1) in the case of a taxpayer with net savings

8 in a taxable year, be increased as of the end of the

9 taxable year by the lesser of—

10 ‘‘(A) the taxpayer’s net savings for the tax11 able year; or

12 ‘‘(B) nontaxable sources of funds (as de13 fined in section 52(a)(2)(B)),

14 ‘‘(2) in the case of a taxpayer with net with15 drawals for the taxable year, decreased as of the end

16 of the taxable year, but not below zero, by the

17 amount of net withdrawals,

18 ‘‘(3) in the case of the sale of a savings asset

19 by a taxpayer for an amount less than its basis, in20 creased by the amount by which the basis exceeds

21 the proceeds of the sale, and

22 ‘‘(4) be increased as provided in subsections (c)

23 and (d).
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•S 722 IS

1 ‘‘(c) SPECIAL RULES TO ENSURE BENEFIT OF SAV2 INGS DEDUCTION UPON SALE OF PRINCIPAL RESI3 DENCE.—

4 ‘‘(1) EXPLANATION.—If a taxpayer who is

5 planning to retire or acquire a smaller principal resi6 dence sells a principal residence in which the tax7 payer has a significant basis and then saves most of

8 the proceeds of the sale, the taxpayer may not have

9 sufficient income in the year to fully absorb the sav10 ings deduction attributable to the new savings. This

11 provision allows the taxpayer to use the portion of

12 the savings deduction that would otherwise not be

13 used to reduce future deferred income.

14 ‘‘(2) RULE.—A taxpayer who sells his principal

15 residence in a taxable year may increase his general

16 basis account by the portion of the saved basis of

17 the principal residence that the taxpayer determines

18 that he cannot use in the taxable year. In his tax

19 return for the year of the sale, the taxpayer shall

20 elect what portion of the saved basis to treat as sav21 ings in determining his Unlimited Savings Allowance

22 and what portion to add to his general basis account

23 as of the end of that year. Once a return is filed

24 in which an election is made, the election shall be

25 irrevocable for that taxable year (except if the
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•S 722 IS

1 amount of saved basis is reduced by a subsequent

2 purchase of a replacement principal residence).

3 ‘‘(3) SAVED BASIS.—The ‘saved basis’ from the

4 sale of a taxpayer’s principal residence shall equal

5 the least of—

6 ‘‘(A) the Unlimited Savings Allowance de7 termined in accordance with section 50 (but

8 without regard to this subsection) for the tax9 able year of the sale of the taxpayer’s principal

10 residence,

11 ‘‘(B) the net proceeds from the sale of the

12 residence (including any proceeds applied to pay

13 off indebtedness but excluding proceeds that

14 were applied to pay transactional costs, such as

15 brokerage fees and transfer taxes), or

16 ‘‘(C) the excess of the taxpayer’s basis in

17 the principal residence over the taxpayer’s basis

18 in any new principal residence to which the res19 idence rollover rule of section 76 applies.

20 ‘‘(d) ELECTION TO INCREASE GENERAL BASIS AC21 COUNT BY BANK ACCOUNT BALANCE.—A taxpayer may

22 elect to increase his general basis account by the balance

23 in his bank accounts as of January 1, 1996. Such election

24 shall be made on the taxpayer’s return for the period cov-
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•S 722 IS

1 ering such date. If the election is made, the taxpayer shall

2 have no basis in his bank accounts.

3 ‘‘(e) OTHER ADJUSTMENTS.—See section

4 56(a)(2)(D) (relating to bank accounts and brokerage ac5 counts that are terminated with basis) and section 78, re6 lating to losses.

7 ‘‘SEC. 58. ANTI-ABUSE RULES.

8 ‘‘(a) BORROWING TO GENERATE DEDUCTION.—

9 ‘‘(1) GENERAL RULE.—A taxpayer shall not be

10 permitted to treat as a savings asset (and the Sec11 retary shall have authority to deny such treatment

12 if claimed by the taxpayer) if such savings asset was

13 acquired with funds borrowed for the purpose of in14 creasing the taxpayer’s Unlimited Savings Allowance

15 or decreasing the taxpayer’s deferred income.

16 ‘‘(2) ORDERING.—Subsection (a) shall be ap17 plied after the net savings calculation in section 50

18 and shall apply only to the extent that that section

19 does not itself deny the taxpayer a benefit from the

20 borrowing.

21 ‘‘(3) EXEMPT BORROWING.—Subsection (a)

22 shall apply to any exempt borrowing to the extent

23 that the borrowing is directly traceable to the acqui24 sition of a savings asset or such borrowing is transi25 tory.
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•S 722 IS

1 ‘‘(b) CONVERSION TO CASH.—Any cash in excess of

2 $250 held by a taxpayer on January 1, 1996, shall be

3 treated as a savings asset. If such cash is used to acquire

4 a savings asset, it will be treated as withdrawn and then

5 used to acquire a savings asset, so that no net deduction

6 arises.

7 ‘‘(c) BORROWING IN LIEU OF WITHDRAWING.—If the

8 Secretary determines that because of the Unlimited Sav9 ings Allowance and deferred income rules, taxpayers are

10 borrowing against their savings to consume rather than

11 withdrawing their savings, the Secretary shall have au12 thority to prescribe rules that treat indebtedness that is

13 secured by interests in savings assets as amounts with14 drawn.

15 ‘‘Subchapter C—Basis, Business Transactions

16 and Nonrecognition Transactions

‘‘Sec. 71. Effect of basis.

‘‘Sec. 72. Basis.

‘‘Sec. 73. Basis in business entities.

‘‘Sec. 74. Gratuitous transfers.

‘‘Sec. 75. Transactions involving business entities.

‘‘Sec. 76. Rollover on residence sale.

‘‘Sec. 77. Other nonrecognition transactions.

‘‘Sec. 78. Losses.

17 ‘‘SEC. 71. EFFECT OF BASIS.

18 ‘‘(a) IN GENERAL.—The amount of gross income to

19 be recognized on the sale or exchange of property equals

20 the excess of—

21 ‘‘(1) the net proceeds from the sale, over
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•S 722 IS

1 ‘‘(2) the taxpayer’s adjusted basis, if any, in the

2 property.

3 ‘‘(b) NONRECOGNITION TRANSACTION.—Subsection

4 (a) shall not apply to nonrecognition transactions de5 scribed in this chapter.

6 ‘‘(c) SAVINGS ASSETS.—Subchapter B generally gov7 erns the treatment of the basis of savings assets.

8 ‘‘SEC. 72. BASIS.

9 ‘‘(a) BASIS, SALE, OR EXCHANGE.—Except to the ex10 tent inconsistent with provisions of this chapter, adjusted

11 basis and the existence of a sale or exchange shall be de12 termined in accordance with principles applicable under

13 the Internal Revenue Code of 1986.

14 ‘‘(b) DEFINITION OF BASIS.—For purposes of this

15 chapter, ‘basis’ means the adjusted basis of property. The

16 adjusted basis of property is generally its cost, as adjusted

17 for actions or transactions that increase or decrease the

18 basis of property. Except as provided in section 12 (relat19 ing to the 3-year amortization of basis in savings assets)

20 and section 73 (relating to business entities and basis in

21 business entities), the taxpayer’s adjusted basis on Janu22 ary 1, 1996, in an asset acquired before that date, shall

23 be its adjusted basis as of December 31, 1995, as deter24 mined under the Internal Revenue Code of 1986.
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•S 722 IS

1 ‘‘(c) EFFECT OF TREATING ASSET PURCHASE AS

2 SAVINGS.—If the purchase of a savings asset is treated

3 in whole or part as an addition to savings, the taxpayer

4 shall have no basis in the amount so treated.

5 ‘‘SEC. 73. BASIS IN BUSINESS ENTITIES.

6 ‘‘(a) PARTNERSHIP INTEREST.—

7 ‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A

8 partner’s basis in a partnership interest as of Janu9 ary 1, 1996, equals—

10 ‘‘(A) the partner’s basis in the partnership

11 as of the end of the taxable year ending on De12 cember 31, 1995, minus

13 ‘‘(B) the amount of the partner’s share of

14 the indebtedness of the partnership taken into

15 account in determining such basis.

16 ‘‘(2) NEGATIVE BASIS.—If the amount deter17 mined under paragraph (1) is negative, the taxpayer

18 has a negative basis in the partnership and such

19 negative basis shall increase the gain on the sale or

20 disposition of the partnership interest (except to the

21 extent such negative basis is taken into account in

22 determining the transition basis deduction).

23 ‘‘(3) ADJUSTMENT TO BASIS.—

24 ‘‘(A) IN GENERAL.—A partner shall have

25 no basis in a partnership formed on or after
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•S 722 IS

1 January 1, 1996, and shall not adjust his basis

2 in any partnership interest after such date by

3 reason of any—

4 ‘‘(i) contribution to the partnership,

5 ‘‘(ii) distribution from the partner6 ship, or

7 ‘‘(iii) any change in the partner’s

8 share of the partnership’s indebtedness.

9 ‘‘(B) EXCEPTIONS.—A partner shall have

10 basis or an addition to basis resulting from—

11 ‘‘(i) contributions of cash or land to a

12 land company (as provided in section 114),

13 or

14 ‘‘(ii) a contribution of personal-use

15 property to a partnership (as provided in

16 section 111).

17 ‘‘(4) PARTNERSHIP.—For purposes of this sub18 section, ‘partnership’ includes a corporation that was

19 treated as an S corporation under such Code.

20 ‘‘(b) PROPRIETORSHIP.—

21 ‘‘(1) OLD PROPRIETORSHIP.—A proprietor’s

22 basis in any business activity conducted before Janu23 ary 1, 1996, which is treated as a business activity

24 as of such date equals—
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•S 722 IS

1 ‘‘(A) the proprietor’s adjusted basis in the

2 assets of such business entity as of the end of

3 the taxable year ending on December 31, 1995,

4 minus

5 ‘‘(B) the balance of any indebtedness the

6 interest on which the proprietor had treated as

7 business interest under section 163(h)(2)(A) of

8 the Internal Revenue Code of 1986.

9 ‘‘(2) NEGATIVE BASIS.—If the amount deter10 mined under paragraph (1) is negative, the propri11 etor has a negative basis in the proprietorship and

12 such negative basis shall increase the gain on the

13 sale or disposition of the entity (except to the extent

14 such negative basis is taken into account in deter15 mining the transition basis deduction).

16 ‘‘(3) ADJUSTMENT TO BASIS.—

17 ‘‘(A) IN GENERAL.—A taxpayer shall have

18 no basis in a business entity (as defined in sec19 tion 151) formed on or after January 1, 1996,

20 and shall not adjust his basis in any such entity

21 by reason of any—

22 ‘‘(i) contribution to the business en23 tity, or

24 ‘‘(ii) distribution from the business

25 entity.
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•S 722 IS

1 ‘‘(B) EXCEPTIONS.—A proprietor shall

2 have basis or an addition to basis resulting

3 from—

4 ‘‘(i) contributions of cash or land to a

5 land company (as provided in section 114),

6 ‘‘(ii) a contribution of personal-use

7 property to a business entity (as provided

8 in section 111).

9 ‘‘(4) PROPRIETORSHIP.—‘Proprietorship’ in10 cludes—

11 ‘‘(A) any family business that is not a

12 partnership, and

13 ‘‘(B) any business activity conducted by a

14 taxpayer other than as an employee if such ac15 tivity constitutes a business entity.

16 ‘‘(c) ANTI-AVOIDANCE RULE.—If partnership dis17 tributions to an individual partner in its taxable year or

18 taxable years ending in 1995 exceeds the partner’s dis19 tributive share of income for such period, the amount of

20 such excess distribution shall be treated as a cash distribu21 tion to the partner on January 1, 1996, and shall not re22 duce the partner’s basis in his partnership interest.

23 ‘‘SEC. 74. GRATUITOUS TRANSFERS.

24 ‘‘(a) IN GENERAL.—If after December 31, 1995, a

25 taxpayer receives a savings asset or any other property
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1 by gift, inheritance, or other gratuitous transfer, the tax2 payer’s basis in the property shall be the lesser of—

3 ‘‘(1) the fair market value of the property at

4 the time of transfer, or

5 ‘‘(2) the transferee’s basis in the property at

6 the time of transfer.

7 ‘‘(b) PROOF REQUIRED.—A taxpayer’s basis in a sav8 ings asset received by gift, inheritance, or other gratuitous

9 transfer shall be presumed to be zero unless the taxpayer

10 can demonstrate to the satisfaction of the Secretary the

11 basis claimed by the taxpayer.

12 ‘‘SEC. 75. TRANSACTIONS INVOLVING BUSINESS ENTITIES.

13 ‘‘(a) CASH CAPITAL CONTRIBUTIONS, BUSINESS IN14 TERESTS ACQUIRED.—

15 ‘‘(1) A taxpayer shall have no basis by reason

16 of cash contributed to the capital of a business on

17 or after January 1, 1996, except as provided in sec18 tion 114 (relating to land companies). A contribu19 tion of property acquired for purposes of contribu20 tion shall be treated as a contribution of cash equal

21 to the amount of property contributed.

22 ‘‘(2) A taxpayer shall have no basis in stock or

23 other interest in a business entity purchased on or

24 after January 1, 1996, except as provided in section
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•S 722 IS

1 77 (relating to certain exchanges) or in the case of

2 an acquisition of a land company.

3 ‘‘(b) CONTRIBUTIONS OF PROPERTY.—

4 ‘‘(1) IN GENERAL.—If a taxpayer contributes

5 personal-use property to a business entity the tax6 payer’s basis in his interest in the entity will in7 crease by the lesser of—

8 ‘‘(A) the fair market value of the property

9 contributed, or

10 ‘‘(B) the basis of the property contributed.

11 ‘‘(2) PERSONAL-USE PROPERTY.—‘Personal-use

12 property’ shall have the meaning given to it in sec13 tion 111(c).

14 ‘‘(3) NO LOSS.—A taxpayer may not increase

15 his general basis account by the amount of any ‘loss’

16 attributable to basis obtained through the contribu17 tion of personal-use property.

18 ‘‘(c) BASIS IN BUSINESS DIVISIONS.—In the case of

19 a spinoff, split-off, or split-up of a business entity in which

20 a taxpayer has basis, the taxpayer’s basis in the original

21 business entity shall be allocated among the new and sur22 viving entities in accordance with the relative fair market

23 values of the taxpayer’s interests in those entities. If inter24 ests in the entities are publicly traded, fair market values

25 shall be based on public trading prices. In other cases,
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•S 722 IS

1 the Secretary shall accept any reasonable allocation made

2 by the taxpayer if the taxpayer notifies the Secretary of

3 the allocation in an attachment to its tax return for the

4 taxable year of the transaction.

5 ‘‘(d) DISTRIBUTIONS.—

6 ‘‘(1) IN GENERAL.—In the case of any distribu7 tion of property by a business entity to a taxpayer,

8 the taxpayer shall have a withdrawal equal to the

9 amount of—

10 ‘‘(A) cash received, and

11 ‘‘(B) the fair market value of property re12 ceived and not converted to business use.

13 ‘‘(2) SAVINGS ASSETS RECEIVED.—The tax14 payer may not treat as an addition to savings any

15 savings asset received from a business entity in a

16 distribution or any business property received and

17 contributed to another business entity.

18 ‘‘(3) EFFECT OF BASIS.—

19 ‘‘(A) DISTRIBUTIONS OTHER THAN IN

20 COMPLETE LIQUIDATION.—Except as provided

21 in paragraph (4), in the case of a dividend or

22 other distribution (including any distribution

23 that would be treated as a return of capital

24 under general business law principles or the In25 ternal Revenue Code of 1986) by a business en-
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•S 722 IS

1 tity, a taxpayer’s basis in such entity shall not

2 be applied to any amounts or property received

3 in the distribution.

4 ‘‘(B) COMPLETE LIQUIDATION.—In the

5 case of a distribution in complete liquidation of

6 a business entity, a taxpayer’s basis in the en7 tity shall be allocated among the cash, savings

8 assets, and property received in the liquidation.

9 Basis allocated to amounts treated as with10 drawn shall be applied in determining the

11 amount of the taxable withdrawal.

12 ‘‘(4) DISTRIBUTION OF PERSONAL-USE PROP13 ERTY.—In the case of the distribution of personal14 use property by a business entity to the taxpayer

15 who contributed such property to the business entity

16 on or after January 1, 1996, the taxpayer’s basis in

17 such property shall equal the lesser of the taxpayer’s

18 basis in the property at the time of contribution or

19 the taxpayer’s basis in the business entity. Upon the

20 distribution, the taxpayer’s basis in the business en21 tity shall be reduced by the basis allocated to the

22 distributed personal-use property.

23 ‘‘SEC. 76. ROLLOVER ON RESIDENCE SALE.

24 ‘‘(a) NONRECOGNITION OF GAIN.—If property (in

25 this section called ‘old residence’) used by the taxpayer
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•S 722 IS

1 as his principal residence is sold by him and, within a pe2 riod beginning 2 years before the date of such sale and

3 ending 2 years after such date, property (in this section

4 called ‘new residence’) is purchased and used by the tax5 payer as his principal residence, gain (if any) from such

6 sale shall be recognized only to the extent that the tax7 payer’s adjusted sales price (as defined in subsection (b))

8 of the old residence exceeds the taxpayer’s cost of purchas9 ing the new residence.

10 ‘‘(b) ADJUSTED SALES PRICE DEFINED.—

11 ‘‘(1) IN GENERAL.—For purposes of this sec12 tion, the ‘adjusted sales price’ means the amount re13 alized, reduced by the aggregate of the expenses for

14 work performed on the old residence in order to as15 sist in its sale.

16 ‘‘(2) LIMITATIONS.—The reduction provided in

17 paragraph (1) applies only to expenses—

18 ‘‘(A) for work performed during the 90-day

19 period ending on the day on which the contract

20 to sell the old residence is entered into;

21 ‘‘(B) which are paid on or before the 30th

22 day after the date of the sale of the old resi23 dence; and

24 ‘‘(C) which are—
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•S 722 IS

1 ‘‘(i) not allowable as deductions in

2 computing taxable income, and

3 ‘‘(ii) not taken into account in com4 puting the amount realized from the sale

5 of the old residence.

6 ‘‘(c) RULES FOR APPLICATION OF SECTION.—For

7 purposes of this section:

8 ‘‘(1) An exchange by the taxpayer of his resi9 dence for other property shall be treated as a sale

10 of such residence, and the acquisition of a residence

11 on the exchange of property shall be treated as a

12 purchase of such residence.

13 ‘‘(2) A residence any part of which was con14 structed or reconstructed by the taxpayer shall be

15 treated as purchased by the taxpayer. In determin16 ing the taxpayer’s cost of purchasing a residence,

17 there shall be included only so much of his cost as

18 is attributable to the acquisition, construction, re19 construction, and improvements made which are

20 properly chargeable to capital account, during the

21 period specified in subsection (a).

22 ‘‘(3) If a residence is purchased by the taxpayer

23 before the date of his sale of the old residence, the

24 purchased residence shall not be treated as his new
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•S 722 IS

1 residence if sold or otherwise disposed of by him be2 fore the date of the sale of the old residence.

3 ‘‘(4) If the taxpayer, during the period de4 scribed in subsection (a), purchases more than 1 res5 idence which is used by him as his principal resi6 dence at some time within 2 years after the date of

7 the sale of the old residence, only the last of such

8 residences so used by him after the date of such sale

9 shall constitute the new residence. If a principal res10 idence is sold in a sale to which subsection (d)(2)

11 applies within 2 years after the sale of the old resi12 dence, for purposes of applying the preceding sen13 tence with respect to the old residence, the principal

14 residence so sold shall be treated as the last resi15 dence used during such 2-year period.

16 ‘‘(d) LIMITATION.—

17 ‘‘(1) IN GENERAL.—Subsection (a) shall not

18 apply with respect to the sale of the taxpayer’s resi19 dence if within 2 years before the date of such sale

20 the taxpayer sold at a gain other property used by

21 him as his principal residence, and any part of such

22 gain was not recognized by reason of subsection (a).

23 ‘‘(2) SUBSEQUENT SALE CONNECTED WITH

24 COMMENCING WORK AT NEW PLACE.—Paragraph (1)

25 shall not apply with respect to the sale of the tax-
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•S 722 IS

1 payer’s residence if such sale was in connection with

2 the commencement of work by the taxpayer as an

3 employee or as a self-employed individual at a new

4 principal place of work.

5 ‘‘(e) BASIS OF NEW RESIDENCE.—Where the pur6 chase of a new residence results, under subsection (a), in

7 the nonrecognition of gain on the sale of an old residence,

8 in determining the adjusted basis of the new residence as

9 of any time following the sale of the old residence, the

10 adjustments to basis shall include a reduction by an

11 amount equal to the amount of the gain not so recognized

12 on the sale of the old residence. For this purpose, the

13 amount of the gain not so recognized on the sale of the

14 old residence includes only so much of such gain as is not

15 recognized by reason of the cost, up to such time, of pur16 chasing the new residence.

17 ‘‘(f) TENANT-STOCKHOLDER IN A COOPERATIVE

18 HOUSING CORPORATION.—For purposes of this chapter,

19 references to property used by the taxpayer as his prin20 cipal residence, and references to the residence of a tax21 payer, shall include stock held by a tenant-stockholder in

22 a cooperative housing corporation if—

23 ‘‘(1) in the case of stock sold, the house or

24 apartment which the taxpayer was entitled to occupy
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•S 722 IS

1 as such stockholder was used by him as his principal

2 residence, and

3 ‘‘(2) in the case of stock purchased, the tax4 payer used as his principal residence the house or

5 apartment which he was entitled to occupy as such

6 stockholder.

7 ‘‘(g) HUSBAND AND WIFE.—If the taxpayer and his

8 spouse, in accordance with regulations which shall be pre9 scribed by the Secretary pursuant to this subsection, con10 sent to the application of paragraph (2) of this subsection,

11 then—

12 ‘‘(1) for purposes of this section—

13 ‘‘(A) the taxpayer’s adjusted sales price of

14 the old residence is the adjusted sales price (of

15 the taxpayer, or of the taxpayer and his spouse)

16 of the old residence, and

17 ‘‘(B) the taxpayer’s cost of purchasing the

18 new residence is the cost (to the taxpayer, his

19 spouse, or both) of purchasing the new resi20 dence (whether held by the taxpayer, his

21 spouse, or the taxpayer and his spouse); and

22 ‘‘(2) so much of the gain on the sale of the old

23 residence as is not recognized solely by reason of

24 this subsection, and so much of the adjustment

25 under subsection (e) to the basis of the new resi-
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•S 722 IS

1 dence as results solely from this subsection shall be

2 allocated between the taxpayer and his spouse as

3 provided in such regulations.

4 This subsection shall apply only if the old residence and

5 the new residence are each used by the taxpayer and his

6 spouse as their principal residence. In case the taxpayer

7 and his spouse do not consent to the application of para8 graph (2) of this subsection, then the recognition of gain

9 on the sale of the old residence shall be determined under

10 this section without regard to the rules provided in this

11 subsection. For purposes of this subsection, except to the

12 extent provided in regulations, in the case of an individual

13 who dies after the date of the sale of the old residence

14 and is married on the date of death, consent to the appli15 cation of paragraph (2) by such individual’s spouse and

16 use of the new residence as the principal residence of such

17 spouse shall be treated as consent and use by such individ18 ual.

19 ‘‘(h) MEMBERS OF ARMED FORCES.—

20 ‘‘(1) IN GENERAL.—The running of any period

21 of time specified in subsection (a) or (c) (other than

22 the 2 years referred to in subsection (c)(4)) shall be

23 suspended during any time that the taxpayer (or his

24 spouse if the old residence and the new residence are

25 each used by the taxpayer and his spouse as their
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•S 722 IS

1 principal residence) serves on extended active duty

2 with the Armed Forces of the United States after

3 the date of the sale of the old residence, except that

4 any such period of time as so suspended shall not

5 extend beyond the date 4 years after the date of the

6 sale of the old residence.

7 ‘‘(2) MEMBERS STATIONED OUTSIDE THE UNIT8 ED STATES OR REQUIRED TO RESIDE IN GOVERN9 MENT QUARTERS.—In the case of any taxpayer who,

10 during any period of time the running of which is

11 suspended by paragraph (1)—

12 ‘‘(A) is stationed outside of the United

13 States, or

14 ‘‘(B) after returning from a tour of duty

15 outside of the United States and pursuant to a

16 determination by the Secretary of Defense that

17 adequate off-base housing is not available at a

18 remote base site, is required to reside in on19 base Government quarters, any such period of

20 time as so suspended shall not expire before the

21 day which is 1 year after the last day described

22 in subparagraph (A) or (B), as the case may

23 be, except that any such period of time as so

24 suspended shall not extend beyond the date
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•S 722 IS

1 which is 8 years after the date of the sale of the

2 old residence.

3 ‘‘(3) EXTENDED ACTIVE DUTY DEFINED.—For

4 purposes of this subsection, ‘extended active duty’

5 means any period of active duty pursuant to a call

6 or order to such duty for a period in excess of 90

7 days or for an indefinite period.

8 ‘‘(i) SPECIAL RULE FOR CONDEMNATION.—In the

9 case of the seizure, requisition, or condemnation of a resi10 dence, or the sale or exchange of a residence under threat

11 or imminence thereof, the provisions of this section shall

12 be applicable if the taxpayer so elects. If such election is

13 made, such seizure, requisition, or condemnation shall be

14 treated as the sale of the residence. Such election shall

15 be made at such time and in such manner as the Secretary

16 shall prescribe by regulations.

17 ‘‘(j) STATUTE OF LIMITATIONS.—If the taxpayer

18 during a taxable year sells at a gain property used by him

19 as his principal residence, then—

20 ‘‘(1) the statutory period for the assessment of

21 any deficiency attributable to any part of such gain

22 shall not expire before the expiration of 3 years from

23 the date the Secretary is notified by the taxpayer (in

24 such manner as the Secretary may by regulations

25 prescribe) of—
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•S 722 IS

1 ‘‘(A) the taxpayer’s cost of purchasing the

2 new residence which the taxpayer claims results

3 in nonrecognition of any part of such gain,

4 ‘‘(B) the taxpayer’s intention not to pur5 chase a new residence within the period speci6 fied in subsection (a), or

7 ‘‘(C) a failure to make such purchase with8 in such period; and

9 ‘‘(2) such deficiency may be assessed before the

10 expiration of such 3-year period notwithstanding the

11 provisions of any other law or rule of law which

12 would otherwise prevent such assessment.

13 ‘‘(k) INDIVIDUAL WHOSE TAX HOME IS OUTSIDE

14 THE UNITED STATES.—The running of any period of time

15 specified in subsection (a) or (c) (other than the 2 years

16 referred to in subsection (c)(4)) shall be suspended during

17 any time that the taxpayer (or his spouse if the old resi18 dence and the new residence are each used by the taxpayer

19 and his spouse as their principal residence) has a tax home

20 outside the United States after the date of the sale of the

21 old residence; except that any such period of time as so

22 suspended shall not extend beyond the date 4 years after

23 the date of the sale of the old residence.
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•S 722 IS

1 ‘‘SEC. 77. OTHER NONRECOGNITION TRANSACTIONS.

2 ‘‘(a) INVOLUNTARY CONVERSIONS.—Under regula3 tions prescribed by the Secretary, the involuntary conver4 sion of property (other than savings assets) held by an

5 individual shall not result in gross income to the individual

6 to the extent that—

7 ‘‘(1) the individual receives property in ex8 change for the involuntarily converted property, or

9 ‘‘(2) the individual receives cash and applies the

10 cash to acquire substitute property (other than sav11 ings assets) for the converted property.

12 To the extent that income is not recognized under this

13 subsection, the taxpayer’s basis in the converted property

14 shall carry over to the new property and any basis in ex15 cess of the cost of new property shall be applied to reduce

16 the amount of gross income recognized with respect to

17 cash received in excess of the cost of new property. This

18 subsection shall apply to proceeds from insurance proceeds

19 described in section 4(b)(13) (relating to exclusions from

20 income).

21 ‘‘(b) CERTAIN REACQUISITIONS OF REAL PROP22 ERTY.—Under regulations prescribed by the Secretary,

23 gross income shall not be recognized in the case of certain

24 reacquisitions of real property. The regulations shall adopt

25 principles similar to those under section 1038 of the Inter26 nal Revenue Code of 1986.
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•S 722 IS

1 ‘‘(c) TRANSFERS OF PROPERTY BETWEEN SPOUSES

2 OR INCIDENT TO DIVORCE.—

3 ‘‘(1) GENERAL RULE.—Gross income shall not

4 be recognized on the transfer of property from an

5 individual to (or in trust for the benefit of)—

6 ‘‘(A) a spouse, or

7 ‘‘(B) a former spouse, but only if the

8 transfer is incident to divorce.

9 ‘‘(2) TRANSFER TREATED AS A GIFT.—Any

10 transfer described in paragraph (1) shall be treated

11 as a gift.

12 ‘‘SEC. 78. LOSSES.

13 ‘‘(a) SAVINGS ASSETS.—If the basis of a savings

14 asset sold or otherwise disposed of by a taxpayer exceeds

15 the amount realized from such asset—

16 ‘‘(1) the taxpayer’s general basis account shall

17 be increased by such excess as of the time of the

18 sale or disposition in accordance with section

19 57(b)(3); and

20 ‘‘(2) the taxpayer may not deduct the loss in

21 computing taxable income (except to the extent it is

22 taken into account as part of the general basis ac23 count).
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1 ‘‘(b) OTHER ASSETS.—No amount shall be deducted

2 in determining gross income in the case of the sale or dis3 position of an asset other than a savings asset.

4 ‘‘(c) DISPOSITION OF SAVINGS ASSET.—For pur5 poses of this section, a savings asset that becomes totally

6 worthless shall be treated as disposed of when it becomes

7 totally worthless.

8 ‘‘Subchapter D—Rules for Exclusions from

9 Gross Income

‘‘Sec. 91. Interest on tax-exempt bonds.

‘‘Sec. 92. Combat pay.

‘‘Sec. 93. Qualified military benefits.

‘‘Sec. 94. Qualified foster care payments.

‘‘Sec. 95. Compensation for injuries or sickness.

‘‘Sec. 96. Meals or lodging furnished for the convenience of the employer.

‘‘Sec. 97. Certain fringe benefits.

10 ‘‘SEC. 91. INTEREST ON TAX-EXEMPT BONDS.

11 ‘‘(a) EXCLUSION.—Except as provided in subsection

12 (b), gross income does not include interest on any State

13 or local bond.

14 ‘‘(b) EXCEPTIONS.—Subsection (a) shall not apply

15 to—

16 ‘‘(1) PRIVATE ACTIVITY BOND WHICH IS NOT A

17 QUALIFIED BOND.—Any private activity bond which

18 is not a qualified bond (within the meaning of para19 graph (3) of subsection (c)).

20 ‘‘(2) ARBITRAGE BOND.—Any arbitrage bond.
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•S 722 IS

1 ‘‘(3) BOND NOT IN REGISTERED FORM, ETC.—

2 Any bond unless such bond meets the applicable re3 quirements set forth in regulations.

4 ‘‘(c) DEFINITIONS.—For purposes of this section—

5 ‘‘(1) STATE OR LOCAL BOND.—‘State or local

6 bond’ means an obligation of a State or political

7 subdivision thereof.

8 ‘‘(2) STATE.—‘State’ includes the District of

9 Columbia and any possession of the United States.

10 ‘‘(3) QUALIFIED BOND.—‘Qualified bond’

11 means any private activity bond if—

12 ‘‘(A) IN GENERAL.—Such bond is—

13 ‘‘(i) an exempt facility bond,

14 ‘‘(ii) a qualified mortgage bond,

15 ‘‘(iii) a qualified veterans’ mortgage

16 bond,

17 ‘‘(iv) a qualified small issue bond,

18 ‘‘(v) a qualified student loan bond, or

19 ‘‘(vi) a qualified 253(c)(3) bond.

20 ‘‘(B) VOLUME CAP.—Such bond is issued

21 as part of an issue which meets the applicable

22 volume cap requirements set forth in regula23 tions.
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•S 722 IS

1 ‘‘(C) OTHER REQUIREMENTS.—Such bond

2 meets the applicable requirements set forth in

3 regulations.

4 ‘‘(d) REGULATIONS.—

5 ‘‘(1) STATUTORY REGULATIONS.—The Sec6 retary shall publish as regulations governing the ap7 plication of this section the text of part IV of sub8 chapter B of chapter 1 of the Internal Revenue Code

9 of 1986 (sections 141 through 149) with only such

10 changes as are required to conform cross references.

11 ‘‘(2) OTHER REGULATIONS.—The Secretary

12 shall have the authority to promulgate such other

13 regulations as he deems necessary or proper to im14 plement this section, except that no such regulations

15 shall conflict with the regulations mandated by para16 graph (1) except as provided in this subtitle.

17 ‘‘SEC. 92. COMBAT PAY.

18 ‘‘(a) ENLISTED PERSONNEL.—Gross income does not

19 include compensation received for active service as a mem20 ber below the grade of commissioned officer in the Armed

21 Forces of the United States for any month during any

22 part of which such member—

23 ‘‘(1) served in a combat zone, or

24 ‘‘(2) was hospitalized as a result of wounds, dis25 ease, or injury incurred while serving in a combat
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1 zone; but this paragraph shall not apply for any

2 month beginning more than 2 years after the date

3 of the termination of combatant activities in such

4 zone.

5 ‘‘(b) COMMISSIONED OFFICERS.—Gross income does

6 not include so much of the compensation as does not ex7 ceed $500 received for active service as a commissioned

8 officer in the Armed Forces of the United States for any

9 month during any part of which such officer—

10 ‘‘(1) served in a combat zone, or

11 ‘‘(2) was hospitalized as a result of wounds, dis12 ease, or injury incurred while serving in a combat

13 zone; but this paragraph shall not apply for any

14 month beginning more than 2 years after the date

15 of the termination of combatant activities in such

16 zone.

17 ‘‘(c) DEFINITIONS.—For purposes of this section—

18 ‘‘(1) ‘Commissioned officer’ does not include a

19 commissioned warrant officer.

20 ‘‘(2) ‘Combat zone’ means any area which the

21 President of the United States by Executive order

22 designates, for purposes of this section or cor23 responding provisions of prior income tax laws, an

24 area in which Armed Forces of the United States
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•S 722 IS

1 are or have (after June 24, 1950) engaged in com2 bat.

3 ‘‘(3) Service is performed in a combat zone only

4 if performed on or after the date designated by the

5 President by Executive order as the date of the com6 mencing of combatant activities in such zone, and on

7 or before the date designated by the President by

8 Executive order as the date of the termination of

9 combatant activities in such zone; except that June

10 25, 1950, shall be considered the date of the com11 mencing of combatant activities in the combat zone

12 designated in Executive Order No. 10195.

13 ‘‘(4) The term ‘compensation’ does not include

14 pensions and retirement pay.

15 ‘‘SEC. 93. QUALIFIED MILITARY BENEFIT.

16 ‘‘(a) IN GENERAL.—Gross income does not include

17 any qualified military benefit. ‘Qualified military benefit’

18 means any allowance or in-kind benefit (other than per19 sonal use of a vehicle) which—

20 ‘‘(1) is received by any member or former mem21 ber of the uniformed service of the United States or

22 any dependent of such member by reason of such

23 member’s status or service as a member of such uni24 formed services, and
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•S 722 IS

1 ‘‘(2) was excludable from gross income on Sep2 tember 9, 1986, under any provision of law, regula3 tion, or administrative practice which was in effect

4 on such date (other than a provision of this title).

5 ‘‘(b) NO OTHER BENEFIT TO BE EXCLUDABLE AS

6 PROVIDED BY THIS TITLE.—Notwithstanding any other

7 provision of law, no benefit shall be treated as a qualified

8 military benefit unless such benefit—

9 ‘‘(1) is a benefit described in subsection (a), or

10 ‘‘(2) is excludable from gross income under this

11 title without regard to any provision of law which is

12 not contained in this title and which is not contained

13 in a revenue Act.

14 ‘‘(c) LIMITATIONS ON MODIFICATIONS.—

15 ‘‘(1) IN GENERAL.—Except as provided in para16 graph (2), no modification or adjustment of any

17 qualified military benefit after September 9, 1986,

18 shall be taken into account.

19 ‘‘(2) EXCEPTION FOR CERTAIN ADJUSTMENTS

20 TO CASH BENEFITS.—Paragraph (1) shall not apply

21 to any adjustment to any qualified military benefit

22 payable in cash which—

23 ‘‘(A) is pursuant to a provision of law or

24 regulation (as in effect on September 9, 1986),

25 and
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•S 722 IS

1 ‘‘(B) is determined by reference to any

2 fluctuation in cost, price, currency, or other

3 similar index.

4 ‘‘SEC. 94. QUALIFIED FOSTER CARE PAYMENTS.

5 ‘‘(a) IN GENERAL.—Gross income does not include

6 any qualified foster care payment.

7 ‘‘(b) QUALIFIED FOSTER CARE PAYMENT DE8 FINED.—

9 ‘‘(1) IN GENERAL.—‘Qualified foster care pay10 ment’ means any amount—

11 ‘‘(A) which is paid by a state or political

12 subdivision thereof or by a placement agency

13 which is described in section 253(c)(3) and ex14 empt from tax under section 253(a), and

15 ‘‘(B) which is—

16 ‘‘(i) paid to the foster care provider

17 for caring for a qualified foster individual

18 in the foster care provider’s home, or

19 ‘‘(ii) a difficulty of care payment.

20 ‘‘(2) QUALIFIED FOSTER INDIVIDUAL.—‘Quali21 fied foster individual’ means any individual who is

22 living in a foster family home in which such individ23 ual was placed by—

24 ‘‘(A) an agency of a State or a political

25 subdivision thereof, or
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•S 722 IS

1 ‘‘(B) in the case of an individual who has

2 not attained age 19, an organization which is li3 censed by a State (or political subdivision there4 of) as a placement agency and which is de5 scribed in section 253(c)(3) and exempt from

6 tax under section 253(a).

7 ‘‘(3) LIMITATION BASED ON NUMBER OF INDI8 VIDUALS OVER THE AGE OF 18.—In the case of any

9 foster home in which there is a qualified foster care

10 individual who has attained age 19, foster care pay11 ments (other than difficulty of care payments) for

12 any period to which such payments relate shall not

13 be excludable from gross income under subsection

14 (a) to the extent such payments are made for more

15 than 5 such qualified foster individuals.

16 ‘‘(c) DIFFICULTY OF CARE PAYMENTS.—For pur17 poses of this section—

18 ‘‘(1) DIFFICULTY OF CARE PAYMENTS.—‘Dif19 ficulty of care payments’ means payments to individ20 uals which are not described in subsection

21 (b)(1)(B)(i), and which—

22 ‘‘(A) are compensation for providing the

23 additional care of a qualified foster individual

24 which is—
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•S 722 IS

1 ‘‘(i) required by reason of a physical,

2 mental, or emotional handicap of such in3 dividual with respect to which the State

4 has determined that there is a need for ad5 ditional compensation, and

6 ‘‘(ii) provided in the home of the fos7 ter care provider, and

8 ‘‘(B) are designated by the payor as com9 pensation described in subparagraph (A).

10 ‘‘(2) LIMITATION BASED ON NUMBER OF INDI11 VIDUALS.—In the case of any foster home, difficulty

12 of care payments for any period to which such pay13 ments relate shall not be excludable from gross in14 come under subsection (a) to the extent such pay15 ments are made for more than—

16 ‘‘(A) 10 qualified foster individuals who

17 have not attained age 19, and

18 ‘‘(B) 5 qualified foster individuals not de19 scribed in subparagraph (A).

20 ‘‘SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS.

21 ‘‘(a) IN GENERAL.—Gross income does not include—

22 ‘‘(1) amounts received under workers’ com23 pensation acts as compensation for personal injuries

24 or sickness;
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1 ‘‘(2) the amount of any damages received

2 (whether by suit or agreement and whether as lump

3 sums or as periodic payments) on account of per4 sonal injuries or sickness;

5 ‘‘(3) amounts received through accident or

6 health insurance for personal injuries or sickness,

7 other than amounts received by an employee to the

8 extent such amounts—

9 ‘‘(A) are attributable to contributions by

10 the employer which were not includible in the

11 gross income of the employee, or

12 ‘‘(B) are paid by the employer;

13 ‘‘(4) amounts received as pension, annuity, or

14 similar allowance for personal injuries or sickness re15 sulting from active service in the armed forces of

16 any country or in the Coast and Geodetic Survey or

17 the Public Health Service, or as a disability annuity

18 payable under the provisions of section 808 of the

19 Foreign Service Act of 1980; and

20 ‘‘(5) amounts received by an individual as dis21 ability income attributable to injuries incurred as a

22 direct result of a violent attack which the Secretary

23 of State determines to be a terrorist attack and

24 which occurred while such individual was an em-
122

•S 722 IS

1 ployee of the United States engaged in the perform2 ance of his official duties outside the United States.

3 Paragraph (2) shall not apply to any punitive damages

4 in connection with a case not involving physical injury or

5 physical sickness.

6 ‘‘(b) TERMINATION OF APPLICATION OF SUBSECTION

7 (a)(4) IN CERTAIN CASES.—

8 ‘‘(1) IN GENERAL.—Subsection (a)(4) shall not

9 apply in the case of an individual who is not de10 scribed in paragraph (2).

11 ‘‘(2) INDIVIDUALS TO WHOM SUBSECTION

12 (a)(4) CONTINUES TO APPLY.—An individual is de13 scribed in this paragraph if—

14 ‘‘(A) on or before September 24, 1975, he

15 was entitled to receive any amount described in

16 subsection (a)(4),

17 ‘‘(B) on September 24, 1975, he was a

18 member of any organization (or reserve compo19 nent thereof) referred to in subsection (a)(4) or

20 under a binding written commitment to become

21 such a member,

22 ‘‘(C) he receives an amount described in

23 subsection (a)(4) by reason of a combat-related

24 injury, or
123

•S 722 IS

1 ‘‘(D) on application therefore, he would be

2 entitled to receive disability compensation from

3 the Veterans’ Administration.

4 ‘‘(3) SPECIAL RULES FOR COMBAT-RELATED IN5 JURIES.—For purposes of this subsection, the term

6 ‘combat-related injury’ means personal injury or

7 sickness—

8 ‘‘(A) which is incurred—

9 ‘‘(i) as a direct result of armed con10 flict,

11 ‘‘(ii) while engaged in extra hazardous

12 service, or

13 ‘‘(iii) under conditions simulating war;

14 or

15 ‘‘(B) which is caused by an instrumentality

16 of war.

17 In the case of an individual who is not described in

18 subparagraph (A) or (B) of paragraph (2), except as

19 provided in paragraph (4), the only amounts taken

20 into account under subsection (a)(4) shall be the

21 amounts which he receives by reason of a combat22 related injury.

23 ‘‘(4) AMOUNT EXCLUDED TO BE NOT LESS

24 THAN VETERANS’ DISABILITY COMPENSATION.—In

25 the case of any individual described in paragraph
124

•S 722 IS

1 (2), the amounts excludable under subsection (a)(4)

2 for any period with respect to any individual shall

3 not be less than the maximum amount which such

4 individual, on application therefor, would be entitled

5 to receive as disability compensation from the Veter6 ans’ Administration.

7 ‘‘(c) CROSS REFERENCES.—

8 ‘‘(1) For exclusion from employee’s gross in9 come of amounts received under accident and health

10 plans, see section 4.

11 ‘‘(2) For exclusion of part of disability retire12 ment pay from the application of subsection (a)(4)

13 of this section, see section 1403 of title 10, United

14 States Code (relating to career compensation laws).

15 ‘‘SEC. 96. MEALS OR LODGING FURNISHED FOR THE CON16 VENIENCE OF THE EMPLOYER.

17 ‘‘(a) MEALS AND LODGING FURNISHED TO EM18 PLOYEE, HIS SPOUSE, AND HIS DEPENDENTS, PURSU19 ANT TO EMPLOYMENT.—There shall be excluded from

20 gross income of an employee the value of any meals or

21 lodging furnished to him, his spouse, or any of his depend22 ents by or on behalf of his employer for the convenience

23 of the employer, but only if—

24 ‘‘(1) in the case of meals, the meals are fur25 nished on the business premises of the employer, or
125

•S 722 IS

1 ‘‘(2) in the case of lodging, the employee is re2 quired to accept such lodging on the business prem3 ises of his employer as a condition of his employ4 ment.

5 ‘‘(b) SPECIAL RULES.—For the purposes of sub6 section (a)—

7 ‘‘(1) PROVISIONS OF EMPLOYMENT CONTRACT

8 OR STATE STATUTE NOT TO BE DETERMINATIVE.—

9 In determining whether meals or lodging are fur10 nished for the convenience of the employer, the pro11 visions of an employment contract or of a State stat12 ute fixing terms of employment shall not be deter13 minative of whether the meals or lodging are in14 tended as compensation.

15 ‘‘(2) CERTAIN FACTORS NOT TAKEN INTO AC16 COUNT WITH RESPECT TO MEALS.—In determining

17 whether meals are furnished for the convenience of

18 the employer, the fact that a charge is made for

19 such meals, and the fact that the employee may ac20 cept or decline such meals, shall not be taken into

21 account.

22 ‘‘(3) CERTAIN FIXED CHARGES FOR MEALS.—

23 ‘‘(A) IN GENERAL.—If—
126

•S 722 IS

1 ‘‘(i) an employee is required to pay on

2 a periodic basis a fixed charge for his

3 meals, and

4 ‘‘(ii) such meals are furnished by the

5 employer for the convenience of the em6 ployer,

7 there shall be excluded from the employee’s

8 gross income an amount equal to such fixed

9 charge.

10 ‘‘(B) APPLICATION OF SUBPARAGRAPH

11 (a).—Subparagraph (A) shall apply—

12 ‘‘(i) whether the employee pays the

13 fixed charge out of his stated compensation

14 or out of his own funds, and

15 ‘‘(ii) only if the employee is required

16 to make the payment whether he accepts

17 or declines the meals.

18 ‘‘(c) EMPLOYEES LIVING IN CERTAIN CAMPS.—

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

20 who is furnished lodging in a camp located in a for21 eign country by or on behalf of his employer, such

22 camp shall be considered to be part of the business

23 premises of the employer.

24 ‘‘(2) CAMP.—For purposes of this section, a

25 camp constitutes lodging which is—
127

•S 722 IS

1 ‘‘(A) provided by or on behalf of the em2 ployer for the convenience of the employer be3 cause the place at which such individual renders

4 services is in a remote area where satisfactory

5 housing is not available on the open market,

6 ‘‘(B) located, as near as practicable, in the

7 vicinity of the place at which such individual

8 renders services, and

9 ‘‘(C) furnished in a common area (or en10 clave) which is not available to the public and

11 which normally accommodates 10 or more em12 ployees.

13 ‘‘(d) LODGING FURNISHED BY CERTAIN EDU14 CATIONAL INSTITUTIONS TO EMPLOYEES.—

15 ‘‘(1) IN GENERAL.—In the case of an employee

16 of an educational institution, gross income shall not

17 include the value of qualified campus lodging fur18 nished to such employee during the taxable year.

19 ‘‘(2) EXCEPTION IN CASES OF INADEQUATE

20 RENT.—Paragraph (1) shall not apply to the extent

21 of the excess of—

22 ‘‘(A) the lesser of—

23 ‘‘(i) 5 percent of the appraised value

24 of the qualified campus lodging, or
128

•S 722 IS

1 ‘‘(ii) the average of the rentals paid

2 by individuals (other than employees or

3 students of the educational institution)

4 during such calendar year for lodging pro5 vided by the educational institution which

6 is comparable to the qualified campus lodg7 ing provided to the employee, over

8 ‘‘(B) the rent paid by the employee for the

9 qualified campus lodging during such calendar

10 year.

11 The appraised value under subparagraph (A)(i) shall

12 be determined as of the close of the calendar year

13 in which the taxable year begins, or, in the case of

14 a rental period not greater than 1 year, at any time

15 during the calendar year in which such period be16 gins.

17 ‘‘(3) QUALIFIED CAMPUS LODGING.—For pur18 poses of this subsection, the term ‘qualified campus

19 lodging’ means lodging to which subsection (a) does

20 not apply and which is—

21 ‘‘(A) located on, or in the proximity of, a

22 campus of the educational institution, and

23 ‘‘(B) furnished to the employee, his spouse,

24 and any of his dependents by or on behalf of

25 such institution for use as a residence.
129

•S 722 IS

1 ‘‘(4) EDUCATIONAL INSTITUTION.—For pur2 poses of this paragraph, the term ‘educational insti3 tution’ means an institution described in section

4 301(b)(1)(A)(ii).

5 ‘‘SEC. 97. CERTAIN FRINGE BENEFITS.

6 ‘‘(a) PURPOSE.—This section includes definitions and

7 rules applicable to the exclusion from gross income for cer8 tain fringe benefits.

9 ‘‘(b) NO-ADDITIONAL-COST SERVICE DEFINED.—

10 ‘No-additional-cost service’ means any service provided by

11 an employer to an employee for use by such employee if—

12 ‘‘(1) such service is offered for sale to cus13 tomers in the ordinary course of the line of business

14 of the employer in which the employee is performing

15 services, and

16 ‘‘(2) the employer incurs no substantial addi17 tional cost (including forgone revenue) in providing

18 such service to the employee (determined without re19 gard to any amount paid by the employee for such

20 service).

21 ‘‘(c) QUALIFIED EMPLOYEE DISCOUNT DEFINED.—

22 ‘‘(1) QUALIFIED EMPLOYEE DISCOUNT.—The

23 term ‘qualified employee discount’ means any em24 ployee discount with respect to qualified property or
130

•S 722 IS

1 services to the extent such discount does not ex2 ceed—

3 ‘‘(A) in the case of property, the gross

4 profit percentage of the price at which the prop5 erty is being offered by the employer to cus6 tomers, or

7 ‘‘(B) in the case of services, 20 percent of

8 the price at which the services are being offered

9 by the employer to customers.

10 ‘‘(2) GROSS PROFIT PERCENTAGE.—

11 ‘‘(A) IN GENERAL.—‘Gross profit percent12 age’ means the percent which—

13 ‘‘(i) the excess of the aggregate sales

14 price of property sold by the employer to

15 customers over the aggregate cost of such

16 property to the employer, is of

17 ‘‘(ii) the aggregate sales price of such

18 property.

19 ‘‘(B) DETERMINATION OF GROSS PROFIT

20 PERCENTAGE.—Gross profit percentage shall be

21 determined on the basis of—

22 ‘‘(i) all property offered to customers

23 in the ordinary course of the line of busi24 ness of the employer in which the employee

25 is performing services (or a reasonable
131

•S 722 IS

1 classification of property selected by the

2 employer), and

3 ‘‘(ii) the employer’s experience during

4 a representative period.

5 ‘‘(3) EMPLOYEE DISCOUNT DEFINED.—‘Em6 ployee discount’ means the amount by which—

7 ‘‘(A) the price at which the property or

8 services are provided by the employer to an em9 ployee for use by such employee, is less than

10 ‘‘(B) the price at which such property or

11 services are being offered by the employer to

12 customers.

13 ‘‘(4) QUALIFIED PROPERTY OR SERVICES.—

14 ‘Qualified property or services’ means any property

15 (other than real property and other than personal

16 property of a kind held for investment) or services

17 which are offered for sale to customers in the ordi18 nary course of the line of business of the employer

19 in which the employee is performing services.

20 ‘‘(d) DE MINIMIS FRINGE DEFINED.—

21 ‘‘(1) IN GENERAL.—‘De minimis fringe’ means

22 any property or service the value of which is (after

23 taking into account the frequency with which similar

24 fringes are provided by the employer to the employ-
132

•S 722 IS

1 er’s employees) so small as to make accounting for

2 it unreasonable or administratively impracticable.

3 ‘‘(2) TREATMENT OF CERTAIN EATING FACILI4 TIES.— The operation by an employer of any eating

5 facility for employees shall be treated as a de

6 minimis fringe if—

7 ‘‘(A) such facility is located on or near the

8 business premises of the employer, and

9 ‘‘(B) revenue derived from such facility

10 normally equals or exceeds the direct operating

11 costs of such facility.

12 The preceding sentence shall apply with respect to

13 any highly compensated employee only if access to

14 the facility is available on substantially the same

15 terms to each member of a group of employees

16 which is defined under a reasonable classification set

17 up by the employer which does not discriminate in

18 favor of highly compensated employees.

19 ‘‘(3) ON-PREMISES GYMS AND OTHER ATHLETIC

20 FACILITIES.—

21 ‘‘(A) IN GENERAL.—De minimis fringe

22 benefits include the provision of on-premises

23 athletic facility by an employer to its employees.

24 ‘‘(B) ON-PREMISES ATHLETIC FACILITY.—

25 For purposes of this paragraph, ‘on-premises
133

•S 722 IS

1 athletic facility’ means any gym or other ath2 letic facility—

3 ‘‘(i) which is located on the premises

4 of the employer,

5 ‘‘(ii) which is operated by the em6 ployer, and

7 ‘‘(iii) substantially all the use of which

8 is by employees of the employer, their

9 spouses, and their dependent children.

10 ‘‘(e) CERTAIN EDUCATIONAL TRAINING BENE11 FITS.—Amounts paid or expenses incurred by the em12 ployer for education or training provided to the employee

13 shall be excluded from gross income under section 4 if

14 (and only if) such amounts or expenses are ordinary and

15 necessary business expenses and are not for an advanced

16 degree or to qualify an employee for a new line of work.

17 ‘‘(f) REGULATIONS.—The Secretary shall prescribe

18 regulations under this section, including regulations that

19 continue certain rules contained in section 132 to the In20 ternal Revenue Code of 1986 related to the fringe benefits

21 described in this section.

22 ‘‘Subchapter E—Rules Relating to Deductions

‘‘Sec. 101. Charitable, etc. organizations.

‘‘Sec. 102. Private foundations.
134

•S 722 IS

1 ‘‘SEC. 101. CHARITABLE, ETC. ORGANIZATIONS.

2 ‘‘(a) PURPOSE.—This section provides definitions for

3 purposes of determining the philanthropic transfer deduc4 tion and for other purposes of this chapter and chapter

5 2.

6 ‘‘(b) REGULAR CHARITY.—

7 ‘‘(1) IN GENERAL.—

8 ‘‘(A) REGULAR CHARITY.—‘Regular char9 ity’ means—

10 ‘‘(i) a church or a convention or asso11 ciation of churches,

12 ‘‘(ii) an educational organization

13 which normally maintains a regular faculty

14 and curriculum and normally has a regu15 larly enrolled body of pupils or students in

16 attendance at the place where its edu17 cational activities are regularly carried on,

18 ‘‘(iii) an organization the principal

19 purpose or functions of which are the pro20 viding of medical or hospital care or medi21 cal education or medical research, if the

22 organization is a hospital, or if the organi23 zation is a medical research organization

24 directly engaged in the continuous active

25 conduct of medical research in conjunction

26 with a hospital,
135

•S 722 IS

1 ‘‘(iv) an organization which normally

2 receives a substantial part of its support

3 (exclusive of income received in the exer4 cise or performance by such organization

5 of its charitable, educational, or other pur6 pose or function constituting the basis for

7 its exemption under section 253(a)) from

8 the United States or any State or political

9 subdivision thereof or from direct or indi10 rect contributions from the general public,

11 and which is organized and operated exclu12 sively to receive, hold, invest, and admin13 ister property and to make expenditures to

14 or for the benefit of a college or university

15 which is an organization referred to in

16 clause (ii) of this subparagraph and which

17 is an agency or instrumentality of a State

18 or political subdivision thereof, or which is

19 owned or operated by a State or political

20 subdivision thereof or by an agency or in21 strumentality of 1 or more States or politi22 cal subdivisions,

23 ‘‘(v) a governmental unit referred to

24 in subsection (c)(1),
136

•S 722 IS

1 ‘‘(vi) an organization referred to in

2 subsection (c)(2) which normally receives a

3 substantial part of its support (exclusive of

4 income received in the exercise or perform5 ance by such organization of its charitable,

6 educational, or other purpose or function

7 constituting the basis for its exemption

8 under section 53(a)) from a governmental

9 unit referred to in subsection (c)(1) or

10 from direct or indirect contributions from

11 the general public,

12 ‘‘(vii) a private foundation described

13 in subparagraph (C), or

14 ‘‘(viii) an organization described in

15 section 302(a)(2) or (3).

16 ‘‘(B) SPECIAL RULE FOR MEDICAL RE17 SEARCH ORGANIZATIONS.—For purposes of de18 termining whether a contribution is to a regular

19 charity, a medical research organization shall

20 not be treated as described in clause (iii) of

21 paragraph (2) unless during the calendar year

22 in which the contribution is made such organi23 zation is committed to spend such contributions

24 for such research before January 1 of the 5th
137

•S 722 IS

1 calendar year which begins after the date such

2 contribution is made,

3 ‘‘(C) CERTAIN PRIVATE FOUNDATIONS.—

4 The private foundations referred to in subpara5 graph (A)(vii) and subsection (e)(1)(B) are—

6 ‘‘(i) a private operating foundation (as

7 defined in section 4942(j)(3)),

8 ‘‘(ii) any other private foundation (as

9 defined in section 102(a)) which, not later

10 than the 15th day of the 3rd month after

11 the close of the foundation’s taxable year

12 in which contributions are received, makes

13 qualifying distributions (as defined in sec14 tion 4942(g), without regard to paragraph

15 (3) thereof), which are treated, after the

16 application of section 4942(g)(3), as dis17 tributions out of corpus (in accordance

18 with section 4942(h)) in an amount equal

19 to 100 percent of such contributions, and

20 with respect to which the taxpayer obtains

21 adequate records or other sufficient evi22 dence from the foundation showing that

23 the foundation made such qualifying dis24 tributions, and
138

•S 722 IS

1 ‘‘(iii) a private foundation all of the

2 contributions to which are pooled in a com3 mon fund and which would be described in

4 section 102(a)(3) but for the right of any

5 substantial contributor (hereafter in this

6 clause called ‘donor’) or his spouse to des7 ignate annually the recipients, from among

8 organizations described in paragraph (1) of

9 section 102(a), of the income attributable

10 to the donor’s contribution to the fund and

11 to direct (by deed or by will) the payment,

12 to an organization described in such para13 graph (1), of the corpus in the common

14 fund attributable to the donor’s contribu15 tion; but this clause shall apply only if all

16 of the income of the common fund is re17 quired to be (and is) distributed to 1 or

18 more organizations described in such para19 graph (1) not later than the 15th day of

20 the 3rd month after the close of the tax21 able year in which the income is realized

22 by the fund and only if all of the corpus

23 attributable to any donor’s contribution to

24 the fund is required to be (and is) distrib25 uted to 1 or more of such organizations
139

•S 722 IS

1 not later than 1 year after his death or

2 after the death of his surviving spouse if

3 she has the right to designate the recipi4 ents of such corpus.

5 ‘‘(2) REFERENCES.—Any reference in other law

6 or in legal documents to an organization described

7 in a clause of section 170(b)(1)(A) of the Internal

8 Revenue Code of 1986 shall constitute a reference to

9 an organization described in the same clause of sec10 tion 301(b)(1)(A).

11 ‘‘(c) CHARITY.—For purposes of determining the de12 ductibility of a philanthropic transfer, ‘charitable contribu13 tion’ means a contribution or gift for the use of—

14 ‘‘(1) a State, a possession of the United States,

15 or any political subdivision of any of the foregoing,

16 or the United States or the District of Columbia,

17 but only if the contribution or gift is made for exclu18 sively public purposes,

19 ‘‘(2) a corporation, trust, or community chest,

20 fund, or foundation—

21 ‘‘(A) created or organized in the United

22 States or in any possession thereof, or under

23 the law of the United States, any State, the

24 District of Columbia, or any possession of the

25 United States,
140

•S 722 IS

1 ‘‘(B) organized and operated exclusively

2 for religious, charitable, scientific, literary, or

3 educational purposes (but only if no part of its

4 activities involve the provision of athletic facili5 ties or equipment) or for the prevention of cru6 elty to children or animals,

7 ‘‘(C) no part of the net earnings of which

8 inures to the benefit of any private shareholder

9 or individual, and

10 ‘‘(D) which qualifies for exemption from

11 the business tax under section 253(c) and is not

12 disqualified for tax exemption by reason of at13 tempting to influence legislation, and which

14 does not participate in, or intervene in (includ15 ing the publishing or distributing of state16 ments), any political campaign on behalf of (or

17 in opposition to) any candidate for public office,

18 ‘‘(3) in the case of a contribution or gift by an

19 individual, a domestic fraternal society, order, or as20 sociation, operating under the lodge system, but only

21 if such contribution or gift is to be used exclusively

22 for religious, charitable, scientific, literary, or edu23 cational purposes, or for the prevention of cruelty to

24 children or animals,
141

•S 722 IS

1 ‘‘(4) a cemetery company owned and operated

2 exclusively for the benefit of its members, or any

3 corporation chartered solely for burial purposes as a

4 cemetery corporation and not permitted by its char5 ter to engage in any business not necessarily inci6 dent to that purpose, if such company or corporation

7 is not operated for profit and no part of the net

8 earnings of such company or corporation inures to

9 the benefit of any private shareholder or individual.

10 ‘‘(d) RULES FOR SUBSECTION (c).—

11 ‘‘(1) LIMITATIONS.—A contribution or gift by a

12 corporation to a trust, chest, fund, or foundation

13 shall be deductible by reason of subsection (c)(2)(B)

14 only if it is to be used within the United States or

15 any of its possessions exclusively for purposes speci16 fied in subparagraph (B).

17 ‘‘(2) REFERENCES.—Any reference in other law

18 or in legal documents to an organization described

19 in a paragraph of section 170(c) of the Internal Rev20 enue Code of 1986 shall constitute a reference to an

21 organization described in the corresponding para22 graph of section 101(c) if an organization is de23 scribed in a paragraph of section 101(c).

24 ‘‘(e) QUALIFIED CONSERVATION CONTRIBUTION.—
142

•S 722 IS

1 ‘‘(1) IN GENERAL.—‘Qualified conservation con2 tribution’ means a contribution—

3 ‘‘(A) of a qualified real property interest,

4 ‘‘(B) to a qualified organization,

5 ‘‘(C) exclusively for conservation purposes.

6 ‘‘(2) QUALIFIED REAL PROPERTY INTEREST.—

7 ‘Qualified real property interest’ means any of the

8 following interests in real property:

9 ‘‘(A) the entire interest of the donor other

10 than a qualified mineral interest,

11 ‘‘(B) a remainder interest, and

12 ‘‘(C) a restriction (granted in perpetuity)

13 on the use which may be made of the real prop14 erty.

15 ‘‘(3) QUALIFIED ORGANIZATION.—For purposes

16 of paragraph (1), the term ‘qualified organization’

17 means an organization which—

18 ‘‘(A) is described in clause (v) or (vi) of

19 subsection (b)(1)(A), or

20 ‘‘(B) is described in section 53(c)(3) and—

21 ‘‘(i) meets the requirements of section

22 102(a)(2), or

23 ‘‘(ii) meets the requirements of sec24 tion 102(a)(3) and is controlled by an or-
143

•S 722 IS

1 ganization described in subparagraph (A)

2 or in clause (i) of this subparagraph.

3 ‘‘(4) CONSERVATION PURPOSE DEFINED.—

4 ‘‘(A) IN GENERAL.—For purposes of this

5 subsection, the term ‘conservation purpose’

6 means—

7 ‘‘(i) the preservation of land areas for

8 outdoor recreation by, or the education of,

9 the general public,

10 ‘‘(ii) the protection of a relatively nat11 ural habitat of fish, wildlife, or plants, or

12 similar ecosystem,

13 ‘‘(iii) the preservation of open space

14 (including farmland and forest land) where

15 such preservation is—

16 ‘‘(I) for the scenic enjoyment of

17 the general public, or

18 ‘‘(II) pursuant to a clearly delin19 eated Federal, State, or local govern20 mental conservation policy, and will

21 yield a significant public benefit, or

22 ‘‘(iv) the preservation of an histori23 cally important land area or a certified his24 toric structure.
144

•S 722 IS

1 ‘‘(B) CERTIFIED HISTORIC STRUCTURE.—

2 For purposes of subparagraph (A)(iv), the term

3 ‘certified historic structure’ means any building,

4 structure, or land area which—

5 ‘‘(i) is listed in the National Register,

6 or

7 ‘‘(ii) is located in a registered historic

8 district and is certified by the Secretary of

9 the Interior to the Secretary as being of

10 historic significance to the district.

11 A building, structure, or land area satisfies the

12 preceding sentence if it satisfies such sentence

13 either at the time of the transfer or on the due

14 date (including extensions) for filing the trans15 feror’s return under this chapter for the taxable

16 year in which the transfer is made.

17 ‘‘(5) EXCLUSIVELY FOR CONSERVATION PUR18 POSES.—For purposes of this subsection—

19 ‘‘(A) CONSERVATION PURPOSE MUST BE

20 PROTECTED.—A contribution shall not be treat21 ed as exclusively for conservation purposes un22 less the conservation purpose is protected in

23 perpetuity.

24 ‘‘(B) NO SURFACE MINING PERMITTED.—
145

•S 722 IS

1 ‘‘(i) IN GENERAL.—Except as pro2 vided in clause ‘‘(ii), in the case of a con3 tribution of any interest where there is a

4 retention of a qualified mineral interest,

5 subparagraph (A) shall not be treated as

6 met if at any time there may be extraction

7 or removal of minerals by any surface min8 ing method.

9 ‘‘(ii) SPECIAL RULE.—With respect to

10 any contribution of property in which the

11 ownership of the surface estate and min12 eral interests were separated before June

13 13, 1976, and remain so separated, sub14 paragraph (A) shall be treated as met if

15 the probability of surface mining occurring

16 on such property is so remote as to be neg17 ligible.

18 ‘‘(6) QUALIFIED MINERAL INTEREST.—For

19 purposes of this subsection, the term ‘qualified min20 eral interest’ means—

21 ‘‘(A) subsurface oil, gas, or other minerals,

22 and

23 ‘‘(B) the right to access to such minerals.

24 ‘‘(f) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL

25 EXPENSES.—No deduction shall be allowed under section
146

•S 722 IS

1 11 for traveling expenses (including amounts expended for

2 meals and lodging) while away from home, whether paid

3 directly or by reimbursement, unless there is no significant

4 element of personal pleasure, recreation, or vacation in

5 such travel.

6 ‘‘(g) TREATMENT OF CERTAIN AMOUNTS PAID TO OR

7 FOR THE BENEFIT OF INSTITUTIONS OF HIGHER EDU8 CATION.—For purposes of section 11, if as the result of

9 a contribution to or for the benefit of an educational orga10 nization—

11 ‘‘(1) which is described in subsection

12 (b)(1)(A)(ii), and

13 ‘‘(2) which is an institution of higher education

14 (as defined in section 3304(f)),

15 the taxpayer receives (directly or indirectly) as a result

16 of paying such amount the right to purchase tickets for

17 seating at an athletic event in an athletic stadium of such

18 institution, 80 percent of such contribution shall be treat19 ed as a charitable contribution (but only if such amount

20 would be allowable as a deduction but for the fact that

21 the taxpayer received the right to purchase tickets). If any

22 portion of a payment is for the purchase of such tickets,

23 such portion and the remaining portion (if any) of such

24 payment shall be treated as separate amounts for purposes

25 of this subsection.
147

•S 722 IS

1 ‘‘SEC. 102. PRIVATE FOUNDATIONS.

2 ‘‘(a) GENERAL RULE.—For purposes of this title,

3 ‘private foundation’ means a domestic or foreign organiza4 tion described in section 253(c)(3) other than—

5 ‘‘(1) an organization described in section

6 101(b)(1)(A) (other than in clauses (vii) and (viii));

7 ‘‘(2) an organization which—

8 ‘‘(A) normally receives more than one-third

9 of its support in each taxable year from any

10 combination of—

11 ‘‘(i) gifts, grants, contributions, or

12 membership fees, and

13 ‘‘(ii) gross receipts from admissions,

14 sales of merchandise, performance of serv15 ices, or furnishing of facilities, in an activ16 ity which is not an unrelated business ac17 tivity (within the meaning of section 256),

18 not including such receipts from any per19 son, or from any bureau or similar agency

20 of a governmental unit (as described in

21 section 101(c)(1)), in any taxable year to

22 the extent such receipts exceed the greater

23 of $5,000 or 1 percent of the organiza24 tion’s support in such taxable year, from

25 persons other than disqualified persons (as

26 defined in section 4946) with respect to
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1 the organization, from governmental units

2 described in section 101(c)(1), or from or3 ganizations described in section

4 101(b)(1)(A) (other than in clauses (vii)

5 and (viii)), and

6 ‘‘(B) normally receives not more than one7 third of its support in each taxable year from

8 the sum of—

9 ‘‘(i) gross investment income (as de10 fined in subsection (e)) and

11 ‘‘(ii) the excess (if any) of the amount

12 of its gross profits from unrelated business

13 activity business taxable income (for pur14 poses of section 255) over the amount of

15 the tax imposed by section 255;

16 ‘‘(3) an organization which—

17 ‘‘(A) is organized, and at all times there18 after is operated, exclusively for the benefit of,

19 to perform the functions of, or to carry out the

20 purposes of 1 or more specified organizations

21 described in paragraph (1) or (2),

22 ‘‘(B) is operated, supervised, or controlled

23 by or in connection with 1 or more organiza24 tions described in paragraph (1) or (2), and
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•S 722 IS

1 ‘‘(C) is not controlled directly or indirectly

2 by 1 or more disqualified persons (as defined in

3 section 4946) other than foundation managers

4 and other than 1 or more organizations de5 scribed in paragraph (1) or (2); and

6 ‘‘(4) an organization which is organized and op7 erated exclusively for testing for public safety.

8 ‘‘(b) CONTINUATION OF PRIVATE FOUNDATION STA9 TUS.—For purposes of this title, if an organization was

10 a private foundation (within the meaning of subsection

11 (a)) on October 9, 1969, or becomes a private foundation

12 on any subsequent date, such organization shall be treated

13 as a private foundation for all periods after October 9,

14 1969, or after such subsequent date, unless its status as

15 such is terminated in accordance with regulations to be

16 prescribed by the Secretary.

17 ‘‘(c) STATUS OF ORGANIZATION AFTER TERMI18 NATION OF PRIVATE FOUNDATION STATUS.—For pur19 poses of this section, an organization the status of which

20 as a private foundation is terminated, shall be treated as

21 an organization created on the day after the date of such

22 termination.

23 ‘‘(d) DEFINITION OF SUPPORT.—For purposes of

24 this section and chapter 42, the term ‘support’ includes

25 (but is not limited to)—
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•S 722 IS

1 ‘‘(1) gifts, grants, contributions, or membership

2 fees,

3 ‘‘(2) gross receipts from admissions, sales of

4 merchandise, performance of services, or furnishing

5 of facilities in any activity which is not an unrelated

6 trade or business,

7 ‘‘(3) net income from unrelated business activi8 ties, whether or not such activities are carried on

9 regularly as a trade or business,

10 ‘‘(4) gross investment income (as defined in

11 subsection (e)),

12 ‘‘(5) tax revenues levied for the benefit of an

13 organization and either paid to or expended on be14 half of such organization, and

15 ‘‘(6) the value of services or facilities (exclusive

16 of services or facilities generally furnished to the

17 public without charge) furnished by a governmental

18 unit referred to in section 101(c)(1) to an organiza19 tion without charge.

20 Such term does not include any gain from the sale or other

21 disposition of property which would be considered as gain

22 from the sale or exchange of a capital asset, or the value

23 of exemption from any Federal, State, or local tax or any

24 similar benefit.
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1 ‘‘(e) DEFINITION OF GROSS INVESTMENT INCOME.—

2 For purposes of subsection (d), the term ‘‘gross invest3 ment income’’ means the gross amount of income from

4 interest, dividends, payments with respect to securities

5 loans, rents, and royalties, but not including any such in6 come to the extent included in computing the tax on unre7 lated business taxable income imposed by section 255.

8 ‘‘(f) PRIVATE OPERATING FOUNDATION.—See sec9 tion 4942(j)(3) for the definition of a ‘private operating

10 foundation’.

11 ‘‘Subchapter F—Special Business Activities.

‘‘Sec. 111. Contributions of personal-use property to a business entity.

‘‘Sec. 112. Rules for rental of real estate.

‘‘Sec. 113. Rules for hobby activity.

‘‘Sec. 114. Land companies.

12 ‘‘SEC. 111. CONTRIBUTIONS OF PERSONAL-USE PROPERTY

13 TO A BUSINESS ENTITY.

14 ‘‘(a) NO SAVINGS ALLOWANCE.—‘Additions to sav15 ings’ do not include the cost, value, or basis of any per16 sonal-use property contributed to a business entity.

17 ‘‘(b) EFFECT OF WITHDRAWALS.—If personal-use

18 property is withdrawn from use in a business activity, the

19 withdrawal shall be considered a taxable withdrawal only

20 to the extent of the value of any additions, changes, or

21 repairs made by the business entity. The taxpayer’s basis

22 in the property withdrawn shall equal its basis in the prop23 erty when contributed, increased by the amount treated
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•S 722 IS

1 as a taxable withdrawal upon the withdrawal of the prop2 erty.

3 ‘‘(c) PERSONAL USE PROPERTY.—‘Personal-use

4 property’ means any property used (other than in a trade

5 or business) by the taxpayer, any person related to the

6 taxpayer, or any person from whom the taxpayer acquired

7 the property at other than an arm’s-length price.

8 ‘‘(d) CROSS REFERENCE.—See sections 75 and 112

9 for other rules relating to personal use property.

10 ‘‘SEC. 112. RULES FOR RENTAL OF REAL ESTATE.

11 ‘‘(a) IN GENERAL.—Except as provided in subsection

12 (b), the activity of rental of real estate is a business activ13 ity to which the business tax under chapter 2 applies. A

14 taxpayer shall not be entitled to any deductions under this

15 chapter with respect to rental property, other than deduc16 tions attributable to additions to savings. A taxpayer shall

17 recognize gross income only with respect to distributions

18 from the rental activity.

19 ‘‘(b) INSUBSTANTIAL RENTAL ACTIVITY.—

20 ‘‘(1) NOT RENTAL PROPERTY.—If a taxpayer

21 uses property on more than 14 days during the tax22 able year for nonbusiness purposes and uses and

23 rents the property for no more than 14 days during

24 the taxable year, the property shall not be consid25 ered rental property or used in the activity of rental
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•S 722 IS

1 of real estate during the taxable year for purposes

2 of subsection (a) and the business tax under chapter

3 2.

4 ‘‘(2) RENTS FROM NONRENTAL PROPERTY.—

5 Any rent from property described in paragraph (1)

6 shall be included in gross income for purposes of the

7 USA Income Tax.

8 ‘‘(3) RENTAL PROPERTY BECOMES NONRENTAL

9 PROPERTY.—If property which is considered rental

10 property for purposes of subsection (a) in 1 taxable

11 year ceases to be rental property (by reason of para12 graph (1)) in the following taxable year, the prop13 erty (and any associated debt) shall be treated as

14 distributed for purposes of rules relating to with15 drawals.

16 ‘‘(c) USE FOR A NONBUSINESS PURPOSE.—For pur17 poses of this section, ‘use for a nonbusiness purpose’

18 means use other than—

19 ‘‘(1) use for which fair rent is paid,

20 ‘‘(2) use in connection with the preparation of

21 the property for rental, or

22 ‘‘(3) use that serves a clear business purpose.

23 Use during any part of a day shall constitute use for that

24 day.
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1 ‘‘SEC. 113. RULES FOR HOBBY ACTIVITY.

2 ‘‘(a) NO SAVINGS ALLOWANCE FOR CONTRIBUTIONS

3 TO HOBBY ACTIVITIES.—A taxpayer may not treat as ad4 ditions to savings amounts contributed to a hobby activity

5 conducted by the individual.

6 ‘‘(b) EXCLUSION FROM INCOME.—Amounts received

7 from a hobby activity shall not be treated as withdrawals

8 from savings to the extent of deductions denied by sub9 section (a).

10 ‘‘(c) HOBBY ACTIVITY.—‘Hobby activity’ means an

11 activity conducted in part for personal pleasure or per12 sonal benefit or an activity conducted without the intent

13 of earning a profit, but which generates revenues. Exam14 ples of hobby activity include—

15 ‘‘(1) occasional painting or the creation of other

16 artwork by an individual who is not in the regular

17 trade or business of producing and selling art,

18 ‘‘(2) part-time book writing by a person whose

19 regular employment activities do not relate to the

20 book, and

21 ‘‘(3) creation of a large home garden to produce

22 for home use and sale.

23 ‘‘SEC. 114. LAND COMPANIES.

24 ‘‘(a) LAND COMPANY.—A ‘land company’ is any busi25 ness entity the principal assets of which are (after taking

26 into account any contributions to and purchases by the
155

•S 722 IS

1 business entity during the taxable year) unimproved land

2 held for a nonbusiness purpose.

3 ‘‘(b) NONBUSINESS PURPOSE.—For purposes of this

4 section, land shall be considered held for a nonbusiness

5 purpose if—

6 ‘‘(1) the land had been purchased by the busi7 ness entity at the time of acquisition or receipt of

8 the land, the purchase would not have been treated

9 as a ‘business purchase’ under the principles of sec10 tion 230 (relating to no deduction from the business

11 tax for land purchased for a nonbusiness use), and

12 ‘‘(2) the land has not been converted to a busi13 ness use and placed in service for such use (as deter14 mined in accordance with section 230(d)).

15 ‘‘(c) BASIS.—An individual’s basis in his ownership

16 interest in a land company shall be increased by—

17 ‘‘(1) the amount of cash contributed to the

18 company, and

19 ‘‘(2) the lesser of the basis or the fair market

20 value of the land contributed to the company.

21 ‘‘Subchapter G—Accounting Methods and

22 Periods

‘‘Sec. 121. Taxable year.

‘‘Sec. 122. Cash method of accounting.
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•S 722 IS

1 ‘‘SEC. 121. TAXABLE YEAR.

2 ‘‘(a) IN GENERAL.—The taxable year for all individ3 uals subject to tax under this chapter shall be the calendar

4 year except as provided in subsection (b).

5 ‘‘(b) SHORT TAXABLE YEARS.—

6 ‘‘(1) BIRTH.—An individual’s taxable year in

7 the year of his birth shall begin on the date of his

8 birth.

9 ‘‘(2) DEATH.—An individual’s taxable year in

10 the year of his death shall end on the date of his

11 death.

12 ‘‘SEC. 122. CASH METHOD OF ACCOUNTING.

13 ‘‘(a) IN GENERAL.—All individuals shall determine

14 their income and deductions using the cash receipts and

15 disbursement method.

16 ‘‘(b) ORIGINAL ISSUE DISCOUNT.—Taxpayers shall

17 not include original issue discount in income until re18 ceived.

19 ‘‘(c) INSTALLMENT SALES.—Taxpayers shall take

20 into account income from installment sales when received.

21 ‘‘(d) CONSTRUCTIVE RECEIPT.—Income shall be

22 treated as received when constructively received.

23 ‘‘(e) EFFECT OF CHANGE OF ACCOUNTING METH24 OD.—Rules similar to those under section 226 shall apply

25 to ensure that a taxpayer does not deduct the same ex26 pense twice or include the same item in income twice.
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1 ‘‘Subchapter H—Nonresident Aliens

‘‘Sec. 131. Tax on nonresident alien individuals.

‘‘Sec. 132. Tax treatment of certain community income of nonresident

aliens.

‘‘Sec. 133. Relationship with treaties.

2 ‘‘SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS.

3 ‘‘(a) NONBUSINESS INCOME.—

4 ‘‘(1) INCOME OTHER THAN CERTAIN GAINS.—

5 There is hereby imposed for each taxable year a tax

6 of 30 percent of the amount received from sources

7 within the United States by a nonresident alien indi8 vidual as—

9 ‘‘(A) interest (other than portfolio interest

10 (as defined in subsection (b)(2)), deposit inter11 est (as defined in subsection (b)(3)) and origi12 nal issue discount, dividends, rents, salaries,

13 wages, premiums, annuities, compensations, re14 munerations, emoluments, and other fixed or

15 determinable annual periodical gains, profits

16 and income,

17 ‘‘(B) gains from the disposal of timber,

18 coal, or iron ore with a retained economic inter19 est,

20 ‘‘(C) in the case of the sale of an original

21 discount obligation or payment on an original

22 issue discount obligation, the interest accrued
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•S 722 IS

1 while the individual was a nonresident alien,

2 and

3 ‘‘(D) 85 percent of social security benefits

4 (as defined in section 3(b)(2)).

5 ‘‘(2) CAPITAL GAINS OF CERTAIN ALIENS.—In

6 the case of a nonresident alien individual present in

7 the United States for a period or periods aggregat8 ing 183 days or more during the taxable year, there

9 is hereby imposed a tax of 30 percent of the amount

10 by which the gains, derived from sources within the

11 United States, from the sale or exchange at any

12 time during such year exceeds his losses, allocable to

13 sources within the United States, from the sale or

14 exchange at any time during such year of capital

15 assets.

16 ‘‘(3) TAX DOES NOT APPLY TO BUSINESS IN17 COME.—The taxes imposed by this section shall not

18 apply to the income of any business entity, except to

19 the extent such income is distributed as compensa20 tion, dividends, or interest.

21 ‘‘(b) SPECIAL RULES AND DEFINITIONS.—

22 ‘‘(1) CERTAIN ANNUITIES.—The taxes imposed

23 by subsection (a) shall not apply to any amount re24 ceived as an annuity under a qualified annuity plan

25 described in section 403(a)(1), or from a qualified
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•S 722 IS

1 trust described in section 401(a) and exempt under

2 section 253(a) if—

3 ‘‘(A) all of the personal services by reason

4 of which the annuity is payable were either—

5 ‘‘(i) personal services performed out6 side the United States by an individual

7 who, at the time of performance of such

8 personal services, was a nonresident alien,

9 or

10 ‘‘(ii) personal services by a non11 resident alien temporarily present in the

12 United States for a period or periods not

13 exceeding 90 days during a taxable year,

14 whose compensation for such services did

15 not exceed $3,000, and who performed

16 such services for—

17 ‘‘(I) a nonresident alien individ18 ual, foreign partnership, or foreign

19 corporation, not engaged in a trade or

20 business within the United States, or

21 ‘‘(II) for an office or place of

22 business maintained in a foreign coun23 try or in a possession of the United

24 States by an individual who is a citi25 zen or resident of the United States
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•S 722 IS

1 or by a domestic partnership or a do2 mestic corporation, and

3 ‘‘(B) at the time the first amount is paid

4 as annuity under the annuity plan or by the

5 trust, 90 percent or more of the employees for

6 whom contributions or benefits are provided

7 under such plan are citizens or residents of the

8 United States.

9 ‘‘(2) PORTFOLIO INTEREST.—

10 ‘‘(A) IN GENERAL.—‘Portfolio interest’

11 means—

12 ‘‘(i) interest on obligations in reg13 istered form if the United States person

14 who would otherwise be required to with15 hold tax on such interest under section

16 1441(a) receives a statement that the ben17 eficial owner of the obligation is not a

18 United States person, and

19 ‘‘(ii) interest on obligations in

20 nonregistered form if appropriate pre21 cautions are taken to ensure that such ob22 ligations will be sold only to persons who

23 are not United States persons and such in24 terest is paid outside the United States.
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1 ‘‘(B) EXCEPTIONS.—Under rules to be

2 prescribed by the Secretary, portfolio interest

3 does not include—

4 ‘‘(i) interest received by a 10-percent

5 equity owner, or

6 ‘‘(ii) contingent interest.

7 ‘‘(3) DEPOSIT INTEREST.—‘Deposit interest’

8 means interest on deposits which are—

9 ‘‘(A) deposits with persons carrying on a

10 banking business (including savings and loans),

11 and

12 ‘‘(B) amounts held by an insurance

13 company under an agreement to pay interest

14 thereon.

15 ‘‘(4) OTHER EXCEPTIONS.—The taxes imposed

16 by subsection (a) shall not apply to—

17 ‘‘(A) a percentage of any dividend paid by

18 a business entity, 80 percent of whose gross re19 ceipts are not taken into account under chapter

20 1 because such receipts are from outside the

21 United States, equal to the percentage of gross

22 receipts not so taken into account,

23 ‘‘(B) gambling winnings (except to the ex24 tent that the Secretary determines by regula-
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•S 722 IS

1 tion that the collection of the tax is administra2 tively feasible),

3 ‘‘(C) compensation paid by a foreign em4 ployer to a nonresident alien individual for the

5 period he is temporarily present in the United

6 States as a nonimmigrant under subparagraph

7 (F) or (J) of section 101(a)(15) of the Immi8 gration and Nationality Act, as amended,

9 ‘‘(D) interest from a series E or series H

10 savings bond if the individual acquired the bond

11 while a resident of the Ryuku Islands or the

12 Trust Territory of the Pacific Islands, or

13 ‘‘(E) amounts earned or payable to any

14 person who is a bona fide resident of Puerto

15 Rico, Guam, American Samoa, or the Northern

16 Mariana Islands (and, therefore, is subject to

17 the tax imposed by subchapter A).

18 ‘‘(c) EXPATRIATION TO AVOID TAX.—

19 ‘‘(1) IN GENERAL.—A nonresident alien individ20 ual who at any time within the 10-year period imme21 diately preceding the close of the taxable year lost

22 United State citizenship shall be taxable in the man23 ner described in paragraph (2) unless none of the

24 principal purposes of losing citizenship was avoid25 ance of tax under subchapter A or subtitle B.
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•S 722 IS

1 ‘‘(2) ALTERNATIVE TAX.—A nonresident alien

2 individual described in paragraph (1) shall be sub3 ject to tax on the items taxable under subsection (a)

4 as determined without regard to exceptions listed or

5 based on definitions contained in subsection (b)

6 using the rate schedule for single individuals under

7 section 15. If the taxes determined under subsection

8 (a) are greater than the tax determined under this

9 subsection, the greater tax shall apply.

10 ‘‘SEC. 132. TAX TREATMENT OF CERTAIN COMMUNITY IN11 COME OF NONRESIDENT ALIENS.

12 ‘‘(a) GENERAL RULE.—In the case of a married cou13 ple 1 or both of whom are nonresident alien individuals

14 and who have community income for the taxable year,

15 such community income shall be treated as follows:

16 ‘‘(1) Compensation income shall be treated as

17 income of the spouse who rendered the services.

18 ‘‘(2) Partnership distributions shall be treated

19 as the related distributive shares of partnership in20 come would be treated under section 1402(a)(5).

21 ‘‘(3) Community income which is derived from

22 the separate property of a spouse shall be treated as

23 income of that spouse.
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•S 722 IS

1 ‘‘(4) All other such community income shall be

2 treated as provided in the applicable community

3 property law.

4 ‘‘(b) EXCEPTION WHERE ELECTION UNDER SEC5 TION 6013(g) IS IN EFFECT.—Subsection (a) shall not

6 apply if an election under subsection (g) or (h) of section

7 6013 (relating to election to treat nonresident alien indi8 viduals as residents of the United States) is in effect.

9 ‘‘SEC. 133. RELATIONSHIP WITH TREATIES.

10 ‘‘(a) STATEMENT OF POLICY.—It is the intention of

11 the USA Tax Code to promote a worldwide tax system

12 in which each nation taxes—

13 ‘‘(1) under an individual tax, only the income of

14 individuals who are residents or citizens of that na15 tion, and

16 ‘‘(2) under a business tax only the business ac17 tivity in such nation.

18 ‘‘(b) EFFECT OF TREATIES.—No tax shall be im19 posed under section 131(a) on income that is exempt from

20 tax by reason of a treaty between the nation of which the

21 nonresident alien is a citizen or resident and the United

22 States. If any such treaty requires that a lower rate of

23 tax be imposed on some or all of the items of income sub24 ject to tax under section 131(a), such lower rate shall
165

•S 722 IS

1 apply to such items in the case of persons to whom such

2 treaty applies.

3 ‘‘(c) EFFECT OF UNILATERAL ACTION BY FOREIGN

4 NATIONS.—No tax shall be imposed under section 131(a)

5 on nonresident aliens who are citizens or residents of an6 other nation if—

7 ‘‘(1) such nation exempts from its income and

8 withholding taxes nonresident alien individuals who

9 are residents or citizens of the United States,

10 ‘‘(2) such nation has entered into a tax infor11 mation sharing agreement with the United States,

12 and

13 ‘‘(3) the Secretary certifies that the preceding

14 2 requirements have been satisfied.

15 ‘‘Subchapter I—Trusts and Estates

‘‘Sec. 141. General rules for trusts.

‘‘Sec. 142. Basis and previously taxed amounts of trusts.

‘‘Sec. 143. Deemed distributions; proxy tax.

‘‘Sec. 144. Trusts.

‘‘Sec. 145. Estates.

‘‘Sec. 146. Income in respect of a decedent.

16 ‘‘SEC. 141. GENERAL RULES FOR TRUSTS.

17 ‘‘(a) BUSINESS ACTIVITIES.—If a trust engages in

18 business activity (as defined in section 206(b)), the trust

19 shall be considered a business entity with respect to such

20 activities for purposes of the business tax under chapter

21 2.
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•S 722 IS

1 ‘‘(b) TRUST NOT SUBJECT TO INDIVIDUAL TAX.—

2 Except as provided in section 143, a trust shall not be

3 subject to the individual tax imposed by section 1.

4 ‘‘(c) CONTRIBUTIONS TO TRUST NOT CONSIDERED

5 SAVINGS.—Amounts contributed to a trust shall not be

6 considered additions to savings for purposes of computing

7 the Unlimited Savings Allowance. The contribution of a

8 savings asset to a trust shall not be considered a sale or

9 withdrawal of the savings assets. The purchase of a sav10 ings asset will be considered an addition to savings even

11 if the asset is purchased with the intent of contributing

12 it to a trust.

13 ‘‘(d) DISTRIBUTIONS FROM A TRUST.—

14 ‘‘(1) CASH DISTRIBUTIONS.—

15 ‘‘(A) IN GENERAL.—Cash distributions

16 from a trust shall be considered ‘withdrawal’ in17 come to the distributee to the extent that such

18 distributions exceed the portion of the trust’s

19 previously taxed amount (‘PTA’) allocated to

20 the withdrawal.

21 ‘‘(B) TRANSITION RULE.—Cash distribu22 tions made from a trust during the first 65

23 days of 1996 shall be considered made on De24 cember 31, 1995.
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1 ‘‘(2) DISTRIBUTIONS OF SAVINGS ASSETS.—The

2 distribution of a savings asset from a trust to an in3 dividual shall not result in any income to the dis4 tributee. For purposes of determining taxable with5 drawals upon the subsequent disposition of the sav6 ings asset by the distributee, the recipient will have

7 a basis in the distributed savings asset equal to—

8 ‘‘(A) the trust’s basis, if any, in the sav9 ings asset, if it is an ‘initial asset’; or

10 ‘‘(B) the PTA allocated to the savings

11 asset, if it is a ‘new asset’.

12 ‘‘(3) DISTRIBUTION OF ASSETS OTHER THAN

13 SAVINGS ASSETS.—In the case of a distribution of

14 an asset other than a savings asset—

15 ‘‘(A) INITIAL ASSETS.—If the asset is an

16 ‘initial asset’, the distributee shall assume the

17 trust’s basis in the asset and the distribution

18 shall not result in any income to the distributee.

19 ‘‘(B) NEW ASSETS.—If the asset is a ‘new

20 asset’, the distributee shall be treated as if it

21 received an amount of cash equal to the cost of

22 the asset to the trust and as if it then pur23 chased the asset for the amount of such cash.

24 The rules of paragraph (1) relating to the dis25 tribution of cash.
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1 ‘‘(4) DISTRIBUTION OF A BUSINESS ENTITY.—

2 The distribution of a business entity or a business

3 asset (such as rental property) that essentially con4 stitutes a business entity shall be treated as the dis5 tribution of a savings asset and as if the distributee

6 received the business entity.

7 ‘‘(e) DEEMED DISTRIBUTION FROM A TRUST.—See

8 section 143 for rules relating to certain deemed distribu9 tions from trusts.

10 ‘‘SEC. 142. BASIS AND PREVIOUSLY TAXED AMOUNTS OF

11 TRUSTS.

12 ‘‘(a) BASIS.—

13 ‘‘(1) ASSETS HELD ON THE EFFECTIVE

14 DATE.—A trust will have a basis in each asset held

15 in trust on January 1, 1996, equal to the trust’s

16 basis in the asset on such date (as determined under

17 the principles of the Internal Revenue Code of

18 1986). The trust will have a basis in cash held on

19 such date equal to the amount of cash. For purposes

20 of this section, cash held in bank accounts, money

21 market accounts, and other similar accounts shall be

22 treated as cash.

23 ‘‘(2) ASSETS CONTRIBUTED.—A trust will have

24 a basis in each asset contributed to the trust on or
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•S 722 IS

1 after January 1, 1996, in an amount equal to the

2 contributor’s basis in such property.

3 ‘‘(3) ASSETS PURCHASED WITH CASH CONTRIB4 UTED TO THE TRUST.—If a trust acquires an asset

5 with cash contributed to the trust within 30 days

6 after contribution of the cash (or by January 31,

7 1996, in the case of cash on hand on January 1,

8 1996), the asset will have a tax basis equal to the

9 amount of such contributed cash used to purchase

10 the asset.

11 ‘‘(4) CARRYOVER BASIS.—If an asset of a trust

12 has a basis determined under paragraph (1), (2), or

13 (3) and such asset is transferred, exchanged, or con14 verted in a transaction in which, under general rules

15 of this chapter, the basis of the successor asset or

16 assets would be determined based on the basis of the

17 transferred, exchanged or converted asset, the

18 trust’s basis in the successor assets shall be deter19 mined in accordance with the general rules of this

20 chapter.

21 ‘‘(5) INITIAL ASSETS.—For purposes of section

22 141 and this section, ‘initial asset’ means an asset

23 (other than cash) which has a basis determined

24 under this section.

25 ‘‘(b) PREVIOUSLY TAXED AMOUNT.—
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1 ‘‘(1) IN GENERAL.—Each trust shall maintain a

2 previously taxed amount balance to be known as the

3 ‘PTA balance’.

4 ‘‘(2) INCREASES.—The PTA balance of a trust

5 shall be increased by—

6 ‘‘(A) the basis of any asset sold or dis7 posed of by the trust (other than by a distribu8 tion or in a carryover basis transaction de9 scribed in paragraph (4) of subsection (a)),

10 ‘‘(B) any interest received by the trust on

11 or after January 1, 1996, that constitutes in12 terest on a tax-exempt bond, and

13 ‘‘(C) any cash contributed to the trust (or

14 held by the trust on January 1, 1996) that is

15 not applied within 30 days to purchase an asset

16 other than cash.

17 ‘‘(3) DECREASES.—The PTA balance of a trust

18 will decrease by the PTA allocated to distributions

19 from the trust and all distributions described in sec20 tion 141(d)(1)(B) (relating to distributions in the

21 first 65 days of 1996).

22 ‘‘(c) NON-PTA ACCOUNT.—Each trust shall main23 tain a non-PTA account. The non-PTA account balance

24 shall equal the excess of—
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•S 722 IS

1 ‘‘(1) all amounts, other than contributions and

2 interest on tax-exempt bonds, received by the trust

3 on or after January 1, 1996, including—

4 ‘‘(A) interest (other than interest on tax5 exempt bonds),

6 ‘‘(B) dividends,

7 ‘‘(C) partnership and other business entity

8 distributions,

9 ‘‘(D) principal received on loans (except to

10 the extent that it constitutes return of basis),

11 ‘‘(E) proceeds of life insurance policies,

12 and

13 ‘‘(F) proceeds from the sale of stocks and

14 bonds, over

15 ‘‘(2) the sum of—

16 ‘‘(A) the basis of all initial assets that are

17 sold by the trust,

18 ‘‘(B) all deductible expenses of a multi-tax19 payer trust or an estate (as determined under

20 section 143),

21 ‘‘(C) all prior distributions of non-PTAs,

22 ‘‘(D) the cost of all new assets sold by the

23 trust, and

24 ‘‘(E) amounts described in section

25 143(b)(1)(A).
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•S 722 IS

1 ‘‘(d) ALLOCATION OF PTA TO DISTRIBUTIONS.—

2 ‘‘(1) IN GENERAL.—Except as provided in para3 graph (2), distributions made from a trust, other

4 than distributions of initial assets, shall be treated

5 as first made out of the non-PTA account and then

6 out of the PTA account.

7 ‘‘(2) PTA ATTRIBUTABLE TO TAX-EXEMPT IN8 COME.—PTA attributable to income from tax-ex9 empt bonds shall be allocated to distributions that

10 are treated under the terms of trust as distributions

11 of income in the order that such distributions are

12 made following the receipt of such tax-exempt in13 come.

14 ‘‘(3) DISTRIBUTIONS TO MULTIPLE BENE15 FICIARIES.—If distributions are made to more than

16 1 distributee in a calendar year and the distributions

17 are to be treated as part distributions out of the

18 PTA account and part distributions out of the non19 PTA account, the distributions made to beneficiaries

20 entitled to distributions from income shall be treated

21 as derived from the non-PTA account to the maxi22 mum extent possible.

23 ‘‘(4) DISTRIBUTION OF NEW ASSETS.—For pur24 poses of applying the rules of this subsection, new

25 assets that are distributed shall be treated as dis-
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•S 722 IS

1 tributed at their cost for purposes of determining

2 the extent to which such assets are distributions out

3 of PTA.

4 ‘‘SEC. 143. DEEMED DISTRIBUTIONS; PROXY TAX.

5 ‘‘(a) SINGLE-TAXPAYER TRUSTS.—In the case of a

6 single-taxpayer trust, the taxpayer shall have a deemed

7 distribution equal to the amount of the expenses of the

8 trust and shall be deemed to have paid the expenses of

9 the trust.

10 ‘‘(b) MULTI-TAXPAYER TRUSTS AND ESTATES.—

11 ‘‘(1) IN GENERAL.—In the case of multi-tax12 payer trusts and estates, a proxy tax is hereby im13 posed on the trust equal to highest marginal tax rate

14 applicable under section 15 multiplied by the excess

15 of—

16 ‘‘(A) the lesser of the non-PTA amount or

17 the nondeductible expenses of the trust or es18 tate for the taxable year, over

19 ‘‘(B) a $300 exemption (or $600 in the

20 case of an estate).

21 ‘‘(2) LIMIT ON EXEMPTION.—If a donor estab22 lishes multiple trusts for the same beneficiaries, the

23 $300 exemption shall apply to only 1 of the trusts.

24 ‘‘(c) DEFINITIONS.—For purposes of this section—

25 ‘‘(1) SINGLE-TAXPAYER TRUST.—
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•S 722 IS

1 ‘‘(A) IN GENERAL.—A ‘single taxpayer

2 trust’ means—

3 ‘‘(i) a trust with only 1 beneficiary, or

4 ‘‘(ii) a revocable trust or other trust

5 for which the grantor would be considered

6 the owner (in which case the grantor will

7 be treated as the beneficiary solely for pur8 poses of subsection (a)).

9 ‘‘(B) CERTAIN TRUSTS WITH MULTIPLE

10 BENEFICIARIES.—If a trust has multiple bene11 ficiaries and each beneficiary has a right to a

12 portion of the income of the trust and right to

13 the same portion of the residual interest of the

14 trust, the trust many elect to be treated as mul15 tiple single-taxpayer trusts and allocate its ex16 penses proportionally to the beneficiaries.

17 ‘‘(2) MULTI-TAXPAYER TRUST.—A ‘multi-tax18 payer trust’ is any trust that is not a single bene19 ficiary trust.

20 ‘‘(3) EXPENSES.—

21 ‘‘(A) IN GENERAL.—The expenses of a

22 trust include State and local taxes, trustees

23 fees, amounts paid to persons who are not

24 beneficiaries of the trust, administration ex25 penses, and all other fees and expenses payable
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•S 722 IS

1 by the trust, other than commissions and other

2 charges directly attributable to the purchase or

3 sale of assets which would reduce the proceeds

4 from the sale of the asset or be treated as part

5 of the cost of an asset.

6 ‘‘(B) EXPENSES OF A BUSINESS ENTITY.—

7 The expenses of a trust do not include the ex8 penses incurred by the trust in its business ac9 tivities that are treated as a business entity.

10 ‘‘(4) DEDUCTIBLE EXPENSES.—‘Deductible ex11 penses’ means expenses of a trust that would be de12 ductible if incurred by an individual.

13 ‘‘(5) CHARITABLE DEDUCTION.—For purposes

14 of determining whether a charitable contribution

15 would be deductible by a multi-taxpayer trust, the

16 rules limiting charitable deductions to specified per17 centages of income shall not apply.

18 ‘‘SEC. 144. TRUSTS.

19 ‘‘(a) GRANTOR TRUSTS.—The provisions of this sub20 chapter shall apply to grantor trusts only if the grantor

21 is an individual.

22 ‘‘(b) CHARITABLE REMAINDER TRUSTS AND CHARI23 TABLE ANNUITY TRUSTS.—The provisions of this sub24 chapter shall, in accordance with regulations prescribed by

25 the Secretary, apply in the case of a charitable remainder
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•S 722 IS

1 annuity trust and a charitable remainder unitrust, except

2 that the proxy tax under section 143(b) shall not apply

3 to such trusts.

4 ‘‘SEC. 145. ESTATES.

5 ‘‘(a) IN GENERAL.—Rules similar to those contained

6 in sections 141 through 144 shall apply to estates.

7 ‘‘(b) EXCEPTIONS.—

8 ‘‘(1) ALLOCATION OF PTA AND NON-PTA.—PTA

9 and non-PTA shall be allocated to take into account

10 directions in a will. Under regulations prescribed by

11 the Secretary, directions may be inferred. A direc12 tion to sell a particular asset and provide the pro13 ceeds to a beneficiary shall be viewed as a direction

14 that the non-PTA attributable to the sale and the

15 PTA attributable to the decedent’s basis in the

16 asset, if any, be allocated to the distribution to the

17 beneficiary.

18 ‘‘(2) EXPENSES DEDUCTIBLE UNDER THE

19 ESTATE TAX.—Expenses of the estate that are de20 ductible under the estate tax but not under the indi21 vidual tax shall be treated as paid out of PTAs, and

22 to the extent so treated and will not be subject to

23 the proxy tax.

24 ‘‘(3) EXPENSE FOR ESTATE TAX.—
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•S 722 IS

1 ‘‘(A) IN GENERAL.—Expenses for the es2 tate tax and any inheritance tax paid by the es3 tate shall be treated as expenses of the estate

4 subject to the proxy tax under section 143(b).

5 ‘‘(B) ELECTION TO REDUCE PTA.—The ex6 ecutor or administrator of an estate can elect,

7 in lieu of treating all estate tax and inheritance

8 tax expenses as subject to the proxy tax under

9 section 143(b), to reduce the PTA amount (but

10 not below zero) by the amount of such taxes. If

11 the amount of such taxes exceeds the PTA

12 amount, such excess shall be treated as ex13 penses of estate tax subject to the proxy tax

14 under section 143(b).

15 SEC. 146. INCOME IN RESPECT OF A DECEDENT.

16 ‘‘(a) INCLUSION IN GROSS INCOME.—

17 ‘‘(1) GENERAL USE.—The amount of all items

18 of gross income in respect of a decedent which are

19 not properly includible in respect of a taxable period

20 in which falls the date of his death, or a prior pe21 riod, shall be included in gross income, for the tax22 able year when received, of:

23 ‘‘(A) the estate of the decedent, if the right

24 to receive the amount is acquired by the dece25 dent’s estate,
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•S 722 IS

1 ‘‘(B) the person who, by reason of the

2 death of the decedent, acquires the right to re3 ceive the amount, if the right to receive the

4 amount is not acquired by the decedent’s estate

5 from the decedent, and

6 ‘‘(C) the person who acquires from the de7 cedent the right to receive the amount by be8 quest, devise or inheritance, if the amount is

9 received after a distribution by the decedent’s

10 estate of such right.

11 ‘‘(2) DEFINITION.—The Secretary shall pre12 scribe regulations on the treatment of income from

13 sales of rights to receive income and installment

14 sales.

15 ‘‘(b) ESTATES.—

16 ‘‘(1) IN GENERAL.—Income in respect of a de17 cedent shall be taken into account by an estate as

18 if it were a nonpreviously taxed amount (non-PTA)

19 for purposes of sections 141 through 145. Such in20 come shall be subject to tax under this chapter only

21 to the extent—

22 ‘‘(A) that the proxy of section 143 applies,

23 and

24 ‘‘(B) amounts are distributed from the es25 tate as non-PTAs.
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•S 722 IS

1 ‘‘(2) ELECTION.—The executor or adminis2 trator of an estate may elect to add income in re3 spect of a decedent to the tax base of the proxy tax

4 under section 143(b), in which case such income

5 shall be treated as an addition to the PTA of an es6 tate.

7 ‘‘Subchapter J—Definitions and Rules of

8 Application

‘‘Sec. 151. Definitions.

‘‘Sec. 152. Rules of application.

9 ‘‘SEC. 151. DEFINITIONS.

10 ‘‘(a) IN GENERAL.—When used in this chapter,

11 where not otherwise distinctly expressed or manifestly in12 compatible with the intent thereof—

13 ‘‘(1) BUSINESS ENTITY.—The definition of

14 ‘business entity’ in section 206 (relating to the busi15 ness tax) shall apply.

16 ‘‘(2) BUSINESS TAX.—‘Business tax’ means the

17 tax imposed by section 201 and, to the extent re18 quired by the context, the provisions of chapter 2.

19 ‘‘(3) INTERNAL REVENUE CODE OF 1986.—‘In20 ternal Revenue Code of 1986’ means the Internal

21 Revenue Code of 1986 as in effect immediately be22 fore the enactment of the business tax and the USA

23 Income Tax.
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•S 722 IS

1 ‘‘(4) UNITED STATES.—‘United States’ means

2 the States and the District of Columbia.

3 ‘‘(b) TERMS DEFINED IN CHAPTER 2.—If a term

4 that is used but not defined in this chapter or in section

5 7701 is defined in chapter 2, the definition in chapter 2

6 shall apply except if manifestly incompatible with the in7 tent of the provision in which the term is used.

8 ‘‘SEC. 152. RULES OF APPLICATION.

9 ‘‘(a) DEFINITIONS.—Any definition included in this

10 chapter shall apply for all purposes of this chapter un11 less—

12 ‘‘(1) such definition is limited to the purposes

13 of a particular chapter, section, or subsection, or

14 ‘‘(2) the definition clearly would not be applica15 ble in a particular context.

16 ‘‘(b) INTERPRETATIONS CONSISTENT WITH INTER17 NAL REVENUE CODE OF 1986.—Terms not defined in this

18 chapter or elsewhere in this title, but defined in the Inter19 nal Revenue Code of 1986, shall be interpreted in a man20 ner consistent with the Internal Revenue Code of 1986,

21 except to the extent such interpretation would be incon22 sistent with the principles and purposes of this chapter.’’

23 (b) EFFECTIVE DATE.—The amendments made by

24 this section shall be effective on January 1, 1996.
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1 SEC. 202. REORGANIZATION OF THE CODE.

2 (a) REPEAL OF CHAPTER 5.—Chapter 5 of the Code

3 (relating to tax on transfers to avoid income tax) is re4 pealed.

5 (b) REDESIGNATION OF OTHER CHAPTERS.—

6 (1) CHAPTER 2.—Chapter 2 of the Code (relat7 ing to the tax on self-employment income) is redesig8 nated as chapter 4.

9 (2) CHAPTER 3.—Chapter 3 of the Code (re10 lating to the withholding of tax on nonresident aliens

11 and foreign corporations) is redesignated as chapter

12 5.

13 TITLE III—NEW BUSINESS TAX

14 SEC. 301. REPEAL OF PRESENT CORPORATE INCOME TAX;

15 NEW TAX PAID BY CORPORATIONS AND

16 OTHER BUSINESSES.

17 (a) IN GENERAL.—The Internal Revenue Code of

18 1986, as amended by title II, is amended by adding after

19 chapter 1 the following new chapter:

20 ‘‘CHAPTER 2—TAX PAID BY

21 CORPORATIONS AND OTHER BUSINESSES

‘‘SUBCHAPTER A. Imposition of tax.

‘‘SUBCHAPTER B. Basic rules for business tax.

‘‘SUBCHAPTER C. Capital contributions, mergers, acquisitions, and distributions.

‘‘SUBCHAPTER D. Accounting method rules.

‘‘SUBCHAPTER E. Land and rental property.

‘‘SUBCHAPTER F. Insurance and financial products.

‘‘SUBCHAPTER G. Financial intermediation and financial institutions.

‘‘SUBCHAPTER H. Tax-exempt organizations.
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•S 722 IS

‘‘SUBCHAPTER I. Cooperatives.

‘‘SUBCHAPTER J. Sourcing rules.

‘‘SUBCHAPTER K. Business conducted in a possession.

‘‘SUBCHAPTER L. Payroll tax credit.

‘‘SUBCHAPTER M. Import tax.

‘‘SUBCHAPTER N. Transition rules.

‘‘SUBCHAPTER O. Rules for administration, consolidated returns.

‘‘SUBCHAPTER P. Definitions and rules of application.

1 ‘‘Subchapter A—Imposition of Tax

‘‘Sec. 201. Tax imposed.

2 ‘‘SECTION 201. TAX IMPOSED.

3 ‘‘(a) TAXABLE BUSINESS ACTIVITY.—A tax is im4 posed on the sale of goods and services in the United

5 States by a business entity. The amount of the tax equals

6 the amount by which—

7 ‘‘(1) the business tax, exceeds

8 ‘‘(2) the payroll tax credit.

9 ‘‘(b) BUSINESS TAX.—The ‘business tax’ imposed on

10 a business entity that sells or leases property or sells serv11 ices in the United States equals 11 percent of the gross

12 profit of the business entity for the taxable year.

13 ‘‘(c) PAYROLL TAX CREDIT.—The ‘payroll tax credit’

14 is a credit for the social security, railroad retirement and

15 hospital insurance taxes paid by an employer, as deter16 mined in accordance with subchapter L (sections 281

17 through 283).

18 ‘‘(d) IMPORT TAX.—For rules relating to the import

19 tax imposed by this chapter, see subchapter M (sections

20 286 through 288).
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•S 722 IS

1 ‘‘Subchapter B—Basic Rules for Business Tax

‘‘Sec. 202. Gross profits.

‘‘Sec. 203. Taxable receipts.

‘‘Sec. 204. Deductible amounts.

‘‘Sec. 205. Cost of business purchases.

‘‘Sec. 206. Business entity and business activity.

‘‘Sec. 207. Loss carryover deduction.

2 ‘‘SEC. 202. GROSS PROFITS.

3 ‘‘ ‘Gross profits’ means for a taxable year of a busi4 ness entity the amount by which—

5 ‘‘(1) the taxable receipts of the business entity

6 for the taxable year exceed,

7 ‘‘(2) the deductible amounts for the business

8 entity for the taxable year.

9 ‘‘SEC. 203. TAXABLE RECEIPTS.

10 ‘‘(a) IN GENERAL.—‘Taxable receipts’ means all re11 ceipts from the sale of property, use of property, and per12 formance of services in the United States.

13 ‘‘(b) GAMES OF CHANCE.—Amounts received by busi14 ness entities engaging in the activity of providing games

15 of chance shall be treated as receipts from the sale of

16 property or services.

17 ‘‘(c) IN-KIND RECEIPTS.—The taxable receipts at18 tributable to the receipt of property, use of property or

19 services in whole or partial exchange for property, use of

20 property or services equal the fair market value of the

21 services or property received, plus any cash received.
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•S 722 IS

1 ‘‘(d) TAXES.—Taxable receipts do not include any ex2 cise tax, sales tax, custom duty, or other separately stated

3 levy imposed by a Federal, State, or local government re4 ceived by a business entity in connection with the sale of

5 property or services or the use of property.

6 ‘‘(e) FINANCIAL RECEIPTS.—

7 ‘‘(1) IN GENERAL.—Except as provided in sub8 chapter G (relating to financial intermediation and

9 financial institutions), taxable receipts do not in10 clude financial receipts.

11 ‘‘(2) FINANCIAL RECEIPTS.—‘Financial re12 ceipts’ include—

13 ‘‘(A) interest,

14 ‘‘(B) dividends and other distributions by a

15 business entity,

16 ‘‘(C) proceeds from the sale of stock, other

17 ownership interests in business entities, or

18 other financial instruments (as defined in sec19 tion 242(b)(3)),

20 ‘‘(D) proceeds from life insurance policies,

21 ‘‘(E) proceeds from annuities,

22 ‘‘(F) proceeds from currency hedging or

23 exchanges, and

24 ‘‘(G) proceeds from other financial trans25 actions.
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•S 722 IS

1 ‘‘(f) CROSS REFERENCES.—

2 ‘‘(1) FINANCIAL INTERMEDIATION.—See sub3 chapters F and G for rules relating to financial

4 intermediation.

5 ‘‘(2) EXPORTS, SALES IN THE UNITED

6 STATES.—See subchapter J for the exclusion from

7 gross receipts for export sales and for rules on sales

8 of property and services in the United States.

9 ‘‘(3) LAND.—See subchapter E for rules relat10 ing to certain sales of land.

11 ‘‘(4) INSURANCE PROCEEDS.—See section 237

12 for rules on the inclusion of certain insurance pro13 ceeds in taxable receipts.

14 ‘‘SEC. 204. DEDUCTIBLE AMOUNTS.

15 ‘‘(a) IN GENERAL.—‘Deductible amounts’ for a busi16 ness entity in a taxable year include—

17 ‘‘(1) the cost of business purchases in the tax18 able year (as determined under section 205),

19 ‘‘(2) such entity’s loss carryover deduction (as

20 determined under section 207), and

21 ‘‘(3) the transition basis deduction (as deter22 mined under section 290).

23 ‘‘(b) FINANCIAL INTERMEDIATION.—See subchapters

24 F and G for special rules for business entities engaging

25 in financial intermediation.
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•S 722 IS

1 ‘‘SEC. 205. COST OF BUSINESS PURCHASES.

2 ‘‘(a) BUSINESS PURCHASES.—

3 ‘‘(1) IN GENERAL.—‘Business purchases’ means

4 the acquisition of—

5 ‘‘(A) property,

6 ‘‘(B) the use of property, or

7 ‘‘(C) services,

8 for use in a business activity in the United States.

9 ‘‘(2) EXAMPLES.—Business purchases include

10 (without limitation) the—

11 ‘‘(A) purchase or rental of real property,

12 ‘‘(B) purchase or rental of capital equip13 ment,

14 ‘‘(C) purchase of supplies and inventory,

15 ‘‘(D) purchase of services from independ16 ent contractors,

17 ‘‘(E) purchase of financial intermediation

18 services (as determined in accordance with sec19 tion 236),

20 ‘‘(F) purchase of a business loss policy (as

21 determined in accordance with section 237),

22 and

23 ‘‘(G) imports for use in a business activity

24 in the United States.

25 ‘‘(3) EXCLUSIONS.—Business purchases do not

26 include—
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•S 722 IS

1 ‘‘(A) payments for use of money or capital,

2 such as interest or dividends (except to the ex3 tent that a portion so paid is a fee for financial

4 intermediation services),

5 ‘‘(B) premiums for life insurance,

6 ‘‘(C) the acquisition of savings assets (as

7 defined in section 53(b)), or financial instru8 ments (as defined in section 242(b)(3)),

9 ‘‘(D) property acquired outside the United

10 States (but such property shall be taken into

11 account as an import if imported),

12 ‘‘(E) services performed outside the United

13 States (unless treated as imported into the

14 United States),

15 ‘‘(F) compensation expenses for an individ16 ual (other than amounts paid to an individual

17 in his capacity as a business entity), or

18 ‘‘(G) taxes (except as provided in sub19 section (b)(2) relating to product taxes).

20 ‘‘(4) COMPENSATION EXPENSES.—‘Compensa21 tion expenses’ means—

22 ‘‘(A) wages, salaries, or other cash payable

23 for services by employees,

24 ‘‘(B) any taxes imposed on the recipient

25 that are withheld by the business entity,
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•S 722 IS

1 ‘‘(C) the cost of property purchased to pro2 vide employees with compensation (other than

3 property incidental to the provision of fringe

4 benefits that are excluded from income under

5 the individual tax),

6 ‘‘(D) the cost of fringe benefits which are

7 includible in an employee’s, partner’s, or propri8 etor’s income under the USA Income Tax (or

9 are excluded solely because such benefits con10 stitute employee savings), including (without

11 limitation)—

12 ‘‘(i) contributions to retirement and

13 severance benefit plans,

14 ‘‘(ii) premiums for the cost of life,

15 health, accident, disability and other insur16 ance policies for which the service provider,

17 members of his family, or persons des18 ignated by him or members of his family

19 are the beneficiaries,

20 ‘‘(iii) the cost of providing parking to

21 employees (unless the parking space is

22 used for a vehicle that is regularly used in

23 a business activity),

24 ‘‘(iv) employer-paid educational bene25 fits,
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•S 722 IS

1 ‘‘(v) employer-paid housing (other

2 than housing provided for the convenience

3 of the employer), and

4 ‘‘(vi) employer-paid meals (other than

5 meals provided for the convenience of the

6 employer).

7 ‘‘(b) COST OF BUSINESS PURCHASES.—

8 ‘‘(1) IN GENERAL.—The ‘cost of a business

9 purchase’ is the amount paid or to be paid for the

10 business purchase.

11 ‘‘(2) TAXES.—

12 ‘‘(A) IN GENERAL.—The ‘cost of business

13 purchases’ includes any product taxes paid or

14 to be paid with respect to the property or serv15 ices purchased.

16 ‘‘(B) PRODUCT TAX.—‘Product tax’ means

17 any excise tax, sales or use tax, custom duty, or

18 other separately stated levy imposed by a Fed19 eral, State, or local government on the produc20 tion, severance or consumption of property or

21 on the provision of services, whether or not sep22 arately stated, and including any such taxes

23 that are technically imposed on the seller of

24 property or services.
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•S 722 IS

1 ‘‘(C) TAXES NOT PRODUCT TAXES.—Prod2 uct taxes do not include—

3 ‘‘(i) the import tax,

4 ‘‘(ii) state and local property taxes,

5 ‘‘(iii) franchise or income taxes,

6 ‘‘(iv) payroll taxes and self-employ7 ment taxes, or

8 ‘‘(v) the business tax.

9 ‘‘(3) IMPORTS.—In the case of an import by a

10 business entity, the cost of the import is the import

11 price for purposes of the import tax. The import tax

12 is not part of the cost of the import.

13 ‘‘(c) PROPERTY AND SERVICES ACQUIRED FOR

14 PROPERTY.—If a business entity receives property or serv15 ices from a business entity in whole or partial exchange

16 for property or services, the property or services acquired

17 shall be treated as if such property and services were pur18 chased for an amount equal to the fair market value of

19 the services or property received, plus any cash received.

20 For purposes of this section, property includes stock and

21 other equity interests in business other than stock or an

22 equity interest in the business entity acquiring the prop23 erty or services. See section 210(b) for rules on property

24 or services received in exchange for an equity interest in

25 the recipient.
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•S 722 IS

1 ‘‘(d) GAMBLING PAYMENTS.—In the case of a busi2 ness involving gambling, lotteries, or other games of

3 chance, business purchases include amounts paid to win4 ners.

5 ‘‘(e) CROSS REFERENCES.—

6 ‘‘(1) FINANCIAL INTERMEDIATION AND INSUR7 ANCE.—For rules relating to fees for financial

8 intermediation services and insurance, see sub9 chapter F.

10 ‘‘(2) LAND.—For special rules relating to the

11 acquisition of land, see subchapter E.

12 ‘‘(3) RENTAL REAL ESTATE.—For special rules

13 relating to the rental of real estate previously occu14 pied by an owner of the real estate, see section 232.

15 ‘‘(4) OUTSIDE THE UNITED STATES.—For spe16 cial rules relating to services performed outside the

17 United States but used inside the United States and

18 international services, see subchapter J.

19 ‘‘SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY.

20 ‘‘(a) BUSINESS ENTITY.—For purposes of the busi21 ness tax, ‘business entity’ means any corporation, unincor22 porated association, partnership, limited liability company,

23 proprietorship, independent contractor, individual, or any

24 other person engaging in business activity in the United
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•S 722 IS

1 States. An individual shall be considered a business entity

2 only with respect to the individual’s business activities.

3 ‘‘(b) BUSINESS ACTIVITY.—‘Business activity’ means

4 the sale of property or services, the leasing of property,

5 the development of property or services for subsequent

6 sale or use in producing property or services for subse7 quent sale. ‘Business activity’ does not include casual or

8 occasional sales of property used by an individual (other

9 than in a business activity), such as the sale by an individ10 ual of a vehicle used by the individual.

11 ‘‘(c) EXCEPTION FOR CERTAIN EMPLOYEES.—

12 ‘‘(1) IN GENERAL.—‘Business activity’ does not

13 include—

14 ‘‘(A) the performance of services by an em15 ployee for an employer that is a business entity

16 with respect to the activity in which the em17 ployee is engaged, or

18 ‘‘(B) the performance of regular domestic

19 household services (including babysitting,

20 housecleaning, and lawn cutting) by an em21 ployee of an employer that is an individual or

22 family.

23 ‘‘(2) EMPLOYEE DEFINED.—For purposes of

24 this subsection, ‘employee’ includes an individual

25 partner who provides services to a partnership or an
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•S 722 IS

1 individual member who provides services to a limited

2 liability company, or a proprietor with respect to

3 compensation for services from his proprietorship.

4 ‘‘SEC. 207. LOSS CARRYOVER DEDUCTION.

5 ‘‘(a) DEDUCTION.—The loss carryover deduction for

6 a taxable year is the lesser of—

7 ‘‘(1) the business entity’s gross profits for the

8 taxable year (determined without the loss carryover

9 deduction), or

10 ‘‘(2) the amount of the loss carryover to the

11 taxable year.

12 ‘‘(b) LOSS CARRYOVER.—

13 ‘‘(1) GENERAL RULE.—A loss for any taxable

14 year may be a loss carryover to each of the 15 tax15 able years following the taxable year of the loss.

16 ‘‘(2) LOSS CARRYOVERS TO A TAXABLE YEAR.—

17 The loss carryover to a taxable year is the sum of

18 the loss carryovers from all prior taxable years be19 ginning on or after January 1, 1996, that can be

20 carried over to the taxable year.

21 ‘‘(3) REDUCTION OF LOSS CARRYOVERS AS A

22 RESULT OF THE DEDUCTION.—A business entity’s

23 loss carryovers shall be reduced each year by the

24 amount of the loss carryover deduction for the year.
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•S 722 IS

1 Loss carryovers shall be reduced in the order that

2 such carryovers arose.

3 ‘‘(c) LOSS FOR TAXABLE YEAR.—A business entity’s

4 loss (if any) for the taxable year equals the excess (if any)

5 of—

6 ‘‘(1) the sum of—

7 ‘‘(A) the cost of business purchases for the

8 taxable year, and

9 ‘‘(B) the transition basis adjustment for

10 the taxable year, over

11 ‘‘(2) taxable receipts for the taxable year.

12 ‘‘(d) SPECIAL RULES.—

13 ‘‘(1) CONSOLIDATED RETURNS.—In the case of

14 a consolidated return, the loss for a taxable year

15 shall be determined on a consolidated group basis.

16 In the case of a deconsolidation, the loss carryovers

17 from the consolidated group shall be allocated in ac18 cordance with rules to be prescribed by the Sec19 retary.

20 ‘‘(2) LOSS CARRYOVERS OF ACQUIRED BUSI21 NESS ENTITY.—

22 ‘‘(A) IN GENERAL.—If a business entity

23 acquires another business entity in a trans24 action that is considered the acquisition of a

25 business entity and the 2 entities file a consoli-
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•S 722 IS

1 dated return or if 2 business entities merge, the

2 loss carryovers will survive and can be applied

3 against the taxable receipts attributable to the

4 business activities carried on (or in the case of

5 a merger formerly carried on) by either entity.

6 ‘‘(B) ASSET ACQUISITION.—If a business

7 entity acquires all or substantially all of the as8 sets of another entity in a transaction that is

9 considered an asset acquisition rather than the

10 acquisition of a business entity, the acquirer

11 will be treated as if it acquired the loss

12 carryovers of the selling entity. For purposes of

13 this rule, the assets of a business entity include

14 ownership interests in other business entities.

15 ‘‘(C) SUBSTANTIALLY ALL.—For purposes

16 of this paragraph ‘substantially all’ means more

17 than 80 percent of the fair market value of a

18 business entity’s net assets. Under rules pre19 scribed by the Secretary, the parties to a trans20 action may elect to treat acquisitions in excess

21 of 70 percent of the fair market value of a busi22 ness entity’s net assets as acquisitions of ‘sub23 stantially all’ of a business entity’s net assets.
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1 ‘‘Subchapter C—Capital Contributions,

2 Mergers, Acquisitions, and Distributions

‘‘Sec. 210. Contributions to a business entity.

‘‘Sec. 211. Distributions of property.

‘‘Sec. 212. Asset acquisitions.

‘‘Sec. 213. Mergers and stock acquisitions.

‘‘Sec. 214. Spinoffs, splitoff, etc.

‘‘Sec. 215. Allocation of certain tax attributes.

3 ‘‘SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.

4 ‘‘(a) BY BUSINESS ENTITY.—

5 ‘‘(1) CASH.—If a business entity contributes

6 cash to a business entity of which it is or becomes

7 a partial or full owner, the amount contributed is

8 not a deductible amount to the contributor or a tax9 able receipt to the recipient.

10 ‘‘(2) PROPERTY OR SERVICES.—If a business

11 entity contributes property or services to a business

12 entity of which it is or becomes a partial or full

13 owner, the transaction will not result in taxable re14 ceipts to the contributor or a deduction for a busi15 ness purchase for the recipient and will not con16 stitute a sale resulting in taxable receipts to the con17 tributor.

18 ‘‘(b) BY INDIVIDUAL.—

19 ‘‘(1) CASH.—If an individual contributes cash

20 to a business entity, the cash received is not a tax21 able receipt.
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1 ‘‘(2) NEW PROPERTY.—If an individual contrib2 utes to a business entity property that the individual

3 purchased for the business entity and which was not

4 used by any person after its purchase, the property

5 shall be considered purchased by such business en6 tity from the person from which the individual pur7 chased the property and the basis of such property

8 in the hands of the business entity shall be the such

9 basis in the hands of the individual.

10 ‘‘(3) PERSONAL USE PROPERTY.—

11 ‘‘(A) IN GENERAL.—If an individual con12 tributes personal use property to a business en13 tity in which the individual has an ownership

14 interest or for which the individual receives an

15 ownership interest, the business entity shall not

16 be permitted to deduct the value of the property

17 received as a business expense. The business

18 entity will have a tax basis in the contributed

19 property equal to the contributor’s basis.

20 ‘‘(B) PERSONAL USE PROPERTY.—‘Per21 sonal use property’ means any property used by

22 an individual at any time other than in a busi23 ness activity.

24 ‘‘(4) SERVICES.—If an individual contributes

25 services to a business entity in which the individual
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1 has an ownership interest or receives an ownership

2 interest, the business entity shall not be permitted to

3 deduct the value of the services received (or the

4 value of the equity interest provided to the services

5 provider).

6 ‘‘SEC. 211. DISTRIBUTIONS OF PROPERTY.

7 ‘‘(a) DISTRIBUTIONS OTHER THAN TO CONTROL8 LING BUSINESS.—If a business entity distributes all or a

9 portion of its assets to its owners (other than a controlling

10 business entity), the business entity will be treated as if

11 it sold the assets to its owners at fair market value. The

12 fair market value will be determined by the distributing

13 corporation and those determinations, unless unreason14 able, will be binding on the recipients.

15 ‘‘(b) DISTRIBUTIONS TO A CONTROLLING BUSI16 NESS.—If a business entity distributes all or a portion of

17 its assets to a controlling business, the controlling busi18 ness will assume the distributing entity’s tax attributes

19 with respect to the assets and neither entity will have tax20 able receipts or a deduction as a result of the transaction.

21 ‘‘(c) DISTRIBUTION OF PERSONAL USE PROP22 ERTY.—If personal use property is distributed to the indi23 vidual who contributed the personal use property to a busi24 ness entity, the fair market value of the property for pur25 poses of paragraph (a) shall equal the basis of the prop-
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1 erty plus any enhancement in value of the property attrib2 utable to business purchases with respect to the property.

3 ‘‘(d) CONTROLLING BUSINESS ENTITY.—A business

4 entity is a ‘controlling business entity’ with respect to an5 other business entity if it owns directly or indirectly more

6 than 50 percent of the profits or capital interest in the

7 other business entity.

8 ‘‘(e) APPLICATION OF THIS SECTION.—This section

9 applies to both liquidating and nonliquidating distribu10 tions. Property shall be treated as distributed if the prop11 erty is used for a nonbusiness purpose (as defined in sec12 tion 232) for more than an insubstantial period of time

13 during a taxable year. See section 232 for rules relating

14 to certain rental property.

15 ‘‘SEC. 212. ASSET ACQUISITIONS.

16 ‘‘(a) IN GENERAL.—If a business entity transfers

17 some or all of its assets, the consideration received for

18 such assets shall be allocated among the assets transferred

19 in the same manner as was required by section 1060 of

20 the Internal Revenue Code of 1986. If the transferee and

21 transferor agree in writing on the allocation of any consid22 eration, or as to the fair market value of any of the assets,

23 such agreement shall be binding on both the transferor

24 and transferee unless the Secretary determines that such

25 allocation (or fair market value) is not appropriate.
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1 ‘‘(b) TAX CONSEQUENCES.—The tax consequences of

2 an asset acquisition shall be determined in accordance

3 with the rules of this chapter and shall be dependent upon

4 allocations made under subsection (a). In general, consid5 eration allocable to savings assets, such as stock in an6 other business entity, would not be included in taxable re7 ceipts of the transferor and would not be a business pur8 chase of the purchaser, but consideration allocable to the

9 sale of tangible property and intangible property (other

10 than savings assets) will constitute taxable receipts of the

11 seller and a business purchase of the purchaser.

12 ‘‘(c) ELECTION TO TREAT ASSET ACQUISITION AS A

13 STOCK ACQUISITION.—In the case of the sale of substan14 tially all of the assets of a business entity or substantially

15 all of the assets of a line of business or a separately stand16 ing business of a business entity, the transferee and trans17 feror can jointly elect to treat the acquisition as if it were

18 an acquisition of the stock of a business entity holding

19 the assets so transferred. In such case, the rules of section

20 213 shall apply.

21 ‘‘(d) AUTHORITY TO REQUIRE ALLOCATION AGREE22 MENT AND NOTICE TO THE SECRETARY.—If the Sec23 retary determines that certain types of asset acquisitions

24 have significant possibilities of tax avoidance, the Sec25 retary may require—
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1 ‘‘(1) parties to such types of acquisitions to

2 enter into agreements allocating consideration,

3 ‘‘(2) parties to acquisitions involving certain

4 kinds of assets to enter into agreements allocating

5 part of the consideration to those assets, or

6 ‘‘(3) parties to certain acquisitions to report in7 formation to the Secretary.

8 ‘‘(e) ASSET ACQUISITION RULES DO NOT APPLY IF

9 CONSIDERATION INCLUDES EQUITY IN PURCHASER.—

10 ‘‘(1) IN GENERAL.—If a business entity issues

11 its own equity or equity in a subsidiary or other con12 trolled entity as part of the consideration for the

13 transfer of assets to it, the transaction shall not be

14 treated as an asset acquisition and the rules of sec15 tion 213 shall apply.

16 ‘‘(2) EQUITY.—For purposes of this subsection,

17 equity means—

18 ‘‘(A) stock, in the case of a corporation,

19 ‘‘(B) a partnership or similar interest, in

20 the case of a partnership or limited liability

21 company, and

22 ‘‘(C) an ownership interest or interest in

23 profits in the case of any other business entity.
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1 ‘‘SEC. 213. MERGERS AND STOCK ACQUISITIONS.

2 ‘‘(a) MERGERS.—A merger of 1 business entity into

3 another or 2 businesses entities into a 3rd business entity

4 or any other similar transaction shall have no direct con5 sequences under the business tax. The surviving entity

6 shall assume the tax attributes of the merged corpora7 tions, including any loss carryovers and credit carryovers.

8 ‘‘(b) STOCK ACQUISITION.—The acquisition of all or

9 substantially all of the ownership interest in 1 business

10 entity either for cash or in exchange for ownership in the

11 acquiring entity or an entity controlled by the acquired

12 entity shall have no direct consequences under the busi13 ness tax.

14 ‘‘SEC. 214. SPINOFFS, SPLITOFFS, ETC.

15 ‘‘A spinoff, splitoff, or split-up of a business entity

16 shall have no direct tax consequences under the business

17 tax.

18 ‘‘SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES.

19 ‘‘The Secretary shall prescribe rules for allocation of

20 loss carryovers and payroll tax credit carryovers in cases

21 of substantial shifts of assets from 1 business entity to

22 another business entity. Under such rules, a portion of a

23 business entity’s carryovers may be deemed transferred

24 when assets are transferred.

25 ‘‘Subchapter D—Accounting Method Rules

‘‘Sec. 220. General accounting rules.
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‘‘Sec. 221. Use of the cash method of accounting.

‘‘Sec. 222. Taxable year.

‘‘Sec. 223. Long-term contracts.

‘‘Sec. 224. Post-sale price adjustments and refunds.

‘‘Sec. 225. Bad debts.

‘‘Sec. 226. Transition rules.

1 ‘‘SEC. 220. GENERAL ACCOUNTING RULES.

2 ‘‘(a) IN GENERAL.—Except as provided in section

3 221, a business entity shall use an accrual method of ac4 counting for purposes of determining the timing of rec5 ognition of taxable receipts and deductions of business

6 purchases. All business purchases shall be deducted when

7 incurred (in the case of a business entity using an accrual

8 method of accounting) or when paid (in case of a business

9 entity using the cash receipts and disbursements method

10 of accounting) without regard to whether the business pur11 chases are for or relate to—

12 ‘‘(1) inventory,

13 ‘‘(2) assets with a useful life of more than 1

14 year, or

15 ‘‘(3) property that will be used to produce other

16 property.

17 ‘‘(b) ECONOMIC PERFORMANCE.—For purposes of

18 determining whether an amount has been incurred, the all

19 events test shall not be treated as met any earlier than

20 when economic performance with respect to such item

21 occurs.
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1 ‘‘(c) CHANGE IN ACCOUNTING METHODS.—Except as

2 otherwise expressly provided in this chapter, a business

3 entity shall secure the consent of the Secretary before

4 changing the method of accounting by which it determines

5 gross profits. This provision shall not apply to changes

6 required by the adoption of the business tax.

7 ‘‘SEC. 221. USE OF THE CASH RECEIPTS AND DISBURSE8 MENTS METHOD OF ACCOUNTING.

9 ‘‘(a) IN GENERAL.—A business entity that was per10 mitted to use and used the cash receipts and disburse11 ments method of accounting under the Internal Revenue

12 Code of 1986 shall be permitted to continue to use the

13 cash receipts and disbursements method of accounting.

14 ‘‘(b) NEW BUSINESS ENTITIES.—A new business en15 tity shall be permitted to use the cash receipts and dis16 bursements method of accounting if permitted to under

17 regulations prescribed by the Secretary.

18 ‘‘(c) CHANGE OR EXPANSION OF BUSINESS.—Sub19 section (a) shall cease to apply to a business entity that

20 changes or expands its business such that under regula21 tions prescribed by the Secretary it is no longer eligible

22 to use the cash receipts and disbursements method of ac23 counting.

24 ‘‘(d) REGULATIONS.—
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1 ‘‘(1) USE OF CASH RECEIPTS AND DISBURSE2 MENTS METHOD.—The Secretary shall prescribe reg3 ulations defining which business entities may use the

4 cash receipts and disbursements method of account5 ing. In general, those regulations shall be consistent

6 with the rules under sections 447 and 448 of the In7 ternal Revenue Code of 1986, except that all cor8 porations shall be treated as C corporations were

9 treated under those sections. The regulations shall

10 not require a business entity described in subsection

11 (a) to convert to the accrual method prior to Janu12 ary 1, 1997.

13 ‘‘(2) CHANGE IN ACCOUNTING METHOD.—The

14 Secretary shall prescribe regulations to prevent dou15 ble counting of taxable receipts and deductible ex16 penses in the case of a change in accounting method.

17 ‘‘SEC. 222. TAXABLE YEAR.

18 ‘‘(a) COMPUTATION OF GROSS PROFITS.—Gross

19 profits shall be computed on the basis of a business enti20 ty’s taxable year.

21 ‘‘(b) TAXABLE YEAR.—‘Taxable year’ means—

22 ‘‘(1) the taxpayer’s annual accounting period, if

23 it is a calendar year or a fiscal year;

24 ‘‘(2) the calendar year, if subsection (g) applies;

25 or
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1 ‘‘(3) the period for which the return is made if

2 the return is made for a period of less than 12

3 months.

4 ‘‘(c) ANNUAL ACCOUNTING PERIOD.—‘Annual ac5 counting period’ means the annual period on the basis of

6 which the business entity regularly keeps its books.

7 ‘‘(d) CALENDAR YEAR.—‘Calendar year’ means a pe8 riod of 12 months ending on December 31.

9 ‘‘(e) FISCAL YEAR.—‘Fiscal year’ means a period of

10 12 months ending on the last day of any month other than

11 December. In the case of any business entity that has

12 made the election provided by subsection (f), the term

13 means the annual period (varying from 52 to 53 weeks)

14 so elected.

15 ‘‘(f) ELECTION OF 52–53 WEEK YEAR.—

16 ‘‘(1) GENERAL RULE.—A business entity which,

17 in keeping its books, regularly computes its income

18 or profits on a basis of an annual period which var19 ies from 52 to 53 weeks and ends always on the

20 same day of the week and ends always—

21 ‘‘(A) on whatever date such same day of

22 the week last occurs in a calendar month, or

23 ‘‘(B) on whatever date such same day of

24 the week falls which is nearest to the last day
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1 of a calendar month, may elect to compute its

2 gross profits on the basis of such annual period.

3 ‘‘(2) REGULATIONS.—The Secretary shall pre4 scribe such regulations as he deems necessary for

5 the application of this subsection, including regula6 tions relating to the application of effective dates to

7 taxpayers using a 52–53 week year.

8 ‘‘(g) CALENDAR YEAR REQUIRED.—

9 ‘‘(1) NO ACCOUNTING PERIOD.—A business en10 tity’s taxable year shall be the calendar year if the

11 business entity does not have an annual accounting

12 period or has an annual accounting period that does

13 not qualify as a fiscal year.

14 ‘‘(2) NEW BUSINESS ENTITY.—The taxable

15 year of a business entity that begins business activ16 ity after December 31, 1995, shall be the calendar

17 year (or a 52–53 week fiscal year ending in Decem18 ber) unless the business entity can demonstrate a

19 business reason for selecting an accounting period

20 other than the calendar year.

21 ‘‘(h) TRANSITION RULE FOR BUSINESS ENTITIES

22 WITH A FISCAL YEAR.—

23 ‘‘(1) IN GENERAL.—A business entity with a

24 taxable year that is not the calendar year shall have

25 a short taxable year ending on December 31, 1995,
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1 and a subsequent taxable year beginning on January

2 1, 1996, and ending on the day immediately preced3 ing the beginning of the business entity’s next fiscal

4 year.

5 ‘‘(2) BUSINESS ENTITIES WITH 52–53 WEEK

6 YEAR ENDING IN DECEMBER.—

7 ‘‘(A) IN GENERAL.—If a business entity

8 has a 52–53 week taxable year (under the In9 ternal Revenue Code of 1986) that ends in De10 cember 1995, it may elect to begin its first tax11 able year for the business tax on the first day

12 immediately following the last day of such tax13 able year.

14 ‘‘(B) NO ELECTION.—If a business entity

15 that has a 52–53 week taxable year that ends

16 in December 1995, does not make the election

17 under subparagraph (A) or is prohibited from

18 making such election by subparagraph (C), the

19 business entity’s taxable year under the Inter20 nal Revenue Code of 1986 that would end in

21 December 1995 shall end on December 31,

22 1995.

23 ‘‘(C) ANTI-ABUSE RULE.—Subparagraph

24 (A) shall not apply to any taxpayer that enters

25 into business transactions in 1995 following the
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1 scheduled end of its fiscal year with business

2 entities that are not subject to the business tax

3 at the time of such transactions if such trans4 actions deviate from the normal course of busi5 ness in order to achieve some tax benefit.

6 ‘‘SEC. 223. LONG-TERM CONTRACTS.

7 ‘‘(a) IN GENERAL.—In the case of a long-term con8 tract—

9 ‘‘(1) CONTRACTOR EXPENSES.—The contractor

10 shall be entitled to deduct its business purchases

11 when paid or incurred.

12 ‘‘(2) CONTRACTOR RECEIPTS.—The contractor

13 shall recognize taxable receipts—

14 ‘‘(A) in the case of a project in which the

15 acquirer has no ownership interest in the

16 project until delivery—

17 ‘‘(i) upon delivery of the project, in

18 the case of an accrual basis contractor, or

19 ‘‘(ii) upon the later of delivery of the

20 project or the receipt of payment, in the

21 case of a cash-basis contractor,

22 ‘‘(B) in the case of a project in which the

23 acquirer obtains an ownership interest as the

24 project is constructed—
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1 ‘‘(i) when the contractor has the right

2 to payments, in the case of an accrual

3 basis contractor, or

4 ‘‘(ii) upon the later of when the con5 tractor receives the cash or has the right

6 to payments, in the case of a cash basis

7 contractor.

8 ‘‘(3) ACQUIRER EXPENSES.—The acquirer that

9 is a business entity shall be entitled to deduct its

10 costs of the business purchase—

11 ‘‘(A) in the case of a cash-basis acquirer,

12 at such time as a cash basis contractor would

13 be required to treat the amounts paid as tax14 able receipts, or

15 ‘‘(B) in the case of an accrual-basis

16 acquirer, at such time as an accrual basis con17 tractor would be required to treat the amounts

18 paid or due as taxable receipts.

19 ‘‘(b) RIGHT TO PAYMENTS.—

20 ‘‘(1) IN GENERAL.—A contractor shall be treat21 ed as having a right to payments with respect to a

22 project at any time to the extent that the contractor

23 would not be required to return payments received

24 (or would be entitled to collect payments not yet re-
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1 ceived) if the project were terminated at such time

2 by the contractor.

3 ‘‘(2) CONTRACTUAL PROVISIONS.—If a long4 term contract includes a procedure for paying the

5 contractor as work is completed (for example, by

6 reason of a draw down from a trust account), the

7 contractual provisions shall generally govern when a

8 contractor has a right to payment.

9 ‘‘(3) PERCENTAGE COMPLETION METHOD OF

10 ACCOUNTING.—If a long-term contract does not in11 clude a mechanism for paying the contractor as

12 work is completed, the percentage-of-completion

13 method of accounting shall be used to determine the

14 timing of taxable receipts of the contractor and busi15 ness purchases of the acquirer.

16 ‘‘(c) LONG-TERM CONTRACT.—

17 ‘‘(1) IN GENERAL.—‘Long-term contract’

18 means—

19 ‘‘(A) any contract that covers service or

20 production through parts of 2 different calendar

21 years if the contract includes a formal deposit

22 and draw-down mechanism, and

23 ‘‘(B) any contract for the manufacture,

24 building, installation, or construction of prop25 erty if such contract is not completed within the
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1 taxable year of the contractor in which such

2 contract is entered into.

3 ‘‘(2) EXCEPTION.—A contract for the manufac4 ture of property shall not be treated as a long-term

5 contract unless such contract involves the manufac6 ture of—

7 ‘‘(A) any unique item of a type which is

8 not normally included in the finished goods in9 ventory of the taxpayer, or

10 ‘‘(B) any item which normally requires

11 more than 12 calendar months to complete.

12 ‘‘(d) CONSISTENCY.—The Secretary may require

13 business entities to file statements containing such infor14 mation with respect to long-term contracts as the Sec15 retary may prescribe to ensure consistency in reporting.

16 ‘‘(e) FOREIGN CONTRACTS.—This section shall not

17 be construed to permit a deduction for a business purchase

18 for the cost of property produced outside the United

19 States pursuant to a long-term contract at any time prior

20 to the import of such property into the United States.

21 ‘‘SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS.

22 ‘‘(a) RECEIPT OF PRICE ADJUSTMENT.—In the case

23 of a post-sale price adjustment attributable to a business

24 purchase which was taken into account in computing gross

25 profits for a prior taxable year, the amount of such adjust-
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1 ment shall be treated as a reduction or increase, as the

2 case may be, in the cost of business purchases for the tax3 able year in which the adjustment is made or incurred.

4 ‘‘(b) ISSUANCE OF PRICE ADJUSTMENT.—In the case

5 of a post-sale price adjustment attributable to a sale the

6 receipts from which were taken into account in determin7 ing taxable receipts for a prior taxable year, the amount

8 of such adjustment shall be treated as a reduction or in9 crease, as the case may be, in taxable receipts for the tax10 able year in which the adjustment is made or incurred.

11 ‘‘(c) POST-SALE PRICE ADJUSTMENT.—‘Post-sale

12 price adjustment’ means a refund, rebate, or other price

13 allowance attributable to a sale of property or services or

14 an upward adjustment in price that was not previously

15 taken into account under the business entity’s method of

16 accounting.

17 ‘‘SEC. 225. BAD DEBTS.

18 ‘‘(a) SELLER.—If an amount owed to an accrual

19 basis business entity for property or services sold—

20 ‘‘(1) was taken into account as a taxable receipt

21 in a prior taxable year, and

22 ‘‘(2) becomes wholly or partially uncollectible

23 during the taxable year,
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1 then the seller shall treat the amount as a reduction in

2 taxable receipts for the taxable year in which it becomes

3 wholly or partially uncollectible.

4 ‘‘(b) NOTICE REQUIREMENT.—No reduction shall be

5 allowed under subsection (a) unless the seller notifies the

6 purchaser of the amount which the seller has treated as

7 wholly or partially uncollectible.

8 ‘‘(c) SUBSEQUENT COLLECTION.—If an amount

9 which was treated as uncollectible under subsection (a) is

10 subsequently collected, it shall be treated as a taxable re11 ceipt when collected.

12 ‘‘(d) PURCHASER.—If a purchaser receives notice

13 under subsection (b) from a seller and the purchaser has

14 treated the amount labeled uncollectible as a business pur15 chase in a prior taxable year, then the purchaser shall

16 treat such amount as a reduction in the cost of business

17 purchases in the taxable year to which the notice relates.

18 If the purchaser subsequently repays such amount, the re19 payment shall constitute the cost of a business purchase.

20 ‘‘SEC. 226. TRANSITION RULES.

21 ‘‘(a) NO DOUBLE DEDUCTIONS.—A business entity

22 shall not be entitled to treat as a ‘cost of business pur23 chase’ any amount that the business entity deducted in

24 computing taxable income under the income tax in effect

25 prior to the effective date of the business tax.
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1 ‘‘(b) NO DOUBLE INCLUSION.—A business entity

2 shall not be required to include in taxable receipts any

3 receipt that the business entity took into account in com4 puting taxable income under the income tax in effect prior

5 to the effect date of the business tax.

6 ‘‘(c) NO LOSS OF DEDUCTION.—An expense which—

7 ‘‘(1) a business entity would have been able to

8 deduct as a cost of a business purchase in an ac9 counting period before the effective date of the busi10 ness tax if the business tax had been in effect in

11 such period, and

12 ‘‘(2) the business entity would have been able to

13 deduct as an expense in computing taxable income

14 in a period after the business tax is effective if the

15 income tax had continued in effect,

16 shall be treated as a cost of a business purchase incurred

17 or paid at the time that it would have been paid or in18 curred under the income tax if the income tax had contin19 ued in effect. This subsection shall not apply to any

20 amount which is to be taken into account under sub21 chapter N (relating to amortization of transition basis,

22 and inventory costs), any amounts which would have been

23 deducted under the income tax through loss carryover de24 ductions, or any deductions deferred by the uniform cap-
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1 italization rules under section 263A of the Internal Reve2 nue Code of 1986.

3 ‘‘(d) ALL TAXABLE RECEIPTS TAXED.—A receipt

4 which—

5 ‘‘(1) a business entity would have been required

6 to treat as a taxable receipt in an accounting period

7 before the effective date of the business tax if the

8 business tax had been in effect in such period, and

9 ‘‘(2) the business entity would have been re10 quired to include in gross income in a period after

11 the business tax is effective if the income tax had

12 continued in effect,

13 shall be treated as a taxable receipt at the time that it

14 would have been included in income if the income tax had

15 continued in effect.

16 ‘‘Subchapter E—Land and Rental Property

‘‘Sec. 230. No deduction for land purchased for nonbusiness use.

‘‘Sec. 231. Taxable receipts for land held for nonbusiness use.

‘‘Sec. 232. Certain rental property.

17 ‘‘SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR

18 NONBUSINESS USE.

19 ‘‘(a) IN GENERAL.—The acquisition of unimproved

20 land shall not constitute a business purchase if the unim21 proved land is not acquired to be used in a business activ22 ity or if the land is acquired for—

23 ‘‘(1) speculation,

24 ‘‘(2) development (including subdivision),
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1 ‘‘(3) temporary leasing or other use not com2 mensurate with the value of the land,

3 ‘‘(4) indefinite future use in a business activity,

4 or

5 ‘‘(5) use in compensating employees.

6 ‘‘(b) FUTURE USE IN BUSINESS ACTIVITY.—Unim7 proved land will not be considered held for ‘indefinite fu8 ture use in a business activity’ if promptly upon acquisi9 tion, the purchaser or the lessee begins construction of im10 provements on the land (other than improvements, such

11 as paving or sewage lines, intended for indefinite future

12 development) that will be used in a business activity. Such

13 improvement must be commensurate with the value of the

14 land.

15 ‘‘(c) UNIMPROVED LAND.—‘Unimproved land’

16 means—

17 ‘‘(1) land with no buildings on it,

18 ‘‘(2) land with improvements if the value of the

19 improvements is relatively small in comparison to

20 the value of the land and it is anticipated that the

21 improvements will be demolished and not used, or

22 ‘‘(3) land in excess of the amount reasonably

23 needed for the buildings located on it.

24 ‘‘(d) CONVERSION TO BUSINESS USE.—If the acqui25 sition of land is not treated as a business purchase by rea-
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1 son of subsection (a) and the land is subsequently used

2 in a manner for which it could have been treated as a

3 business purchase, the cost of the land will be treated as

4 a business purchase when the improvements on the land

5 are placed in service (or in the case of construction for

6 sale, substantially completed and advertised for sale).

7 ‘‘SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD

8 FOR NONBUSINESS USE.

9 ‘‘(a) TAX BASIS.—A business entity shall have a tax

10 basis in land equal to the cost of the land if such cost

11 is not deductible by reason of section 30(a) and the land

12 has not been converted to business use for purposes of

13 section 230(d).

14 ‘‘(b) TAXABLE RECEIPTS OF A LAND SALE.—The

15 taxable receipts from the sale of land (or portion thereof)

16 in which a business entity has a tax basis by reason of

17 subsection (a) shall be the amount by which the proceeds

18 exceed the basis of such land (or portion thereof).

19 ‘‘SEC. 232. CERTAIN RENTAL PROPERTY.

20 ‘‘(a) IN GENERAL.—Except as provided in subsection

21 (b), the activity of rental of real estate is a business activ22 ity to which the business tax applies.

23 ‘‘(b) NOT RENTAL PROPERTY.—

24 ‘‘(1) IN GENERAL.—If the owners of property

25 use the property for at least 14 days during the tax-
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1 able year for a nonbusiness purpose and rent the

2 property for no more than 14 days during the tax3 able year, the property shall not be considered rental

4 property or used in the activity of rental of real es5 tate during the taxable year for purposes of the

6 business tax.

7 ‘‘(2) NONBUSINESS USE.—For purposes of this

8 section, ‘use for a nonbusiness purpose’ means use

9 other than—

10 ‘‘(A) use for which fair rent is paid,

11 ‘‘(B) use in connection with the prepara12 tion of the property for rental, or

13 ‘‘(C) use that serves a clear business pur14 pose.

15 Use during any part of a day shall constitute use for

16 that day.

17 ‘‘(c) RENTAL PROPERTY BECOMES NONRENTAL

18 PROPERTY.—If property which is considered rental prop19 erty for purposes of subsection (a) in 1 taxable year ceases

20 to be rental property (by reason of subsection (b)) in the

21 following taxable year, the property (and any associated

22 debt) shall be treated as distributed by the business entity

23 to its owners. Section 211(a) shall apply to such distribu24 tion.
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1 ‘‘Subchapter F—Insurance and Financial

2 Products

‘‘Sec. 235. General rules.

‘‘Sec. 236. Fees for financial intermediation services.

‘‘Sec. 237. Deductible insurance premiums.

‘‘Sec. 238. Nondeductible insurance premiums.

‘‘Sec. 239. Certain implicit fees for financial intermediation services.

3 ‘‘SEC. 235. GENERAL RULES.

4 ‘‘(a) TAXABLE RECEIPTS.—Except in the case of a

5 financial intermediation business, taxable receipts do not

6 include financial receipts (as defined in section 203(e)(2)).

7 ‘‘(b) BUSINESS PURCHASES.—Except in the case of

8 a financial intermediation business, business purchases do

9 not include the cost of financial instruments (as defined

10 in section 242(b)(3)) or payments for use of money or cap11 ital, other than fees for financial intermediation services.

12 ‘‘SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERV13 ICES.

14 ‘‘(a) BUSINESS PURCHASES.—Business purchases in15 clude explicit fees and implicit fees for financial

16 intermediation services (except to the extent that such fees

17 are for services treated as performed outside the United

18 States and not imported into the United States or for

19 services treated as exported.).

20 ‘‘(b) FINANCIAL INTERMEDIATION SERVICES.—The

21 definition of ‘financial intermediation service’ in section

22 241 applies for purposes of this section.

23 ‘‘(c) EXPLICIT FEES.—
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•S 722 IS

1 ‘‘(1) IN GENERAL.—‘Explicit fees for financial

2 intermediation services’ means separately stated fees

3 for services provided by a business entity in the fi4 nancial intermediation business. Explicit fees do not

5 include fees for use of money or capital.

6 ‘‘(2) EXAMPLES.—Explicit fees for financial

7 intermediation services include (without limita8 tion)—

9 ‘‘(A) separately listed maintenance and

10 service charges of providers of financial

11 intermediation services,

12 ‘‘(B) loan documentation fees,

13 ‘‘(C) brokerage fees,

14 ‘‘(D) loan origination fees,

15 ‘‘(E) underwriting fees,

16 ‘‘(F) trustees’ fees, and

17 ‘‘(G) fees for credit checks.

18 ‘‘(3) EXCLUSIONS.—Explicit fees for financial

19 intermediation services do not include prepaid inter20 est and other fees for use of money or capital even

21 if such fees are separately stated or are labeled as

22 service fees.

23 ‘‘(d) IMPLICIT FEES.—

24 ‘‘(1) IMPLICIT FEES ATTRIBUTABLE TO BOR25 ROWING.—
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•S 722 IS

1 ‘‘(A) IN GENERAL.—Implicit fees attrib2 utable to borrowing from banks and other fi3 nancial institutions shall include the portion of

4 interest payments that the Secretary designates

5 as constituting service fees.

6 ‘‘(B) TIMING.—Implicit fees determined

7 under this paragraph shall not be deductible in

8 any taxable year prior to the taxable year in

9 which the interest is paid. If the amount of the

10 interest to which implicit fees relate was de11 ducted as original issue discount under the In12 ternal Revenue Code of 1986, the implicit fees

13 with respect to such interest shall not constitute

14 a deductible business purchase.

15 ‘‘(C) DESIGNATION BY SECRETARY.—

16 ‘‘(i) ESTIMATE OF DIFFERENTIAL.—

17 The Secretary shall estimate for each cal18 endar year the difference between the cost

19 of funds for banks and the rates of interest

20 (including discount points) charged to the

21 most credit-worthy depositors of banks.

22 The determinations shall be made sepa23 rately for—

24 ‘‘(I) loans with terms of not more

25 than 3 years,
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•S 722 IS

1 ‘‘(II) loans with terms of over 3

2 but not over 9 years, and

3 ‘‘(III) loans with terms of over 9

4 years.

5 ‘‘(ii) DESIGNATION OF IMPLICIT

6 FEES.—The Secretary shall designate the

7 differences determined under clause (i) as

8 the portion of interest expense on loans

9 from banks and other financial institutions

10 that constitutes an implicit fee for term

11 loans originated during the following cal12 endar year for the respective periods listed

13 in subclauses (I) through (III) of clause

14 (i). The difference determined for loans de15 scribed in subclause (I) of clause (i) shall

16 apply to determine the implicit fee portion

17 of interest on demand loans outstanding

18 during the following calendar year.

19 ‘‘(iii) HISTORICAL DETERMINATION.—

20 The Secretary shall make an historical de21 termination in accordance with the prin22 ciples of this subparagraph to designate

23 the portion of interest on term loans made

24 before January 1, 1996, that will con25 stitute implicit fees.
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•S 722 IS

1 ‘‘(2) IMPLICIT FEES FOR OTHER FINANCIAL

2 INTERMEDIATION ACTIVITY.—Implicit fees for finan3 cial intermediation services include the portion of the

4 fees or other charges paid to a provider of financial

5 intermediation services (other than lending) as such

6 provider designates in accordance with section 39.

7 ‘‘SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS.

8 ‘‘(a) IN GENERAL.—The cost of insurance premiums

9 on business loss policies to the extent that such policies

10 insure risks in the United States constitute costs of busi11 ness purchases. Proceeds from such policies constitute tax12 able receipts.

13 ‘‘(b) BUSINESS LOSS POLICY.—A ‘business loss pol14 icy’ is an insurance policy—

15 ‘‘(1) owned by a business entity,

16 ‘‘(2) the beneficiary of which is the business en17 tity or another business entity doing business with

18 the owner of the policy,

19 ‘‘(3) that has no inside buildup or other savings

20 component,

21 ‘‘(4) that covers losses on a loss incurred or

22 claims made basis during the term of the policy,

23 ‘‘(5) that has a term of not more than 2 years,

24 ‘‘(6) that is not a direct or indirect form of

25 compensation, and
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•S 722 IS

1 ‘‘(7) that covers direct losses of the business,

2 such as—

3 ‘‘(A) damage to or theft of property used

4 in the business activity,

5 ‘‘(B) tort claims against the business,

6 ‘‘(C) loss of use of business premises or

7 services,

8 ‘‘(D) malpractice, or

9 ‘‘(E) alleged or actual breach of fiduciary

10 obligations.

11 ‘‘SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS.

12 ‘‘(a) NONDEDUCTIBILITY.—The cost of insurance

13 policies that are not business loss policy policies are not

14 deductible costs of business purchases.

15 ‘‘(b) PROCEEDS OF NONDEDUCTIBLE POLICIES.—In16 surance proceeds from policies described in subsection (a)

17 do not constitute taxable receipts.

18 ‘‘(c) APPLICATION OF THIS SECTION TO CERTAIN

19 INSURANCE.—This section shall apply to life insurance

20 policies.

21 ‘‘SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL

22 INTERMEDIATION SERVICES.

23 ‘‘(a) DEDUCTIBILITY OF FEES.—If a financial

24 intermediation business (as defined in section 241(b))

25 elects to determine implicit fees for financial
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•S 722 IS

1 intermediation services pursuant to this section and notify

2 its business customers of their share of the implicit fees

3 in accordance with this section, a business entity which

4 receives such notice may treat the amount reported in the

5 notice as an implicit fee for financial intermediation serv6 ices in the calendar year to which such notice relates.

7 ‘‘(b) ALLOCATION AND REPORTING.—

8 ‘‘(1) IN GENERAL.—A financial intermediation

9 business may—

10 ‘‘(A) allocate fees received for services for

11 which no separately stated fees (or implicit fees

12 for borrowing determined under section

13 236(d)(1)) are charged among recipients of

14 such services on a reasonable and consistent

15 basis, and

16 ‘‘(B) report to each recipient not later

17 than February 15th of each year the amount so

18 allocated to it with respect to the immediately

19 preceding calendar year.

20 ‘‘(2) MAXIMUM FEES ALLOCATED.—The maxi21 mum amount that may be allocated by a financial

22 intermediation business for a calendar year is the

23 excess of—

24 ‘‘(A) the gross profits of the financial

25 intermediation business for the calendar year
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•S 722 IS

1 (as reasonably estimated by the financial

2 intermediation business), over

3 ‘‘(B) the explicit fees for financial

4 intermediation services received by the financial

5 intermediation business.

6 ‘‘(3) REASONABLE ALLOCATION.—An allocation

7 will not be considered reasonable unless it takes into

8 account and allocates fees to—

9 ‘‘(A) both services provided to business en10 tities and services provided to individuals (other

11 than in a business capacity), and

12 ‘‘(B) both persons who receive money from

13 the financial intermediation business and per14 sons who pay money to the financial

15 intermediation business (even though amounts

16 allocated to the former do not constitute im17 plicit fees).

18 ‘‘(4) REGULATIONS.—The Secretary shall pre19 scribe regulations relating to the allocations under

20 this subsection, including regulations addressing—

21 ‘‘(A) rules for timing of deductions of im22 plicit fees paid by fiscal year recipients,

23 ‘‘(B) subsequent year adjustments if a fi24 nancial intermediation business allocates too

25 much in a calendar year,
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•S 722 IS

1 ‘‘(C) rules for advance approval from the

2 Secretary for allocation procedures, and

3 ‘‘(D) safe-harbor alternatives to the alloca4 tion procedures described in this subsection.

5 ‘‘(c) NOT APPLICABLE TO LENDING SERVICES.—

6 This section shall not apply to lending services.

7 ‘‘Subchapter G—Financial Intermediation

8 and Financial Institutions

‘‘Sec. 241. Activities constituting a financial intermediation business.

‘‘Sec. 242. General rule for taxation.

‘‘Sec. 243. Special rule for banks.

‘‘Sec. 244. Insurance companies.

‘‘Sec. 245. Financial pass-thru entities.

‘‘Sec. 246. Financial intermediation by other businesses.

9 ‘‘SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL

10 INTERMEDIATION BUSINESS.

11 ‘‘(a) FINANCIAL INTERMEDIATION BUSINESS.—The

12 providing of financial intermediation services shall be con13 sidered a business activity. The gross profit of a business

14 entity providing financial intermediation services shall be

15 determined by taking into account the rules of this sub16 chapter.

17 ‘‘(b) SEPARATE BUSINESS ACTIVITY.—The provision

18 of financial intermediation services for unrelated persons

19 shall be considered a separate business activity and a busi20 ness shall be considered a separate entity with respect to

21 such activity. An entity engaging in such business is re-
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•S 722 IS

1 ferred to in this chapter as a ‘financial intermediation

2 business’.

3 ‘‘(c) INTERNAL FINANCIAL INTERMEDIATION BY A

4 BUSINESS.—Section 246 shall apply to a business that

5 provides financial intermediation services for itself and re6 lated parties but generally does not provide such services

7 for unrelated parties.

8 ‘‘(d) DEFINITIONS.—

9 ‘‘(1) FINANCIAL INTERMEDIATION SERVICES.—

10 ‘Financial intermediation services’ include—

11 ‘‘(A) lending services,

12 ‘‘(B) insurance services,

13 ‘‘(C) market-making and dealer services,

14 and

15 ‘‘(D) any other service provided as busi16 ness activity in which a person acts as an

17 intermediary in—

18 ‘‘(i) the transfer of property, services,

19 or financial assets, liabilities, risks or in20 struments (or income or expense derived

21 therefrom) between 2 or more persons, or

22 ‘‘(ii) the pooling of economic risk

23 among other persons

24 and derives all or a portion of such person’s

25 gross receipts from streams of income or ex-
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•S 722 IS

1 pense, discounts, or other financial flows associ2 ated with the matter with respect to which such

3 person is acting as an intermediary.

4 ‘‘(2) LENDING SERVICES.—‘Lending services’

5 means the regular making of loans and providing

6 credit to, or taking deposits from customers, but

7 does not include an installment or delayed payment

8 arrangement provided by a seller of property or serv9 ices under which additional charges or fees are im10 posed by the seller for the late payment.

11 ‘‘(3) MARKET-MAKING OR DEALER SERVICES.—

12 ‘Market-making or dealer services’ means services

13 provided by a person who—

14 ‘‘(A) regularly purchases financial instru15 ments from or sells financial instruments to

16 customers in the ordinary course of a trade or

17 business, or

18 ‘‘(B) regularly offers to enter into, assume,

19 offset, assign, or otherwise terminate positions

20 in financial instruments with customers in the

21 ordinary course of a trade or business.

22 ‘‘SEC. 242. GENERAL RULE FOR TAXATION.

23 ‘‘(a) IN GENERAL.—In the case of a financial

24 intermediation business, gross profits shall be computed

25 by—
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•S 722 IS

1 ‘‘(1) substituting financial receipts for taxable

2 receipts, and

3 ‘‘(2) including financial expenses as business

4 purchases.

5 ‘‘(b) DEFINITIONS.—

6 ‘‘(1) FINANCIAL RECEIPTS.—‘Financial re7 ceipts’ means all receipts other than amounts re8 ceived as contributions to capital.

9 ‘‘(2) FINANCIAL EXPENSES.—‘Financial ex10 penses’ include—

11 ‘‘(A) payments for principal and interest

12 that is properly allocable to the provision of fi13 nancial intermediation services,

14 ‘‘(B) the cost of and payments under fi15 nancial instruments (other than financial in16 struments in the person subject to the tax im17 posed under this chapter and any person relat18 ed to such person),

19 ‘‘(C) claims and cash surrender values paid

20 in connection with insurance or reinsurance

21 services, and

22 ‘‘(D) amounts paid for reinsurance.

23 ‘‘(3) FINANCIAL INSTRUMENT.—‘Financial in24 strument’ means any—

25 ‘‘(A) share of stock in a corporation,
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•S 722 IS

1 ‘‘(B) equity ownership in any widely held

2 or publicly traded partnership, trust, or other

3 business entity,

4 ‘‘(C) note, bond, debenture, or other evi5 dence of indebtedness,

6 ‘‘(D) interest rate, currency, or equity no7 tional principal contract,

8 ‘‘(E) evidence or interest in, or a derivative

9 financial instrument in, any financial instru10 ment described in subparagraph (A), (B), (C),

11 or (D), or any currency, including any option,

12 forward contract, short position, and any simi13 lar financial instrument in such a financial in14 strument or currency, and

15 ‘‘(F) a position which—

16 ‘‘(i) is not a financial instrument de17 scribed in subparagraph (A), (B), (C), (D)

18 or (E),

19 ‘‘(ii) is a hedge with respect to such

20 a financial instrument, and

21 ‘‘(iii) is clearly identified in the deal22 er’s records as being described in this sub23 paragraph before the close of the day on

24 which it was acquired or entered into.
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•S 722 IS

1 ‘‘(c) INTERNATIONAL MATTERS.—For purposes of

2 this section in the case of a financial intermediation busi3 ness with activity in and outside the United States—

4 ‘‘(1) INCLUSION REGARDLESS OF SOURCE.—

5 ‘‘(A) Financial receipts shall be determined

6 without regard to whether such receipts are re7 ceived for property or service provided in or

8 outside the United States, except that financial

9 receipts do not include amounts that—

10 ‘‘(i) are not taxable receipts (as deter11 mined without regard to this section), but

12 ‘‘(ii) would have been taxable receipts

13 (as determined without regard to this sec14 tion) if such receipts had been received for

15 services or property in the United States.

16 ‘‘(B) Financial expenses shall be deter17 mined without regard to whether such expenses

18 are received for property or services acquired in

19 or outside the United States.

20 ‘‘(2) ALLOCATION.—Under regulations pre21 scribed by the Secretary, gross profits (as deter22 mined without regard to this paragraph) shall be re23 duced by the amount of financial intermediation

24 gross profit attributable to financial intermediation

25 activity provided outside the United States.
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•S 722 IS

1 ‘‘(3) GROSS PROFIT ATTRIBUTABLE TO FINAN2 CIAL INTERMEDIATION ACTIVITY.—‘Gross profits at3 tributable to financial intermediation activity’ means

4 the excess of—

5 ‘‘(A) gross profits as determined under

6 this section (but without regard to paragraph

7 (2)), over

8 ‘‘(B) gross profits as determined without

9 regard to this subchapter.

10 ‘‘SEC. 243. SPECIAL RULES FOR BANKS.

11 ‘‘(a) IN GENERAL.—In the case of a bank, gross prof12 its shall be determined in accordance with section 242, ex13 cept that—

14 ‘‘(1) FINANCIAL RECEIPTS.—Financial receipts

15 shall include only—

16 ‘‘(A) taxable receipts (as determined with17 out regard to this subchapter),

18 ‘‘(B) interest on loans made or acquired by

19 the bank,

20 ‘‘(C) gain on the sale of loans,

21 ‘‘(D) discount points received, and

22 ‘‘(E) any explicit fees for financial or fidu23 ciary services not included in subparagraphs

24 (A) through (E).
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1 ‘‘(2) FINANCIAL EXPENSES.—Financial ex2 penses shall include only—

3 ‘‘(A) interest paid to depositors and on

4 other funds borrowed by the bank, and

5 ‘‘(B) reasonable additions to reserves for

6 bad debts.

7 ‘‘(3) FORECLOSURE PROPERTY.—Gross profits

8 shall properly take into account proceeds from the

9 operation or sale of foreclosure property.

10 ‘‘(b) BANK.—

11 ‘‘(1) IN GENERAL.—‘Bank’ means a bank or

12 trust company incorporated and doing business

13 under the laws of the United States, the District of

14 Columbia, or any State, a substantial part of the

15 business of which consists of receiving deposits and

16 making loans and discounts, or of exercising fidu17 ciary powers similar to those exercised by national

18 banks under the authority of the Comptroller of the

19 Currency, and which is subject by law to supervision

20 and examination by State or Federal authority hav21 ing supervision over banking institutions or credit

22 unions. Such term includes domestic building and

23 loan associations and credit unions.

24 ‘‘(2) OTHER ACTIVITIES.—If a bank is engaged

25 in significant amounts of activities other than those
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•S 722 IS

1 described in paragraph (1), the bank shall be consid2 ered as a separate business entity with respect to

3 such other activity.

4 ‘‘SEC. 244. INSURANCE COMPANIES.

5 ‘‘(a) IN GENERAL.—In the case of companies provid6 ing insurance services, gross profits shall be determined

7 in accordance with section 242, except—

8 ‘‘(1) subsection (c) of section 242 (relating to

9 international operations) shall not apply,

10 ‘‘(2) the rules of subchapter J (sourcing rules)

11 shall apply to determine financial receipts and finan12 cial expenses.

13 ‘‘(b) RESULT INCONSISTENT WITH STATUTORY IN14 TENT.—If an insurance company determines that the ap15 plication of subsection (a) produces results inconsistent

16 with the territorial approach of the business tax, it may

17 apply to the Secretary for permission to apply section

18 242(c) in lieu of subsection (a).

19 ‘‘SEC. 245. FINANCIAL PASS-THRU ENTITIES.

20 ‘‘(a) IN GENERAL.—In the case of a financial pass21 thru entity, gross profits shall be determined in accord22 ance with section 242, except—

23 ‘‘(1) financial receipts shall include contribu24 tions to capital,

25 ‘‘(2) financial expenses shall include—
237

•S 722 IS

1 ‘‘(A) distributions to persons holding inter2 ests in the pass-thru entity, and

3 ‘‘(B) investments in related entities (in4 cluding wholly owned entities) engaging in real

5 estate investment.

6 ‘‘(b) PASS-THRU ENTITY.—

7 ‘‘(1) IN GENERAL.—‘Pass-thru entity’ means a

8 business entity that is intended to serve as a con9 duit. The Secretary shall prescribe regulations defin10 ing pass-thru entity. Such term shall include—

11 ‘‘(A) entities that would qualify as regu12 lated investment companies under the Internal

13 Revenue Code of 1986,

14 ‘‘(B) entities that would qualify as real es15 tate investment trusts under the Internal Reve16 nue Code of 1986,

17 ‘‘(C) entities that would qualify as

18 REMICs under the Internal Revenue Code of

19 1986, and

20 ‘‘(D) partnerships whose purposes are to

21 invest the funds of the partners in financial in22 struments, distribute or reinvest the income

23 from such investments, and distribute or rein24 vest the proceeds from the sale of such instru25 ments.
238

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1 ‘‘(2) ENGAGEMENT IN BUSINESS ACTIVITY.—

2 An entity will not qualify as a pass-thru entity if it

3 engages in more than an insubstantial amount of

4 business activity (other than investing in and selling

5 financial instruments). The preceding sentence will

6 not apply if the business entity treats the business

7 activity as engaged in by a separate business entity

8 (separately subject to tax under this chapter).

9 ‘‘SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSI10 NESSES.

11 ‘‘(a) IN GENERAL.—If a business entity that is not

12 regularly in the business of providing financial

13 intermediation services to unrelated parties engages in sig14 nificant financial intermediation activity, its gross profits

15 shall be increased by its gross profits from financial

16 intermediation activity (determined as if such activity were

17 an activity of a pass-thru entity that paid all costs of such

18 financial intermediation activity including—

19 ‘‘(1) compensation for persons engaging in such

20 activity,

21 ‘‘(2) equipment involved in such activity, and

22 ‘‘(3) office space for persons involved in such

23 activity).

24 ‘‘(b) PROXY.—A business entity to which subsection

25 (a) applies will be treated as satisfying the requirements
239

•S 722 IS

1 of that subsection if it increases its gross receipts by the

2 portion of employee compensation properly allocable to the

3 provision of financial intermediation services.

4 ‘‘(c) SIGNIFICANT FINANCIAL INTERMEDIATION.—A

5 business will be considered as engaging in substantial fi6 nancial intermediation if—

7 ‘‘(1) more than 5 percent of the compensation

8 paid by the business to its employees is for employ9 ees whose primary activity is the management of the

10 business’s investments in financial instruments, or

11 ‘‘(2) at all times during the taxable year and

12 the immediately preceding full taxable year, more

13 than 10 percent of its assets are financial instru14 ments other than—

15 ‘‘(A) equity interests in business entities in

16 which it holds more than 50 percent in value of

17 the outstanding equity,

18 ‘‘(B) equity interests in joint ventures in

19 which the company is actively participating,

20 ‘‘(C) purchase money loans to its cus21 tomers, and

22 ‘‘(D) business loans and equity invest23 ments that serve a direct business purpose.

24 ‘‘Subchapter H—Tax-Exempt Organizations

‘‘Sec. 251. Exemption for governmental entities.

‘‘Sec. 252. Taxable activity of governmental entities.

‘‘Sec. 253. Tax-exempt organizations.
240

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‘‘Sec. 254. Special rules for (c)(3) organizations.

‘‘Sec. 255. Tax on unrelated business activity.

‘‘Sec. 256. Unrelated business activity.

1 ‘‘SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES.

2 ‘‘(a) STATES.—Except as provided in section 252, a

3 State, political subdivision thereof and the District of Co4 lumbia shall be exempt from taxation under this chapter

5 on any gross profits derived from the exercise of any es6 sential governmental function.

7 ‘‘(b) POSSESSIONS.—The government of any posses8 sion of the United States shall be exempt from taxation

9 under this chapter on any gross profits earned by the pos10 session.

11 ‘‘SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTI12 TIES.

13 ‘‘(a) CERTAIN ACTIVITIES TAXABLE.—A govern14 mental entity shall be considered a business and subject

15 to tax on any business activity of a type frequently pro16 vided by business entities subject to tax under this

17 chapter.

18 ‘‘(b) CERTAIN ACTIVITIES TREATED AS ESSENTIAL

19 GOVERNMENT FUNCTIONS.—Subsection (a) shall not

20 apply to the following activities, which shall be treated as

21 essential government functions:

22 ‘‘(1) Provision of mass transportation services.

23 ‘‘(2) Provision of public utility services.
241

•S 722 IS

1 ‘‘SEC. 253. TAX-EXEMPT ORGANIZATIONS.

2 ‘‘(a) EXEMPTION FROM TAXATION.—An organiza3 tion described in subsection (c) or (d) shall be exempt

4 from taxation under this chapter.

5 ‘‘(b) TAX ON UNRELATED BUSINESS ACTIVITY.—An

6 organization exempt from taxation under subsection (a)

7 shall be subject to tax to the extent provided in sections

8 55 and 56, but shall be considered a tax-exempt organiza9 tion for purposes of any law that refers to tax-exempt or10 ganizations.

11 ‘‘(c) LIST OF EXEMPT ORGANIZATIONS.—The follow12 ing organizations are referred to in subsection (a):

13 ‘‘(1) INSTRUMENTALITY OF THE UNITED

14 STATES.—Any corporation organized under Act of

15 Congress which is an instrumentality of the United

16 States but only if such corporation—

17 ‘‘(A) is exempt from Federal income

18 taxes—

19 ‘‘(i) under such Act as amended and

20 supplemented before July 18, 1984, or

21 ‘‘(ii) under this title without regard to

22 any provision of law which is not contained

23 in this title and which is not contained in

24 a revenue Act, or

25 ‘‘(B) is described in subsection (g).
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•S 722 IS

1 ‘‘(2) TITLE HOLDING COMPANIES.—Corpora2 tions organized for the exclusive purpose of holding

3 title to property, collecting income therefrom, and

4 turning over the entire amount thereof, less ex5 penses, to an organization which itself is exempt

6 under this section. Rules similar to the rules of sub7 paragraph (G) of paragraph (5) shall apply for pur8 poses of this paragraph.

9 ‘‘(3) CHARITABLE, RELIGIOUS AND EDU10 CATIONAL ORGANIZATIONS.—Corporations, and any

11 community chest, fund, or foundation, organized and

12 operated exclusively for religious, charitable, sci13 entific, literary, or educational purposes, or for the

14 prevention of cruelty to children or animals, no part

15 of the net earnings of which inures to the benefit of

16 any private shareholder or individual, no substantial

17 part of the activities of which is carrying on propa18 ganda, or otherwise attempting, to influence legisla19 tion (except as otherwise provided in subsection (f)),

20 and which does not participate in, or intervene in

21 (including the publishing or distributing of state22 ments), any political campaign on behalf of (or in

23 opposition to) any candidate for public office.
243

•S 722 IS

1 ‘‘(4) QUALIFIED BENEFIT PLAN OR TRUST.—A

2 corporation, trust, or other organization described

3 in—

4 ‘‘(A) section 401(a),

5 ‘‘(B) any of the following paragraphs of

6 section 501(c) of the Internal Revenue Code of

7 1986—

8 ‘‘(i) paragraph (9) (relating to vol9 untary employees’ beneficiary associa10 tions),

11 ‘‘(ii) paragraph (11) (relating to

12 teachers’ retirement funds),

13 ‘‘(iii) paragraph (17) (relating to sup14 plemental unemployment compensation

15 benefits),

16 ‘‘(iv) paragraph (18) (certain grand17 fathered pension trusts),

18 ‘‘(v) paragraph (21) (relating to Black

19 Lung Act trusts),

20 ‘‘(vi) paragraph (22) (relating to cer21 tain multiemployer trusts), or

22 ‘‘(vii) paragraph (24) (relating to cer23 tain grandfathered ERISA trusts).

24 ‘‘(5) REAL ESTATE HOLDING COMPANIES.—

25 ‘‘(A) Any corporation or trust which—
244

•S 722 IS

1 ‘‘(i) has no more than 35 shareholders

2 or beneficiaries,

3 ‘‘(ii) has only 1 class of stock or bene4 ficial interest, and

5 ‘‘(iii) is organized for the exclusive

6 purposes of—

7 ‘‘(I) acquiring real property and

8 holding title to, and collecting income

9 from, such property, and

10 ‘‘(II) remitting the entire amount

11 of income from such property (less ex12 penses) to 1 or more organizations de13 scribed in paragraph (1), (3) or (4)

14 which are shareholders of such cor15 poration or beneficiaries of such trust.

16 For purposes of clause (iii), the term ‘real property’

17 shall not include any interest as a tenant in common

18 (or similar interest) and shall not include any indi19 rect interest.

20 ‘‘(B) A corporation or trust shall in no

21 event be treated as described in subparagraph

22 (A) unless such corporation or trust permits its

23 shareholders or beneficiaries—

24 ‘‘(i) to dismiss the corporation’s or

25 trust’s investment adviser, following rea-
245

•S 722 IS

1 sonable notice, upon a vote of the share2 holders or beneficiaries holding a majority

3 of interest in the corporation or trust, and

4 ‘‘(ii) to terminate their interest in the

5 corporation or trust by either, or both, of

6 the following alternatives, as determined by

7 the corporation or trust:

8 ‘‘(I) by selling or exchanging

9 their stock in the corporation or inter10 est in the trust (subject to any Fed11 eral or State securities law) to any or12 ganization described in paragraph (1),

13 (3) or (4) so long as the sale or ex14 change does not increase the number

15 of shareholders or beneficiaries in

16 such corporation or trust above 35, or

17 ‘‘(II) by having their stock or in18 terest redeemed by the corporation or

19 trust after the shareholder or bene20 ficiary has provided 90 days notice to

21 such corporation or trust.

22 ‘‘(C) For purposes of subparagraph (A),

23 the term ‘real property’ includes any personal

24 property which is leased under, or in connection

25 with, a lease of real property, but only if the
246

•S 722 IS

1 rent attributable to such personal property for

2 the taxable year does not exceed 15 percent of

3 the total rent for the taxable year attributable

4 to both the real and personal property leased

5 under, or in connection with, such lease.

6 ‘‘(D) An organization shall not be treated

7 as failing to be described in this paragraph

8 merely by reason of the receipt of any otherwise

9 disqualifying income which is incidentally de10 rived from the holding of real property. If the

11 amount of otherwise disqualifying income ex12 ceeds 10 percent of the organization’s gross in13 come for the taxable year, it shall not be treat14 ed as ‘incidentally derived’ unless the organiza15 tion establishes to the satisfaction of the Sec16 retary that the receipt of such disqualifying in17 come in excess of such limitation was inadvert18 ent and reasonable steps are being taken to cor19 rect the circumstances giving rise to such in20 come.

21 ‘‘(6) RELIGIOUS AND APOSTOLIC ORGANIZA22 TIONS.—Religious or apostolic associations or cor23 porations, if such associations or corporations have

24 a common treasury or community treasury, even if

25 such associations or corporations engage in business
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•S 722 IS

1 for the common benefit of the members, but only if

2 such activity is treated as unrelated business activ3 ity.

4 ‘‘(7) CEMETERY COMPANIES.—Cemetery com5 panies owned and operated exclusively for the bene6 fit of their members or which are not operated for

7 profit; and any corporation chartered solely for the

8 purpose of the disposal of bodies by burial or crema9 tion which is not permitted by its charter to engage

10 in any business not necessarily incident to that pur11 pose, no part of the net earnings of which inures to

12 the benefit of any private shareholder or individual.

13 ‘‘(d) COOPERATIVE HOSPITAL SERVICE ORGANIZA14 TIONS.—For purposes of this chapter, an organization

15 shall be treated as an organization organized and operated

16 exclusively for charitable purposes, if—

17 ‘‘(1) such organization is organized and oper18 ated solely—

19 ‘‘(A) to perform, on a centralized basis, 1

20 or more of the following services which, if per21 formed on its own behalf by a hospital which is

22 an organization described in subsection (c)(3)

23 and exempt from taxation under subsection (a),

24 would constitute activities in exercising or per25 forming the purpose or function constituting
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•S 722 IS

1 the basis for its exemption: data processing,

2 purchasing (including the purchasing of insur3 ance on a group basis), warehousing, billing

4 and collection, food, clinical, industrial engi5 neering, laboratory, printing, communications,

6 record center, and personnel (including selec7 tion, testing, training, and education of person8 nel) services; and

9 ‘‘(B) to perform such services solely for 2

10 or more hospitals each of which is—

11 ‘‘(i) an organization described in sub12 section (c)(3) which is exempt from tax13 ation under subsection (a),

14 ‘‘(ii) a constituent part of an organi15 zation described in subsection (c)(3) which

16 is exempt from taxation under subsection

17 (a) and which, if organized and operated

18 as a separate entity, would constitute an

19 organization described in subsection (c)(3),

20 or

21 ‘‘(iii) owned and operated by the Unit22 ed States, a State, the District of Colum23 bia, or a possession of the United States,

24 or a political subdivision or an agency or

25 instrumentality of any of the foregoing;
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•S 722 IS

1 ‘‘(2) such organization is organized and oper2 ated on a cooperative basis and allocates or pays,

within 81 3 ⁄2 months after the close of its taxable year,

4 all net earnings to patrons on the basis of services

5 performed for them; and

6 ‘‘(3) if such organization has capital stock, all

7 of such stock outstanding is owned by its patrons.

8 For purposes of this title, any organization which, by rea9 son of the preceding sentence, is an organization described

10 in subsection (c)(3) and exempt from taxation under sub11 section (a), shall be treated as a hospital and as an organi12 zation referred to in section 101(b)(1)(A)(iii).

13 ‘‘(e) COOPERATIVE SERVICE ORGANIZATIONS OF OP14 ERATING EDUCATIONAL ORGANIZATIONS.—For purposes

15 of this chapter, if an organization is—

16 ‘‘(1) organized and operated solely to hold,

17 commingle, and collectively invest and reinvest (in18 cluding arranging for and supervising the perform19 ance by independent contractors of investment serv20 ices related thereto) in stocks and securities, the

21 moneys contributed thereto by each of the members

22 of such organization, and to collect income there23 from and turn over the entire amount thereof, less

24 expenses, to such members,
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•S 722 IS

1 ‘‘(2) organized and controlled by 1 or more

2 such members, and

3 ‘‘(3) comprised solely of members that are orga4 nizations described in clause (ii) or (iv) of section

5 101(b)(1)(A)—

6 ‘‘(A) which are exempt from taxation

7 under subsection (a), or

8 ‘‘(B) the gross profits of which are ex9 cluded from taxation under section 251(a), then

10 such organization shall be treated as an organi11 zation organized and operated exclusively for

12 charitable purposes.

13 ‘‘(f) EXPENDITURES BY PUBLIC CHARITIES TO IN14 FLUENCE LEGISLATION.—

15 ‘‘(1) GENERAL RULE.—In the case of an orga16 nization to which this subsection applies, exemption

17 from taxation under subsection (a) shall be denied

18 because a substantial part of the activities of such

19 organization consists of carrying on propaganda, or

20 otherwise attempting, to influence legislation, but

21 only if such organization normally—

22 ‘‘(A) makes lobbying expenditures in ex23 cess of the lobbying ceiling amount for such or24 ganization for each taxable year, or
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•S 722 IS

1 ‘‘(B) makes grass roots expenditures in ex2 cess of the grass roots ceiling amount for such

3 organization for each taxable year.

4 ‘‘(2) DEFINITIONS.—For purposes of this sub5 section—

6 ‘‘(A) LOBBYING EXPENDITURES.—‘Lobby7 ing expenditures’ means expenditures for the

8 purpose of influencing legislation (as defined in

9 section 4911(d)).

10 ‘‘(B) LOBBYING CEILING AMOUNT.—The

11 lobbying ceiling amount for any organization

12 for any taxable year is 150 percent of the lob13 bying nontaxable amount for such organization

14 for such taxable year, determined under section

15 4911.

16 ‘‘(C) GRASS ROOTS EXPENDITURES.—

17 ‘Grass roots expenditures’ means expenditures

18 for the purpose of influencing legislation (as de19 fined in section 4911(d) without regard to para20 graph (1)(B) thereof).

21 ‘‘(D) GRASS ROOTS CEILING AMOUNT.—

22 The grass roots ceiling amount for any organi23 zation for any taxable year is 150 percent of

24 the grass roots nontaxable amount for such or-
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•S 722 IS

1 ganization for such taxable year, determined

2 under section 4911.

3 ‘‘(3) ORGANIZATIONS TO WHICH THIS SUB4 SECTION APPLIES.—This subsection shall apply to

5 any organization which has elected (in such manner

6 and at such time as the Secretary may prescribe) to

7 have the provisions of this subsection apply to such

8 organization and which, for the taxable year which

9 includes the date the election is made, is described

10 in subsection (c)(3) and is not described in para11 graph (4) and is not a private foundation.

12 ‘‘(4) DISQUALIFIED ORGANIZATIONS.—This

13 subsection does not apply to—

14 ‘‘(A) a church,

15 ‘‘(B) an integrated auxiliary of a church or

16 of a convention or association of churches, or

17 ‘‘(C) a member of an affiliated group of or18 ganizations (within the meaning of section

19 4911(f)(2)) if 1 or more members of such group

20 is described in subparagraph (A) or (B).

21 ‘‘(5) YEARS FOR WHICH ELECTION IS EFFEC22 TIVE.—An election by an organization under this

23 subsection shall be effective for all taxable years of

24 such organization which—
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•S 722 IS

1 ‘‘(A) end after the date the election is

2 made, and

3 ‘‘(B) begin before the date the election is

4 revoked by such organization (under regulations

5 prescribed by the Secretary).

6 ‘‘(6) NO EFFECT ON CERTAIN ORGANIZA7 TIONS.—With respect to any organization for a tax8 able year for which—

9 ‘‘(A) such organization is described in

10 paragraph (5), or

11 ‘‘(B) an election under this subsection is

12 not in effect for such organization, nothing in

13 this subsection or in section 4911 shall be con14 strued to affect the interpretation of the phrase,

15 ‘no substantial part of the activities of which is

16 carrying on propaganda, or otherwise attempt17 ing, to influence legislation,’ under subsection

18 (c)(3).

19 ‘‘(g) GOVERNMENT CORPORATIONS EXEMPT UNDER

20 SUBSECTION (c)(1).—For purposes of subsection (c)(1),

21 the following organizations are described in this sub22 section:

23 ‘‘(1) The Central Liquidity Facility established

24 under title III of the Federal Credit Union Act (12

25 U.S.C. 1795 et seq.).
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•S 722 IS

1 ‘‘(2) The Resolution Trust Corporation estab2 lished under section 21A of the Federal Home Loan

3 Bank Act.

4 ‘‘(3) The Resolution Funding Corporation es5 tablished under section 21B of the Federal Home

6 Loan Bank Act.

7 ‘‘(h) CERTAIN EDUCATIONAL ORGANIZATIONS.—An

8 organization shall not be eligible for exemption as an edu9 cational organization under subsection (c)(3) if a substan10 tial amount of its activities and funds are devoted to—

11 ‘‘(1) conducting seminars and other similar pro12 grams,

13 ‘‘(2) conducting research to educate Congress

14 or the general public about public policy issues,

15 ‘‘(3) producing books and pamphlets, or

16 ‘‘(4) a combination of the foregoing.

17 ‘‘SEC. 254. SPECIAL RULES FOR (C)(3) ORGANIZATIONS.

18 ‘‘(a) NEW ORGANIZATIONS MUST NOTIFY SEC19 RETARY.—Except as provided in subsection (c), an organi20 zation shall not be treated as an organization described

21 in section 253(c)(3)—

22 ‘‘(1) unless such organization has given notice

23 to the Secretary, in such manner as the Secretary

24 may prescribe, that it is applying for recognition of

25 such status, or
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•S 722 IS

1 ‘‘(2) for any period before giving of such notice,

2 if such notice is given after the time prescribed by

3 the Secretary by regulations for giving notice under

4 this subsection.

5 ‘‘(b) PRESUMPTION THAT ORGANIZATIONS ARE PRI6 VATE FOUNDATIONS.—Except as provided in subsection

7 (c), any organization described in section 253(c)(3) and

8 which does not notify the Secretary, at such time and in

9 such manner as the Secretary may by regulations pre10 scribe, that it is not a private foundation (as defined in

11 section 102) shall be presumed to be a private foundation.

12 ‘‘(c) EXCEPTIONS.—Subsections (a) and (b) shall not

13 apply to—

14 ‘‘(1) organizations organized before October 10,

15 1969;

16 ‘‘(2) organizations which obtained recognition

17 of tax-exempt status under section 501(c)(3) of the

18 Internal Revenue Code of 1986 (in the case of sub19 section (a) only);

20 ‘‘(3) organizations which were determined not

21 to be private foundations under the Internal Reve22 nue Code of 1986;

23 ‘‘(4) churches, their integrated auxiliaries, and

24 conventions and associations of churches;
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•S 722 IS

1 ‘‘(5) any organization that is not a private

2 foundation and the gross receipts of which in each

3 taxable year are not more than $25,000; or

4 ‘‘(6) such other classes of organizations which

5 the Secretary may exempt.

6 ‘‘SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY.

7 ‘‘(a) IN GENERAL.—Each organization described in

8 subsection (b) shall be subject to the business tax under

9 section 201 on its gross profits from its unrelated business

10 activity.

11 ‘‘(b) ORGANIZATIONS SUBJECT TO TAX.—This sec12 tion shall apply to—

13 ‘‘(1) organizations exempt from the business

14 tax under section 253(a), other than instrumental15 ities of the United States described in section

16 253(c)(1), and

17 ‘‘(2) colleges and universities which are instru18 mentalities of any government and corporations

19 owned by 1 or more such colleges or universities.

20 ‘‘SEC. 256. UNRELATED BUSINESS ACTIVITY.

21 ‘‘(a) IN GENERAL.—‘Unrelated business activity’

22 means any trade or business the conduct of which is not

23 substantially related (aside from the need of such organi24 zation for income or funds or the use it makes of the prof25 its derived) to the exercise or performance by such organi-
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•S 722 IS

1 zation of its charitable, educational, or other purpose or

2 function constituting the basis for its exemption under

3 section 253, except that such term does not include any

4 trade or business—

5 ‘‘(1) in which substantially all the work in car6 rying on such trade or business is performed for the

7 organization without compensation;

8 ‘‘(2) which is carried on, in the case of an orga9 nization described in section 253(c)(3) or in the case

10 of a college or university described in section 255(b),

11 by the organization primarily for the convenience of

12 its members, students, patients, officers, or employ13 ees, which is the selling by the organization of items

14 of work-related clothes and equipment and items

15 normally sold through vending machines, through

16 food dispensing facilities, or by snack bars, for the

17 convenience of its members at their usual places of

18 employment; or

19 ‘‘(3) which is the selling of merchandise, sub20 stantially all of which has been received by the orga21 nization as gifts or contributions.

22 ‘‘(b) ADVERTISING, ETC., ACTIVITIES.—For pur23 poses of this section, ‘trade or business’ includes any activ24 ity which is carried on for the production of income from

25 the sale of goods or the performance of services. For pur-
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•S 722 IS

1 poses of the preceding sentence, an activity does not lose

2 identity as a trade or business merely because it is carried

3 on within a larger aggregate of similar activities or within

4 a larger complex of other endeavors which may, or may

5 not, be related to the exempt purposes of the organization.

6 Where an activity carried on for profit constitutes an un7 related trade or business, no part of such trade or business

8 shall be excluded from such classification merely because

9 it does not result in profit.

10 ‘‘(c) TRADE OR BUSINESS.—

11 ‘‘(1) CERTAIN BUSINESS ACTIVITIES.—An ac12 tivity shall not be considered a ‘trade or business’

13 solely because the activity is a business activity

14 (such as certain passive rental activity) that would

15 be subject to the business tax if conducted by a busi16 ness entity other than a tax-exempt organization.

17 ‘‘(2) REGULATIONS.—The Secretary shall pre18 scribe regulations defining a ‘trade or business.’

19 Such regulations shall be consistent with the provi20 sions under sections 511 through 513 of the Internal

21 Revenue Code of 1986, except to the extent such

22 provisions are inconsistent with other principles of

23 the business tax. The regulations shall include exclu24 sions from the definition of ‘trade or business’ simi-
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•S 722 IS

1 lar to those contained in section 513 of the Internal

2 Revenue Code for—

3 ‘‘(A) certain bingo games,

4 ‘‘(B) certain hospital services, and

5 ‘‘(C) certain public entertainment activity

6 at fairs and expositions by an organization

7 which regularly conducts, as 1 of its substantial

8 exempt purposes, an agricultural or educational

9 fair or exhibition.

10 ‘‘(3) TRADE SHOWS.—The conduct of trade

11 shows and conventions shall not be excluded from

12 the definition of trade or business.

13 ‘‘Subchapter I—Cooperatives

‘‘Sec. 260. Patronage dividends of cooperatives.

14 ‘‘SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES.

15 ‘‘(a) PATRONAGE DIVIDENDS PAID BY SUPPLY CO16 OPERATIVES.—A qualified patronage dividend paid by a

17 supply cooperative to a patron shall be treated as if it is

18 a refund of a portion of the amounts paid by the patron

19 for goods, services, or use of capital. In general, if the

20 supply cooperative included the amount received from the

21 patron in taxable receipts, the dividend shall reduce tax22 able receipts in the year incurred. If the recipient of the

23 dividend is a business entity which deducted the cost of

24 business purchases to which the dividend related, the re-
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•S 722 IS

1 cipient will reduce its cost of business purchases by the

2 amount of the dividend in the year the dividend is paid

3 or incurred.

4 ‘‘(b) PATRONAGE DIVIDENDS PAID BY MARKETING

5 COOPERATIVES.—A qualified patronage dividend paid to

6 a patron by a marketing cooperative shall be treated as

7 an upward price adjustment in the amount received by the

8 patron for its goods marketed by the cooperative. In gen9 eral, the cooperative will increase its cost of business pur10 chases by the amount of the qualified patronage dividend

11 and the recipient will increase its taxable receipts by the

12 amount of the qualified patronage dividend.

13 ‘‘(c) DIVIDEND TREATMENT.—Only the portion of a

14 patronage dividend that is not a qualified patronage divi15 dend shall be treated as a dividend under this chapter and

16 chapter 1.

17 ‘‘(d) DEFINITIONS.—

18 ‘‘(1) QUALIFIED PATRONAGE DIVIDEND.—A

19 ‘qualified patronage dividend’ is that part of a pa20 tronage dividend that is attributable to the patron’s

21 allocable share of patronage earnings of a marketing

22 cooperative or a supply cooperative.

23 ‘‘(2) SUPPLY COOPERATIVE.—A ‘supply cooper24 ative’ is a cooperative that sells goods or service to
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•S 722 IS

1 patrons and provided patronage dividends with re2 spect to the quantity of purchases of the patrons.

3 ‘‘(3) MARKETING COOPERATIVE.—A ‘marketing

4 cooperative’ is a cooperative that sells goods pro5 duced by its members and provides patronage divi6 dends to the members based on the quantities of

7 goods sold or provided for sale.

8 ‘‘(e) SPECIAL RULES.—

9 ‘‘(1) NOTICES OF ALLOCATION AND PER-UNIT

10 RETAIN CERTIFICATES.—Except as provided in

11 paragraph (2), a notice of allocation, per-unit retain

12 certificate, or other similar document shall not be

13 treated as a patronage dividend until it is redeemed

14 in cash or property.

15 ‘‘(2) OPPORTUNITY TO RECEIVE CASH.—If a

16 patron is given an opportunity to receive a patron17 age dividend in cash, but instead chooses to accept

18 a per-unit retain certificate or a qualified notice of

19 allocation, the patron will be treated as receiving

20 cash and simultaneously contributing to the capital

21 of the cooperative.

22 ‘‘(3) APPLICATION LIMITED TO QUALIFIED CO23 OPERATIVES.—Under rules to be prescribed by the

24 Secretary, this section shall apply only to coopera-
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•S 722 IS

1 tives to which 1 of the following provisions of the In2 ternal Revenue Code of 1986 would have applied:

3 ‘‘(A) Section 501(c)(12) (relating to coop4 erative telephone companies and similar organi5 zations).

6 ‘‘(B) Section 501(c)(14) (relating to cer7 tain cooperative banks).

8 ‘‘(C) Section 521 (relating to farm co9 operatives).

10 ‘‘(D) Section 1381 (relating to coopera11 tives generally).

12 ‘‘(4) REGULATIONS.—The Secretary shall pre13 scribe regulations for the application of this section.

14 The regulations shall generally be consistent with

15 subchapter T of chapter 1 of the Internal Revenue

16 Code of 1986 except to the extent that such rules

17 are inconsistent with provisions of this chapter.

18 ‘‘Subchapter J—Sourcing Rules

‘‘Sec. 265. Exports of property or services.

‘‘Sec. 266. Imports of property or services.

‘‘Sec. 267. Import or export of services.

‘‘Sec. 268. International transportation services.

‘‘Sec. 269. International communications.

‘‘Sec. 270. Insurance.

19 ‘‘SEC. 265. EXPORTS OF PROPERTY OR SERVICES.

20 ‘‘(a) GENERAL RULE.—Taxable receipts do not in21 clude amounts received for property or services exported
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•S 722 IS

1 from the United States by the exporter thereof for use

2 or consumption outside the United States.

3 ‘‘(b) EXPORT THROUGH NONBUSINESS ENTITY.—

4 For purposes of subsection (a), if property or services are

5 sold to a governmental entity or a tax-exempt organization

6 for export and are exported other than in an activity of

7 such entity which is subject to the business tax, then the

8 seller of such property or services is deemed to be the ex9 porter thereof.

10 ‘‘(c) EXPORT OF SERVICES.—See section 267 for

11 rules for determining whether services are exported or im12 ported.

13 ‘‘SEC. 266. IMPORTS OF PROPERTY OR SERVICES.

14 ‘‘(a) IN GENERAL.—The import of property or serv15 ices for consumption in the United States shall constitute

16 a business purchase if such property or service is to be

17 used in a business activity in the United States. Property

18 being held for sale or retail by a business entity that is

19 in the business of selling goods shall be considered held

20 for ‘use in a business activity’.

21 ‘‘(b) AMOUNT OF BUSINESS PURCHASE.—

22 ‘‘(1) IN GENERAL.—The cost of business pur23 chases with respect to the import of property or

24 services for use or consumption in the United States

25 is the customs value, price or other amount used for
264

•S 722 IS

1 purposes of determining the import tax under sec2 tion 286 or section 287.

3 ‘‘(2) IMPORT TAX.—The cost of business pur4 chases does not include any import tax paid. No de5 duction shall be allowed with respect to property or

6 service imported by a business entity unless the im7 port tax is paid with respect to such import.

8 ‘‘SEC. 267. IMPORT OR EXPORT OF SERVICES.

9 ‘‘(a) IN GENERAL.—Except as otherwise provided in

10 this subchapter or in rules prescribed under subchapter

11 G (relating to financial intermediation business), services

12 shall not be treated as imported or exported from the loca13 tion in which such services are performed.

14 ‘‘(b) IMPORT OF SERVICES.—A business entity shall

15 be treated as importing a service if—

16 ‘‘(1) the benefit of the service will be realized

17 in the United States, and

18 ‘‘(2) the benefit will be realized solely in con19 nection with the United States business activities of

20 the business entity.

21 ‘‘(c) EXPORT OF SERVICES.—A business will be

22 treated as exporting a service if—

23 ‘‘(1) the benefit of the service will be realized

24 outside of the United States, and
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•S 722 IS

1 ‘‘(2) the benefit will be realized solely in con2 nection with the activities of the purchaser occurring

3 outside the United States.

4 ‘‘(d) SERVICES ACQUIRED FROM SERVICE PROVIDER

5 THAT PROVIDES SERVICES IN AND OUTSIDE THE UNIT6 ED STATES.—

7 ‘‘(1) IN GENERAL.—If a business entity ac8 quires services from a service provider that provides

9 services both in and outside the United States and

10 the service provider shows on the invoice where the

11 services are provided—

12 ‘‘(A) the business entity shall treat the

13 services as provided where stated on the invoice,

14 and

15 ‘‘(B) the service provider shall treat as tax16 able receipts any services listed as provided in

17 the United States.

18 ‘‘(2) NO INVOICE.—If a business entity acquires

19 services from a service provider that provides serv20 ices both in and outside the United States and the

21 service provider does not show on an invoice where

22 such services are provided—

23 ‘‘(A) the business entity shall treat the

24 services as if provided in the location to which

25 payment is sent, and
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•S 722 IS

1 ‘‘(B) the service provider shall treat as tax2 able receipts any payments received in the Unit3 ed States.

4 ‘‘(e) SPECIAL RULES PREVAIL.—See sections 268

5 and 269 for special rule relating to transportation and

6 communication services.

7 ‘‘SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES.

8 ‘‘(a) TRANSPORTATION OF PROPERTY.—

9 ‘‘(1) TAXABLE RECEIPTS.—

10 ‘‘(A) EXPORTS.—Taxable receipts do not

11 include receipts from the transportation of

12 property exported from the United States.

13 ‘‘(B) IMPORTS.—Taxable receipts include

14 receipts from transportation of property im15 ported into the United States only if such costs

16 are not taken into account in determining the

17 import tax.

18 ‘‘(C) PRESUMPTIONS.—The Secretary shall

19 prescribe regulations describing situations in

20 which a transporter of property must presume

21 that no import tax has been paid on the cost of

22 its services.

23 ‘‘(2) BUSINESS PURCHASES.—

24 ‘‘(A) EXPORTS.—Business purchases do

25 not include amounts paid or incurred for the
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•S 722 IS

1 cost of transportation of property exported from

2 the United States.

3 ‘‘(B) IMPORTS.—Amounts paid or incurred

4 for transportation of goods imported into the

5 United States, shall constitute a cost of busi6 ness purchase only to the extent that such

7 amounts are taken into account in determining

8 the customs value for purposes of section

9 286(a) (relating to the import tax).

10 ‘‘(b) TRANSPORTATION OF PASSENGERS.—

11 ‘‘(1) TAXABLE RECEIPTS.—Taxable receipts—

12 ‘‘(A) include receipts from the transpor13 tation of passengers from the United States to

14 a destination outside the United States, but

15 ‘‘(B) do not include receipts from the

16 transportation of passengers from outside the

17 United States to a destination in the United

18 States.

19 ‘‘(2) BUSINESS PURCHASES.—Business pur20 chases—

21 ‘‘(A) include amounts paid or incurred in

22 a business activity for the transportation of

23 passengers from the United States to a destina24 tion outside the United States, but
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•S 722 IS

1 ‘‘(B) do not include amounts paid or in2 curred for transportation of passengers from

3 outside the United States to a destination in

4 the United States.

5 ‘‘(3) SIMPLIFYING RULES.—The Secretary may

6 provide rules that simplify this subsection, including

7 rules under which—

8 ‘‘(A) half of receipts attributable to trans9 portation to or from the United States are

10 treated as taxable receipts,

11 ‘‘(B) half of the cost for business trips to

12 and from the United States are treated as busi13 ness purchases, and

14 ‘‘(C) all transportation expenses of a busi15 ness entity that has no regular business outside

16 the United States are treated as business pur17 chases.

18 ‘‘SEC. 269. INTERNATIONAL COMMUNICATIONS.

19 ‘‘(a) IN GENERAL.—For purposes of section 266,

20 communications services shall be treated as provided at

21 the point of origin of the communications and shall not

22 be treated as imported or exported.

23 ‘‘(b) COMMUNICATIONS SERVICES.—Communications

24 services include—

25 ‘‘(1) telephone communications services,
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•S 722 IS

1 ‘‘(2) courier services (except in the case of

2 transportation of property that is imported or ex3 ported),

4 ‘‘(3) satellite transmission services,

5 ‘‘(4) telegraph services,

6 ‘‘(5) facsimile transmission services, and

7 ‘‘(6) other similar services.

8 ‘‘SEC. 270. INSURANCE.

9 ‘‘(a) IN GENERAL.—Insurance services will be treat10 ed as provided at the location of the insurance company

11 providing the services. Except as the Secretary may pre12 scribe by regulations, insurance companies will be treated

13 as providing services at the location to which insurance

14 payments are made.

15 ‘‘(b) INSURED RISKS IN THE UNITED STATES.—If

16 insurance services are provided outside the United States

17 and the insured risk is located in the United States—

18 ‘‘(1) the insurance service shall be treated as

19 imported,

20 ‘‘(2) the insurance premiums shall be subject to

21 the import tax, and

22 ‘‘(3) payments of insurance benefits shall not be

23 treated as imported.

24 ‘‘(c) INSURED RISK OUTSIDE THE UNITED

25 STATES.—If insurance services are provided inside the
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•S 722 IS

1 United States and the insured risk is located outside the

2 United States—

3 ‘‘(1) insurance services shall be treated as ex4 ported, and

5 ‘‘(2) payments of insurance benefits shall be

6 treated as payments for services outside the United

7 States, and shall not be deducted as business pur8 chases.

9 ‘‘(d) INSURANCE SERVICES.—Insurance services

10 means the provision of insurance and services related to

11 insurance other than insurance that is treated as a savings

12 asset under section 53(b).

13 ‘‘SEC. 271. BANKING SERVICES.

14 The Secretary shall prescribe regulations on the loca15 tion of banking services and the extent to which such serv16 ices are to be treated as imported or exported.

17 ‘‘Subchapter K—Business Conducted in a

18 Possession

‘‘Sec. 276. Treatment of possessions.

19 ‘‘SEC. 276. TREATMENT OF POSSESSIONS.

20 ‘‘(a) IN GENERAL.—For purposes of the business tax

21 imposed by this chapter, the U.S. possessions shall not

22 be treated as part of the United States.

23 ‘‘(b) EFFECT ON PAYROLL TAX CREDIT.—Except as

24 provided in subsection (c), a business entity may not claim
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•S 722 IS

1 a payroll tax credit with respect to any payroll taxes paid

2 with respect to income of residents of the U.S. possessions.

3 ‘‘(c) POSSESSION.—For purposes of this subchapter,

4 ‘U.S. possession’ or ‘possession’ means a possession of the

5 United States and includes the Commonwealth of Puerto

6 Rico and the Virgin Islands.

7 ‘‘Subchapter L—Payroll Tax Credit

‘‘Sec. 281. Amount of credit.

‘‘Sec. 282. Current-year payroll tax credit.

‘‘Sec. 283. Credit carryover.

8 ‘‘SEC. 281. AMOUNT OF CREDIT.

9 ‘‘(a) AMOUNT OF CREDIT.—The payroll tax credit for

10 a business entity for a taxable year is the lesser of—

11 ‘‘(1) the sum of—

12 ‘‘(A) the current-year payroll tax credit,

13 and

14 ‘‘(B) the credit carryovers to the taxable

15 year, or

16 ‘‘(2) the business entity’s business tax for the

17 taxable year (determined without regard to the pay18 roll tax credit).

19 ‘‘(b) CONSOLIDATED RETURNS.—In the case of busi20 ness entities filing consolidated returns, the amount of the

21 credit shall be determined using the combined payroll tax

22 credits and credit carryovers of the business entities and

23 the combined business tax of the business entities.
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1 ‘‘SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT.

2 ‘‘(a) IN GENERAL.—The ‘current-year payroll tax

3 credit’ is an amount equal to the sum of—

4 ‘‘(1) the employer’s share of the FICA tax im5 posed on wages of its employees during the taxable

6 year,

7 ‘‘(2) the employer’s share of the tier 1 railroad

8 retirement tax for its employees during the taxable

9 year, and

10 ‘‘(3) one-half of the allocable portion of the

11 SECA tax (as described in subsection (b)(3)).

12 ‘‘(b) DEFINITIONS.—

13 ‘‘(1) EMPLOYER’S SHARE OF THE FICA TAX.—

14 ‘Employer’s share of the FICA tax’ means the old15 age, survivors, disability and hospital insurance

16 taxes imposed by section 3111.

17 ‘‘(2) EMPLOYER’S SHARE OF THE TIER 1 RAIL18 ROAD RETIREMENT TAX.—‘Employer’s share of the

19 tier 1 railroad retirement tax’ means—

20 ‘‘(A) the tier 1 railroad retirement tax im21 posed by section 3221(a), and

22 ‘‘(B) the portion of the tax imposed by sec23 tion 3211(a)(1) on employee representatives at24 tributable to the tax imposed by section 3111.

25 ‘‘(3) ONE-HALF OF THE ALLOCABLE PORTION

26 OF THE SECA TAX.—
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1 ‘‘(A) SECA TAX.—‘SECA tax’ means the

2 self-employment tax imposed by section 1401.

3 ‘‘(B) PARTNERSHIPS.—Until such time as

4 the SECA tax and the Federal Insurance Con5 tributions Acts are amended to treat partners

6 of partnerships as employees, if a partner des7 ignates a partnership as a principal source of

8 employment income for the taxable year, one9 half of the partnership’s allocable portion of the

10 SECA tax of such partner equals the FICA tax

11 that the employer would have been required to

12 pay under section 3111 with respect to such

13 partner if the partner’s self-employment income

14 as reported by the partnership were wages sub15 ject to the FICA tax. A partner and partner16 ship can agree to treat no portion of a partner’s

17 SECA tax as allocable to the partnership.

18 ‘‘(C) PROPRIETORSHIP.—In the case of an

19 individual who is a proprietor or sole owner and

20 provider of service to a business entity, the indi21 vidual shall allocate the portion of one-half of

22 his SECA tax not allocated pursuant to sub23 paragraph (B) to his business entities in ac24 cordance with rules prescribed by the Secretary.
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1 ‘‘(c) SPECIAL RULE.—Under rules prescribed by the

2 Secretary, an individual subject to the self-employment tax

3 shall pay half of the self-employment tax on an amount

4 of self employment income not less than the amount of

5 the individual’s self-employment income taken into ac6 count by partnerships under subparagraph (B) of sub7 section (b)(3).

8 ‘‘SEC. 283. CREDIT CARRYOVER.

9 ‘‘(a) CARRYOVER.—A current-year payroll credit that

10 is not applied in the taxable year in which earned shall

11 constitute a credit carryover until applied but for no more

12 than 15 taxable years.

13 ‘‘(b) ORDER OF USE.—For purposes of determining

14 which credits are applied under section 281, if the total

15 credit allowable in a taxable year is less than the sum of

16 the current-year payroll credit and the carryover credits,

17 the current-year payroll credit shall be considered applied

18 first and then credit carryovers shall be considered applied

19 in the order earned.

20 ‘‘Subchapter M—Import Tax

‘‘Sec. 286. Imposition of tax on property.

‘‘Sec. 287. Imposition of tax on import of services.

‘‘Sec. 288. General rules for the import tax.

21 ‘‘SEC. 286. IMPOSITION OF TAX ON PROPERTY.

22 ‘‘(a) GENERAL RULE.—There is hereby imposed a

23 tax equal to 11 percent of the customs value of all prop-
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1 erty entered into the United States for consumption, use

2 or warehousing.

3 ‘‘(b) LIABILITY FOR TAX.—The tax imposed on the

4 import of property by subsection (a) shall be paid by the

5 person entering the property into the United States for

6 consumption, use or warehousing. Such tax shall be due

7 and payable at the time of import.

8 ‘‘(c) IMPORTS OF PREVIOUSLY EXPORTED PROP9 ERTY.—In the case of any article that is classified under

10 a heading or subheading of subchapter I or II of chapter

11 98 of the Tariff Schedules of the United States, the tax

12 under this section shall be imposed only on that portion

13 of the customs value of such article that is dutiable under

14 such heading or subheading.

15 ‘‘(d) IMPORTS FOR PERSONAL CONSUMPTION.—The

16 import tax imposed by this section shall not apply to any

17 article entered into the United States duty free under sub18 chapters I through VII of chapter 98 of the Tariff Sched19 ules of the United States.

20 ‘‘SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES.

21 ‘‘(a) GENERAL RULE.—There is hereby imposed a

22 tax equal to 11 percent of the cost of all services treated

23 as imported into the United States during the taxable year

24 of the service recipient.
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1 ‘‘(b) LIABILITY FOR THE TAX.—The tax on the im2 port of services imposed by subsection (a) shall be paid

3 by the person who receives the imported services. The tax

4 shall be payable as if it were an addition to the business

5 tax imposed by section 201.

6 ‘‘(c) IMPORTED SERVICES.—For purposes of this sec7 tion, services shall be treated as imported if such services

8 are treated as imported under section 267 (general rules

9 on import of services) or section 270 (related to insur10 ance).

11 ‘‘(d) SPECIAL RULE FOR INSURANCE.—The seller of

12 insurance that is treated as imported under section 270

13 shall be liable for the collection of the tax imposed by sub14 section (a) on the insurance and for paying such tax to

15 the Secretary. The first sentence of subsection (b) (relat16 ing to the person liable for the tax) shall apply to insur17 ance only to the extent that the seller of the insurance

18 services does not collect such tax.

19 ‘‘SEC. 288. GENERAL RULES FOR THE IMPORT TAX.

20 ‘‘(a) IMPORT TAX.—‘Import tax’ means the tax im21 posed by section 286 on the import of property and the

22 tax imposed by section 287 on the import of services.

23 ‘‘(b) NO CREDITS.—No credits shall be allowed

24 against the import tax, other than credit for prior overpay25 ment or credits for deposits of the import tax.
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1 ‘‘Subchapter N—Transition Rules

‘‘Sec. 290. Amortization of transition basis.

‘‘Sec. 291. Sales of transition basis property.

‘‘Sec. 292. Carryovers.

‘‘Sec. 293. Section 481 adjustments.

2 ‘‘SEC. 290. AMORTIZATION OF TRANSITION BASIS.

3 ‘‘(a) TRANSITION BASIS DEDUCTION.—The ‘transi4 tion basis deduction’ for a taxable year is the sum of the

5 amortization allowance determined under this section for

6 the taxable year.

7 ‘‘(b) AMORTIZATION RULES.—The amortization al8 lowance for each category of amortizable basis shall be de9 termined by amortizing the amortizable basis of such cat10 egory ratably over the amortization period for the category

11 beginning January 1, 1996.

12 ‘‘(c) AMORTIZATION PERIOD.—The amortization pe13 riods shall be determined in accordance with the following

14 table:

‘‘In the case of: The amortization period is:

Category I basis ............................. 10 years.

Category II basis ........................... 30 years.

Category III basis .......................... 40 years.

Unrecovered inventory costs .......... 3 years.

15 ‘‘(d) CATEGORIES.—

16 ‘‘(1) CATEGORY I BASIS.—‘Category I basis’ is

17 the sum of the unrecovered bases as of January 1,

18 1996, of all depreciable property placed in service

19 prior to January 1, 1996, and the unamortized por-
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1 tion of amortizable costs incurred before January 1,

2 1996, if—

3 ‘‘(A) cost recovery or amortization began

4 before January 1, 1996, and

5 ‘‘(B) the remaining recovery period or am6 ortization period as of January 1, 1996, is less

7 than 15 years.

8 ‘‘(2) CATEGORY II BASIS.—‘Category II basis’

9 is the sum of the unrecovered bases as of January

10 1, 1996, of all depreciable property placed in service

11 prior to January 1, 1996, and the unamortized por12 tion of amortizable costs incurred before January 1,

13 1996, if—

14 ‘‘(A) cost recovery or amortization began

15 before January 1, 1996, and

16 ‘‘(B) the remaining recovery period or am17 ortization period as of January 1, 1996, is than

18 15 years or more.

19 ‘‘(3) CATEGORY III BASIS.—‘Category III basis’

20 is the sum of the adjusted basis of each asset satis21 fying the following requirements:

22 ‘‘(A) The asset was placed in service prior

23 to January 1, 1996,

24 ‘‘(B) The asset was used in a business ac25 tivity in 1996,
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1 ‘‘(C) The cost of the asset was capitalized

2 and not depreciable or otherwise recoverable

3 under the Internal Revenue Code of 1986, and

4 ‘‘(D) The cost of the asset would have con5 stituted deductible expenses under the business

6 tax if such cost had been incurred after 1995.

7 ‘‘(4) UNRECOVERED INVENTORY COSTS.—‘Un8 recovered inventory costs’ means the cost of goods

9 sold (as determined under the Internal Revenue

10 Code of 1986) if a business entity sold all of its in11 ventory (including inventory being produced) on the

12 effective date of the business tax.

13 ‘‘(e) RULES OF APPLICATION.—

14 ‘‘(1) REMAINING RECOVERY PERIOD.—

15 ‘‘(A) TIME OF MEASURE.—The remaining

16 recovery period shall be determined as of De17 cember 31, 1995, and shall include each taxable

18 year ending after such date in which a deduc19 tion would have been allowed under the Internal

20 Revenue Code of 1986.

21 ‘‘(B) ACCOUNTING METHOD.—The remain22 ing recovery period shall be determined using

23 the cost recovery method and rules applicable

24 for determining taxable income under the Inter25 nal Revenue Code of 1986.
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1 ‘‘(2) DEPLETABLE ASSETS.—Under rules pre2 scribed by the Secretary, this section shall apply to

3 the remaining cost basis of depletable property and

4 to other property for which a cost recovery method

5 other than 1 based on time is used.

6 ‘‘SEC. 291. SALES OF TRANSITION BASIS PROPERTY.

7 ‘‘(a) IN GENERAL.—Except as provided in subsection

8 (b), for purposes of determining the tax consequences of

9 a sale, retirement, casualty or conversion to personal use

10 of an asset whose basis or cost is taken into account under

11 section 290, the amount to be amortized shall be treated

12 as fully deducted upon the adoption of the business tax.

13 ‘‘(b) SUBSTANTIAL SALES.—

14 ‘‘(1) IN GENERAL.—In the case of a substantial

15 sale of assets to which the amortization rules of sec16 tion 290 apply, the purchaser and seller may jointly

17 elect to have the purchaser assume the amortization

18 deductions attributable to such assets, in which

19 case—

20 ‘‘(A) the seller’s taxable receipts from such

21 sale shall be reduced by the amount of

22 unamortized basis or cost assumed by the pur23 chaser,

24 ‘‘(B) the purchaser may treat as a cost of

25 a business purchase only the portion of the pur-
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1 chase price in excess of the amount of

2 unamortized basis or cost assumed, and

3 ‘‘(C) the unamortized basis or cost as4 sumed shall continue to be amortized in the

5 manner amortized by the seller.

6 ‘‘(2) SUBSTANTIAL SALE.—A sale of assets by

7 a business entity to another business entity is a sub8 stantial sale if—

9 ‘‘(A) more than 20 percent (in fair market

10 value or in original cost) of the assets of the

11 seller are sold,

12 ‘‘(B) the total consideration for the sale

13 exceeds $1 million or 20 percent of the taxable

14 receipts of the seller for the taxable year pre15 ceding the year of the sale, or

16 ‘‘(C) the sale satisfies other criteria estab17 lished by the Secretary to prevent distortions in

18 gross profits resulting from asset sales.

19 ‘‘SEC. 292. CARRYOVERS.

20 ‘‘(a) NO LOSS CARRYOVERS.—No deduction shall be

21 allowed under the business tax for net operating loss

22 carryovers, capital loss carryovers, or any other loss

23 carryovers from the income tax under the Internal Reve24 nue Code of 1986.
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1 ‘‘(b) NO CREDIT CARRYOVERS.—No credits shall be

2 allowed under the business tax for business credit

3 carryovers, minimum tax credit carryovers, or any other

4 credit carryovers from the income tax under the Internal

5 Revenue Code of 1986.

6 ‘‘SEC. 293. SECTION 481 ADJUSTMENTS.

7 ‘‘(a) POSITIVE NET SECTION 481 ADJUSTMENT

8 AMOUNT.—If, as of January 1, 1996, a business entity

9 has a positive net section 481 adjustment amount, the

10 amount shall be applied to reduce the transition basis in

11 accounts (for purposes of section 290) in the following

12 order:

13 ‘‘(1) First, to reduce the category I basis (but

14 not below zero).

15 ‘‘(2) Second, to reduce the category II basis

16 (but not below zero).

17 ‘‘(3) Third, to reduce the unrecovered inventory

18 costs.

19 ‘‘(b) NEGATIVE NET SECTION 481 ADJUSTMENT

20 AMOUNT.—If, as of January 1, 1996, a business entity

21 has a negative net section 481 adjustment amount, the

22 amount shall be applied to increase category I basis for

23 purposes of section 290.
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1 ‘‘(c) SECTION 481 ADJUSTMENT.—A business enti2 ty’s net section 481 adjustment is determined by sub3 tracting—

4 ‘‘(1) the sum of all additional deductions to

5 which a business entity would be entitled by reason

6 of section 481 of the Internal Revenue Code of 1986

7 for periods beginning on or after the effective date

8 of the business tax with respect to changes in ac9 counting methods made before such effective date,

10 from

11 ‘‘(2) the sum of all additional income which a

12 business entity would recognize by reason of section

13 481 of the Internal Revenue Code of 1986 for peri14 ods beginning on or after the effective date of the

15 business tax with respect to changes in accounting

16 methods made before such effective date,

17 in each case assuming that the income tax under the In18 ternal Revenue Code of 1986 remained in effect.

19 ‘‘Subchapter O—Rules for Administration,

20 Consolidated Returns

‘‘Sec. 301. Returns, due dates, etc.

‘‘Sec. 302. Consolidated returns.

21 ‘‘SEC. 301. RETURNS, DUE DATES, ETC.

22 ‘‘(a) IN GENERAL.—Until subtitle F is amended to

23 reflect the adoption of this chapter, the rules of subtitle
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1 F relating to C corporations shall apply to business enti2 ties with respect to—

3 ‘‘(1) returns and records;

4 ‘‘(2) time and place for paying tax;

5 ‘‘(3) assessment of taxes;

6 ‘‘(4) collections and liens;

7 ‘‘(5) abatements, credits, and refunds;

8 ‘‘(6) interest on underpayments and overpay9 ments;

10 ‘‘(7) additions to tax and penalties;

11 ‘‘(8) closing agreements and compromises;

12 ‘‘(9) crimes;

13 ‘‘(10) judicial proceedings;

14 ‘‘(11) discovery of liability and enforcement;

15 and

16 ‘‘(12) estimated taxes.

17 ‘‘(b) INDIVIDUALS ENGAGING IN BUSINESS ACTIVI18 TIES.—Under rules prescribed by the Secretary, individ19 uals engaging in business activities on their own or with

20 their spouses shall be permitted to file their business tax

21 returns with their individual tax returns and shall be sub22 ject to estimated tax rules for individual income tax re23 turns.
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1 ‘‘SEC. 302. CONSOLIDATED RETURNS.

2 ‘‘(a) IN GENERAL.—Business entities may file con3 solidated returns of business tax if such entities would

4 have been permitted to file consolidated returns under sec5 tion 1501 of the Internal Revenue Code of 1986 and such

6 section were applied by treating each business entity as

7 a corporation and its owners or partners as shareholders.

8 ‘‘(b) FINANCIAL INSTITUTIONS.—Financial

9 intermediation businesses may be included in consolidated

10 returns, but each financial intermediation business must

11 compute its gross profits separately.

12 ‘‘(c) INTERCOMPANY TRANSACTIONS.—In computing

13 the gross profits of a consolidated group, intercompany

14 transactions can be taken into account, or at the election

15 of the filer, be disregarded (except in the case of trans16 actions with financial intermediation businesses).

17 ‘‘Subchapter P—Definitions and Rules of

18 Application

‘‘Sec. 310. Definitions.

‘‘Sec. 311. Rules of application.

19 ‘‘SEC. 310. DEFINITIONS.

20 ‘‘(a) IN GENERAL.—When used in this chapter,

21 where not otherwise distinctly expressed or manifestly in22 compatible with the intent thereof—

23 ‘‘(1) USA INCOME TAX.—‘USA Income Tax’

24 means the tax imposed by chapter 1.
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1 ‘‘(2) INTERNAL REVENUE CODE OF 1986.—‘In2 ternal Revenue Code of 1986’ means the Internal

3 Revenue Code of 1986 as in effect immediately be4 fore the enactment of the business tax and the USA

5 Income Tax.

6 ‘‘(3) UNITED STATES.—‘United States’ means

7 the States and the District of Columbia.

8 ‘‘(b) TERMS DEFINED IN CHAPTER 2.—If a term

9 that is used but not defined in this chapter or in section

10 7701 is defined in chapter 1, the definition in chapter 1

11 shall apply except if manifestly incompatible with the in12 tent of the provision in which the term is used.

13 ‘‘SEC. 311. RULES OF APPLICATION.

14 ‘‘(a) DEFINITIONS.—Any definition included in this

15 chapter shall apply for all purposes of this chapter un16 less—

17 ‘‘(1) such definition is limited to the purposes

18 of a particular chapter, section, or subsection, or

19 ‘‘(2) the definition clearly would not be applica20 ble in a particular context.

21 ‘‘(b) INTERPRETATIONS CONSISTENT WITH THE IN22 TERNAL REVENUE CODE OF 1986.—Terms not defined

23 in this chapter or elsewhere in this title, but defined in

24 the Internal Revenue Code of 1986, shall be interpreted

25 in a manner consistent with the Internal Revenue Code
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1 of 1986, except to the extent such interpretation would

2 be inconsistent with the principles and purposes of this

3 chapter.’’

4 (b) The amendments made by this section shall be

5 effective on January 1, 1996, except to the extent other6 wise specifically provided in the text of such amendments.

7 SEC. 302. REPEAL OF CHAPTER 6.

8 Chapter 6 of the Code (relating to consolidated re9 turns) is repealed as of January 1, 1996.

10 TITLE IV—DEFERRED

11 COMPENSATION PLANS

12 SEC. 401. PROVISIONS SAVED.

13 (a) IN GENERAL.—The sections contained in sub14 chapter D of chapter 1 of the Code (relating to deferred

15 compensation, etc.) are redesignated as chapter 3.

16 (b) LIMITATIONS ON CHAPTER 3.—Chapter 3 of the

17 Code (as redesignated by subsection (a)) is amended by

18 inserting before section 401 the following new section:

19 ‘‘SEC. 400. EFFECT OF CHAPTER 3.

20 ‘‘(a) IN GENERAL.—The provisions of chapter 3 (sec21 tions 401 through 420) are included in this subtitle pri22 marily for purposes of cross-reference and for purposes of

23 determining whether plans are exempt from the business

24 tax.
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1 ‘‘(b) EFFECT ON INCOME TAX DEDUCTIONS.—Not2 withstanding any provisions to the contrary in this chap3 ter, no provision of this chapter shall operate to create

4 a deduction from taxable income for purposes of the indi5 vidual tax imposed by chapter 1, nor shall any provision

6 of this chapter operate to cause any amount which would

7 be considered an addition to savings under chapter 1 to

8 not be considered an addition to savings.

9 ‘‘(c) EFFECT ON BUSINESS TAX DEDUCTIONS.—

10 Notwithstanding any provision to the contrary in this

11 chapter, no provision of this chapter shall cause any

12 amount to be treated as a cost of business purchase or

13 to otherwise be deducted from gross receipts for purposes

14 of computing the business tax under chapter 2.

15 ‘‘(d) NO CREDITS.—Notwithstanding any provision

16 to the contrary in this chapter, no provision of this chapter

17 shall result in a tax credit against any tax imposed by

18 chapter 1 or chapter 2.

19 ‘‘(e) EFFECT OF FAILURE TO COMPLY WITH PROVI20 SIONS.—A failure to comply with applicable provisions in

21 this chapter could cause a plan to lose its exemption from

22 the business tax and, thereby subject certain business ac23 tivities of the plan to the business tax.’’

24 (c) CLERICAL AMENDMENTS.—The table of sections

25 for subpart A of part 1 of chapter 3 of the Code is amend-
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1 ed by inserting before the item relating to section 401 the

2 following new item:

‘‘Sec. 400. Effect of chapter 3.’’

3 (d) EFFECTIVE DATE.—The amendments made by

4 this section shall be effective on January 1, 1996.

5 TITLE V—TECHNICAL AND

6 ADMINISTRATIVE CHANGES

7 SEC. 501. USA TAX CODE.

8 (a) REDESIGNATION OF THE CODE.—The Internal

9 Revenue Code enacted August 16, 1954, and as heretofore

10 hereby, and hereafter amended may be cited as the ‘‘USA

11 Tax Code’’.

12 (b) REFERENCES IN LAWS, ETC.—Except where in13 appropriate, any reference in any law, Executive order, or

14 other document—

15 (1) to the Internal Revenue Code of 1954 or

16 the Internal Revenue Code of 1986 shall include a

17 reference to the USA Tax Code, and

18 (2) to the USA Tax Code shall include a ref19 erence, with respect to periods before January 1,

20 1996, to the Internal Revenue Code of 1954 or the

21 Internal Revenue Code of 1986.

22 SEC. 502. REVISIONS TO THE CODE.

23 Not later than January 1, 1997, the Secretary shall

24 submit to Congress proposed changes in the USA Tax

25 Code that—
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1 (1) eliminate cross-references to the Internal

2 Revenue Code of 1986 (except with respect to tran3 sition issues) and insert provisions similar to the

4 cross-referenced sections of the Internal Revenue

5 Code of 1986,

6 (2) revise subtitles B through J of the Internal

7 Revenue Code of 1986 to fully reflect the new sub8 title A of the Internal Revenue Code,

9 (3) include statutory definitions or rules in

10 cases where the Secretary concludes that the defini11 tions or rules cannot or should not be addressed by

12 regulation,

13 (4) revise chapter 4 of the USA Tax Code (re14 lating to the self-employment tax) to conform to

15 changes made by this Act, and

16 (5) revise chapter 5 of the USA Tax Code to

17 reflect changes made in this Act.

18 SEC. 503. APPLICATION OF SUBTITLE F.

19 Until such time as subtitle F of the Code is amended

20 to reflect the amendments made by this Act, the provisions

21 of subtitle F shall be treated as generally applying to the

22 USA Income Tax and the business tax imposed by such

23 amendments—

24 (1) without regard to specific cross references,
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1 (2) without regard to provisions relating to

2 partnerships, and

3 (3) as if the business tax were the corporate in4 come tax and all business entities were corporations

5 (except for purposes of collection, in which case the

6 owners of noncorporate entities shall be obligated for

7 taxes owed by the entities to the same extent as

8 such owners would if the entity owed the tax prior

9 to the amendment of such Code.

10 SEC. 504. CLERICAL AMENDMENT.

11 The table of chapters for subtitle A of the Code is

12 amended to read as follows:

‘‘CHAPTER 1. Unlimited Savings Allowance tax for individuals.

‘‘CHAPTER 2. Tax paid by corporations and other businesses.

‘‘CHAPTER 3. Deferred compensation, etc.

‘‘CHAPTER 4. Tax on self-employment income.

‘‘CHAPTER 5. Withholding tax on nonresident aliens and foreign corporations.’’

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