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[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 722 Introduced in Senate (IS)]

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.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS

    (a) Short Title.--This Act may be cited as the ``USA Tax Act of 
1995''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act a reference is made to the Code or to a 
section or provision of the Code, the reference shall be considered to 
be made to the Internal Revenue Code of 1986 or to a section or 
provision thereof.
    (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.

           TITLE I--FINDINGS; NEED TO REPLACE THE INCOME TAX

SEC. 101. RESTRUCTURING AND REPLACING THE INCOME TAX OF THE UNITED 
              STATES.

    (a) Findings.--The Congress finds that--
            (1) to provide for the prosperity of future generations, 
        the United States must achieve higher levels of saving and 
        investment, which will in turn increase productivity, economic 
        growth, and living standards;
            (2) the Tax Code is an important element of our national 
        saving policy;
            (3) the current Tax Code is irreparably flawed and should 
        be replaced with a new progressive system which promotes saving 
        and investment, and thus more rapid economic growth, while 
        ensuring fairness through progressive taxation;
            (4) all individuals at all income levels should be given a 
        fair opportunity to save, invest, and raise their standard of 
        living and that of their children;
            (5) future economic growth requires a tax system that 
        facilitates successful competition in the global marketplace;
            (6) the tax system of the United States must be as simple 
        and efficient as possible; and
            (7) to ensure that national saving is increased, reform of 
        the tax system must not increase the Federal budget deficit.
    (b) Main Features of USA Tax System.--
            (1) Replacement of old tax system.--Chapter 1 of subtitle A 
        (related to income taxes) of the Code is repealed and replaced 
        for years beginning after 1995.
            (2) New tax system.--The USA Tax consists of--
                    (A) a simplified tax collected from individuals, 
                that for years after 1995 replaces the income tax 
                imposed on individuals by section 1 of the Code, and
                    (B) a simplified tax collected from corporations 
                and other businesses, that for years after 1995 
                replaces the income tax imposed on corporations by 
                section 11 of the Code.
            (3) USA tax on gross profits.--Corporations and other 
        businesses pay tax on their annual gross profits from business 
        conducted in the United States, except that--
                    (A) export revenues are excluded, and
                    (B) imports are taxed.
            (4) USA tax on income.--Individuals pay tax on their annual 
        income from wages, dividends, interest, and other financial 
        income (including sales of property), except that--
                    (A) tax is deferred on income the consumption of 
                which is deferred and added to the national stock of 
                savings,
                    (B) a portion of each family's income is exempt 
                from tax, and
                    (C) deductions are allowed for--
                            (i) education costs,
                            (ii) religious, charitable, and other 
                        philanthropic donations, and
                            (iii) home mortgage interest payments.
            (5) Credit for fica payroll taxes paid.--The amount of tax 
        due is reduced by the payroll tax that is--
                    (A) in the case of an employee, withheld from 
                wages, or
                    (B) in the case of a corporation or other business, 
                paid by the employer.
    (c) Concepts and Structure of New Tax System.--
            (1) Guiding principles of the usa tax system.--The USA Tax 
        is based on the following principles:
                    (A) National wealth and well-being depend on the 
                work, skill, and savings and investment of people.
                    (B) Businesses are people and their capital working 
                together.
                    (C) Capital makes people more productive.
                    (D) Everyone benefits from a growing stock of 
                national savings which in turn allows for a growing 
                stock of physical and human capital.
                    (E) Under the USA Tax, the deferral of taxation on 
                investments in physical and human capital represents an 
                investment by the Federal Government in the Nation's 
                capital stock and the Federal Government shares in the 
                return on its investment in the form of higher economic 
                output and revenues in the future.
            (2) Single tax in 2 parts.--The USA Tax is composed of a 
        business tax and an individual tax which are 2 parts of a 
        single tax system that subjects all income produced and 
        received to taxation once and only once. The 2 parts are as 
        follows:
                    (A) Business tax at the source of income.--Tax is 
                paid by corporations and other businesses which produce 
                and sell goods and services that are--
                            (i) the source of nearly all the gross 
                        domestic product of the United States, and
                            (ii) the ultimate source of income received 
                        by individuals.
                    (B) Individual tax on income received.--Tax is paid 
                by individuals--
                            (i) when they receive wages and salaries as 
                        compensation for gross domestic product created 
                        by their work, and
                            (ii) when they receive interest, dividends, 
                        and other financial income as compensation for 
                        gross domestic product created by their savings 
                        and investment.
            (3) Saving and investment.--The USA Tax allows people to 
        save and businesses to invest as follows:
                    (A) Fair opportunity for people to save.--
                            (i) No prepayment of tax.--When a person 
                        defers receipt of income by adding it to the 
                        national stock of savings--
                                    (I) a deduction is allowed for the 
                                amount saved, and
                                    (II) tax is deferred.
                            (ii) Withdrawal of savings and earnings.--
                        When withdrawn from savings, both the principal 
                        amount saved and the earnings on savings are 
                        included in gross income subject to tax.
                            (iii) Analogy to individual retirement 
                        accounts.--The deduction for saving is the 
                        equivalent of allowing a deduction for the 
                        contribution a person makes to an individual 
                        retirement account (IRA), except that--
                                    (I) savers have greater control and 
                                flexibility,
                                    (II) no specially designated 
                                account is required,
                                    (III) savings are not limited to 
                                retirement purposes,
                                    (IV) the deduction for saving is 
                                unlimited in amount, and
                                    (V) savings can be withdrawn at any 
                                time for any purpose.
                    (B) Fair opportunity for businesses to invest.--
                            (i) No prepayment of tax.--When a business 
                        invests in plant and equipment--
                                    (I) a deduction is allowed for the 
                                cost, and
                                    (II) tax is deferred.
                            (ii) Tax on earnings and recovery of 
                        cost.--When recovered out of business revenues, 
                        both the cost of the investment and the 
                        earnings on the investment are included in 
                        gross profit subject to tax.
                            (iii) Expensing.--The deduction for 
                        investment is the equivalent of allowing the 
                        cost of plant and equipment to be expensed 
                        instead of depreciated.
            (4) Fair opportunity to compete in the global 
        marketplace.--The USA Tax serves the strategic interests of the 
        United States in international markets as follows:
                    (A) Border adjustable tax.--
                            (i) American-made exports.--Goods and 
                        services produced in the United States can be 
                        sold into world markets free of tax.
                            (ii) Foreign-made imports.--Goods and 
                        services imported into the United States bear a 
                        fair and proportionate share of the tax burden 
                        in the United States.
                            (iii) Leveling the international playing 
                        field.--Border adjustments for exports and 
                        imports are consistent with international 
                        standards and practice.
            (5) Simpler and more understandable tax.--Compared to the 
        income tax it replaces, the USA Tax for individuals--
                    (A) is written in a simpler, more understandable 
                form, and
                    (B) contains only a few exemptions, deductions, and 
                credits.
            (6) USA tax is revenue neutral.--The USA Tax is designed to 
        neither increase nor decrease the total amount of tax paid and 
        collected under the current Code.
            (7) Maintaining tax progressivity for individuals.--
                    (A) Graduated tax.--Like the tax imposed by section 
                1 of the current Code, the USA Tax for individuals is a 
                graduated tax.
                    (B) Family living allowance.--The USA Tax 
                recognizes that every family's budget includes 
                necessities. The USA Tax provides a family living 
                allowance that exempts from taxation the first dollars 
                earned and spent to maintain a basic standard of 
                living.
                    (C) Individual tax burden by income level.--The tax 
                burden across income classes ranging from low income to 
                high income is about the same as under the current 
                Code.
            (8) Business and individual portions of tax burden.--
                    (A) Business portion of tax burden.--Corporations 
                and other businesses pay about the same portion of the 
                total tax as under the current Code.
                    (B) Individual portion of tax burden.--Individuals 
                pay about the same portion of the total tax as under 
                the current Code.
            (9) Emphasizing personal independence and responsibility.--
                    (A) Reinforcing a culture of work and thrift.--
                Instead of being solely a calculation of how much they 
                must pay to the government, the USA Tax converts the 
                income tax into an annual calculation of--
                            (i) how much people produce and contribute 
                        to the economy,
                            (ii) how much they take out of the economy, 
                        and
                            (iii) how much they save and put back into 
                        the economy for their own and the nation's 
                        future.
                    (B) Greater control and responsibility.--Because 
                people are allowed to defer tax on income through 
                saving, they have--
                            (i) more control over their own income and 
                        taxes,
                            (ii) a greater ability to plan and provide 
                        for their own future, and
                            (iii) a fair opportunity to do so.
            (10) More opportunity for wage earners at lower income 
        levels.--
                    (A) Refundable credit for employee payroll tax.--
                The amount of the payroll tax paid or withheld under 
                the Code from an employee's wages (and paid into the 
                Social Security and Hospital Insurance Trust Funds) 
                is--
                            (i) credited against the employee's income 
                        tax, and
                            (ii) refunded to the employee to the extent 
                        in excess of the employee's income tax.
                    (B) Refundable income tax credit for the working 
                poor.--The USA Tax--
                            (i) increases the credit allowed by section 
                        32 of the current Code, and
                            (ii) concentrates the credit on families 
                        with children.
                    (C) No effect on trust fund or benefits.--The 
                income tax credit allowed for payroll taxes deposited 
                in the Social Security Trust Fund does not--
                            (i) reduce the amount in such fund, or
                            (ii) reduce the payment of any person's 
                        benefits from the fund.

                   TITLE II--USA TAX FOR INDIVIDUALS

SEC. 201. UNLIMITED SAVINGS ALLOWANCE TAX FOR INDIVIDUALS.

    (a) In General.--Chapter 1 of the Code is amended to read as 
follows:

      ``CHAPTER 1--UNLIMITED SAVINGS 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.

                      ``Subchapter A--Basic Rules

        ``Sec. 1. USA income tax.
        ``Sec. 2. Persons liable for the USA income tax.
        ``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.

``SEC. 1. USA INCOME TAX.

    ``(a) Imposition of Tax.--An income tax is imposed on each 
individual described in section 2. The income tax shall equal the 
amount determined by applying the tax schedules in section 15 to the 
taxable income of the taxpayer for the taxable year and reducing the 
tax so determined by the USA tax credits for the taxable year.
    ``(b) Taxable Income.--`Taxable income' means adjusted gross 
income, reduced by--
            ``(1) the personal and dependency deduction,
            ``(2) the Family Living Allowance,
            ``(3) the USA deductions, including--
                    ``(A) the homeowner deduction,
                    ``(B) the education deduction, and
                    ``(C) the philanthropic transfer deduction, and
            ``(4) the transition basis deduction.
    ``(c) Adjusted Gross Income.--`Adjusted gross income' means the sum 
of current-year gross income and deferred income, reduced by the 
alimony and child support deductions and the Unlimited Savings 
Allowance.
    ``(d) Current-Year Gross Income.--`Current-year gross income' means 
gross income for the taxable year other than deferred income.
    ``(e) Deferred Income.--`Deferred income' means income attributable 
to withdrawals of previously saved gross income as determined under 
sections 51 and 52.
    ``(f) Name.--The tax imposed by this chapter shall be known as the 
`USA Income Tax'.

``SEC. 2. PERSONS LIABLE FOR THE USA INCOME TAX.

    ``(a) Individuals Only.--The USA Income Tax shall apply only to 
individuals.
    ``(b) Citizens and Resident Aliens.--The USA Income Tax shall apply 
to all citizens of the United States and to all resident aliens of the 
United States. Except as specifically provided in this chapter, the USA 
Income Tax shall not apply to nonresident aliens.
    ``(c) Nonresident Aliens.--For rules applicable to the compensation 
income of nonresident aliens, see subchapter H (sections 131 and 132). 
For rules on the withholding of tax on nonresident aliens, see chapter 
5 (sections 1441-1464).
    ``(d) Taxpayer.--For purposes of this chapter, `taxpayer' means an 
individual, or, in the case of a joint return, the husband and the 
wife.

``SEC. 3. GROSS INCOME.

    ``(a) General Definition.--Except as otherwise provided in this 
chapter, `gross income for the taxable year' means all income from 
whatever source derived by a taxpayer during the taxable year, 
including (but not limited to) the following items:
            ``(1) Compensation for services, including (but not limited 
        to)--
                    ``(A) salaries,
                    ``(B) wages,
                    ``(C) commissions,
                    ``(D) tips, and
                    ``(E) distributions from business entities (as 
                defined in section 151).
            ``(2) Fringe benefits (except as specifically excluded by 
        section 4(a)), including (but not limited to)--
                    ``(A) the cost of health, disability, or other 
                similar insurance paid by an employer if the taxpayer 
                is indirectly or directly the beneficiary of the policy 
                or has the right to name the beneficiary of the policy,
                    ``(B) employer-paid parking (unless the employee 
                uses the automobile parked in the space regularly on 
                employer business),
                    ``(C) employer-paid educational benefits,
                    ``(D) employer-paid housing (other than housing 
                provided for the convenience of the employer),
                    ``(E) employer-paid meals (other than meals 
                provided for the convenience of the employer or 
                reimbursement for the reasonable cost of meals incurred 
                on overnight travel),
                    ``(F) amounts contributed by an employer on behalf 
                of an employee to a group legal services plan, and
                    ``(G) dependent care assistance received from an 
                employer.
            ``(3) Distributions from business entities (as defined in 
        section 151) constituting--
                    ``(A) compensation for use of capital, including 
                interest,
                    ``(B) shares of profits (including dividends), or
                    ``(C) return of capital including accumulated but 
                undistributed profits.
            ``(4) Interest not described in paragraph (3)(A).
            ``(5) Rents.
            ``(6) Royalties.
            ``(7) Alimony, child support, and separate maintenance 
        payments.
            ``(8) Pensions and other retirement plan payments (except 
        to the extent taken into account in determining deferred 
        income).
            ``(9) Includible social security benefits.
            ``(10) Income from the discharge of indebtedness.
            ``(11) Gains on the sale or disposition of assets (other 
        than savings assets).
            ``(12) Amounts stolen or embezzled.
    ``(b) Definitions.--For purposes of subsection (a) and section 4--
            ``(1) Employer.--`Employer' includes--
                    ``(A) in the case of a partner who provides 
                services for a partnership, the partnership,
                    ``(B) in the case of a proprietor, the 
                proprietorship, and
                    ``(C) in the case of an independent contractor, any 
                business or individual that hires the independent 
                contractor.
            ``(2) Social security benefits.--
                    ``(A) In general.--`Social Security benefits' means 
                any amount received by the taxpayer by reason of 
                entitlement to--
                            ``(i) a monthly benefit under title II of 
                        the Social Security Act, or
                            ``(ii) a tier 1 railroad retirement 
                        benefit.
        The amount received by a taxpayer shall be determined as if the 
        Social Security Act did not contain section 203(i) thereof.
                    ``(B) Tier 1 railroad retirement benefit.--`Tier 1 
                railroad retirement benefit' means--
                            ``(i) the amount of the annuity under the 
                        Railroad Retirement Act of 1974 equal to the 
                        amount of the benefit to which the taxpayer 
                        would have been entitled under the Social 
                        Security Act if all of the service after 
                        December 31, 1936, of the employee (on whose 
                        record the annuity is being paid) has been 
                        included in the term `employment' as defined in 
                        the Social Security Act, and
                            ``(ii) a monthly annuity amount under 
                        section 3(f)(3) of the Railroad Retirement Act 
                        of 1974.
                    ``(C) Workers' compensation substitutes.--If by 
                reason of section 224 of the Social Security Act or 
                section 3(a)(1) of the Railroad Retirement Act of 1974, 
                any social security benefit is reduced because of the 
                receipt of a benefit under a workers' compensation act, 
                the term `social security benefit' includes that 
                portion of such benefit which equals such reduction.
                    ``(D) Effect of early payment.--If social security 
                benefits checks are delivered before the end of the 
                calendar month for which they are issued and are not 
                deposited until the month for which they are issued, 
                they will be treated as received in the month for which 
                they are issued.
            ``(3) Includible social security benefits.--`Includible 
        social security benefits' means the portion of social security 
        benefits that would be included in gross income under section 
        86(a) of the Internal Revenue Code of 1986, except that for 
        purposes of applying such section, the term `modified adjusted 
        gross income' means adjusted gross income (as defined in 
        section 1(c)), determined without regard to the inclusion of 
        any social security benefits.
    ``(c) Cross References.--
            ``(1) Specifically excluded items.--For items specifically 
        excluded from gross income, see section 4 and sections 91 
        through 97.
            ``(2) Deferred income.--For rules relating to deferred 
        income as a result of the Unlimited Savings Allowance, see 
        subchapter B (sections 50 through 58).

``SEC. 4. EXCLUSIONS FROM GROSS INCOME.

    ``(a) General Rule.--Gross income for the taxable year does not 
include:
            ``(1) Returns or benefits from previously taxed income.--
                    ``(A) Social security benefits (as defined in 
                section 3(b)(2)), other than includible social security 
                benefits (as defined in section 3(b)(3)).
                    ``(B) Amounts received under accident or health 
                benefit plans (but only if the cost of such plans was 
                paid by the employee or included in gross income of the 
                employee).
                    ``(C) Value of services provided pursuant to a 
                group legal service plan (but only if the cost of such 
                services was paid by the employee or paid by the 
                employer and included in the gross income of the 
                employee).
                    ``(D) Amounts received under an insurance contract 
                for certain living expenses in the case of an 
                individual whose principal residence is damaged or 
                destroyed or who is denied access because of the threat 
                of such occurrence.
                    ``(E) In the case of amounts or property received 
                for property in which the taxpayer has a basis, an 
                amount equal to the basis.
            ``(2) Compensation for special kinds of service.--
                    ``(A) In the case of a minister of the gospel--
                            ``(i) the rental value of a home furnished 
                        to him, or
                            ``(ii) the rental allowance paid to him as 
                        part of his compensation, to the extent used by 
                        him to rent or provide a home.
                    ``(B) Certain combat pay of members of the Armed 
                Forces of the United States (as provided in section 
                92).
                    ``(C) Certain reduced uniform services retirement 
                pay (as defined in section 122 of the Internal Revenue 
                Code of 1986).
                    ``(D) Qualified military benefits (as defined in 
                section 93).
                    ``(E) Moving allowances for active military 
                personnel (as defined in section 217(g) of the Internal 
                Revenue Code of 1986).
                    ``(F) Certain foster care payments (as defined in 
                section 94).
            ``(3) Gratuitous, charitable, and governmental transfers.--
                    ``(A) Gifts.
                    ``(B) Inheritances.
                    ``(C) Supplemental security income, aid to families 
                with dependent children, food stamps, Section 8 Low 
                Income Rental Assistance, benefits under the low income 
                home energy assistance program, and benefits under 
                other similar Federal and State assistance programs for 
                low-income individuals and families.
                    ``(D) Benefits or assistance received from a 
                charitable organization as the result of a disaster or 
                by reason of financial need.
            ``(4) Tax-exempt bond interest.--Interest on State and 
        local bonds (as provided in section 91);
            ``(5) Compensation for injury and sickness.--
                    ``(A) Amounts received as compensation for personal 
                injury or sickness (as provided in section 95).
                    ``(B) Reimbursement and direct payments under 
                Medicare and Medicaid.
            ``(6) Benefits primarily for the convenience of the 
        employer and certain fringe benefits that are difficult to 
        value.--
                    ``(A) Meals or lodging furnished for the 
                convenience of the employer (as provided in section 
                96).
                    ``(B) Value of a parking space if employee uses the 
                car parked in the space regularly on company business.
                    ``(C) A fringe benefit that is a no-additional-cost 
                service (as defined in section 97(b)), subject to rules 
                prohibiting discrimination in favor of the highly 
                compensated.
                    ``(D) A qualified employee discount (as defined in 
                section 97(c)), subject to rules prohibiting 
                discrimination in favor of the highly compensated.
                    ``(E) Any property or services provided to an 
                employee to the extent that if the employee were 
                treated as a business and the business paid for those 
                services, the employee could deduct the cost of such 
                property or services under the business tax.
                    ``(F) A de minimis fringe benefit (as defined in 
                section 97(d)).
                    ``(G) Transportation in a commuter highway vehicle 
                if such transportation is in connection with travel 
                between the employee's residence and place of 
                employment.
                    ``(H) Any amount received directly or indirectly by 
                an individual from an employer for moving expenses if--
                            ``(i) the move is associated with a change 
                        in job locations for the same employer, and
                            ``(ii) the expenses of such move would have 
                        been deductible under the rules under section 
                        217 of the Internal Revenue Code of 1986 if 
                        paid directly by the employee.
            ``(7) Repayable receipts.--The proceeds of borrowing or any 
        other amounts legally received that the taxpayer is legally 
        obligated to return (except that the imputed interest rules of 
        section 7872 may apply if there is inadequate stated interest).
            ``(8) Certain income earned abroad.--Certain income and 
        housing costs of citizens and residents of the United States 
        living outside the United States in accordance with the rules 
        under section 911 of the Internal Revenue Code of 1986.
            ``(9) Discharge of indebtedness.--The amount of 
        indebtedness discharged unless the discharge is for services, 
        property, or other valuable right.
            ``(10) Rollover rules.--Amounts to which the like-kind 
        exchange rule of section 56(b) or the residence rollover rule 
        of section 76 applies.
            ``(11) Certain amounts immediately saved.--Certain amounts 
        that would be treated as gross income but which are saved by 
        the payor on behalf of the employee, including--
                    ``(A) employer contributions to retirement and 
                severance plans qualified under chapter 3 (relating to 
                deferred compensation plans);
                    ``(B) bonuses and compensation paid in the form of 
                stock or stock options in the employer; and
                    ``(C) life insurance premiums paid by an employer.
            ``(12) Taxable receipts of a business entity.--Amounts that 
        are treated as taxable receipts of a business entity under the 
        business tax.
            ``(13) Certain insurance proceeds.--Proceeds of casualty, 
        property damage, theft, or loss insurance.
    ``(b) Special Rules.--
            ``(1) Limited application of immediate savings exclusion.--
        The exclusion contained in paragraph (11) of subsection (a) 
        shall not apply to compensation of officers, directors, 
        partners, or proprietors of business entities unless such 
        amounts are paid pursuant to plans that are qualified under 
        chapter 3 (relating to deferred compensation plans). If the 
        immediate savings exclusion does not apply to an individual 
        because of this paragraph, the amount not excluded shall be 
        treated as an addition to savings.
            ``(2) Amounts taken into account in determining deferred 
        income.--Any amount which is to be taken into account in 
        determining withdrawals from savings under section 54 shall not 
        also be taken into account in determining current-year gross 
        income.

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

    ``(a) General Rule.--A taxpayer shall be allowed an alimony and 
child support deductions for an amount equal to the alimony, child 
support, or separate maintenance payments paid during the taxpayer's 
taxable year.
    ``(b) Definition of Alimony, Child Support, and Separate 
Maintenance Payments.--`Alimony, child support, and separate 
maintenance payments' means any alimony, child support, or separate 
maintenance payment which is includible in gross income under section 
3.

``SEC. 6. PERSONAL AND DEPENDENCY DEDUCTION.

    ``(a) Amount of Exemption.--The personal and dependency deduction 
for an individual shall equal the number of exemptions multiplied by 
$2,550.
    ``(b) Number of Exemptions.--
            ``(1) Taxpayer.--One exemption shall be allowed for the 
        taxpayer unless the taxpayer files a joint return with a 
        spouse, in which case 1 exemption shall be allowed for the 
        husband and 1 for the wife.
            ``(2) Eligible dependent.--An exemption shall be allowed 
        for each eligible dependent.
    ``(c) Dependent.--
            ``(1) Definition.--`Dependent' means any of the following 
        individuals over half of whose support, for the calendar year 
        in which the calendar year of the taxpayer begins, was received 
        from the taxpayer or is treated as received from the taxpayer:
                    ``(A) A son or daughter of the taxpayer, or a 
                descendant of either.
                    ``(B) A stepson, stepdaughter, stepfather, or 
                stepmother of the taxpayer.
                    ``(C) A brother, sister, stepbrother, or stepsister 
                of the taxpayer.
                    ``(D) The father or mother of the taxpayer, or an 
                ancestor of either.
                    ``(E) A son or daughter of a brother or sister of 
                the taxpayer.
                    ``(F) A brother or sister of the mother or father 
                of the taxpayer.
                    ``(G) A son-in-law, daughter-in-law, father-in-law, 
                mother-in-law, brother-in-law, or sister-in-law of the 
                taxpayer.
                    ``(H) An individual (other than an individual who 
                at any time during the taxable year was the spouse, 
                determined without regard to section 7703, of a 
                taxpayer) who, for the taxable year of the taxpayer, 
                has as his principal place of abode the home of the 
                taxpayer and is a member of the taxpayer's household.
            ``(2) Rules relating to the general definition.--The 
        Secretary shall prescribe rules similar to the rules under 
        section 152 of the Internal Revenue Code of 1986 that shall 
        apply to the general definition of `dependent', including 
        definitional rules, rules relating to multiple support 
        agreements, and support tests in cases of children of divorced 
        parents.
    ``(d) Eligible Dependent.--
            ``(1) In general.--The term `eligible dependent' means a 
        dependent--
                    ``(A) whose gross income for the calendar year in 
                which the taxable year of the taxpayer begins is less 
                than the exemption amount, or
                    ``(B) who is a child of the taxpayer and who--
                            ``(i) has not attained the age of 19 at the 
                        close of the calendar year in which the taxable 
                        year of the taxpayer begins, or
                            ``(ii) is a student who has not attained 
                        the age of 24 at the close of such calendar 
                        year.
            ``(2) Exclusions.--A dependent who files a joint return 
        with a spouse for the calendar year in which the taxable year 
        of the taxpayer begins is not an eligible dependent.
            ``(3) Rules relating to definitions.--The Secretary shall 
        prescribe rules similar to those included in or applicable 
        under the Internal Revenue Code of 1986 relating to this 
        subsection, including rules defining `child' and `student' and 
        rules relating to the income of handicapped dependents.
    ``(e) Inflation Adjustment.--The dollar amount contained in 
subsection (a) shall be adjusted for inflation beginning with calendar 
year 1997 in accordance with procedures of the section 24.

``SEC. 7. FAMILY LIVING ALLOWANCE.

    ``(a) Amount of Allowance.--The Family Living Allowance for a 
taxpayer shall be determined in accordance 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.
    ``(b) Limitation in the Case of Certain Dependents.--In the case of 
an individual for whom another taxpayer can claim an exemption under 
section 6, the Family Living Allowance for such individual shall not 
exceed the greater of $650 or such individual's earned income (as 
defined in section 22(c)(2)).
    ``(c) Adjustments for Inflation.--The dollar amounts contained in 
subsections (a) and (b) shall be adjusted for inflation beginning with 
calendar year 1997 in accordance with the procedures of section 24.

``SEC. 8. USA DEDUCTIONS.

    ``In computing taxable income, an individual shall be entitled to 
the following deductions:
            ``(1) The homeowner deduction described in section 9.
            ``(2) The education deduction described in section 10.
            ``(3) The philanthropic transfer deduction described in 
        section 11.

``SEC. 9. HOMEOWNER DEDUCTION.

    ``(a) In General.--The homeowner deduction shall equal the amount 
of interest paid by the taxpayer during the taxable year on acquisition 
indebtedness with respect to any qualified residence of the taxpayer.
    ``(b) Definitions.--
            ``(1) Acquisition indebtedness.--`Acquisition indebtedness' 
        means any indebtedness that is secured by a qualified residence 
        and that--
                    ``(A) was incurred in acquiring, constructing, or 
                substantially improving the qualified residence, or
                    ``(B) was incurred to refinance any indebtedness 
                that is described in subparagraph (A) or this 
                subparagraph (B) but only to the extent that the 
                refinancing does not exceed the amount refinanced.
        The aggregate amount treated as acquisition indebtedness shall 
        not exceed $1,000,000 ($500,000 in the case of a married 
        individual filing separately).
            ``(2) Qualified residence.--`Qualified residence' means the 
        principal residence of the taxpayer and 1 other residence of 
        the taxpayer that is designated by the taxpayer and which--
                    ``(A) is used by the taxpayer as a residence for 
                more than 14 days during such year for which such unit 
                is rented, and
                    ``(B) is not rented for more than 14 days during 
                such year.
    ``(c) Cooperative Housing Corporation Tenant.--Any indebtedness 
secured by stock held by a taxpayer as a tenant-stockholder in a 
cooperative housing corporation shall be treated as secured by the 
house or apartment which the taxpayer is entitled to occupy as a 
tenant-stockholder. If such stock cannot be used to secure 
indebtedness, the indebtedness will be treated as so secured if the 
taxpayer establishes that such indebtedness was incurred to acquire 
stock.

``SEC. 10. EDUCATION DEDUCTION.

    ``(a) In General.--The education deduction shall equal the sum of 
the qualified educational expenses for each eligible student.
    ``(b) Qualified Education Expenses.--
            ``(1) In general.--`Qualified education expenses' means 
        with respect to an eligible student the lesser of--
                    ``(A) $2,000, or
                    ``(B) the qualified higher education expenses of 
                the eligible student paid by the taxpayer during the 
                taxable year.
            ``(2) Qualified higher education expenses.--
                    ``(A) In general.--`Qualified higher education 
                expenses' means tuition and fees required for the 
                enrollment of an eligible student at an eligible 
                education institution. Such term shall not include 
expenses with respect to any course or other education involving 
sports, games, or hobbies other than as part of a degree program.
                    ``(B) Eligible educational institution.--`Eligible 
                educational institution' means--
                            ``(i) an institution described in section 
                        1201(a) or section 481(a)(1)(C) or (D) of the 
                        Higher Education Act of 1965 (as in effect on 
                        October 21, 1988),
                            ``(ii) an area vocational education school 
                        as defined in section 521(3)(C) or (D) of the 
                        Carl D. Perkins Vocational Educational Act, and
                            ``(iii) in the case of a student who has 
                        attained the age of 18 before the beginning of 
                        the taxable year, and not graduated from high 
                        school before the beginning of the taxable 
                        year, an accredited school providing remedial 
                        education.
            ``(3) Eligible student.--`Eligible student' means--
                    ``(A) the taxpayer, but only if no other taxpayer 
                treats the taxpayer as a dependent for which an 
                exemption is allowed in computing the dependency 
                deduction under section 6,
                    ``(B) the taxpayer's spouse if a joint return is 
                filed, and
                    ``(C) any dependent of the taxpayer for whom the 
                taxpayer is allowed an exemption in computing the 
                dependency deduction under section 6.
    ``(c) Limitation.--The maximum education deduction in a taxable 
year is $8,000 ($4,000 in the case of married individuals filing 
separate returns).
    ``(d) Inflation Adjustments.--The dollar amounts contained in 
subsections (b)(1)(A) and (c) shall be adjusted for inflation beginning 
with calendar year 1997 in accordance with section 24.

``SEC. 11. PHILANTHROPIC TRANSFER DEDUCTION.

    ``(a) In General.--The philanthropic transfer deduction shall equal 
the amount of charitable contributions made by the taxpayer in the 
taxable year, subject to the limitations in subsection (b). A deduction 
shall be allowable as a deduction only if verified under regulations 
prescribed by the Secretary.
    ``(b) Limitation on Amount.--
            ``(1) General rule.--A deduction for contributions to 
        regular charities in any taxable year shall be allowed only to 
        the extent that such contributions do not exceed 50 percent of 
        the taxpayer's adjusted gross income. Other charitable 
        contributions shall be allowed only to the extent that such 
        contributions do not exceed the lesser of--
                    ``(A) 30 percent of the taxpayer's adjusted gross 
                income, or
                    ``(B) the excess, if any, of 50 percent of the 
                taxpayer's adjusted gross income over the amount of 
                charitable contributions to regular charities.
            ``(2) Carryover.--If the amount of charitable contributions 
        made in a taxable year exceeds the amount which can be deducted 
        in such year, the excess shall be carried over for a period of 
        up to 5 years in accordance with rules to be prescribed by the 
        Secretary.
            ``(3) Regular charity.--For purposes of this subsection, 
        `regular charity' means an organization described in section 
        101, that is not a private foundation (other than a private 
        operating foundation) (as such terms are defined in section 
        102).
    ``(c) Charitable Contribution.--`Charitable contribution' means a 
contribution or gift to or for the use of a governmental or charitable 
recipient (as defined in section 101).
    ``(d) Contributions of Savings Assets and Other Property.--
            ``(1) General rule.--In the case of a charitable 
        contribution of property, the amount of the contribution shall 
        equal the lesser of the fair market value of the property or 
        the taxpayer's basis in the property.
            ``(2) Fair market value deductions in certain cases.--
        Notwithstanding paragraph (1), in the case of a charitable 
        contribution (other than a contribution to a private foundation 
        that is not a private operating foundation) of--
                    ``(A) real property,
                    ``(B) tangible property if the use by the donee is 
                related to its purpose or function constituting the 
                basis for its exemption from the business tax or in the 
                case of a governmental unit, to any governmental unit, 
                and
                    ``(C) stocks, bonds, or other savings assets 
                acquired before 1996 and not subject to amortization 
                under section 12, the amount of the charitable 
                contribution shall equal the fair market value of the 
                property reduced by the amount of gain that would not 
                have been long-term capital gain (under principles of 
                the Internal Revenue Code of 1986) if the property had 
                been sold by the taxpayer at its fair market value.
            ``(3) Contributions of stock for which market quotations 
        are readily available.--
                    ``(A) In general.--In the case of contributions of 
                qualified appreciated stock--
                            ``(i) paragraph (2) shall apply without 
                        regard to whether the stock is contributed to a 
                        private foundation, and
                            ``(ii) if the acquisition of the stock was 
                        treated as savings or the taxpayer's basis in 
                        the stock was amortized under section 12, the 
                        amount of the charitable contribution shall 
                        equal the excess, if any, of the fair market 
                        value of the stock over the cost of the stock 
                        to the purchaser (or if received by gratuitous 
                        transfer, the acquirer of the stock).
                    ``(B) Qualified appreciated stock.--`Qualified 
                appreciated stock' means any stock of a corporation for 
                which (as of the date of the contribution) market 
                quotations are readily available on an established 
                securities market, except that in the case of a donor 
                to a private foundation, the term does not include 
                stock to the extent that the amount so contributed, 
                when increased by prior contributions by the donor of 
                stock in the same corporation, exceeds 10 percent in 
                value of the outstanding stock of such corporation.
    ``(e) Other Rules.--The Secretary shall prescribe rules limiting 
the availability of the philanthropic transfer deduction in certain 
cases, including rules for--
            ``(1) contributions of property placed in trust,
            ``(2) contributions of partial interests in property,
            ``(3) contributions subject to liabilities that are 
        assumed,
            ``(4) out-of-pocket expenditures on behalf of a charity to 
        influence legislation,
            ``(5) substantiation of contributions in excess of $250,
            ``(6) contributions designated for lobbying activity,
            ``(7) amounts paid to maintain certain students as members 
        of taxpayer's household,
            ``(8) qualified conservation contributions, and
            ``(9) deductions for travel expenses on behalf of a charity 
        where there is a significant element of personal pleasure.

``SEC. 12. TRANSITION BASIS DEDUCTION.

    ``(a) In General.--The transition basis deduction in any year is 
equal to the lesser of--
            ``(1) the taxpayer's taxable income determined without the 
        transition basis deduction, and
            ``(2) the transition carryover, if any, from the preceding 
        year plus, in the case of a transition year, one-third of the 
        transition basis.
If the amount determined under paragraph (2) exceeds the amount 
determined under paragraph (1), the excess will constitute the 
transition carryover to the following taxable year.
    ``(b) Transition Years.--`Transition years' means 1996, 1997, and 
1998.
    ``(c) Transition Basis.--A taxpayer's transition basis shall be--
            ``(1) zero, if the taxpayer's aggregate basis in his 
        qualified savings assets as of January 1, 1996, exceeds $50,000 
        ($25,000 in the case of married persons filing separately for 
        1996), or
            ``(2) the taxpayer's aggregate basis in qualified savings 
        assets as of January 1, 1996, if such basis is $50,000 ($25,000 
        in the case of married persons filing separately for 1996) or 
        less.
A married couple filing a joint return shall be considered a single 
taxpayer for purposes of this subsection.
    ``(d) Qualified Savings Assets.--`Qualified savings assets' means 
savings assets as defined in section 53(b), except--
            ``(1) a taxpayer may elect to exclude retirement accounts 
        from qualified saving assets for purposes of application of 
        this section, and
            ``(2) `qualified savings assets' do not include the 
        taxpayer's ownership in any business entity to which he 
        regularly provides services (other than publicly traded stock 
        of any such entity).
    ``(e) Effect of Claiming Deductions.--If this section applies to a 
taxpayer, the taxpayer shall have no basis as of January 1, 1996, in 
the qualified savings assets whose bases are amortized pursuant to this 
section. The sale or disposition of a qualified savings asset after 
January 1, 1996, shall have no effect on the taxpayer's transition 
basis deduction.
    ``(f) Negative Basis.--In determining a taxpayer's basis in 
qualified savings assets, negative basis determined under section 73 
for interests in partnerships and proprietorships shall be taken into 
account.
    ``(g) Election To Forgo Application of Deduction.--A taxpayer may 
elect to forgo application of this section by not claiming a transition 
basis deduction for 1996.

``SEC. 13. LIMITATION ON DEDUCTIONS.

    ``(a) In General.--A taxpayer's deductions shall not reduce the 
taxpayer's taxable income below zero. Except as provided in section 
11(b) (relating to the limitation on the philanthropic transfer 
deduction) and section 12(a) (relating to transition basis), a taxpayer 
shall not be entitled to carry over any unused deductions.
    ``(b) Deductions.--For purposes of this section, `deductions' 
means--
            ``(1) the alimony and child support deductions,
            ``(2) the personal and dependency deduction,
            ``(3) the Family Living Allowance,
            ``(4) the USA deductions, and
            ``(5) the transition basis deduction.

``SEC. 15. TAX RATES.

    ``(a) Married Individuals Filing Joint Returns and Surviving 
Spouses.--The tax schedule for every married individual who files a 
joint return with a spouse and for every surviving spouse (as defined 
in section 17(a)) is--
            ``(1) For taxable years beginning in 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.
            ``(2) For taxable years beginning in 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.
            ``(3) For taxable years beginning in 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.
            ``(4) For taxable years beginning in 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.
            ``(5) For taxable years beginning after 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.
    ``(b) Heads of Households.--The tax schedule for every head of 
household (as defined in section 17(b)) is--
            ``(1) For taxable years beginning in 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.
            ``(2) For taxable years beginning in 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.
            ``(3) For taxable years beginning in 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.
            ``(4) For taxable years beginning in 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.
            ``(5) For taxable years beginning after 1999.--

``If taxable income is:             The tax is:
    Not over $4,750................
                                        8% of taxable income.
    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.
    ``(c) Unmarried Individuals.--The tax schedule for an unmarried 
individual who is not a head of a household or a surviving spouse is--
            ``(1) For taxable years beginning in 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.
            ``(2) For taxable years beginning in 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.
            ``(3) For taxable years beginning in 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.
            ``(4) For taxable years beginning in 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.
    Over $14,400...................
                                        $2,560, plus 40% of the excess 
                                                over $14,400.
            ``(5) For taxable years beginning after 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.
    ``(d) Married Individuals Filing Separate Returns.--The tax 
schedule for a married individual filing a separate return is--
            ``(1) For taxable years beginning in 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.
            ``(2) For taxable years beginning in 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.
            ``(3) For taxable years beginning in 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.
            ``(4) For taxable years beginning in 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.
            ``(5) For taxable years beginning after 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.
    ``(e) Adjustments for Inflation.--For taxable years beginning on or 
after January 1, 1997, the tax schedules in subsections (a) through (d) 
shall be adjusted so that inflation will not result in tax increases in 
accordance with the procedures under section 24.
    ``(f) Definitions.--See section 17 for rules on filing status.

``SEC. 16. KIDDIE TAX.

    ``(a) General Rule.--If a child has a living parent and net 
unearned income and the child has not attained the age of 14 before the 
close of the taxable year--
            ``(1) the net unearned income of the child shall be 
        included in the taxable income of the eligible parent for 
        purposes of determining the parent's tax liability, or
            ``(2) the tax calculated under the tax rate schedules for 
        the child as a separate taxpayer shall not be less than the sum 
        of--
                    ``(A) the tax which would have been determined 
                under the rate schedule if the taxable income of the 
                child were reduced by the net unearned income of the 
                child, plus
                    ``(B) such child's share of the allocable parental 
                tax.
    ``(b) Child's Share of Allocable Parental Tax.--
            ``(1) Allocable parental tax.--`Allocable parental tax' 
        means the excess of--
                    ``(A) the tax that would have been determined under 
                the rate schedules on the eligible parent's taxable 
                income if such income included the net unearned income 
                of all of the eligible parent's children to which this 
                section applies, over
                    ``(B) the tax actually determined under the rate 
                schedules without regard to this section.
            ``(2) Child's share.--A child's share of the allocable 
        parental tax is equal to the amount that bears the same ratio 
        to the total allocable parental tax as the child's net unearned 
        income bears to the aggregate net unearned income of all 
        children to whom this section applies for whom the eligible 
        parent is the eligible parent.
    ``(c) Eligible Parent.--`Eligible parent' means--
            ``(1) both parents of the child if the parents file a joint 
        return,
            ``(2) the surviving parent of a child if the child has only 
        1 surviving parent,
            ``(3) the custodial parent if the child's parents are not 
        married, or
            ``(4) the parent with the greater taxable income if the 
        parents are married and filing separate returns.
    ``(d) Net Unearned Income.--`Net unearned income' means the excess, 
if any, of--
            ``(1) the adjusted gross income of the child, over
            ``(2) the sum of--
                    ``(A) the earned income (as defined in section 
                22(c)(2)) of the child, and
                    ``(B) an amount equal to the Family Living 
                Allowance for a dependent child.

``SEC. 17. RULES FOR FILING STATUS AND RATE TABLES.

    ``(a) Definition of Surviving Spouse.--
            ``(1) In general.--For purposes of section 15, `surviving 
        spouse' means an individual--
                    ``(A) whose spouse died during either of his 2 
                taxable years immediately preceding the taxable year, 
                and
                    ``(B) who maintains as his home a household which 
                constitutes for the taxable year the principal place of 
                abode (as a member of such household) of a dependent,
                            ``(i) who (within the meaning of section 6) 
                        is a son, stepson, daughter, or stepdaughter of 
                        the taxpayer, and
                            ``(ii) who the taxpayer is entitled to 
                        treat as an exemption for purposes of computing 
                        the personal dependency deduction for the 
                        taxable year under section 6.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half of the 
        cost of maintaining the household during the taxable year is 
        furnished by such individual.
            ``(2) Limitations.--Notwithstanding paragraph (1), for 
        purposes of section 15, an individual shall not be considered 
        to be a surviving spouse--
                    ``(A) if the individual has remarried at any time 
                before the close of the taxable year, or
                    ``(B) unless, for the individual's taxable year 
                during which his spouse died, a joint return could have 
                been made under the provisions of section 6013 (without 
                regard to subsection (a)(3) thereof).
            ``(3) Special rule where deceased spouse was in missing 
        status.--If an individual was in a missing status (within the 
        meaning of section 6013(f)(3)) as a result of service in a 
        combat zone and if such individual remains in such status until 
        the date referred to in subparagraph (A) or (B), then, for 
        purposes of paragraph (1)(A), the date on which such individual 
        died shall be treated as the earlier of the date determined 
        under subparagraph (A) or the date determined under 
        subparagraph (B):
                    ``(A) the date on which the determination is made 
                under section 556 of title 37 of the United States Code 
                or under section 5566 of title 5 of such Code 
                (whichever is applicable) that such individual died 
                while in such missing status, or
                    ``(B) the date which is 2 years after the date 
                designated under section 292 (relating to exemption for 
                combat zones) as the date of termination of combatant 
                activities in that zone.
    ``(b) Definition of Head of Household.--
            ``(1) In general.--For purposes of this chapter, an 
        individual shall be considered a head of a household if, and 
        only if, such individual is not married at the close of his 
        taxable year, is not a surviving spouse (as defined in 
        subsection (a)), and either--
                    ``(A) maintains as his home a household which 
                constitutes for more than one-half of such taxable year 
                the principal place of abode, as a member of such 
                household, of--
                            ``(i) a son, stepson, daughter, or 
                        stepdaughter of the taxpayer, or a descendant 
                        of a son or daughter of the taxpayer, but if 
                        such son, stepson, daughter, stepdaughter, or 
                        descendant is married at the close of the 
                        taxpayer's taxable year, only if the taxpayer 
                        is entitled to claim such person as an 
                        exemption for the taxable year for purposes of 
                        computing the dependency deduction under 
                        section 6 (or would be so entitled but for the 
                        release of a claim to such exemption by the 
                        custodial parent),
                            ``(ii) any other person who is a dependent 
                        of the taxpayer, if the taxpayer is entitled to 
                        claim such person as an exemption in 
                        determining the personal dependency deduction 
                        for the taxable year, or
                    ``(B) maintains a household which constitutes for 
                such taxable year the principal place of abode of the 
                father or mother of the taxpayer, if the taxpayer is 
                entitled to a personal dependency deduction for the 
                taxable year for such father or mother.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half of the 
        cost of maintaining the household during the taxable year is 
        furnished by such individual.
            ``(2) Determination of status.--For purposes of this 
        subsection--
                    ``(A) a legally adopted child of a person shall be 
                considered a child of such person by blood;
                    ``(B) an individual who is legally separated from 
                his spouse under a decree of divorce or of separate 
                maintenance shall not be considered as married;
                    ``(C) a taxpayer shall be considered as not married 
                at the close of his taxable year if at any time during 
                the taxable year his spouse is a nonresident alien; and
                    ``(D) a taxpayer shall be considered as married at 
                the close of his taxable year if his spouse (other than 
                a spouse described in subparagraph (C)) died during the 
                taxable year.
            ``(3) Limitations.--Notwithstanding paragraph (1), for 
        purposes of this chapter, a taxpayer shall not be considered to 
        be a head of a household--
                    ``(A) if at any time during the taxable year he is 
                a nonresident alien; or
                    ``(B) by reason of an individual who would not be a 
                dependent for the taxable year but for--
                            ``(i) subparagraph (H) of section 6(c)(1) 
                        or
                            ``(ii) multiple support rules prescribed by 
                        the Secretary.
    ``(c) Certain Married Individuals Living Apart.--For purposes of 
this part, an individual shall be treated as not married at the close 
of the taxable year if such individual is so treated under the 
provisions of section 7703(b).
    ``(d) Nonresident Aliens.--In the case of a nonresident alien 
individual, the taxes imposed by section 1 shall not apply.

``SEC. 20. USA TAX CREDITS.

    ``(a) In General.--The USA tax credits are and shall be applied in 
the following order:
            ``(1) The foreign tax credit as prescribed by the Secretary 
        under rules similar to the rules of subpart A of part III of 
        subchapter N of chapter 1 of the Internal Revenue Code of 1986, 
        but only with respect to foreign taxes on amounts that are 
        included in the gross income of the taxpayer.
            ``(2) The payroll tax credit under section 21.
            ``(3) The earned income tax credit under section 22.
            ``(4) The taxes-paid tax credit under section 23.
    ``(b) Refundable Credits.--If a taxpayer's USA tax credits (other 
than the foreign tax credit) for a taxable year exceed the taxpayer's 
tax liability for the taxable year (before application of the USA tax 
credits (other than the foreign tax credit)), the taxpayer shall be 
entitled to a refund for such excess. The taxpayer may elect in lieu of 
a refund to apply such excess as a tax paid for the following taxable 
year.

``SEC. 21. PAYROLL TAX CREDIT.

    ``(a) In General.--A taxpayer shall be allowed a payroll tax credit 
in an amount equal to the sum of--
            ``(1) the employee's share of the basic FICA tax,
            ``(2) the employee's share of the basic Tier 1 railroad 
        retirement tax, and
            ``(3) one-half of the basic SECA tax payable with respect 
        to the taxpayer's compensation or earnings during the taxable 
        year.
    ``(b) Definitions.--
            ``(1) Employee's share of the basic fica tax.--`Employee's 
        share of the basic FICA tax' means the old-age, survivors and 
        disability insurance tax imposed by section 3101(a) and the 
        portion of the hospital insurance tax imposed by section 
        3101(b) that is attributable to the wage base on which the 
        section 3101(a) tax is imposed.
            ``(2) Employee's share of the basic tier 1 railroad 
        retirement tax.--`Employee's share of the basic Tier 1 railroad 
        retirement tax' means--
                    ``(A) the portion of the tax imposed by section 
                3201 with respect to compensation below the applicable 
                base (as defined in section 3231(e)(2)); and
                    ``(B) the portion of the tax imposed by section 
                3211(a)(1) on railroad employee representatives 
                attributable to the tax imposed by section 3101(a) and 
                the portion of the hospital insurance tax imposed by 
                section 3101(b) that is attributable to the wage base 
                on which the section 3101(a) tax is imposed.
            ``(3) Basic seca tax.--`Basic SECA tax' means the old-age, 
        survivors and disability insurance tax imposed by section 
        1401(a) on self-employment income and the portion of the 
        hospital insurance tax imposed by section 1401(b) on self-
        employment income that is attributable to the amount of self-
        employment income (as determined under section 1402(b)) on 
        which the section 1401(a) tax is imposed.
    ``(c) No Credit for Refundable Tax.--No credit shall be allowed 
with respect to any FICA tax or railroad retirement tax for which a 
taxpayer is entitled to a refund because of overpayment of tax on the 
applicable wage base.

``SEC. 22. EARNED INCOME TAX CREDIT.

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

``In the case of an eligible        The credit percentage is:
        individual with:
    1 qualifying child............................                   34
    2 or more qualifying children.................                  40.
            ``(2) Phaseout percentage.--In the case of an eligible 
        individual, the phaseout percentage is equal to the difference 
        between the highest marginal tax rate and the second highest 
        marginal tax rate for such individual under the applicable 
        subsection of section 15.
            ``(3) Amounts.--
                    ``(A) In general.--Except as provided in 
                subparagraphs (B) and (C), the earned income amount and 
                the phaseout amount shall be determined as follows:

                                                                        
          ``In the case of an                                           
          unmarried eligible      The earned income  The phaseout amount
           individual with:           amount is:             is:        
                                                                        
      1 qualifying child........     $8,641              $9,000         
      2 or more qualifying                                              
       children.................     $8,175              $9,000         
                                                                        

                                                                        
      ``In the case of a married  The earned income  The phaseout amount
       eligible individual with:      amount is:             is:        
                                                                        
      1 qualifying child........     $10,726             $11,000        
      2 or more qualifying                                              
       children.................     $10,000             $10,831        
                                                                        

                    ``(B) Inflation adjustments for earned income 
                amount.--
                            ``(i) In general.--In the case of any 
                        taxable year beginning after 1996, each earned 
                        income amount contained in subparagraph (A) 
                        shall be adjusted for inflation in accordance 
                        with section 24, except that the rounding rules 
                        of clause (ii) shall apply.
                            ``(ii) Rounding.--If any earned income 
                        amount after being increased under section 24 
                        is not a multiple of $10, such amount shall be 
                        rounded to the nearest multiple of $10.
                    ``(C) Phaseout amounts for taxable years beginning 
                after 1996.--In the case of taxable years beginning 
                after 1996, the phaseout amount with respect to any 
                eligible individual shall equal--
                            ``(i) the sum of--
                                    ``(I) the dollar amount of the 
                                floor of the second tax bracket for 
                                such individual under the applicable 
                                subsection of section 15 for such year,
                                    ``(II) the Family Living Allowance 
                                for such individual for such year, and
                                    ``(III) the number of exemptions 
                                (not to exceed 4) allowed under section 
                                6 for such individual for such year, 
                                reduced by
                            ``(ii) the earned income amount multiplied 
                        by the ratio of the credit percentage to the 
                        phaseout percentage for such individual for 
                        such year.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Eligible individual.--
                    ``(A) In general.--`Eligible individual' means any 
                individual who has a qualifying child for the taxable 
                year.
                    ``(B) Qualifying child ineligible.--If an 
                individual is the qualifying child of a taxpayer for 
                any taxable year of such taxpayer beginning in a 
                calendar year, such individual shall not be treated as 
                an eligible individual for any taxable year of such 
                individual beginning in such calendar year.
                    ``(C) 2 or more eligible individuals.--If 2 or more 
                individuals would (but for this subparagraph and after 
                application of subparagraph (B)) be treated as eligible 
                individuals with respect to the same qualifying child 
                for taxable years beginning in the same calendar year, 
                only the individual with the highest adjusted gross 
                income for such taxable years shall be treated as an 
                eligible individual with respect to such qualifying 
                child. year, only the individual with the highest 
adjusted gross income for such taxable years shall be treated as an 
eligible individual with respect to such qualifying child.
                    ``(D) Exception for individual claiming partial 
                exclusion for living abroad.--An individual who claims 
                the partial exclusion from income for persons living 
                abroad for the taxable year is an eligible individual 
                for such taxable year.
                    ``(E) Limitation on eligibility of nonresident 
                aliens.--An individual who is a nonresident alien 
                individual for any portion of the taxable year is not 
                an eligible individual unless such individual is 
                treated for such taxable year as a resident of the 
                United States for purposes of this chapter by reason of 
                an election under subsection (g) or (h) of section 
                6013.
            ``(2) Earned income.--
                    ``(A) The term `earned income' means--
                            ``(i) wages, salaries, tips, and other 
                        employee compensation, plus
                            ``(ii) the amount of the taxpayer's net 
                        earnings from self-employment for the taxable 
                        year (within the meaning of section 1402(a)), 
                        plus any credit received under section 280 with 
                        respect to such self-employment income.
                    ``(B) For purposes of subparagraph (A)--
                            ``(i) the earned income of an individual 
                        shall be computed without regard to any 
                        community property laws,
                            ``(ii) no amount received as a pension or 
                        annuity shall be taken into account,
                            ``(iii) no income of nonresident alien 
                        individuals not connected with United States 
                        business shall be taken into account, and
                            ``(iv) no amount received for services 
                        provided by an individual while the individual 
                        is an inmate at a penal institution shall be 
                        taken into account.
            ``(3) Qualifying child.--
                    ``(A) In general.--`Qualifying child' means, with 
                respect to any taxpayer for any taxable year, an 
                individual--
                            ``(i) who bears a relationship to the 
                        taxpayer described in subparagraph (B),
                            ``(ii) except as provided in subparagraph 
                        (B)(iii), who has the same principal place of 
                        abode as the taxpayer for more than one-half of 
                        such taxable year,
                            ``(iii) who meets the age requirements of 
                        subparagraph (C), and
                            ``(iv) with respect to whom the taxpayer 
                        meets the identification requirements of 
                        subparagraph (D).
                    ``(B) Relationship test.--
                            ``(i) In general.--An individual bears a 
                        relationship to the taxpayer described in this 
                        subparagraph if such individual is--
                                    ``(I) a son or daughter of the 
                                taxpayer, or a descendant of either,
                                    ``(II) a stepson or stepdaughter of 
                                the taxpayer, or
                                    ``(III) an eligible foster child of 
                                the taxpayer.
                            ``(ii) Married children.--Clause (i) shall 
                        not apply to any individual who is married as 
                        of the close of the taxpayer's taxable year 
                        unless the taxpayer is entitled to claim such 
                        individual as an exemption in computing the 
                        dependency deduction under section 6 for such 
                        taxable year.
                            ``(iii) Eligible foster child.--For 
                        purposes of clause (i)(III), the term `eligible 
                        foster child' means an individual not described 
                        in clause (i) (I) or (II) who--
                                    ``(I) the taxpayer cares for as the 
                                taxpayer's own child, and
                                    ``(II) has the same principal place 
                                of abode as the taxpayer for the 
                                taxpayer's entire taxable year.
                            ``(iv) Adoption.--For purposes of this 
                        subparagraph, a child who is legally adopted, 
                        or who is placed with the taxpayer by an 
                        authorized placement agency for adoption by the 
                        taxpayer, shall be treated as a child by blood.
                    ``(C) Age requirements.--An individual meets the 
                requirements of this subparagraph if such individual--
                            ``(i) has not attained the age of 19 as of 
                        the close of the calendar year in which the 
                        taxable year of the taxpayer begins,
                            ``(ii) is a student who has not attained 
                        the age of 24 as of the close of such calendar 
                        year, or
                            ``(iii) is permanently and totally disabled 
                        at any time during the taxable year.
                    ``(D) Identification requirements.--
                            ``(i) In general.--The requirements of this 
                        subparagraph are met if the taxpayer includes 
                        the name, age, and TIN of each qualifying child 
                        (without regard to this subparagraph) on the 
                        return of tax for the taxable year.
                            ``(ii) Other methods.--The Secretary may 
                        prescribe other methods for providing the 
                        information described in clause (i).
                    ``(E) Abode must be in the united states.--The 
                requirements of subparagraphs (A)(ii) and (B)(iii)(II) 
                shall be met only if the principal place of abode is in 
                the United States.
            ``(4) Treatment of military personnel stationed outside the 
        united states.--For purposes of this subsection, the principal 
        place of abode of a member of the Armed Forces of the United 
        States shall be treated as in the United States during any 
        period during which such member is stationed outside the United 
        States while serving on extended active duty with the Armed 
        Forces of the United States.
    ``(d) Married Individuals.--In the case of an individual who is 
married (within the meaning of section 7703), this section shall apply 
only if a joint return is filed for the taxable year under section 
6013.
    ``(e) Taxable Year Must Be Full Taxable Year.--Except in the case 
of a taxable year closed by reason of the death of the taxpayer, no 
credit shall be allowable under this section in the case of a taxable 
year covering a period of less than 12 months.
    ``(f) Amount of Credit To Be Determined Under Tables.--
            ``(1) In general.--The amount of the credit allowed by this 
        section shall be determined under tables prescribed by the 
        Secretary.
            ``(2) Requirements for tables.--The tables prescribed under 
        paragraph (1) shall reflect the provisions of subsections (a) 
        and (b) and shall have income brackets of not greater than $50 
        each--
                    ``(A) for earned income between $0 and the amount 
                of earned income at which the credit is phased out 
                under subsection (b), and
                    ``(B) for adjusted gross income between the dollar 
                amount at which the phaseout begins under subsection 
                (b) and the amount of adjusted gross income at which 
                the credit is phased out under subsection (b).
    ``(g) Coordination With Advance Payments of Earned Income Credit.--
            ``(1) Recapture of excess advance payments.--If any payment 
        is made to the individual by an employer under section 3507 
        during any calendar year, then the tax imposed by this chapter 
        for the individual's last taxable year beginning in such 
        calendar year shall be increased by the aggregate amount of 
        such payments.
            ``(2) Reconciliation of payments advanced and credit 
        allowed.--Any increase in tax under paragraph (1) shall not be 
        treated as tax imposed by this chapter for purposes of 
        determining the amount of any credit (other than the credit 
        allowed by subsection (a)) allowable under this subpart.
    ``(h) Coordination With Certain Means-Tested Programs.--For 
purposes of--
            ``(1) the United States Housing Act of 1937,
            ``(2) title V of the Housing Act of 1949,
            ``(3) section 101 of the Housing and Urban Development Act 
        of 1965,
            ``(4) sections 221(d)(3), 235, and 236 of the National 
        Housing Act, and
            ``(5) the Food Stamp Act of 1977,
any refund made to an individual (or the spouse of an individual) by 
reason of this section, and any payment made to such individual (or 
such spouse) by an employer under section 3507, shall not be treated as 
income (and shall not be taken into account in determining resources 
for the month of its receipt and the following month).

``SEC. 23. TAXES-PAID TAX CREDIT.

    ``The taxes-paid tax credit shall equal the sum of--
            ``(1) Wage withholding.--The amount withheld as tax under 
        chapter 24.
            ``(2) Special refunds of social security tax when wages 
        earned from more than 1 employer.--The amount allowable under 
        section 6413(c) as a special refund of taxes imposed on wages.
            ``(3) Overpayments of prior-year tax.--Any overpayment of a 
        prior tax obligation that the taxpayer or the Secretary applies 
        to the tax for the taxable year.
            ``(4) Estimated taxes.--Any estimated taxes paid by the 
        taxpayer with respect to the taxpayer's tax liability for the 
        taxable year which are treated as payment on account of income 
        tax for purposes of section 6315 (relating to estimated taxes).

``SEC. 24. INDEXING FOR INFLATION.

    ``(a) Publication of Tables and Numbers.--Not later than December 
15 of 1996, and each subsequent calendar year, the Secretary shall 
prescribe tables and dollar amounts which shall apply in the 
immediately following calendar year in lieu of the tables and dollar 
amounts that are required to be adjusted for inflation in accordance 
with this section.
    ``(b) Method of Adjustment.--
            ``(1) In general.--The dollar amounts which are required to 
        be adjusted pursuant to this section for a calendar year shall 
        be the dollar amounts as stated in this chapter multiplied by 
        the cost of living adjustment for such calendar year, rounded 
        as provided in subsection (d).
            ``(2) Tax rate tables.--In the case of a tax rate table, 
        the dollar amounts to be adjusted in accordance with paragraph 
        (1) are the minimum and maximum dollar amounts for each rate 
        bracket for which a tax is imposed. The amounts setting forth 
        the bottom tax for each bracket shall be adjusted to the extent 
        necessary to reflect the adjustments in the rate brackets.
    ``(c) Cost-of-Living Adjustment.--
            ``(1) In general.--The cost-of-living adjustment for any 
        calendar year is the percentage (if any) by which--
                    ``(A) the CPI for the preceding calendar year, 
                exceeds
                    ``(B) the CPI for the calendar year 1995.
            ``(2) CPI for any calendar year.--For purposes of paragraph 
        (1), the CPI for any calendar year is the average of the 
        Consumer Price Index as of the close of the 12-month period 
        ending on August 31 of such calendar year.
            ``(3) Consumer price index.--For purposes of paragraph (2), 
        `Consumer Price Index' means the last Consumer Price Index for 
        all-urban consumers published by the Department of Labor. For 
        purposes of the preceding sentence, the revision of the 
        Consumer Price Index which is most consistent with the Consumer 
        Price Index for calendar year 1995 shall be used.
    ``(d) Rounding.--
            ``(1) In general.--If any increase determined under 
        subsection (b) is not a multiple of $50, such increase shall be 
        rounded to the next lowest multiple of $50.
            ``(2) Multiples of $25.--Paragraph (1) shall be applied by 
        substituting `$25' for `$50' in the case of--
                    ``(A) amounts for married individuals filing 
                separately, and
                    ``(B) any other dollar amount that is to be 
                adjusted for inflation if that dollar amount is less 
                than $1,000.

    ``Subchapter B--Unlimited Savings Allowance 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.

``SEC. 50. UNLIMITED SAVINGS ALLOWANCE.

    ``(a) Explanation.--The Unlimited Savings Allowance reflects the 
amount of current-year gross income that is deferred because it has 
been placed in the national pool of savings. The Unlimited Savings 
Allowance is intended to reflect the amount of net new savings other 
than new savings attributable to borrowing or to tax-exempt interest.
    ``(b) Amount.--The Unlimited Savings Allowance for a taxable year 
shall equal the deductible net savings determined in accordance with 
section 52(a).

``SEC. 51. DEFERRED INCOME.

    ``(a) Explanation.--Deferred income is the amount of gross income 
that was previously deferred through the Unlimited Savings Allowance 
and that is treated as withdrawn from savings in the taxable year 
thereby terminating the deferral.
    ``(b) Amount.--The amount of deferred income for a taxable year is 
equal to the net includible withdrawal income determined in accordance 
with section 52(b).

``SEC. 52. BASIC COMPUTATION RULES.

    ``(a) Savings Deduction.--
            ``(1) Net savings.--`Net savings' equals the excess, if 
        any, of--
                    ``(A) additions to savings (as defined in section 
                53) in the taxable year, over
                    ``(B) taxable withdrawals from savings (as defined 
                in section 54) in the taxable year.
            ``(2) Deductible net savings.--`Deductible net savings' 
        equals the excess, if any of--
                    ``(A) net savings in the taxable year, over
                    ``(B) the sum of the following `nontaxable sources 
                of funds':
                            ``(i) Net nonexempt borrowing in the 
                        taxable year.
                            ``(ii) Income received in the taxable year 
                        which is exempt under section 91 (relating to 
                        interest on tax-exempt bonds).
                            ``(iii) The basis of savings withdrawn in 
                        the taxable year.
    ``(b) Net Includible Withdrawal Income.--
            ``(1) Net withdrawal.--`Net withdrawal' equals the excess, 
        if any, of--
                    ``(A) taxable withdrawals from savings (as defined 
                in section 54) in the taxable year, over
                    ``(B) additions to savings (as defined in section 
                53) in the taxable year.
            ``(2) Net includible withdrawal income.--`Net includible 
        withdrawal income' equals the excess, if any, of--
                    ``(A) the net withdrawal in the taxable year, over
                    ``(B) the balance in the taxpayer's general basis 
                account.

``SEC. 53. ADDITIONS TO SAVINGS; SAVINGS ASSETS.

    ``(a) In General.--`Additions to savings' means--
            ``(1) the acquisition of savings assets,
            ``(2) the amount determined to be the net addition to each 
        savings, money market, checking, credit union, brokerage, or 
        other similar account during the taxable year in accordance 
        with section 56(a)(1),
            ``(3) payments of premiums on life insurance policies, and
            ``(4) contributions to retirement accounts.
    ``(b) Savings Assets.--Savings assets include stocks, bonds, 
securities, certificates of deposits, investments in partnerships and 
proprietorships, shares of mutual funds, life insurance policies, 
annuities, and other similar savings or investment assets.
    ``(c) Certain Items Not Constituting Savings Assets.--Savings 
assets do not include--
            ``(1) investments in land, whether made directly, or 
        through investments in business entities whose primary purpose 
        is the investment in land,
            ``(2) cash on hand,
            ``(3) any collectible, such as--
                    ``(A) any work of art,
                    ``(B) any rug or antique,
                    ``(C) any metal or gem,
                    ``(D) stamps and coins,
                    ``(E) any alcoholic beverage, and
                    ``(F) any other tangible personal property 
                specified by the Secretary, and
            ``(4) the investment in any business entity, the purpose of 
        which is to hold collectibles for appreciation.
    ``(d) Personal Use Property.--See sections 75 and 111 for special 
rules relating to personal-use property.

``SEC. 54. WITHDRAWALS.

    ``(a) Withdrawals.--`Withdrawals' means--
            ``(1) the sale, exchange, or other disposition of a savings 
        asset,
            ``(2) the net amount, if any, withdrawn from each savings, 
        money market, checking, credit union, brokerage, or other 
        similar account during the taxable year as determined in 
        accordance with section 56(a)(1),
            ``(3) amounts paid to the taxpayer under life insurance or 
        annuity policies, and
            ``(4) amounts withdrawn from retirement accounts and 
        amounts paid pursuant to defined contribution plans.
    ``(b) Taxable Withdrawals.--`Taxable withdrawals' means the portion 
of a withdrawal in excess of the basis of the savings withdrawn. See 
section 78 for rules relating to losses.
    ``(c) Basis of Savings Withdrawn.--The basis of savings withdrawn 
shall take into account any basis that the taxpayer may have in an 
asset or account by reason of its acquisition prior to January 1, 1996, 
or its acquisition by gift or inheritance. Under regulations prescribed 
by the Secretary, rules similar to the rules under section 72 of the 
Internal Revenue Code of 1986 shall apply for purposes of determining 
the basis of assets withdrawn in the case of payments under annuities, 
retirement plans, life insurance contracts, and any other arrangements 
for which the taxpayer acquired rights in part by payment of amounts 
that were included in income and not deducted when paid.

``SEC. 55. NET NONEXEMPT BORROWING.

    ``(a) Net Nonexempt Borrowing.--A taxpayer's `net nonexempt 
borrowing' for a taxable year equals the excess, if any, of--
            ``(1) the taxpayer's nonexempt debt as of the end of the 
        taxable year, over
            ``(2) the taxpayer's nonexempt debt at the beginning of the 
        taxable year.
    ``(b) Nonexempt Debt.--`Nonexempt debt' means the principal amount 
of and accrued interest on any indebtedness to the extent such 
indebtedness is not exempt indebtedness.
    ``(c) Exempt Indebtedness.--`Exempt indebtedness' means the 
following:
            ``(1) Mortgage debt on principal residence.--Any 
        indebtedness with respect to the taxpayer's principal residence 
        the interest on which would be deductible under section 9, as 
        applied without regard to the $1,000,000 limitation contained 
        therein.
            ``(2) Debt to acquire a consumer durable.--So much of 
        indebtedness directly related and traceable to the acquisition 
        of a consumer durable, such as furniture, appliances, or a 
        family automobile, that does not exceed $25,000.
            ``(3) Charges for purchases of goods and services.--Amounts 
        billed or to be billed to the taxpayer for purchases of goods 
        and services if such amounts are paid within the billing cycle 
        in which such amounts are first billed.
            ``(4) $10,000 of other debt.--Not more than $10,000 of 
        indebtedness which is not exempt under another paragraph of 
        this subsection.

``SEC. 56. SPECIAL RULES.

    ``(a) Special Rules for Bank and Brokerage Accounts.--
            ``(1) In general.--In the case of a brokerage account or a 
        bank account, for a taxable year--
                    ``(A) `Withdrawal' mean the excess, if any, of--
                            ``(i) Taxpayer withdrawals from the account 
                        during the taxable year, over
                            ``(ii) Taxpayer deposits to the account 
                        during the taxable year.
                    ``(B) `Addition to savings' means the excess, if 
                any, of--
                            ``(i) Taxpayer deposits to the account 
                        during the taxable year, over
                            ``(ii) Taxpayer withdrawals from the 
                        account during the taxable year.
                    ``(C) Any earnings on assets in the account 
                (including interest, dividends, and the proceeds from 
                the sale of stock or other savings assets) that are 
                credited to the account shall not be taken into account 
                in determining gross income or additions to saving, 
                except to the extent taken into account in subparagraph 
                (A) or (B) because such earnings are withdrawn.
                    ``(D) For purposes of this paragraph, if savings 
                assets are transferred to a brokerage account, such 
                assets shall not be treated as `deposits' to the 
                accounts.
            ``(2) Basis.--
                    ``(A) Initial basis.--A taxpayer's initial basis in 
                a bank or brokerage account held on January 1, 1996, 
                shall be the sum of the basis of the assets held in the 
                account except--
                            ``(i) assets whose basis is amortized 
                        pursuant to section 12 shall have no basis in 
                        such assets for these purposes, and
                            ``(ii) a bank account shall have no basis 
                        if the taxpayer elects to treat the basis of 
                        his bank account as an addition to his general 
                        basis account in accordance with section 57(d).
                    ``(B) Additions to basis.--The basis in a bank 
                account or brokerage account shall increase by the 
                amount of--
                            ``(i) interest on tax-exempt bonds credited 
                        to the account, and
                            ``(ii) the transferor's basis in any 
                        savings assets transferred to a brokerage 
                        account.
                    ``(C) Reductions in basis.--Basis in a bank account 
                or brokerage account will be reduced by the amount by 
                which the withdrawal for the year (as determined under 
                paragraph (1)) exceeds the taxable withdrawal for the 
                year (as determined under paragraph (3)).
                    ``(D) Basis in closed account.--If a taxpayer 
                closes a bank account or a brokerage account and the 
                taxpayer has basis remaining in the account after 
                application of subparagraph (C) for the year of 
                withdrawal, the remaining basis shall be added to the 
                taxpayer's general basis account.
            ``(3) Taxable withdrawals.--The basis in an account shall 
        be allocated to the last withdrawals from a bank account or 
        brokerage account. Accordingly, if a taxpayer has a withdrawal 
        (as defined in paragraph (1)) from a bank account or a 
        brokerage account in a taxable year, the amount of such 
        withdrawal that constitutes a taxable withdrawal equals the 
        excess of--
                    ``(A) the amount of the withdrawal, over
                    ``(B) the amount by which the basis of the account 
                exceeds the value of the account as of the end of 
                taxable year.
            ``(4) Definitions.--For purposes of this subsection--
                    ``(A) Bank account.--`Bank account' means a 
                checking, savings, or money market account with a bank, 
                credit union, or other financial institution.
                    ``(B) Brokerage account.--`Brokerage account' means 
                an account with a brokerage firm which holds savings 
                assets on behalf of the taxpayer and reports 
                transactions with respect to such assets in periodical 
                reports to the taxpayer.
                    ``(C) Value of an account.--
                            ``(i) Value of bank account.--The value of 
                        a bank account is the cash held in the account 
                        as of the last day of the taxable year.
                            ``(ii) Value of a brokerage account.--The 
                        value of a brokerage account is the sum of the 
                        amount of cash in any cash account or account 
                        whose value is regularly denominated in dollar 
                        value, plus the cost of other savings assets 
                        held in the account.
                            ``(iii) Cost of savings asset.--The cost of 
                        a savings asset held in a brokerage account--
                                    ``(I) on January 1, 1996, is the 
                                taxpayer's basis in such asset if the 
                                basis is reported to the brokerage firm 
                                in accordance with regulations 
                                prescribed by the Secretary,
                                    ``(II) transferred to the brokerage 
                                account after January 1, 1996, is the 
                                taxpayer's basis in the savings asset 
                                at the time of transfer,
                                    ``(III) acquired through the 
                                brokerage account, is the cost of such 
                                asset (less commissions), and
                                    ``(IV) in all other cases, the fair 
                                market value of the asset as determined 
                                by the brokerage firm.
                    ``(D) Withdrawals from an account.--Withdrawals 
                from an account include service charges, brokerage 
                commissions, and other fees charged to the account.
            ``(5) Provisions not applicable to some accounts.--The 
        provisions of this subsection shall not apply to a bank account 
        or a brokerage account--
                    ``(A) if a taxpayer elects in accordance with 
                regulations prescribed by the Secretary not to have the 
                provisions apply, or
                    ``(B) the bank, brokerage firm, or other financial 
                institution with which the account is held fails to 
                provide annual reports to the taxpayer in sufficient 
                detail for the taxpayer to make the determinations 
                required by this subsection.
    ``(b) Rollover of Basis in Certain Cases.--If a taxpayer sells a 
savings asset in which it has a basis and within 2 weeks of the sale 
acquires 1 or more savings assets, the taxpayer may elect to--
            ``(1) roll over its basis from the asset sold to the asset 
        purchased,
            ``(2) not treat so much of the proceeds of the sale of the 
        savings asset as equals the cost of new savings assets as a 
        withdrawal, and
            ``(3) not treat so much of the cost of the new savings 
        asset as equals the proceeds of the sale of the old savings 
        asset as new savings.
Such election shall be made on the tax return for the taxable year of 
the sale of the old asset.
    ``(c) Rules for Gratuitous Transfers.--
            ``(1) No withdrawal for donor.--If a donor transfers a 
        savings asset other than cash (or a bank account or other 
        similar account with a balance denominated in cash) to a donee, 
        whether during the donor's life or by reason of the donor's 
        death, the donor shall not be treated as withdrawing the amount 
        so transferred.
            ``(2) Anti-abuse rule.--Under regulations to be prescribed 
        by the Secretary, paragraph (1) shall not apply to any inter 
        vivos transfer if the transfer is made primarily to effect a 
        transfer of tax liability to a taxpayer in a lower tax bracket. 
        The Secretary may presume that a transfer was made primarily to 
        effect a transfer of tax liability if the savings asset (or any 
        savings asset acquired with the proceeds of such asset) is 
        sold, disposed of, or withdrawn within the 3-year period 
        following the transfer and the proceeds are used to pay 
        expenses that the transferor is likely to have paid but for the 
        transfer.
            ``(3) Transfer of cash or bank account.--If a donor 
        transfers cash (or a bank account or other similar account with 
        a balance denominated in cash) to a donee, the donor will be 
        treated as having withdrawn the amount so transferred. The 
        donee will be treated as making an addition to savings to the 
        extent that the donee makes an addition to savings with cash or 
        maintains the account so transferred.

``SEC. 57. GENERAL BASIS ACCOUNT.

    ``(a) Explanation.--The general basis account is intended to allow 
the taxpayer to withdraw from savings an amount of savings equal to the 
amount which had previously been included in income because the amount 
was saved before the Unlimited Savings Allowance became applicable or 
because no savings deduction was allowed because the savings was 
treated as made with borrowed funds, tax-exempt income, or from 
withdrawals of previously taxed savings.
    ``(b) In General.--Each taxpayer shall have a general basis 
account, which shall start with a balance of zero, which balance 
shall--
            ``(1) in the case of a taxpayer with net savings in a 
        taxable year, be increased as of the end of the taxable year by 
        the lesser of--
                    ``(A) the taxpayer's net savings for the taxable 
                year; or
                    ``(B) nontaxable sources of funds (as defined in 
                section 52(a)(2)(B)),
            ``(2) in the case of a taxpayer with net withdrawals for 
        the taxable year, decreased as of the end of the taxable year, 
        but not below zero, by the amount of net withdrawals,
            ``(3) in the case of the sale of a savings asset by a 
        taxpayer for an amount less than its basis, increased by the 
        amount by which the basis exceeds the proceeds of the sale, and
            ``(4) be increased as provided in subsections (c) and (d).
    ``(c) Special Rules To Ensure Benefit of Savings Deduction Upon 
Sale of Principal Residence.--
            ``(1) Explanation.--If a taxpayer who is planning to retire 
        or acquire a smaller principal residence sells a principal 
        residence in which the taxpayer has a significant basis and 
        then saves most of the proceeds of the sale, the taxpayer may 
        not have sufficient income in the year to fully absorb the 
        savings deduction attributable to the new savings. This 
        provision allows the taxpayer to use the portion of the savings 
        deduction that would otherwise not be used to reduce future 
        deferred income.
            ``(2) Rule.--A taxpayer who sells his principal residence 
        in a taxable year may increase his general basis account by the 
        portion of the saved basis of the principal residence that the 
        taxpayer determines that he cannot use in the taxable year. In 
        his tax return for the year of the sale, the taxpayer shall 
        elect what portion of the saved basis to treat as savings in 
        determining his Unlimited Savings Allowance and what portion to 
add to his general basis account as of the end of that year. Once a 
return is filed in which an election is made, the election shall be 
irrevocable for that taxable year (except if the amount of saved basis 
is reduced by a subsequent purchase of a replacement principal 
residence).
            ``(3) Saved basis.--The `saved basis' from the sale of a 
        taxpayer's principal residence shall equal the least of--
                    ``(A) the Unlimited Savings Allowance determined in 
                accordance with section 50 (but without regard to this 
                subsection) for the taxable year of the sale of the 
                taxpayer's principal residence,
                    ``(B) the net proceeds from the sale of the 
                residence (including any proceeds applied to pay off 
                indebtedness but excluding proceeds that were applied 
                to pay transactional costs, such as brokerage fees and 
                transfer taxes), or
                    ``(C) the excess of the taxpayer's basis in the 
                principal residence over the taxpayer's basis in any 
                new principal residence to which the residence rollover 
                rule of section 76 applies.
    ``(d) Election To Increase General Basis Account by Bank Account 
Balance.--A taxpayer may elect to increase his general basis account by 
the balance in his bank accounts as of January 1, 1996. Such election 
shall be made on the taxpayer's return for the period covering such 
date. If the election is made, the taxpayer shall have no basis in his 
bank accounts.
    ``(e) Other Adjustments.--See section 56(a)(2)(D) (relating to bank 
accounts and brokerage accounts that are terminated with basis) and 
section 78, relating to losses.

``SEC. 58. ANTI-ABUSE RULES.

    ``(a) Borrowing To Generate Deduction.--
            ``(1) General rule.--A taxpayer shall not be permitted to 
        treat as a savings asset (and the Secretary shall have 
        authority to deny such treatment if claimed by the taxpayer) if 
        such savings asset was acquired with funds borrowed for the 
        purpose of increasing the taxpayer's Unlimited Savings 
        Allowance or decreasing the taxpayer's deferred income.
            ``(2) Ordering.--Subsection (a) shall be applied after the 
        net savings calculation in section 50 and shall apply only to 
        the extent that that section does not itself deny the taxpayer 
        a benefit from the borrowing.
            ``(3) Exempt borrowing.--Subsection (a) shall apply to any 
        exempt borrowing to the extent that the borrowing is directly 
        traceable to the acquisition of a savings asset or such 
        borrowing is transitory.
    ``(b) Conversion to Cash.--Any cash in excess of $250 held by a 
taxpayer on January 1, 1996, shall be treated as a savings asset. If 
such cash is used to acquire a savings asset, it will be treated as 
withdrawn and then used to acquire a savings asset, so that no net 
deduction arises.
    ``(c) Borrowing in Lieu of Withdrawing.--If the Secretary 
determines that because of the Unlimited Savings Allowance and deferred 
income rules, taxpayers are borrowing against their savings to consume 
rather than withdrawing their savings, the Secretary shall have 
authority to prescribe rules that treat indebtedness that is secured by 
interests in savings assets as amounts withdrawn.

    ``Subchapter C--Basis, Business Transactions 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.

``SEC. 71. EFFECT OF BASIS.

    ``(a) In General.--The amount of gross income to be recognized on 
the sale or exchange of property equals the excess of--
            ``(1) the net proceeds from the sale, over
            ``(2) the taxpayer's adjusted basis, if any, in the 
        property.
    ``(b) Nonrecognition Transaction.--Subsection (a) shall not apply 
to nonrecognition transactions described in this chapter.
    ``(c) Savings Assets.--Subchapter B generally governs the treatment 
of the basis of savings assets.

``SEC. 72. BASIS.

    ``(a) Basis, Sale, or Exchange.--Except to the extent inconsistent 
with provisions of this chapter, adjusted basis and the existence of a 
sale or exchange shall be determined in accordance with principles 
applicable under the Internal Revenue Code of 1986.
    ``(b) Definition of Basis.--For purposes of this chapter, `basis' 
means the adjusted basis of property. The adjusted basis of property is 
generally its cost, as adjusted for actions or transactions that 
increase or decrease the basis of property. Except as provided in 
section 12 (relating to the 3-year amortization of basis in savings 
assets) and section 73 (relating to business entities and basis in 
business entities), the taxpayer's adjusted basis on January 1, 1996, 
in an asset acquired before that date, shall be its adjusted basis as 
of December 31, 1995, as determined under the Internal Revenue Code of 
1986.
    ``(c) Effect of Treating Asset Purchase as Savings.--If the 
purchase of a savings asset is treated in whole or part as an addition 
to savings, the taxpayer shall have no basis in the amount so treated.

``SEC. 73. BASIS IN BUSINESS ENTITIES.

    ``(a) Partnership Interest.--
            ``(1) Initial basis in old partnerships.--A partner's basis 
        in a partnership interest as of January 1, 1996, equals--
                    ``(A) the partner's basis in the partnership as of 
                the end of the taxable year ending on December 31, 
                1995, minus
                    ``(B) the amount of the partner's share of the 
                indebtedness of the partnership taken into account in 
                determining such basis.
            ``(2) Negative basis.--If the amount determined under 
        paragraph (1) is negative, the taxpayer has a negative basis in 
        the partnership and such negative basis shall increase the gain 
        on the sale or disposition of the partnership interest (except 
        to the extent such negative basis is taken into account in 
        determining the transition basis deduction).
            ``(3) Adjustment to basis.--
                    ``(A) In general.--A partner shall have no basis in 
                a partnership formed on or after January 1, 1996, and 
                shall not adjust his basis in any partnership interest 
                after such date by reason of any--
                            ``(i) contribution to the partnership,
                            ``(ii) distribution from the partnership, 
                        or
                            ``(iii) any change in the partner's share 
                        of the partnership's indebtedness.
                    ``(B) Exceptions.--A partner shall have basis or an 
                addition to basis resulting from--
                            ``(i) contributions of cash or land to a 
                        land company (as provided in section 114), or
                            ``(ii) a contribution of personal-use 
                        property to a partnership (as provided in 
                        section 111).
            ``(4) Partnership.--For purposes of this subsection, 
        `partnership' includes a corporation that was treated as an S 
        corporation under such Code.
    ``(b) Proprietorship.--
            ``(1) Old proprietorship.--A proprietor's basis in any 
        business activity conducted before January 1, 1996, which is 
        treated as a business activity as of such date equals--
                    ``(A) the proprietor's adjusted basis in the assets 
                of such business entity as of the end of the taxable 
                year ending on December 31, 1995, minus
                    ``(B) the balance of any indebtedness the interest 
                on which the proprietor had treated as business 
                interest under section 163(h)(2)(A) of the Internal 
                Revenue Code of 1986.
            ``(2) Negative basis.--If the amount determined under 
        paragraph (1) is negative, the proprietor has a negative basis 
        in the proprietorship and such negative basis shall increase 
        the gain on the sale or disposition of the entity (except to 
        the extent such negative basis is taken into account in 
        determining the transition basis deduction).
            ``(3) Adjustment to basis.--
                    ``(A) In general.--A taxpayer shall have no basis 
                in a business entity (as defined in section 151) formed 
                on or after January 1, 1996, and shall not adjust his 
                basis in any such entity by reason of any--
                            ``(i) contribution to the business entity, 
                        or
                            ``(ii) distribution from the business 
                        entity.
                    ``(B) Exceptions.--A proprietor shall have basis or 
                an addition to basis resulting from--
                            ``(i) contributions of cash or land to a 
                        land company (as provided in section 114),
                            ``(ii) a contribution of personal-use 
                        property to a business entity (as provided in 
                        section 111).
            ``(4) Proprietorship.--`Proprietorship' includes--
                    ``(A) any family business that is not a 
                partnership, and
                    ``(B) any business activity conducted by a taxpayer 
                other than as an employee if such activity constitutes 
                a business entity.
    ``(c) Anti-Avoidance Rule.--If partnership distributions to an 
individual partner in its taxable year or taxable years ending in 1995 
exceeds the partner's distributive share of income for such period, the 
amount of such excess distribution shall be treated as a cash 
distribution to the partner on January 1, 1996, and shall not reduce 
the partner's basis in his partnership interest.

``SEC. 74. GRATUITOUS TRANSFERS.

    ``(a) In General.--If after December 31, 1995, a taxpayer receives 
a savings asset or any other property by gift, inheritance, or other 
gratuitous transfer, the taxpayer's basis in the property shall be the 
lesser of--
            ``(1) the fair market value of the property at the time of 
        transfer, or
            ``(2) the transferee's basis in the property at the time of 
        transfer.
    ``(b) Proof Required.--A taxpayer's basis in a savings asset 
received by gift, inheritance, or other gratuitous transfer shall be 
presumed to be zero unless the taxpayer can demonstrate to the 
satisfaction of the Secretary the basis claimed by the taxpayer.

``SEC. 75. TRANSACTIONS INVOLVING BUSINESS ENTITIES.

    ``(a) Cash Capital Contributions, Business Interests Acquired.--
            ``(1) A taxpayer shall have no basis by reason of cash 
        contributed to the capital of a business on or after January 1, 
        1996, except as provided in section 114 (relating to land 
        companies). A contribution of property acquired for purposes of 
        contribution shall be treated as a contribution of cash equal 
        to the amount of property contributed.
            ``(2) A taxpayer shall have no basis in stock or other 
        interest in a business entity purchased on or after January 1, 
        1996, except as provided in section 77 (relating to certain 
        exchanges) or in the case of an acquisition of a land company.
    ``(b) Contributions of Property.--
            ``(1) In general.--If a taxpayer contributes personal-use 
        property to a business entity the taxpayer's basis in his 
        interest in the entity will increase by the lesser of--
                    ``(A) the fair market value of the property 
                contributed, or
                    ``(B) the basis of the property contributed.
            ``(2) Personal-use property.--`Personal-use property' shall 
        have the meaning given to it in section 111(c).
            ``(3) No loss.--A taxpayer may not increase his general 
        basis account by the amount of any `loss' attributable to basis 
        obtained through the contribution of personal-use property.
    ``(c) Basis in Business Divisions.--In the case of a spinoff, 
split-off, or split-up of a business entity in which a taxpayer has 
basis, the taxpayer's basis in the original business entity shall be 
allocated among the new and surviving entities in accordance with the 
relative fair market values of the taxpayer's interests in those 
entities. If interests in the entities are publicly traded, fair market 
values shall be based on public trading prices. In other cases, the 
Secretary shall accept any reasonable allocation made by the taxpayer 
if the taxpayer notifies the Secretary of the allocation in an 
attachment to its tax return for the taxable year of the transaction.
    ``(d) Distributions.--
            ``(1) In general.--In the case of any distribution of 
        property by a business entity to a taxpayer, the taxpayer shall 
        have a withdrawal equal to the amount of--
                    ``(A) cash received, and
                    ``(B) the fair market value of property received 
                and not converted to business use.
            ``(2) Savings assets received.--The taxpayer may not treat 
        as an addition to savings any savings asset received from a 
        business entity in a distribution or any business property 
        received and contributed to another business entity.
            ``(3) Effect of basis.--
                    ``(A) Distributions other than in complete 
                liquidation.--Except as provided in paragraph (4), in 
                the case of a dividend or other distribution (including 
                any distribution that would be treated as a return of 
                capital under general business law principles or the 
                Internal Revenue Code of 1986) by a business entity, a 
                taxpayer's basis in such entity shall not be applied to 
                any amounts or property received in the distribution.
                    ``(B) Complete liquidation.--In the case of a 
                distribution in complete liquidation of a business 
                entity, a taxpayer's basis in the entity shall be 
                allocated among the cash, savings assets, and property 
                received in the liquidation. Basis allocated to amounts 
                treated as withdrawn shall be applied in determining 
                the amount of the taxable withdrawal.
            ``(4) Distribution of personal-use property.--In the case 
        of the distribution of personal-use property by a business 
        entity to the taxpayer who contributed such property to the 
        business entity on or after January 1, 1996, the taxpayer's 
        basis in such property shall equal the lesser of the taxpayer's 
        basis in the property at the time of contribution or the 
        taxpayer's basis in the business entity. Upon the distribution, 
        the taxpayer's basis in the business entity shall be reduced by 
        the basis allocated to the distributed personal-use property.

``SEC. 76. ROLLOVER ON RESIDENCE SALE.

    ``(a) Nonrecognition of Gain.--If property (in this section called 
`old residence') used by the taxpayer as his principal residence is 
sold by him and, within a period beginning 2 years before the date of 
such sale and ending 2 years after such date, property (in this section 
called `new residence') is purchased and used by the taxpayer as his 
principal residence, gain (if any) from such sale shall be recognized 
only to the extent that the taxpayer's adjusted sales price (as defined 
in subsection (b)) of the old residence exceeds the taxpayer's cost of 
purchasing the new residence.
    ``(b) Adjusted Sales Price Defined.--
            ``(1) In general.--For purposes of this section, the 
        `adjusted sales price' means the amount realized, reduced by 
        the aggregate of the expenses for work performed on the old 
        residence in order to assist in its sale.
            ``(2) Limitations.--The reduction provided in paragraph (1) 
        applies only to expenses--
                    ``(A) for work performed during the 90-day period 
                ending on the day on which the contract to sell the old 
                residence is entered into;
                    ``(B) which are paid on or before the 30th day 
                after the date of the sale of the old residence; and
                    ``(C) which are--
                            ``(i) not allowable as deductions in 
                        computing taxable income, and
                            ``(ii) not taken into account in computing 
                        the amount realized from the sale of the old 
                        residence.
    ``(c) Rules for Application of Section.--For purposes of this 
section:
            ``(1) An exchange by the taxpayer of his residence for 
        other property shall be treated as a sale of such residence, 
        and the acquisition of a residence on the exchange of property 
        shall be treated as a purchase of such residence.
            ``(2) A residence any part of which was constructed or 
        reconstructed by the taxpayer shall be treated as purchased by 
        the taxpayer. In determining the taxpayer's cost of purchasing 
        a residence, there shall be included only so much of his cost 
        as is attributable to the acquisition, construction, 
        reconstruction, and improvements made which are properly 
        chargeable to capital account, during the period specified in 
        subsection (a).
            ``(3) If a residence is purchased by the taxpayer before 
        the date of his sale of the old residence, the purchased 
        residence shall not be treated as his new residence if sold or 
        otherwise disposed of by him before the date of the sale of the 
        old residence.
            ``(4) If the taxpayer, during the period described in 
        subsection (a), purchases more than 1 residence which is used 
        by him as his principal residence at some time within 2 years 
        after the date of the sale of the old residence, only the last 
        of such residences so used by him after the date of such sale 
        shall constitute the new residence. If a principal residence is 
        sold in a sale to which subsection (d)(2) applies within 2 
        years after the sale of the old residence, for purposes of 
        applying the preceding sentence with respect to the old 
        residence, the principal residence so sold shall be treated as 
        the last residence used during such 2-year period.
    ``(d) Limitation.--
            ``(1) In general.--Subsection (a) shall not apply with 
        respect to the sale of the taxpayer's residence if within 2 
        years before the date of such sale the taxpayer sold at a gain 
        other property used by him as his principal residence, and any 
        part of such gain was not recognized by reason of subsection 
        (a).
            ``(2) Subsequent sale connected with commencing work at new 
        place.--Paragraph (1) shall not apply with respect to the sale 
        of the taxpayer's residence if such sale was in connection with 
        the commencement of work by the taxpayer as an employee or as a 
        self-employed individual at a new principal place of work.
    ``(e) Basis of New Residence.--Where the purchase of a new 
residence results, under subsection (a), in the nonrecognition of gain 
on the sale of an old residence, in determining the adjusted basis of 
the new residence as of any time following the sale of the old 
residence, the adjustments to basis shall include a reduction by an 
amount equal to the amount of the gain not so recognized on the sale of 
the old residence. For this purpose, the amount of the gain not so 
recognized on the sale of the old residence includes only so much of 
such gain as is not recognized by reason of the cost, up to such time, 
of purchasing the new residence.
    ``(f) Tenant-Stockholder in a Cooperative Housing Corporation.--For 
purposes of this chapter, references to property used by the taxpayer 
as his principal residence, and references to the residence of a 
taxpayer, shall include stock held by a tenant-stockholder in a 
cooperative housing corporation if--
            ``(1) in the case of stock sold, the house or apartment 
        which the taxpayer was entitled to occupy as such stockholder 
was used by him as his principal residence, and
            ``(2) in the case of stock purchased, the taxpayer used as 
        his principal residence the house or apartment which he was 
        entitled to occupy as such stockholder.
    ``(g) Husband and Wife.--If the taxpayer and his spouse, in 
accordance with regulations which shall be prescribed by the Secretary 
pursuant to this subsection, consent to the application of paragraph 
(2) of this subsection, then--
            ``(1) for purposes of this section--
                    ``(A) the taxpayer's adjusted sales price of the 
                old residence is the adjusted sales price (of the 
                taxpayer, or of the taxpayer and his spouse) of the old 
                residence, and
                    ``(B) the taxpayer's cost of purchasing the new 
                residence is the cost (to the taxpayer, his spouse, or 
                both) of purchasing the new residence (whether held by 
                the taxpayer, his spouse, or the taxpayer and his 
                spouse); and
            ``(2) so much of the gain on the sale of the old residence 
        as is not recognized solely by reason of this subsection, and 
        so much of the adjustment under subsection (e) to the basis of 
        the new residence as results solely from this subsection shall 
        be allocated between the taxpayer and his spouse as provided in 
        such regulations.
This subsection shall apply only if the old residence and the new 
residence are each used by the taxpayer and his spouse as their 
principal residence. In case the taxpayer and his spouse do not consent 
to the application of paragraph (2) of this subsection, then the 
recognition of gain on the sale of the old residence shall be 
determined under this section without regard to the rules provided in 
this subsection. For purposes of this subsection, except to the extent 
provided in regulations, in the case of an individual who dies after 
the date of the sale of the old residence and is married on the date of 
death, consent to the application of paragraph (2) by such individual's 
spouse and use of the new residence as the principal residence of such 
spouse shall be treated as consent and use by such individual.
    ``(h) Members of Armed Forces.--
            ``(1) In general.--The running of any period of time 
        specified in subsection (a) or (c) (other than the 2 years 
        referred to in subsection (c)(4)) shall be suspended during any 
        time that the taxpayer (or his spouse if the old residence and 
        the new residence are each used by the taxpayer and his spouse 
        as their principal residence) serves on extended active duty 
        with the Armed Forces of the United States after the date of 
        the sale of the old residence, except that any such period of 
        time as so suspended shall not extend beyond the date 4 years 
        after the date of the sale of the old residence.
            ``(2) Members stationed outside the united states or 
        required to reside in government quarters.--In the case of any 
        taxpayer who, during any period of time the running of which is 
        suspended by paragraph (1)--
                    ``(A) is stationed outside of the United States, or
                    ``(B) after returning from a tour of duty outside 
                of the United States and pursuant to a determination by 
                the Secretary of Defense that adequate off-base housing 
                is not available at a remote base site, is required to 
                reside in on-base Government quarters, any such period 
                of time as so suspended shall not expire before the day 
                which is 1 year after the last day described in 
                subparagraph (A) or (B), as the case may be, except 
                that any such period of time as so suspended shall not 
                extend beyond the date which is 8 years after the date 
                of the sale of the old residence.
            ``(3) Extended active duty defined.--For purposes of this 
        subsection, `extended active duty' means any period of active 
        duty pursuant to a call or order to such duty for a period in 
        excess of 90 days or for an indefinite period.
    ``(i) Special Rule for Condemnation.--In the case of the seizure, 
requisition, or condemnation of a residence, or the sale or exchange of 
a residence under threat or imminence thereof, the provisions of this 
section shall be applicable if the taxpayer so elects. If such election 
is made, such seizure, requisition, or condemnation shall be treated as 
the sale of the residence. Such election shall be made at such time and 
in such manner as the Secretary shall prescribe by regulations.
    ``(j) Statute of Limitations.--If the taxpayer during a taxable 
year sells at a gain property used by him as his principal residence, 
then--
            ``(1) the statutory period for the assessment of any 
        deficiency attributable to any part of such gain shall not 
        expire before the expiration of 3 years from the date the 
        Secretary is notified by the taxpayer (in such manner as the 
        Secretary may by regulations prescribe) of--
                    ``(A) the taxpayer's cost of purchasing the new 
                residence which the taxpayer claims results in 
                nonrecognition of any part of such gain,
                    ``(B) the taxpayer's intention not to purchase a 
                new residence within the period specified in subsection 
                (a), or
                    ``(C) a failure to make such purchase within such 
                period; and
            ``(2) such deficiency may be assessed before the expiration 
        of such 3-year period notwithstanding the provisions of any 
        other law or rule of law which would otherwise prevent such 
        assessment.
    ``(k) Individual Whose Tax Home Is Outside the United States.--The 
running of any period of time specified in subsection (a) or (c) (other 
than the 2 years referred to in subsection (c)(4)) shall be suspended 
during any time that the taxpayer (or his spouse if the old residence 
and the new residence are each used by the taxpayer and his spouse as 
their principal residence) has a tax home outside the United States 
after the date of the sale of the old residence; except that any such 
period of time as so suspended shall not extend beyond the date 4 years 
after the date of the sale of the old residence.

``SEC. 77. OTHER NONRECOGNITION TRANSACTIONS.

    ``(a) Involuntary Conversions.--Under regulations prescribed by the 
Secretary, the involuntary conversion of property (other than savings 
assets) held by an individual shall not result in gross income to the 
individual to the extent that--
            ``(1) the individual receives property in exchange for the 
        involuntarily converted property, or
            ``(2) the individual receives cash and applies the cash to 
        acquire substitute property (other than savings assets) for the 
        converted property.
To the extent that income is not recognized under this subsection, the 
taxpayer's basis in the converted property shall carry over to the new 
property and any basis in excess of the cost of new property shall be 
applied to reduce the amount of gross income recognized with respect to 
cash received in excess of the cost of new property. This subsection 
shall apply to proceeds from insurance proceeds described in section 
4(b)(13) (relating to exclusions from income).
    ``(b) Certain Reacquisitions of Real Property.--Under regulations 
prescribed by the Secretary, gross income shall not be recognized in 
the case of certain reacquisitions of real property. The regulations 
shall adopt principles similar to those under section 1038 of the 
Internal Revenue Code of 1986.
    ``(c) Transfers of Property Between Spouses or Incident To 
Divorce.--
            ``(1) General rule.--Gross income shall not be recognized 
        on the transfer of property from an individual to (or in trust 
        for the benefit of)--
                    ``(A) a spouse, or
                    ``(B) a former spouse, but only if the transfer is 
                incident to divorce.
            ``(2) Transfer treated as a gift.--Any transfer described 
        in paragraph (1) shall be treated as a gift.

``SEC. 78. LOSSES.

    ``(a) Savings Assets.--If the basis of a savings asset sold or 
otherwise disposed of by a taxpayer exceeds the amount realized from 
such asset--
            ``(1) the taxpayer's general basis account shall be 
        increased by such excess as of the time of the sale or 
        disposition in accordance with section 57(b)(3); and
            ``(2) the taxpayer may not deduct the loss in computing 
        taxable income (except to the extent it is taken into account 
        as part of the general basis account).
    ``(b) Other Assets.--No amount shall be deducted in determining 
gross income in the case of the sale or disposition of an asset other 
than a savings asset.
    ``(c) Disposition of Savings Asset.--For purposes of this section, 
a savings asset that becomes totally worthless shall be treated as 
disposed of when it becomes totally worthless.

         ``Subchapter D--Rules for Exclusions from 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.

``SEC. 91. INTEREST ON TAX-EXEMPT BONDS.

    ``(a) Exclusion.--Except as provided in subsection (b), gross 
income does not include interest on any State or local bond.
    ``(b) Exceptions.--Subsection (a) shall not apply to--
            ``(1) Private activity bond which is not a qualified 
        bond.--Any private activity bond which is not a qualified bond 
        (within the meaning of paragraph (3) of subsection (c)).
            ``(2) Arbitrage bond.--Any arbitrage bond.
            ``(3) Bond not in registered form, etc.--Any bond unless 
        such bond meets the applicable requirements set forth in 
        regulations.
    ``(c) Definitions.--For purposes of this section--
            ``(1) State or local bond.--`State or local bond' means an 
        obligation of a State or political subdivision thereof.
            ``(2) State.--`State' includes the District of Columbia and 
        any possession of the United States.
            ``(3) Qualified bond.--`Qualified bond' means any private 
        activity bond if--
                    ``(A) In general.--Such bond is--
                            ``(i) an exempt facility bond,
                            ``(ii) a qualified mortgage bond,
                            ``(iii) a qualified veterans' mortgage 
                        bond,
                            ``(iv) a qualified small issue bond,
                            ``(v) a qualified student loan bond, or
                            ``(vi) a qualified 253(c)(3) bond.
                    ``(B) Volume cap.--Such bond is issued as part of 
                an issue which meets the applicable volume cap 
                requirements set forth in regulations.
                    ``(C) Other requirements.--Such bond meets the 
                applicable requirements set forth in regulations.
    ``(d) Regulations.--
            ``(1) Statutory regulations.--The Secretary shall publish 
        as regulations governing the application of this section the 
        text of part IV of subchapter B of chapter 1 of the Internal 
        Revenue Code of 1986 (sections 141 through 149) with only such 
        changes as are required to conform cross references.
            ``(2) Other regulations.--The Secretary shall have the 
        authority to promulgate such other regulations as he deems 
        necessary or proper to implement this section, except that no 
        such regulations shall conflict with the regulations mandated 
        by paragraph (1) except as provided in this subtitle.

``SEC. 92. COMBAT PAY.

    ``(a) Enlisted Personnel.--Gross income does not include 
compensation received for active service as a member below the grade of 
commissioned officer in the Armed Forces of the United States for any 
month during any part of which such member--
            ``(1) served in a combat zone, or
            ``(2) was hospitalized as a result of wounds, disease, or 
        injury incurred while serving in a combat zone; but this 
        paragraph shall not apply for any month beginning more than 2 
        years after the date of the termination of combatant activities 
        in such zone.
    ``(b) Commissioned Officers.--Gross income does not include so much 
of the compensation as does not exceed $500 received for active service 
as a commissioned officer in the Armed Forces of the United States for 
any month during any part of which such officer--
            ``(1) served in a combat zone, or
            ``(2) was hospitalized as a result of wounds, disease, or 
        injury incurred while serving in a combat zone; but this 
        paragraph shall not apply for any month beginning more than 2 
        years after the date of the termination of combatant activities 
        in such zone.
    ``(c) Definitions.--For purposes of this section--
            ``(1) `Commissioned officer' does not include a 
        commissioned warrant officer.
            ``(2) `Combat zone' means any area which the President of 
        the United States by Executive order designates, for purposes 
        of this section or corresponding provisions of prior income tax 
        laws, an area in which Armed Forces of the United States are or 
        have (after June 24, 1950) engaged in combat.
            ``(3) Service is performed in a combat zone only if 
        performed on or after the date designated by the President by 
        Executive order as the date of the commencing of combatant 
        activities in such zone, and on or before the date designated 
        by the President by Executive order as the date of the 
        termination of combatant activities in such zone; except that 
        June 25, 1950, shall be considered the date of the commencing 
        of combatant activities in the combat zone designated in 
        Executive Order No. 10195.
            ``(4) The term `compensation' does not include pensions and 
        retirement pay.

``SEC. 93. QUALIFIED MILITARY BENEFIT.

    ``(a) In General.--Gross income does not include any qualified 
military benefit. `Qualified military benefit' means any allowance or 
in-kind benefit (other than personal use of a vehicle) which--
            ``(1) is received by any member or former member of the 
        uniformed service of the United States or any dependent of such 
        member by reason of such member's status or service as a member 
        of such uniformed services, and
            ``(2) was excludable from gross income on September 9, 
        1986, under any provision of law, regulation, or administrative 
        practice which was in effect on such date (other than a 
        provision of this title).
    ``(b) No Other Benefit To Be Excludable as Provided by This 
Title.--Notwithstanding any other provision of law, no benefit shall be 
treated as a qualified military benefit unless such benefit--
            ``(1) is a benefit described in subsection (a), or
            ``(2) is excludable from gross income under this title 
        without regard to any provision of law which is not contained 
        in this title and which is not contained in a revenue Act.
    ``(c) Limitations on Modifications.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        modification or adjustment of any qualified military benefit 
        after September 9, 1986, shall be taken into account.
            ``(2) Exception for certain adjustments to cash benefits.--
        Paragraph (1) shall not apply to any adjustment to any 
        qualified military benefit payable in cash which--
                    ``(A) is pursuant to a provision of law or 
                regulation (as in effect on September 9, 1986), and
                    ``(B) is determined by reference to any fluctuation 
                in cost, price, currency, or other similar index.

``SEC. 94. QUALIFIED FOSTER CARE PAYMENTS.

    ``(a) In General.--Gross income does not include any qualified 
foster care payment.
    ``(b) Qualified Foster Care Payment Defined.--
            ``(1) In general.--`Qualified foster care payment' means 
        any amount--
                    ``(A) which is paid by a state or political 
                subdivision thereof or by a placement agency which is 
                described in section 253(c)(3) and exempt from tax 
                under section 253(a), and
                    ``(B) which is--
                            ``(i) paid to the foster care provider for 
                        caring for a qualified foster individual in the 
                        foster care provider's home, or
                            ``(ii) a difficulty of care payment.
            ``(2) Qualified foster individual.--`Qualified foster 
        individual' means any individual who is living in a foster 
        family home in which such individual was placed by--
                    ``(A) an agency of a State or a political 
                subdivision thereof, or
                    ``(B) in the case of an individual who has not 
                attained age 19, an organization which is licensed by a 
                State (or political subdivision thereof) as a placement 
                agency and which is described in section 253(c)(3) and 
                exempt from tax under section 253(a).
            ``(3) Limitation based on number of individuals over the 
        age of 18.--In the case of any foster home in which there is a 
        qualified foster care individual who has attained age 19, 
        foster care payments (other than difficulty of care payments) 
        for any period to which such payments relate shall not be 
        excludable from gross income under subsection (a) to the extent 
        such payments are made for more than 5 such qualified foster 
        individuals.
    ``(c) Difficulty of Care Payments.--For purposes of this section--
            ``(1) Difficulty of care payments.--`Difficulty of care 
        payments' means payments to individuals which are not described 
        in subsection (b)(1)(B)(i), and which--
                    ``(A) are compensation for providing the additional 
                care of a qualified foster individual which is--
                            ``(i) required by reason of a physical, 
                        mental, or emotional handicap of such 
                        individual with respect to which the State has 
                        determined that there is a need for additional 
                        compensation, and
                            ``(ii) provided in the home of the foster 
                        care provider, and
                    ``(B) are designated by the payor as compensation 
                described in subparagraph (A).
            ``(2) Limitation based on number of individuals.--In the 
        case of any foster home, difficulty of care payments for any 
        period to which such payments relate shall not be excludable 
        from gross income under subsection (a) to the extent such 
        payments are made for more than--
                    ``(A) 10 qualified foster individuals who have not 
                attained age 19, and
                    ``(B) 5 qualified foster individuals not described 
                in subparagraph (A).

``SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS.

    ``(a) In General.--Gross income does not include--
            ``(1) amounts received under workers' compensation acts as 
        compensation for personal injuries or sickness;
            ``(2) the amount of any damages received (whether by suit 
        or agreement and whether as lump sums or as periodic payments) 
        on account of personal injuries or sickness;
            ``(3) amounts received through accident or health insurance 
        for personal injuries or sickness, other than amounts received 
        by an employee to the extent such amounts--
                    ``(A) are attributable to contributions by the 
                employer which were not includible in the gross income 
                of the employee, or
                    ``(B) are paid by the employer;
            ``(4) amounts received as pension, annuity, or similar 
        allowance for personal injuries or sickness resulting from 
        active service in the armed forces of any country or in the 
        Coast and Geodetic Survey or the Public Health Service, or as a 
        disability annuity payable under the provisions of section 808 
        of the Foreign Service Act of 1980; and
            ``(5) amounts received by an individual as disability 
        income attributable to injuries incurred as a direct result of 
        a violent attack which the Secretary of State determines to be 
        a terrorist attack and which occurred while such individual was 
        an employee of the United States engaged in the performance of 
        his official duties outside the United States.
Paragraph (2) shall not apply to any punitive damages in connection 
with a case not involving physical injury or physical sickness.
    ``(b) Termination of Application of Subsection (a)(4) in Certain 
Cases.--
            ``(1) In general.--Subsection (a)(4) shall not apply in the 
        case of an individual who is not described in paragraph (2).
            ``(2) Individuals to whom subsection (a)(4) continues to 
        apply.--An individual is described in this paragraph if--
                    ``(A) on or before September 24, 1975, he was 
                entitled to receive any amount described in subsection 
                (a)(4),
                    ``(B) on September 24, 1975, he was a member of any 
                organization (or reserve component thereof) referred to 
                in subsection (a)(4) or under a binding written 
                commitment to become such a member,
                    ``(C) he receives an amount described in subsection 
                (a)(4) by reason of a combat-related injury, or
                    ``(D) on application therefore, he would be 
                entitled to receive disability compensation from the 
                Veterans' Administration.
            ``(3) Special rules for combat-related injuries.--For 
        purposes of this subsection, the term `combat-related injury' 
        means personal injury or sickness--
                    ``(A) which is incurred--
                            ``(i) as a direct result of armed conflict,
                            ``(ii) while engaged in extra hazardous 
                        service, or
                            ``(iii) under conditions simulating war; or
                    ``(B) which is caused by an instrumentality of war.
        In the case of an individual who is not described in 
        subparagraph (A) or (B) of paragraph (2), except as provided in 
        paragraph (4), the only amounts taken into account under 
        subsection (a)(4) shall be the amounts which he receives by 
        reason of a combat-related injury.
            ``(4) Amount excluded to be not less than veterans' 
        disability compensation.--In the case of any individual 
        described in paragraph (2), the amounts excludable under 
        subsection (a)(4) for any period with respect to any individual 
        shall not be less than the maximum amount which such 
        individual, on application therefor, would be entitled to 
        receive as disability compensation from the Veterans' 
        Administration.
    ``(c) Cross References.--
            ``(1) For exclusion from employee's gross income of amounts 
        received under accident and health plans, see section 4.
            ``(2) For exclusion of part of disability retirement pay 
        from the application of subsection (a)(4) of this section, see 
        section 1403 of title 10, United States Code (relating to 
        career compensation laws).

``SEC. 96. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE 
              EMPLOYER.

    ``(a) Meals and Lodging Furnished to Employee, His Spouse, and His 
Dependents, Pursuant to Employment.--There shall be excluded from gross 
income of an employee the value of any meals or lodging furnished to 
him, his spouse, or any of his dependents by or on behalf of his 
employer for the convenience of the employer, but only if--
            ``(1) in the case of meals, the meals are furnished on the 
        business premises of the employer, or
            ``(2) in the case of lodging, the employee is required to 
        accept such lodging on the business premises of his employer as 
        a condition of his employment.
    ``(b) Special Rules.--For the purposes of subsection (a)--
            ``(1) Provisions of employment contract or state statute 
        not to be determinative.--In determining whether meals or 
        lodging are furnished for the convenience of the employer, the 
        provisions of an employment contract or of a State statute 
        fixing terms of employment shall not be determinative of 
        whether the meals or lodging are intended as compensation.
            ``(2) Certain factors not taken into account with respect 
        to meals.--In determining whether meals are furnished for the 
        convenience of the employer, the fact that a charge is made for 
        such meals, and the fact that the employee may accept or 
        decline such meals, shall not be taken into account.
            ``(3) Certain fixed charges for meals.--
                    ``(A) In general.--If--
                            ``(i) an employee is required to pay on a 
                        periodic basis a fixed charge for his meals, 
                        and
                            ``(ii) such meals are furnished by the 
                        employer for the convenience of the employer,
                there shall be excluded from the employee's gross 
                income an amount equal to such fixed charge.
                    ``(B) Application of subparagraph (a).--
                Subparagraph (A) shall apply--
                            ``(i) whether the employee pays the fixed 
                        charge out of his stated compensation or out of 
                        his own funds, and
                            ``(ii) only if the employee is required to 
                        make the payment whether he accepts or declines 
                        the meals.
    ``(c) Employees Living in Certain Camps.--
            ``(1) In general.--In the case of an individual who is 
        furnished lodging in a camp located in a foreign country by or 
        on behalf of his employer, such camp shall be considered to be 
        part of the business premises of the employer.
            ``(2) Camp.--For purposes of this section, a camp 
        constitutes lodging which is--
                    ``(A) provided by or on behalf of the employer for 
                the convenience of the employer because the place at 
                which such individual renders services is in a remote 
                area where satisfactory housing is not available on the 
                open market,
                    ``(B) located, as near as practicable, in the 
                vicinity of the place at which such individual renders 
                services, and
                    ``(C) furnished in a common area (or enclave) which 
                is not available to the public and which normally 
                accommodates 10 or more employees.
    ``(d) Lodging Furnished by Certain Educational Institutions to 
Employees.--
            ``(1) In general.--In the case of an employee of an 
        educational institution, gross income shall not include the 
        value of qualified campus lodging furnished to such employee 
        during the taxable year.
            ``(2) Exception in cases of inadequate rent.--Paragraph (1) 
        shall not apply to the extent of the excess of--
                    ``(A) the lesser of--
                            ``(i) 5 percent of the appraised value of 
                        the qualified campus lodging, or
                            ``(ii) the average of the rentals paid by 
                        individuals (other than employees or students 
                        of the educational institution) during such 
                        calendar year for lodging provided by the 
                        educational institution which is comparable to 
                        the qualified campus lodging provided to the 
                        employee, over
                    ``(B) the rent paid by the employee for the 
                qualified campus lodging during such calendar year.
        The appraised value under subparagraph (A)(i) shall be 
        determined as of the close of the calendar year in which the 
        taxable year begins, or, in the case of a rental period not 
        greater than 1 year, at any time during the calendar year in 
        which such period begins.
            ``(3) Qualified campus lodging.--For purposes of this 
        subsection, the term `qualified campus lodging' means lodging 
        to which subsection (a) does not apply and which is--
                    ``(A) located on, or in the proximity of, a campus 
                of the educational institution, and
                    ``(B) furnished to the employee, his spouse, and 
                any of his dependents by or on behalf of such 
                institution for use as a residence.
            ``(4) Educational institution.--For purposes of this 
        paragraph, the term `educational institution' means an 
        institution described in section 301(b)(1)(A)(ii).

``SEC. 97. CERTAIN FRINGE BENEFITS.

    ``(a) Purpose.--This section includes definitions and rules 
applicable to the exclusion from gross income for certain fringe 
benefits.
    ``(b) No-Additional-Cost Service Defined.--`No-additional-cost 
service' means any service provided by an employer to an employee for 
use by such employee if--
            ``(1) such service is offered for sale to customers in the 
        ordinary course of the line of business of the employer in 
        which the employee is performing services, and
            ``(2) the employer incurs no substantial additional cost 
        (including forgone revenue) in providing such service to the 
        employee (determined without regard to any amount paid by the 
        employee for such service).
    ``(c) Qualified Employee Discount Defined.--
            ``(1) Qualified employee discount.--The term `qualified 
        employee discount' means any employee discount with respect to 
        qualified property or services to the extent such discount does 
        not exceed--
                    ``(A) in the case of property, the gross profit 
                percentage of the price at which the property is being 
                offered by the employer to customers, or
                    ``(B) in the case of services, 20 percent of the 
                price at which the services are being offered by the 
                employer to customers.
            ``(2) Gross profit percentage.--
                    ``(A) In general.--`Gross profit percentage' means 
                the percent which--
                            ``(i) the excess of the aggregate sales 
                        price of property sold by the employer to 
                        customers over the aggregate cost of such 
                        property to the employer, is of
                            ``(ii) the aggregate sales price of such 
                        property.
                    ``(B) Determination of gross profit percentage.--
                Gross profit percentage shall be determined on the 
                basis of--
                            ``(i) all property offered to customers in 
                        the ordinary course of the line of business of 
                        the employer in which the employee is 
                        performing services (or a reasonable 
                        classification of property selected by the 
                        employer), and
                            ``(ii) the employer's experience during a 
                        representative period.
            ``(3) Employee discount defined.--`Employee discount' means 
        the amount by which--
                    ``(A) the price at which the property or services 
                are provided by the employer to an employee for use by 
                such employee, is less than
                    ``(B) the price at which such property or services 
                are being offered by the employer to customers.
            ``(4) Qualified property or services.--`Qualified property 
        or services' means any property (other than real property and 
        other than personal property of a kind held for investment) or 
        services which are offered for sale to customers in the 
        ordinary course of the line of business of the employer in 
        which the employee is performing services.
    ``(d) De Minimis Fringe Defined.--
            ``(1) In general.--`De minimis fringe' means any property 
        or service the value of which is (after taking into account the 
        frequency with which similar fringes are provided by the 
        employer to the employer's employees) so small as to make 
        accounting for it unreasonable or administratively 
        impracticable.
            ``(2) Treatment of certain eating facilities.-- The 
        operation by an employer of any eating facility for employees 
        shall be treated as a de minimis fringe if--
                    ``(A) such facility is located on or near the 
                business premises of the employer, and
                    ``(B) revenue derived from such facility normally 
                equals or exceeds the direct operating costs of such 
                facility.
        The preceding sentence shall apply with respect to any highly 
        compensated employee only if access to the facility is 
        available on substantially the same terms to each member of a 
        group of employees which is defined under a reasonable 
        classification set up by the employer which does not 
        discriminate in favor of highly compensated employees.
            ``(3) On-premises gyms and other athletic facilities.--
                    ``(A) In general.--De minimis fringe benefits 
                include the provision of on-premises athletic facility 
                by an employer to its employees.
                    ``(B) On-premises athletic facility.--For purposes 
                of this paragraph, `on-premises athletic facility' 
                means any gym or other athletic facility--
                            ``(i) which is located on the premises of 
                        the employer,
                            ``(ii) which is operated by the employer, 
                        and
                            ``(iii) substantially all the use of which 
                        is by employees of the employer, their spouses, 
                        and their dependent children.
    ``(e) Certain Educational Training Benefits.--Amounts paid or 
expenses incurred by the employer for education or training provided to 
the employee shall be excluded from gross income under section 4 if 
(and only if) such amounts or expenses are ordinary and necessary 
business expenses and are not for an advanced degree or to qualify an 
employee for a new line of work.
    ``(f) Regulations.--The Secretary shall prescribe regulations under 
this section, including regulations that continue certain rules 
contained in section 132 to the Internal Revenue Code of 1986 related 
to the fringe benefits described in this section.

              ``Subchapter E--Rules Relating to Deductions

        ``Sec. 101. Charitable, etc. organizations.
        ``Sec. 102. Private foundations.

``SEC. 101. CHARITABLE, ETC. ORGANIZATIONS.

    ``(a) Purpose.--This section provides definitions for purposes of 
determining the philanthropic transfer deduction and for other purposes 
of this chapter and chapter 2.
    ``(b) Regular Charity.--
            ``(1) In general.--
                    ``(A) Regular charity.--`Regular charity' means--
                            ``(i) a church or a convention or 
                        association of churches,
                            ``(ii) an educational organization which 
                        normally maintains a regular faculty and 
                        curriculum and normally has a regularly 
                        enrolled body of pupils or students in 
                        attendance at the place where its educational 
                        activities are regularly carried on,
                            ``(iii) an organization the principal 
                        purpose or functions of which are the providing 
                        of medical or hospital care or medical 
                        education or medical research, if the 
                        organization is a hospital, or if the 
                        organization is a medical research organization 
                        directly engaged in the continuous active 
                        conduct of medical research in conjunction with 
                        a hospital,
                            ``(iv) an organization which normally 
                        receives a substantial part of its support 
                        (exclusive of income received in the exercise 
                        or performance by such organization of its 
                        charitable, educational, or other purpose or 
                        function constituting the basis for its 
                        exemption under section 253(a)) from the United 
                        States or any State or political subdivision 
                        thereof or from direct or indirect 
                        contributions from the general public, and 
                        which is organized and operated exclusively to 
                        receive, hold, invest, and administer property 
                        and to make expenditures to or for the benefit 
                        of a college or university which is an 
                        organization referred to in clause (ii) of this 
                        subparagraph and which is an agency or 
                        instrumentality of a State or political 
                        subdivision thereof, or which is owned or 
                        operated by a State or political subdivision 
                        thereof or by an agency or instrumentality of 1 
                        or more States or political subdivisions,
                            ``(v) a governmental unit referred to in 
                        subsection (c)(1),
                            ``(vi) an organization referred to in 
                        subsection (c)(2) which normally receives a 
                        substantial part of its support (exclusive of 
                        income received in the exercise or performance 
                        by such organization of its charitable, 
                        educational, or other purpose or function 
                        constituting the basis for its exemption under 
                        section 53(a)) from a governmental unit 
                        referred to in subsection (c)(1) or from direct 
                        or indirect contributions from the general 
                        public,
                            ``(vii) a private foundation described in 
                        subparagraph (C), or
                            ``(viii) an organization described in 
                        section 302(a)(2) or (3).
                    ``(B) Special rule for medical research 
                organizations.--For purposes of determining whether a 
                contribution is to a regular charity, a medical 
                research organization shall not be treated as described 
                in clause (iii) of paragraph (2) unless during the 
                calendar year in which the contribution is made such 
                organization is committed to spend such contributions 
                for such research before January 1 of the 5th calendar 
                year which begins after the date such contribution is 
                made,
                    ``(C) Certain private foundations.--The private 
                foundations referred to in subparagraph (A)(vii) and 
                subsection (e)(1)(B) are--
                            ``(i) a private operating foundation (as 
                        defined in section 4942(j)(3)),
                            ``(ii) any other private foundation (as 
                        defined in section 102(a)) which, not later 
                        than the 15th day of the 3rd month after the 
                        close of the foundation's taxable year in which 
                        contributions are received, makes qualifying 
                        distributions (as defined in section 4942(g), 
                        without regard to paragraph (3) thereof), which 
                        are treated, after the application of section 
                        4942(g)(3), as distributions out of corpus (in 
                        accordance with section 4942(h)) in an amount 
                        equal to 100 percent of such contributions, and 
                        with respect to which the taxpayer obtains 
                        adequate records or other sufficient evidence 
                        from the foundation showing that the foundation 
                        made such qualifying distributions, and
                            ``(iii) a private foundation all of the 
                        contributions to which are pooled in a common 
                        fund and which would be described in section 
                        102(a)(3) but for the right of any substantial 
                        contributor (hereafter in this clause called 
                        `donor') or his spouse to designate annually 
                        the recipients, from among organizations 
                        described in paragraph (1) of section 102(a), 
                        of the income attributable to the donor's 
                        contribution to the fund and to direct (by deed 
                        or by will) the payment, to an organization 
                        described in such paragraph (1), of the corpus 
                        in the common fund attributable to the donor's 
                        contribution; but this clause shall apply only 
                        if all of the income of the common fund is 
                        required to be (and is) distributed to 1 or 
                        more organizations described in such paragraph 
                        (1) not later than the 15th day of the 3rd 
                        month after the close of the taxable year in 
                        which the income is realized by the fund and 
                        only if all of the corpus attributable to any 
                        donor's contribution to the fund is required to 
                        be (and is) distributed to 1 or more of such 
                        organizations not later than 1 year after his 
                        death or after the death of his surviving 
                        spouse if she has the right to designate the 
                        recipients of such corpus.
            ``(2) References.--Any reference in other law or in legal 
        documents to an organization described in a clause of section 
        170(b)(1)(A) of the Internal Revenue Code of 1986 shall 
        constitute a reference to an organization described in the same 
        clause of section 301(b)(1)(A).
    ``(c) Charity.--For purposes of determining the deductibility of a 
philanthropic transfer, `charitable contribution' means a contribution 
or gift for the use of--
            ``(1) a State, a possession of the United States, or any 
        political subdivision of any of the foregoing, or the United 
        States or the District of Columbia, but only if the 
        contribution or gift is made for exclusively public purposes,
            ``(2) a corporation, trust, or community chest, fund, or 
        foundation--
                    ``(A) created or organized in the United States or 
                in any possession thereof, or under the law of the 
                United States, any State, the District of Columbia, or 
                any possession of the United States,
                    ``(B) organized and operated exclusively for 
                religious, charitable, scientific, literary, or 
                educational purposes (but only if no part of its 
                activities involve the provision of athletic facilities 
                or equipment) or for the prevention of cruelty to 
                children or animals,
                    ``(C) no part of the net earnings of which inures 
                to the benefit of any private shareholder or 
                individual, and
                    ``(D) which qualifies for exemption from the 
                business tax under section 253(c) and is not 
                disqualified for tax exemption by reason of attempting 
                to influence legislation, and which does not 
                participate in, or intervene in (including the 
                publishing or distributing of statements), any 
                political campaign on behalf of (or in opposition to) 
                any candidate for public office,
            ``(3) in the case of a contribution or gift by an 
        individual, a domestic fraternal society, order, or 
        association, operating under the lodge system, but only if such 
        contribution or gift is to be used exclusively for religious, 
        charitable, scientific, literary, or educational purposes, or 
        for the prevention of cruelty to children or animals,
            ``(4) a cemetery company owned and operated exclusively for 
        the benefit of its members, or any corporation chartered solely 
        for burial purposes as a cemetery corporation and not permitted 
        by its charter to engage in any business not necessarily 
        incident to that purpose, if such company or corporation is not 
        operated for profit and no part of the net earnings of such 
        company or corporation inures to the benefit of any private 
        shareholder or individual.
    ``(d) Rules for Subsection (c).--
            ``(1) Limitations.--A contribution or gift by a corporation 
        to a trust, chest, fund, or foundation shall be deductible by 
        reason of subsection (c)(2)(B) only if it is to be used within 
        the United States or any of its possessions exclusively for 
        purposes specified in subparagraph (B).
            ``(2) References.--Any reference in other law or in legal 
        documents to an organization described in a paragraph of 
        section 170(c) of the Internal Revenue Code of 1986 shall 
        constitute a reference to an organization described in the 
        corresponding paragraph of section 101(c) if an organization is 
        described in a paragraph of section 101(c).
    ``(e) Qualified Conservation Contribution.--
            ``(1) In general.--`Qualified conservation contribution' 
        means a contribution--
                    ``(A) of a qualified real property interest,
                    ``(B) to a qualified organization,
                    ``(C) exclusively for conservation purposes.
            ``(2) Qualified real property interest.--`Qualified real 
        property interest' means any of the following interests in real 
        property:
                    ``(A) the entire interest of the donor other than a 
                qualified mineral interest,
                    ``(B) a remainder interest, and
                    ``(C) a restriction (granted in perpetuity) on the 
                use which may be made of the real property.
            ``(3) Qualified organization.--For purposes of paragraph 
        (1), the term `qualified organization' means an organization 
        which--
                    ``(A) is described in clause (v) or (vi) of 
                subsection (b)(1)(A), or
                    ``(B) is described in section 53(c)(3) and--
                            ``(i) meets the requirements of section 
                        102(a)(2), or
                            ``(ii) meets the requirements of section 
                        102(a)(3) and is controlled by an organization 
                        described in subparagraph (A) or in clause (i) 
                        of this subparagraph.
            ``(4) Conservation purpose defined.--
                    ``(A) In general.--For purposes of this subsection, 
                the term `conservation purpose' means--
                            ``(i) the preservation of land areas for 
                        outdoor recreation by, or the education of, the 
                        general public,
                            ``(ii) the protection of a relatively 
                        natural habitat of fish, wildlife, or plants, 
                        or similar ecosystem,
                            ``(iii) the preservation of open space 
                        (including farmland and forest land) where such 
                        preservation is--
                                    ``(I) for the scenic enjoyment of 
                                the general public, or
                                    ``(II) pursuant to a clearly 
                                delineated Federal, State, or local 
                                governmental conservation policy, and 
                                will yield a significant public 
                                benefit, or
                            ``(iv) the preservation of an historically 
                        important land area or a certified historic 
                        structure.
                    ``(B) Certified historic structure.--For purposes 
                of subparagraph (A)(iv), the term `certified historic 
                structure' means any building, structure, or land area 
                which--
                            ``(i) is listed in the National Register, 
                        or
                            ``(ii) is located in a registered historic 
                        district and is certified by the Secretary of 
                        the Interior to the Secretary as being of 
                        historic significance to the district.
                A building, structure, or land area satisfies the 
                preceding sentence if it satisfies such sentence either 
                at the time of the transfer or on the due date 
                (including extensions) for filing the transferor's 
                return under this chapter for the taxable year in which 
                the transfer is made.
            ``(5) Exclusively for conservation purposes.--For purposes 
        of this subsection--
                    ``(A) Conservation purpose must be protected.--A 
                contribution shall not be treated as exclusively for 
                conservation purposes unless the conservation purpose 
                is protected in perpetuity.
                    ``(B) No surface mining permitted.--
                            ``(i) In general.--Except as provided in 
                        clause ``(ii), in the case of a contribution of 
                        any interest where there is a retention of a 
                        qualified mineral interest, subparagraph (A) 
                        shall not be treated as met if at any time 
                        there may be extraction or removal of minerals 
                        by any surface mining method.
                            ``(ii) Special rule.--With respect to any 
                        contribution of property in which the ownership 
                        of the surface estate and mineral interests 
                        were separated before June 13, 1976, and remain 
                        so separated, subparagraph (A) shall be treated 
                        as met if the probability of surface mining 
                        occurring on such property is so remote as to 
                        be negligible.
            ``(6) Qualified mineral interest.--For purposes of this 
        subsection, the term `qualified mineral interest' means--
                    ``(A) subsurface oil, gas, or other minerals, and
                    ``(B) the right to access to such minerals.
    ``(f) Denial of Deduction for Certain Travel Expenses.--No 
deduction shall be allowed under section 11 for traveling expenses 
(including amounts expended for meals and lodging) while away from 
home, whether paid directly or by reimbursement, unless there is no 
significant element of personal pleasure, recreation, or vacation in 
such travel.
    ``(g) Treatment of Certain Amounts Paid to or for the Benefit of 
Institutions of Higher Education.--For purposes of section 11, if as 
the result of a contribution to or for the benefit of an educational 
organization--
            ``(1) which is described in subsection (b)(1)(A)(ii), and
            ``(2) which is an institution of higher education (as 
        defined in section 3304(f)),
the taxpayer receives (directly or indirectly) as a result of paying 
such amount the right to purchase tickets for seating at an athletic 
event in an athletic stadium of such institution, 80 percent of such 
contribution shall be treated as a charitable contribution (but only if 
such amount would be allowable as a deduction but for the fact that the 
taxpayer received the right to purchase tickets). If any portion of a 
payment is for the purchase of such tickets, such portion and the 
remaining portion (if any) of such payment shall be treated as separate 
amounts for purposes of this subsection.

``SEC. 102. PRIVATE FOUNDATIONS.

    ``(a) General Rule.--For purposes of this title, `private 
foundation' means a domestic or foreign organization described in 
section 253(c)(3) other than--
            ``(1) an organization described in section 101(b)(1)(A) 
        (other than in clauses (vii) and (viii));
            ``(2) an organization which--
                    ``(A) normally receives more than one-third of its 
                support in each taxable year from any combination of--
                            ``(i) gifts, grants, contributions, or 
                        membership fees, and
                            ``(ii) gross receipts from admissions, 
                        sales of merchandise, performance of services, 
                        or furnishing of facilities, in an activity 
                        which is not an unrelated business activity 
                        (within the meaning of section 256), not 
                        including such receipts from any person, or 
                        from any bureau or similar agency of a 
                        governmental unit (as described in section 
                        101(c)(1)), in any taxable year to the extent 
                        such receipts exceed the greater of $5,000 or 1 
                        percent of the organization's support in such 
                        taxable year, from persons other than 
                        disqualified persons (as defined in section 
                        4946) with respect to the organization, from 
                        governmental units described in section 
                        101(c)(1), or from organizations described in 
                        section 101(b)(1)(A) (other than in clauses 
                        (vii) and (viii)), and
                    ``(B) normally receives not more than one-third of 
                its support in each taxable year from the sum of--
                            ``(i) gross investment income (as defined 
                        in subsection (e)) and
                            ``(ii) the excess (if any) of the amount of 
                        its gross profits from unrelated business 
                        activity business taxable income (for purposes 
                        of section 255) over the amount of the tax 
                        imposed by section 255;
            ``(3) an organization which--
                    ``(A) is organized, and at all times thereafter is 
                operated, exclusively for the benefit of, to perform 
                the functions of, or to carry out the purposes of 1 or 
                more specified organizations described in paragraph (1) 
                or (2),
                    ``(B) is operated, supervised, or controlled by or 
                in connection with 1 or more organizations described in 
                paragraph (1) or (2), and
                    ``(C) is not controlled directly or indirectly by 1 
                or more disqualified persons (as defined in section 
                4946) other than foundation managers and other than 1 
                or more organizations described in paragraph (1) or 
                (2); and
            ``(4) an organization which is organized and operated 
        exclusively for testing for public safety.
    ``(b) Continuation of Private Foundation Status.--For purposes of 
this title, if an organization was a private foundation (within the 
meaning of subsection (a)) on October 9, 1969, or becomes a private 
foundation on any subsequent date, such organization shall be treated 
as a private foundation for all periods after October 9, 1969, or after 
such subsequent date, unless its status as such is terminated in 
accordance with regulations to be prescribed by the Secretary.
    ``(c) Status of Organization After Termination of Private 
Foundation Status.--For purposes of this section, an organization the 
status of which as a private foundation is terminated, shall be treated 
as an organization created on the day after the date of such 
termination.
    ``(d) Definition of Support.--For purposes of this section and 
chapter 42, the term `support' includes (but is not limited to)--
            ``(1) gifts, grants, contributions, or membership fees,
            ``(2) gross receipts from admissions, sales of merchandise, 
        performance of services, or furnishing of facilities in any 
        activity which is not an unrelated trade or business,
            ``(3) net income from unrelated business activities, 
        whether or not such activities are carried on regularly as a 
        trade or business,
            ``(4) gross investment income (as defined in subsection 
        (e)),
            ``(5) tax revenues levied for the benefit of an 
        organization and either paid to or expended on behalf of such 
        organization, and
            ``(6) the value of services or facilities (exclusive of 
        services or facilities generally furnished to the public 
        without charge) furnished by a governmental unit referred to in 
        section 101(c)(1) to an organization without charge.
Such term does not include any gain from the sale or other disposition 
of property which would be considered as gain from the sale or exchange 
of a capital asset, or the value of exemption from any Federal, State, 
or local tax or any similar benefit.
    ``(e) Definition of Gross Investment Income.--For purposes of 
subsection (d), the term ``gross investment income'' means the gross 
amount of income from interest, dividends, payments with respect to 
securities loans, rents, and royalties, but not including any such 
income to the extent included in computing the tax on unrelated 
business taxable income imposed by section 255.
    ``(f) Private Operating Foundation.--See section 4942(j)(3) for the 
definition of a `private operating foundation'.

              ``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.

``SEC. 111. CONTRIBUTIONS OF PERSONAL-USE PROPERTY TO A BUSINESS 
              ENTITY.

    ``(a) No Savings Allowance.--`Additions to savings' do not include 
the cost, value, or basis of any personal-use property contributed to a 
business entity.
    ``(b) Effect of Withdrawals.--If personal-use property is withdrawn 
from use in a business activity, the withdrawal shall be considered a 
taxable withdrawal only to the extent of the value of any additions, 
changes, or repairs made by the business entity. The taxpayer's basis 
in the property withdrawn shall equal its basis in the property when 
contributed, increased by the amount treated as a taxable withdrawal 
upon the withdrawal of the property.
    ``(c) Personal Use Property.--`Personal-use property' means any 
property used (other than in a trade or business) by the taxpayer, any 
person related to the taxpayer, or any person from whom the taxpayer 
acquired the property at other than an arm's-length price.
    ``(d) Cross Reference.--See sections 75 and 112 for other rules 
relating to personal use property.

``SEC. 112. RULES FOR RENTAL OF REAL ESTATE.

    ``(a) In General.--Except as provided in subsection (b), the 
activity of rental of real estate is a business activity to which the 
business tax under chapter 2 applies. A taxpayer shall not be entitled 
to any deductions under this chapter with respect to rental property, 
other than deductions attributable to additions to savings. A taxpayer 
shall recognize gross income only with respect to distributions from 
the rental activity.
    ``(b) Insubstantial Rental Activity.--
            ``(1) Not rental property.--If a taxpayer uses property on 
        more than 14 days during the taxable year for nonbusiness 
        purposes and uses and rents the property for no more than 14 
        days during the taxable year, the property shall not be 
        considered rental property or used in the activity of rental of 
        real estate during the taxable year for purposes of subsection 
        (a) and the business tax under chapter 2.
            ``(2) Rents from nonrental property.--Any rent from 
        property described in paragraph (1) shall be included in gross 
        income for purposes of the USA Income Tax.
            ``(3) Rental property becomes nonrental property.--If 
        property which is considered rental property for purposes of 
        subsection (a) in 1 taxable year ceases to be rental property 
        (by reason of paragraph (1)) in the following taxable year, the 
        property (and any associated debt) shall be treated as 
        distributed for purposes of rules relating to withdrawals.
    ``(c) Use for a Nonbusiness Purpose.--For purposes of this section, 
`use for a nonbusiness purpose' means use other than--
            ``(1) use for which fair rent is paid,
            ``(2) use in connection with the preparation of the 
        property for rental, or
            ``(3) use that serves a clear business purpose.
Use during any part of a day shall constitute use for that day.

``SEC. 113. RULES FOR HOBBY ACTIVITY.

    ``(a) No Savings Allowance for Contributions to Hobby Activities.--
A taxpayer may not treat as additions to savings amounts contributed to 
a hobby activity conducted by the individual.
    ``(b) Exclusion From Income.--Amounts received from a hobby 
activity shall not be treated as withdrawals from savings to the extent 
of deductions denied by subsection (a).
    ``(c) Hobby Activity.--`Hobby activity' means an activity conducted 
in part for personal pleasure or personal benefit or an activity 
conducted without the intent of earning a profit, but which generates 
revenues. Examples of hobby activity include--
            ``(1) occasional painting or the creation of other artwork 
        by an individual who is not in the regular trade or business of 
        producing and selling art,
            ``(2) part-time book writing by a person whose regular 
        employment activities do not relate to the book, and
            ``(3) creation of a large home garden to produce for home 
        use and sale.

``SEC. 114. LAND COMPANIES.

    ``(a) Land Company.--A `land company' is any business entity the 
principal assets of which are (after taking into account any 
contributions to and purchases by the business entity during the 
taxable year) unimproved land held for a nonbusiness purpose.
    ``(b) Nonbusiness Purpose.--For purposes of this section, land 
shall be considered held for a nonbusiness purpose if--
            ``(1) the land had been purchased by the business entity at 
        the time of acquisition or receipt of the land, the purchase 
        would not have been treated as a `business purchase' under the 
        principles of section 230 (relating to no deduction from the 
        business tax for land purchased for a nonbusiness use), and
            ``(2) the land has not been converted to a business use and 
        placed in service for such use (as determined in accordance 
        with section 230(d)).
    ``(c) Basis.--An individual's basis in his ownership interest in a 
land company shall be increased by--
            ``(1) the amount of cash contributed to the company, and
            ``(2) the lesser of the basis or the fair market value of 
        the land contributed to the company.

             ``Subchapter G--Accounting Methods and Periods

        ``Sec. 121. Taxable year.
        ``Sec. 122. Cash method of accounting.

``SEC. 121. TAXABLE YEAR.

    ``(a) In General.--The taxable year for all individuals subject to 
tax under this chapter shall be the calendar year except as provided in 
subsection (b).
    ``(b) Short Taxable Years.--
            ``(1) Birth.--An individual's taxable year in the year of 
        his birth shall begin on the date of his birth.
            ``(2) Death.--An individual's taxable year in the year of 
        his death shall end on the date of his death.

``SEC. 122. CASH METHOD OF ACCOUNTING.

    ``(a) In General.--All individuals shall determine their income and 
deductions using the cash receipts and disbursement method.
    ``(b) Original Issue Discount.--Taxpayers shall not include 
original issue discount in income until received.
    ``(c) Installment Sales.--Taxpayers shall take into account income 
from installment sales when received.
    ``(d) Constructive Receipt.--Income shall be treated as received 
when constructively received.
    ``(e) Effect of Change of Accounting Method.--Rules similar to 
those under section 226 shall apply to ensure that a taxpayer does not 
deduct the same expense twice or include the same item in income twice.

                   ``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.

``SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS.

    ``(a) Nonbusiness Income.--
            ``(1) Income other than certain gains.--There is hereby 
        imposed for each taxable year a tax of 30 percent of the amount 
        received from sources within the United States by a nonresident 
        alien individual as--
                    ``(A) interest (other than portfolio interest (as 
                defined in subsection (b)(2)), deposit interest (as 
                defined in subsection (b)(3)) and original issue 
                discount, dividends, rents, salaries, wages, premiums, 
                annuities, compensations, remunerations, emoluments, 
                and other fixed or determinable annual periodical 
                gains, profits and income,
                    ``(B) gains from the disposal of timber, coal, or 
                iron ore with a retained economic interest,
                    ``(C) in the case of the sale of an original 
                discount obligation or payment on an original issue 
                discount obligation, the interest accrued while the 
                individual was a nonresident alien, and
                    ``(D) 85 percent of social security benefits (as 
                defined in section 3(b)(2)).
            ``(2) Capital gains of certain aliens.--In the case of a 
        nonresident alien individual present in the United States for a 
        period or periods aggregating 183 days or more during the 
        taxable year, there is hereby imposed a tax of 30 percent of 
        the amount by which the gains, derived from sources within the 
        United States, from the sale or exchange at any time during 
        such year exceeds his losses, allocable to sources within the 
        United States, from the sale or exchange at any time during 
        such year of capital assets.
            ``(3) Tax does not apply to business income.--The taxes 
        imposed by this section shall not apply to the income of any 
        business entity, except to the extent such income is 
        distributed as compensation, dividends, or interest.
    ``(b) Special Rules and Definitions.--
            ``(1) Certain annuities.--The taxes imposed by subsection 
        (a) shall not apply to any amount received as an annuity under 
        a qualified annuity plan described in section 403(a)(1), or 
        from a qualified trust described in section 401(a) and exempt 
        under section 253(a) if--
                    ``(A) all of the personal services by reason of 
                which the annuity is payable were either--
                            ``(i) personal services performed outside 
                        the United States by an individual who, at the 
                        time of performance of such personal services, 
                        was a nonresident alien, or
                            ``(ii) personal services by a nonresident 
                        alien temporarily present in the United States 
                        for a period or periods not exceeding 90 days 
                        during a taxable year, whose compensation for 
                        such services did not exceed $3,000, and who 
                        performed such services for--
                                    ``(I) a nonresident alien 
                                individual, foreign partnership, or 
                                foreign corporation, not engaged in a 
                                trade or business within the United 
                                States, or
                                    ``(II) for an office or place of 
                                business maintained in a foreign 
                                country or in a possession of the 
                                United States by an individual who is a 
                                citizen or resident of the United 
                                States or by a domestic partnership or 
                                a domestic corporation, and
                    ``(B) at the time the first amount is paid as 
                annuity under the annuity plan or by the trust, 90 
                percent or more of the employees for whom contributions 
                or benefits are provided under such plan are citizens 
                or residents of the United States.
            ``(2) Portfolio interest.--
                    ``(A) In general.--`Portfolio interest' means--
                            ``(i) interest on obligations in registered 
                        form if the United States person who would 
                        otherwise be required to withhold tax on such 
                        interest under section 1441(a) receives a 
                        statement that the beneficial owner of the 
                        obligation is not a United States person, and
                            ``(ii) interest on obligations in 
                        nonregistered form if appropriate precautions 
                        are taken to ensure that such obligations will 
                        be sold only to persons who are not United 
                        States persons and such interest is paid 
                        outside the United States.
                    ``(B) Exceptions.--Under rules to be prescribed by 
                the Secretary, portfolio interest does not include--
                            ``(i) interest received by a 10-percent 
                        equity owner, or
                            ``(ii) contingent interest.
            ``(3) Deposit interest.--`Deposit interest' means interest 
        on deposits which are--
                    ``(A) deposits with persons carrying on a banking 
                business (including savings and loans), and
                    ``(B) amounts held by an insurance company under an 
                agreement to pay interest thereon.
            ``(4) Other exceptions.--The taxes imposed by subsection 
        (a) shall not apply to--
                    ``(A) a percentage of any dividend paid by a 
                business entity, 80 percent of whose gross receipts are 
                not taken into account under chapter 1 because such 
                receipts are from outside the United States, equal to 
                the percentage of gross receipts not so taken into 
                account,
                    ``(B) gambling winnings (except to the extent that 
                the Secretary determines by regulation that the 
                collection of the tax is administratively feasible),
                    ``(C) compensation paid by a foreign employer to a 
                nonresident alien individual for the period he is 
                temporarily present in the United States as a 
                nonimmigrant under subparagraph (F) or (J) of section 
                101(a)(15) of the Immigration and Nationality Act, as 
                amended,
                    ``(D) interest from a series E or series H savings 
                bond if the individual acquired the bond while a 
                resident of the Ryuku Islands or the Trust Territory of 
                the Pacific Islands, or
                    ``(E) amounts earned or payable to any person who 
                is a bona fide resident of Puerto Rico, Guam, American 
                Samoa, or the Northern Mariana Islands (and, therefore, 
                is subject to the tax imposed by subchapter A).
    ``(c) Expatriation To Avoid Tax.--
            ``(1) In general.--A nonresident alien individual who at 
        any time within the 10-year period immediately preceding the 
        close of the taxable year lost United State citizenship shall 
        be taxable in the manner described in paragraph (2) unless none 
        of the principal purposes of losing citizenship was avoidance 
        of tax under subchapter A or subtitle B.
            ``(2) Alternative tax.--A nonresident alien individual 
        described in paragraph (1) shall be subject to tax on the items 
        taxable under subsection (a) as determined without regard to 
        exceptions listed or based on definitions contained in 
        subsection (b) using the rate schedule for single individuals 
        under section 15. If the taxes determined under subsection (a) 
        are greater than the tax determined under this subsection, the 
        greater tax shall apply.

``SEC. 132. TAX TREATMENT OF CERTAIN COMMUNITY INCOME OF NONRESIDENT 
              ALIENS.

    ``(a) General Rule.--In the case of a married couple 1 or both of 
whom are nonresident alien individuals and who have community income 
for the taxable year, such community income shall be treated as 
follows:
            ``(1) Compensation income shall be treated as income of the 
        spouse who rendered the services.
            ``(2) Partnership distributions shall be treated as the 
        related distributive shares of partnership income would be 
        treated under section 1402(a)(5).
            ``(3) Community income which is derived from the separate 
        property of a spouse shall be treated as income of that spouse.
            ``(4) All other such community income shall be treated as 
        provided in the applicable community property law.
    ``(b) Exception Where Election Under Section 6013(g) Is in 
Effect.--Subsection (a) shall not apply if an election under subsection 
(g) or (h) of section 6013 (relating to election to treat nonresident 
alien individuals as residents of the United States) is in effect.

``SEC. 133. RELATIONSHIP WITH TREATIES.

    ``(a) Statement of Policy.--It is the intention of the USA Tax Code 
to promote a worldwide tax system in which each nation taxes--
            ``(1) under an individual tax, only the income of 
        individuals who are residents or citizens of that nation, and
            ``(2) under a business tax only the business activity in 
        such nation.
    ``(b) Effect of Treaties.--No tax shall be imposed under section 
131(a) on income that is exempt from tax by reason of a treaty between 
the nation of which the nonresident alien is a citizen or resident and 
the United States. If any such treaty requires that a lower rate of tax 
be imposed on some or all of the items of income subject to tax under 
section 131(a), such lower rate shall apply to such items in the case 
of persons to whom such treaty applies.
    ``(c) Effect of Unilateral Action by Foreign Nations.--No tax shall 
be imposed under section 131(a) on nonresident aliens who are citizens 
or residents of another nation if--
            ``(1) such nation exempts from its income and withholding 
        taxes nonresident alien individuals who are residents or 
        citizens of the United States,
            ``(2) such nation has entered into a tax information 
        sharing agreement with the United States, and
            ``(3) the Secretary certifies that the preceding 2 
        requirements have been satisfied.

                   ``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.

``SEC. 141. GENERAL RULES FOR TRUSTS.

    ``(a) Business Activities.--If a trust engages in business activity 
(as defined in section 206(b)), the trust shall be considered a 
business entity with respect to such activities for purposes of the 
business tax under chapter 2.
    ``(b) Trust Not Subject to Individual Tax.--Except as provided in 
section 143, a trust shall not be subject to the individual tax imposed 
by section 1.
    ``(c) Contributions to Trust Not Considered Savings.--Amounts 
contributed to a trust shall not be considered additions to savings for 
purposes of computing the Unlimited Savings Allowance. The contribution 
of a savings asset to a trust shall not be considered a sale or 
withdrawal of the savings assets. The purchase of a savings asset will 
be considered an addition to savings even if the asset is purchased 
with the intent of contributing it to a trust.
    ``(d) Distributions From a Trust.--
            ``(1) Cash distributions.--
                    ``(A) In general.--Cash distributions from a trust 
                shall be considered `withdrawal' income to the 
                distributee to the extent that such distributions 
                exceed the portion of the trust's previously taxed 
                amount (`PTA') allocated to the withdrawal.
                    ``(B) Transition rule.--Cash distributions made 
                from a trust during the first 65 days of 1996 shall be 
                considered made on December 31, 1995.
            ``(2) Distributions of savings assets.--The distribution of 
        a savings asset from a trust to an individual shall not result 
        in any income to the distributee. For purposes of determining 
        taxable withdrawals upon the subsequent disposition of the 
        savings asset by the distributee, the recipient will have a 
        basis in the distributed savings asset equal to--
                    ``(A) the trust's basis, if any, in the savings 
                asset, if it is an `initial asset'; or
                    ``(B) the PTA allocated to the savings asset, if it 
                is a `new asset'.
            ``(3) Distribution of assets other than savings assets.--In 
        the case of a distribution of an asset other than a savings 
        asset--
                    ``(A) Initial assets.--If the asset is an `initial 
                asset', the distributee shall assume the trust's basis 
                in the asset and the distribution shall not result in 
                any income to the distributee.
                    ``(B) New assets.--If the asset is a `new asset', 
                the distributee shall be treated as if it received an 
                amount of cash equal to the cost of the asset to the 
                trust and as if it then purchased the asset for the 
                amount of such cash. The rules of paragraph (1) 
                relating to the distribution of cash.
            ``(4) Distribution of a business entity.--The distribution 
        of a business entity or a business asset (such as rental 
        property) that essentially constitutes a business entity shall 
        be treated as the distribution of a savings asset and as if the 
        distributee received the business entity.
    ``(e) Deemed Distribution From a Trust.--See section 143 for rules 
relating to certain deemed distributions from trusts.

``SEC. 142. BASIS AND PREVIOUSLY TAXED AMOUNTS OF TRUSTS.

    ``(a) Basis.--
            ``(1) Assets held on the effective date.--A trust will have 
        a basis in each asset held in trust on January 1, 1996, equal 
        to the trust's basis in the asset on such date (as determined 
        under the principles of the Internal Revenue Code of 1986). The 
        trust will have a basis in cash held on such date equal to the 
        amount of cash. For purposes of this section, cash held in bank 
        accounts, money market accounts, and other similar accounts 
        shall be treated as cash.
            ``(2) Assets contributed.--A trust will have a basis in 
        each asset contributed to the trust on or after January 1, 
        1996, in an amount equal to the contributor's basis in such 
        property.
            ``(3) Assets purchased with cash contributed to the 
        trust.--If a trust acquires an asset with cash contributed to 
        the trust within 30 days after contribution of the cash (or by 
        January 31, 1996, in the case of cash on hand on January 1, 
        1996), the asset will have a tax basis equal to the amount of 
        such contributed cash used to purchase the asset.
            ``(4) Carryover basis.--If an asset of a trust has a basis 
        determined under paragraph (1), (2), or (3) and such asset is 
        transferred, exchanged, or converted in a transaction in which, 
        under general rules of this chapter, the basis of the successor 
        asset or assets would be determined based on the basis of the 
        transferred, exchanged or converted asset, the trust's basis in 
        the successor assets shall be determined in accordance with the 
        general rules of this chapter.
            ``(5) Initial assets.--For purposes of section 141 and this 
        section, `initial asset' means an asset (other than cash) which 
        has a basis determined under this section.
    ``(b) Previously Taxed Amount.--
            ``(1) In general.--Each trust shall maintain a previously 
        taxed amount balance to be known as the `PTA balance'.
            ``(2) Increases.--The PTA balance of a trust shall be 
        increased by--
                    ``(A) the basis of any asset sold or disposed of by 
                the trust (other than by a distribution or in a 
                carryover basis transaction described in paragraph (4) 
                of subsection (a)),
                    ``(B) any interest received by the trust on or 
                after January 1, 1996, that constitutes interest on a 
                tax-exempt bond, and
                    ``(C) any cash contributed to the trust (or held by 
                the trust on January 1, 1996) that is not applied 
                within 30 days to purchase an asset other than cash.
            ``(3) Decreases.--The PTA balance of a trust will decrease 
        by the PTA allocated to distributions from the trust and all 
        distributions described in section 141(d)(1)(B) (relating to 
        distributions in the first 65 days of 1996).
    ``(c) Non-PTA Account.--Each trust shall maintain a non-PTA 
account. The non-PTA account balance shall equal the excess of--
            ``(1) all amounts, other than contributions and interest on 
        tax-exempt bonds, received by the trust on or after January 1, 
        1996, including--
                    ``(A) interest (other than interest on tax-exempt 
                bonds),
                    ``(B) dividends,
                    ``(C) partnership and other business entity 
                distributions,
                    ``(D) principal received on loans (except to the 
                extent that it constitutes return of basis),
                    ``(E) proceeds of life insurance policies, and
                    ``(F) proceeds from the sale of stocks and bonds, 
                over
            ``(2) the sum of--
                    ``(A) the basis of all initial assets that are sold 
                by the trust,
                    ``(B) all deductible expenses of a multi-taxpayer 
                trust or an estate (as determined under section 143),
                    ``(C) all prior distributions of non-PTAs,
                    ``(D) the cost of all new assets sold by the trust, 
                and
                    ``(E) amounts described in section 143(b)(1)(A).
    ``(d) Allocation of PTA to Distributions.--
            ``(1) In general.--Except as provided in paragraph (2), 
        distributions made from a trust, other than distributions of 
        initial assets, shall be treated as first made out of the non-
        PTA account and then out of the PTA account.
            ``(2) PTA attributable to tax-exempt income.--PTA 
        attributable to income from tax-exempt bonds shall be allocated 
        to distributions that are treated under the terms of trust as 
        distributions of income in the order that such distributions 
        are made following the receipt of such tax-exempt income.
            ``(3) Distributions to multiple beneficiaries.--If 
        distributions are made to more than 1 distributee in a calendar 
        year and the distributions are to be treated as part 
        distributions out of the PTA account and part distributions out 
        of the non-PTA account, the distributions made to beneficiaries 
        entitled to distributions from income shall be treated as 
        derived from the non-PTA account to the maximum extent 
        possible.
            ``(4) Distribution of new assets.--For purposes of applying 
        the rules of this subsection, new assets that are distributed 
        shall be treated as distributed at their cost for purposes of 
        determining the extent to which such assets are distributions 
        out of PTA.

``SEC. 143. DEEMED DISTRIBUTIONS; PROXY TAX.

    ``(a) Single-Taxpayer Trusts.--In the case of a single-taxpayer 
trust, the taxpayer shall have a deemed distribution equal to the 
amount of the expenses of the trust and shall be deemed to have paid 
the expenses of the trust.
    ``(b) Multi-Taxpayer Trusts and Estates.--
            ``(1) In general.--In the case of multi-taxpayer trusts and 
        estates, a proxy tax is hereby imposed on the trust equal to 
        highest marginal tax rate applicable under section 15 
        multiplied by the excess of--
                    ``(A) the lesser of the non-PTA amount or the 
                nondeductible expenses of the trust or estate for the 
                taxable year, over
                    ``(B) a $300 exemption (or $600 in the case of an 
                estate).
            ``(2) Limit on exemption.--If a donor establishes multiple 
        trusts for the same beneficiaries, the $300 exemption shall 
        apply to only 1 of the trusts.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Single-taxpayer trust.--
                    ``(A) In general.--A `single taxpayer trust' 
                means--
                            ``(i) a trust with only 1 beneficiary, or
                            ``(ii) a revocable trust or other trust for 
                        which the grantor would be considered the owner 
                        (in which case the grantor will be treated as 
                        the beneficiary solely for purposes of 
                        subsection (a)).
                    ``(B) Certain trusts with multiple beneficiaries.--
                If a trust has multiple beneficiaries and each 
                beneficiary has a right to a portion of the income of 
                the trust and right to the same portion of the residual 
                interest of the trust, the trust many elect to be 
                treated as multiple single-taxpayer trusts and allocate 
                its expenses proportionally to the beneficiaries.
            ``(2) Multi-taxpayer trust.--A `multi-taxpayer trust' is 
        any trust that is not a single beneficiary trust.
            ``(3) Expenses.--
                    ``(A) In general.--The expenses of a trust include 
                State and local taxes, trustees fees, amounts paid to 
                persons who are not beneficiaries of the trust, 
                administration expenses, and all other fees and 
                expenses payable by the trust, other than commissions 
                and other charges directly attributable to the purchase 
                or sale of assets which would reduce the proceeds from 
                the sale of the asset or be treated as part of the cost 
                of an asset.
                    ``(B) Expenses of a business entity.--The expenses 
                of a trust do not include the expenses incurred by the 
                trust in its business activities that are treated as a 
                business entity.
            ``(4) Deductible expenses.--`Deductible expenses' means 
        expenses of a trust that would be deductible if incurred by an 
        individual.
            ``(5) Charitable deduction.--For purposes of determining 
        whether a charitable contribution would be deductible by a 
        multi-taxpayer trust, the rules limiting charitable deductions 
        to specified percentages of income shall not apply.

``SEC. 144. TRUSTS.

    ``(a) Grantor Trusts.--The provisions of this subchapter shall 
apply to grantor trusts only if the grantor is an individual.
    ``(b) Charitable Remainder Trusts and Charitable Annuity Trusts.--
The provisions of this subchapter shall, in accordance with regulations 
prescribed by the Secretary, apply in the case of a charitable 
remainder annuity trust and a charitable remainder unitrust, except 
that the proxy tax under section 143(b) shall not apply to such trusts.

``SEC. 145. ESTATES.

    ``(a) In General.--Rules similar to those contained in sections 141 
through 144 shall apply to estates.
    ``(b) Exceptions.--
            ``(1) Allocation of pta and non-pta.--PTA and non-PTA shall 
        be allocated to take into account directions in a will. Under 
        regulations prescribed by the Secretary, directions may be 
        inferred. A direction to sell a particular asset and provide 
        the proceeds to a beneficiary shall be viewed as a direction 
        that the non-PTA attributable to the sale and the PTA 
        attributable to the decedent's basis in the asset, if any, be 
        allocated to the distribution to the beneficiary.
            ``(2) Expenses deductible under the estate tax.--Expenses 
        of the estate that are deductible under the estate tax but not 
        under the individual tax shall be treated as paid out of PTAs, 
        and to the extent so treated and will not be subject to the 
        proxy tax.
            ``(3) Expense for estate tax.--
                    ``(A) In general.--Expenses for the estate tax and 
                any inheritance tax paid by the estate shall be treated 
                as expenses of the estate subject to the proxy tax 
                under section 143(b).
                    ``(B) Election to reduce pta.--The executor or 
                administrator of an estate can elect, in lieu of 
                treating all estate tax and inheritance tax expenses as 
                subject to the proxy tax under section 143(b), to 
                reduce the PTA amount (but not below zero) by the 
                amount of such taxes. If the amount of such taxes 
                exceeds the PTA amount, such excess shall be treated as 
                expenses of estate tax subject to the proxy tax under 
                section 143(b).

SEC. 146. INCOME IN RESPECT OF A DECEDENT.

    ``(a) Inclusion in Gross Income.--
            ``(1) General use.--The amount of all items of gross income 
        in respect of a decedent which are not properly includible in 
        respect of a taxable period in which falls the date of his 
        death, or a prior period, shall be included in gross income, 
        for the taxable year when received, of:
                    ``(A) the estate of the decedent, if the right to 
                receive the amount is acquired by the decedent's 
                estate,
                    ``(B) the person who, by reason of the death of the 
                decedent, acquires the right to receive the amount, if 
                the right to receive the amount is not acquired by the 
                decedent's estate from the decedent, and
                    ``(C) the person who acquires from the decedent the 
                right to receive the amount by bequest, devise or 
                inheritance, if the amount is received after a 
                distribution by the decedent's estate of such right.
            ``(2) Definition.--The Secretary shall prescribe 
        regulations on the treatment of income from sales of rights to 
        receive income and installment sales.
    ``(b) Estates.--
            ``(1) In general.--Income in respect of a decedent shall be 
        taken into account by an estate as if it were a nonpreviously 
        taxed amount (non-PTA) for purposes of sections 141 through 
        145. Such income shall be subject to tax under this chapter 
        only to the extent--
                    ``(A) that the proxy of section 143 applies, and
                    ``(B) amounts are distributed from the estate as 
                non-PTAs.
            ``(2) Election.--The executor or administrator of an estate 
        may elect to add income in respect of a decedent to the tax 
        base of the proxy tax under section 143(b), in which case such 
        income shall be treated as an addition to the PTA of an estate.

          ``Subchapter J--Definitions and Rules of Application

        ``Sec. 151. Definitions.
        ``Sec. 152. Rules of application.

``SEC. 151. DEFINITIONS.

    ``(a) In General.--When used in this chapter, where not otherwise 
distinctly expressed or manifestly incompatible with the intent 
thereof--
            ``(1) Business entity.--The definition of `business entity' 
        in section 206 (relating to the business tax) shall apply.
            ``(2) Business tax.--`Business tax' means the tax imposed 
        by section 201 and, to the extent required by the context, the 
        provisions of chapter 2.
            ``(3) Internal revenue code of 1986.--`Internal Revenue 
        Code of 1986' means the Internal Revenue Code of 1986 as in 
        effect immediately before the enactment of the business tax and 
        the USA Income Tax.
            ``(4) United states.--`United States' means the States and 
        the District of Columbia.
    ``(b) Terms Defined in Chapter 2.--If a term that is used but not 
defined in this chapter or in section 7701 is defined in chapter 2, the 
definition in chapter 2 shall apply except if manifestly incompatible 
with the intent of the provision in which the term is used.

``SEC. 152. RULES OF APPLICATION.

    ``(a) Definitions.--Any definition included in this chapter shall 
apply for all purposes of this chapter unless--
            ``(1) such definition is limited to the purposes of a 
        particular chapter, section, or subsection, or
            ``(2) the definition clearly would not be applicable in a 
        particular context.
    ``(b) Interpretations Consistent With Internal Revenue Code of 
1986.--Terms not defined in this chapter or elsewhere in this title, 
but defined in the Internal Revenue Code of 1986, shall be interpreted 
in a manner consistent with the Internal Revenue Code of 1986, except 
to the extent such interpretation would be inconsistent with the 
principles and purposes of this chapter.''
    (b) Effective Date.--The amendments made by this section shall be 
effective on January 1, 1996.

SEC. 202. REORGANIZATION OF THE CODE.

    (a) Repeal of Chapter 5.--Chapter 5 of the Code (relating to tax on 
transfers to avoid income tax) is repealed.
    (b) Redesignation of Other Chapters.--
            (1) Chapter 2.--Chapter 2 of the Code (relating to the tax 
        on self-employment income) is redesignated as chapter 4.
            (2) Chapter 3.--Chapter 3 of the Code (relating to the 
        withholding of tax on nonresident aliens and foreign 
        corporations) is redesignated as chapter 5.

                      TITLE III--NEW BUSINESS TAX

SEC. 301. REPEAL OF PRESENT CORPORATE INCOME TAX; NEW TAX PAID BY 
              CORPORATIONS AND OTHER BUSINESSES.

    (a) In General.--The Internal Revenue Code of 1986, as amended by 
title II, is amended by adding after chapter 1 the following new 
chapter:

       ``CHAPTER 2--TAX PAID BY 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.
        ``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.

                   ``Subchapter A--Imposition of Tax

        ``Sec. 201. Tax imposed.

``SECTION 201. TAX IMPOSED.

    ``(a) Taxable Business Activity.--A tax is imposed on the sale of 
goods and services in the United States by a business entity. The 
amount of the tax equals the amount by which--
            ``(1) the business tax, exceeds
            ``(2) the payroll tax credit.
    ``(b) Business Tax.--The `business tax' imposed on a business 
entity that sells or leases property or sells services in the United 
States equals 11 percent of the gross profit of the business entity for 
the taxable year.
    ``(c) Payroll Tax Credit.--The `payroll tax credit' is a credit for 
the social security, railroad retirement and hospital insurance taxes 
paid by an employer, as determined in accordance with subchapter L 
(sections 281 through 283).
    ``(d) Import Tax.--For rules relating to the import tax imposed by 
this chapter, see subchapter M (sections 286 through 288).

              ``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.

``SEC. 202. GROSS PROFITS.

    ```Gross profits' means for a taxable year of a business entity the 
amount by which--
            ``(1) the taxable receipts of the business entity for the 
        taxable year exceed,
            ``(2) the deductible amounts for the business entity for 
        the taxable year.

``SEC. 203. TAXABLE RECEIPTS.

    ``(a) In General.--`Taxable receipts' means all receipts from the 
sale of property, use of property, and performance of services in the 
United States.
    ``(b) Games of Chance.--Amounts received by business entities 
engaging in the activity of providing games of chance shall be treated 
as receipts from the sale of property or services.
    ``(c) In-Kind Receipts.--The taxable receipts attributable to the 
receipt of property, use of property or services in whole or partial 
exchange for property, use of property or services equal the fair 
market value of the services or property received, plus any cash 
received.
    ``(d) Taxes.--Taxable receipts do not include any excise tax, sales 
tax, custom duty, or other separately stated levy imposed by a Federal, 
State, or local government received by a business entity in connection 
with the sale of property or services or the use of property.
    ``(e) Financial Receipts.--
            ``(1) In general.--Except as provided in subchapter G 
        (relating to financial intermediation and financial 
        institutions), taxable receipts do not include financial 
        receipts.
            ``(2) Financial receipts.--`Financial receipts' include--
                    ``(A) interest,
                    ``(B) dividends and other distributions by a 
                business entity,
                    ``(C) proceeds from the sale of stock, other 
                ownership interests in business entities, or other 
                financial instruments (as defined in section 
                242(b)(3)),
                    ``(D) proceeds from life insurance policies,
                    ``(E) proceeds from annuities,
                    ``(F) proceeds from currency hedging or exchanges, 
                and
                    ``(G) proceeds from other financial transactions.
    ``(f) Cross References.--
            ``(1) Financial intermediation.--See subchapters F and G 
        for rules relating to financial intermediation.
            ``(2) Exports, sales in the united states.--See subchapter 
        J for the exclusion from gross receipts for export sales and 
        for rules on sales of property and services in the United 
        States.
            ``(3) Land.--See subchapter E for rules relating to certain 
        sales of land.
            ``(4) Insurance proceeds.--See section 237 for rules on the 
        inclusion of certain insurance proceeds in taxable receipts.

``SEC. 204. DEDUCTIBLE AMOUNTS.

    ``(a) In General.--`Deductible amounts' for a business entity in a 
taxable year include--
            ``(1) the cost of business purchases in the taxable year 
        (as determined under section 205),
            ``(2) such entity's loss carryover deduction (as determined 
        under section 207), and
            ``(3) the transition basis deduction (as determined under 
        section 290).
    ``(b) Financial Intermediation.--See subchapters F and G for 
special rules for business entities engaging in financial 
intermediation.

``SEC. 205. COST OF BUSINESS PURCHASES.

    ``(a) Business Purchases.--
            ``(1) In general.--`Business purchases' means the 
        acquisition of--
                    ``(A) property,
                    ``(B) the use of property, or
                    ``(C) services,
        for use in a business activity in the United States.
            ``(2) Examples.--Business purchases include (without 
        limitation) the--
                    ``(A) purchase or rental of real property,
                    ``(B) purchase or rental of capital equipment,
                    ``(C) purchase of supplies and inventory,
                    ``(D) purchase of services from independent 
                contractors,
                    ``(E) purchase of financial intermediation services 
                (as determined in accordance with section 236),
                    ``(F) purchase of a business loss policy (as 
                determined in accordance with section 237), and
                    ``(G) imports for use in a business activity in the 
                United States.
            ``(3) Exclusions.--Business purchases do not include--
                    ``(A) payments for use of money or capital, such as 
                interest or dividends (except to the extent that a 
                portion so paid is a fee for financial intermediation 
                services),
                    ``(B) premiums for life insurance,
                    ``(C) the acquisition of savings assets (as defined 
                in section 53(b)), or financial instruments (as defined 
                in section 242(b)(3)),
                    ``(D) property acquired outside the United States 
                (but such property shall be taken into account as an 
                import if imported),
                    ``(E) services performed outside the United States 
                (unless treated as imported into the United States),
                    ``(F) compensation expenses for an individual 
                (other than amounts paid to an individual in his 
                capacity as a business entity), or
                    ``(G) taxes (except as provided in subsection 
                (b)(2) relating to product taxes).
            ``(4) Compensation expenses.--`Compensation expenses' 
        means--
                    ``(A) wages, salaries, or other cash payable for 
                services by employees,
                    ``(B) any taxes imposed on the recipient that are 
                withheld by the business entity,
                    ``(C) the cost of property purchased to provide 
                employees with compensation (other than property 
                incidental to the provision of fringe benefits that are 
                excluded from income under the individual tax),
                    ``(D) the cost of fringe benefits which are 
                includible in an employee's, partner's, or proprietor's 
                income under the USA Income Tax (or are excluded solely 
                because such benefits constitute employee savings), 
                including (without limitation)--
                            ``(i) contributions to retirement and 
                        severance benefit plans,
                            ``(ii) premiums for the cost of life, 
                        health, accident, disability and other 
                        insurance policies for which the service 
                        provider, members of his family, or persons 
                        designated by him or members of his family are 
                        the beneficiaries,
                            ``(iii) the cost of providing parking to 
                        employees (unless the parking space is used for 
                        a vehicle that is regularly used in a business 
                        activity),
                            ``(iv) employer-paid educational benefits,
                            ``(v) employer-paid housing (other than 
                        housing provided for the convenience of the 
                        employer), and
                            ``(vi) employer-paid meals (other than 
                        meals provided for the convenience of the 
                        employer).
    ``(b) Cost of Business Purchases.--
            ``(1) In general.--The `cost of a business purchase' is the 
        amount paid or to be paid for the business purchase.
            ``(2) Taxes.--
                    ``(A) In general.--The `cost of business purchases' 
                includes any product taxes paid or to be paid with 
                respect to the property or services purchased.
                    ``(B) Product tax.--`Product tax' means any excise 
                tax, sales or use tax, custom duty, or other separately 
                stated levy imposed by a Federal, State, or local 
                government on the production, severance or consumption 
                of property or on the provision of services, whether or 
                not separately stated, and including any such taxes 
                that are technically imposed on the seller of property 
                or services.
                    ``(C) Taxes not product taxes.--Product taxes do 
                not include--
                            ``(i) the import tax,
                            ``(ii) state and local property taxes,
                            ``(iii) franchise or income taxes,
                            ``(iv) payroll taxes and self-employment 
                        taxes, or
                            ``(v) the business tax.
            ``(3) Imports.--In the case of an import by a business 
        entity, the cost of the import is the import price for purposes 
        of the import tax. The import tax is not part of the cost of 
        the import.
    ``(c) Property and Services Acquired for Property.--If a business 
entity receives property or services from a business entity in whole or 
partial exchange for property or services, the property or services 
acquired shall be treated as if such property and services were 
purchased for an amount equal to the fair market value of the services 
or property received, plus any cash received. For purposes of this 
section, property includes stock and other equity interests in business 
other than stock or an equity interest in the business entity acquiring 
the property or services. See section 210(b) for rules on property or 
services received in exchange for an equity interest in the recipient.
    ``(d) Gambling Payments.--In the case of a business involving 
gambling, lotteries, or other games of chance, business purchases 
include amounts paid to winners.
    ``(e) Cross References.--
            ``(1) Financial intermediation and insurance.--For rules 
        relating to fees for financial intermediation services and 
        insurance, see subchapter F.
            ``(2) Land.--For special rules relating to the acquisition 
        of land, see subchapter E.
            ``(3) Rental real estate.--For special rules relating to 
        the rental of real estate previously occupied by an owner of 
        the real estate, see section 232.
            ``(4) Outside the united states.--For special rules 
        relating to services performed outside the United States but 
        used inside the United States and international services, see 
        subchapter J.

``SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY.

    ``(a) Business Entity.--For purposes of the business tax, `business 
entity' means any corporation, unincorporated association, partnership, 
limited liability company, proprietorship, independent contractor, 
individual, or any other person engaging in business activity in the 
United States. An individual shall be considered a business entity only 
with respect to the individual's business activities.
    ``(b) Business Activity.--`Business activity' means the sale of 
property or services, the leasing of property, the development of 
property or services for subsequent sale or use in producing property 
or services for subsequent sale. `Business activity' does not include 
casual or occasional sales of property used by an individual (other 
than in a business activity), such as the sale by an individual of a 
vehicle used by the individual.
    ``(c) Exception for Certain Employees.--
            ``(1) In general.--`Business activity' does not include--
                    ``(A) the performance of services by an employee 
                for an employer that is a business entity with respect 
                to the activity in which the employee is engaged, or
                    ``(B) the performance of regular domestic household 
                services (including babysitting, housecleaning, and 
                lawn cutting) by an employee of an employer that is an 
                individual or family.
            ``(2) Employee defined.--For purposes of this subsection, 
        `employee' includes an individual partner who provides services 
        to a partnership or an individual member who provides services 
to a limited liability company, or a proprietor with respect to 
compensation for services from his proprietorship.

``SEC. 207. LOSS CARRYOVER DEDUCTION.

    ``(a) Deduction.--The loss carryover deduction for a taxable year 
is the lesser of--
            ``(1) the business entity's gross profits for the taxable 
        year (determined without the loss carryover deduction), or
            ``(2) the amount of the loss carryover to the taxable year.
    ``(b) Loss Carryover.--
            ``(1) General rule.--A loss for any taxable year may be a 
        loss carryover to each of the 15 taxable years following the 
        taxable year of the loss.
            ``(2) Loss carryovers to a taxable year.--The loss 
        carryover to a taxable year is the sum of the loss carryovers 
        from all prior taxable years beginning on or after January 1, 
        1996, that can be carried over to the taxable year.
            ``(3) Reduction of loss carryovers as a result of the 
        deduction.--A business entity's loss carryovers shall be 
        reduced each year by the amount of the loss carryover deduction 
        for the year. Loss carryovers shall be reduced in the order 
        that such carryovers arose.
    ``(c) Loss for Taxable Year.--A business entity's loss (if any) for 
the taxable year equals the excess (if any) of--
            ``(1) the sum of--
                    ``(A) the cost of business purchases for the 
                taxable year, and
                    ``(B) the transition basis adjustment for the 
                taxable year, over
            ``(2) taxable receipts for the taxable year.
    ``(d) Special Rules.--
            ``(1) Consolidated returns.--In the case of a consolidated 
        return, the loss for a taxable year shall be determined on a 
        consolidated group basis. In the case of a deconsolidation, the 
        loss carryovers from the consolidated group shall be allocated 
        in accordance with rules to be prescribed by the Secretary.
            ``(2) Loss carryovers of acquired business entity.--
                    ``(A) In general.--If a business entity acquires 
                another business entity in a transaction that is 
                considered the acquisition of a business entity and the 
                2 entities file a consolidated return or if 2 business 
                entities merge, the loss carryovers will survive and 
                can be applied against the taxable receipts 
                attributable to the business activities carried on (or 
                in the case of a merger formerly carried on) by either 
                entity.
                    ``(B) Asset acquisition.--If a business entity 
                acquires all or substantially all of the assets of 
                another entity in a transaction that is considered an 
                asset acquisition rather than the acquisition of a 
                business entity, the acquirer will be treated as if it 
                acquired the loss carryovers of the selling entity. For 
                purposes of this rule, the assets of a business entity 
                include ownership interests in other business entities.
                    ``(C) Substantially all.--For purposes of this 
                paragraph `substantially all' means more than 80 
                percent of the fair market value of a business entity's 
                net assets. Under rules prescribed by the Secretary, 
                the parties to a transaction may elect to treat 
                acquisitions in excess of 70 percent of the fair market 
                value of a business entity's net assets as acquisitions 
                of `substantially all' of a business entity's net 
                assets.

   ``Subchapter C--Capital Contributions, 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.

``SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.

    ``(a) By Business Entity.--
            ``(1) Cash.--If a business entity contributes cash to a 
        business entity of which it is or becomes a partial or full 
        owner, the amount contributed is not a deductible amount to the 
        contributor or a taxable receipt to the recipient.
            ``(2) Property or services.--If a business entity 
        contributes property or services to a business entity of which 
        it is or becomes a partial or full owner, the transaction will 
        not result in taxable receipts to the contributor or a 
        deduction for a business purchase for the recipient and will 
        not constitute a sale resulting in taxable receipts to the 
        contributor.
    ``(b) By Individual.--
            ``(1) Cash.--If an individual contributes cash to a 
        business entity, the cash received is not a taxable receipt.
            ``(2) New property.--If an individual contributes to a 
        business entity property that the individual purchased for the 
        business entity and which was not used by any person after its 
        purchase, the property shall be considered purchased by such 
        business entity from the person from which the individual 
        purchased the property and the basis of such property in the 
        hands of the business entity shall be the such basis in the 
        hands of the individual.
            ``(3) Personal use property.--
                    ``(A) In general.--If an individual contributes 
                personal use property to a business entity in which the 
                individual has an ownership interest or for which the 
                individual receives an ownership interest, the business 
                entity shall not be permitted to deduct the value of 
                the property received as a business expense. The 
                business entity will have a tax basis in the 
                contributed property equal to the contributor's basis.
                    ``(B) Personal use property.--`Personal use 
                property' means any property used by an individual at 
                any time other than in a business activity.
            ``(4) Services.--If an individual contributes services to a 
        business entity in which the individual has an ownership 
        interest or receives an ownership interest, the business entity 
        shall not be permitted to deduct the value of the services 
        received (or the value of the equity interest provided to the 
        services provider).

``SEC. 211. DISTRIBUTIONS OF PROPERTY.

    ``(a) Distributions Other Than to Controlling Business.--If a 
business entity distributes all or a portion of its assets to its 
owners (other than a controlling business entity), the business entity 
will be treated as if it sold the assets to its owners at fair market 
value. The fair market value will be determined by the distributing 
corporation and those determinations, unless unreasonable, will be 
binding on the recipients.
    ``(b) Distributions to a Controlling Business.--If a business 
entity distributes all or a portion of its assets to a controlling 
business, the controlling business will assume the distributing 
entity's tax attributes with respect to the assets and neither entity 
will have taxable receipts or a deduction as a result of the 
transaction.
    ``(c) Distribution of Personal Use Property.--If personal use 
property is distributed to the individual who contributed the personal 
use property to a business entity, the fair market value of the 
property for purposes of paragraph (a) shall equal the basis of the 
property plus any enhancement in value of the property attributable to 
business purchases with respect to the property.
    ``(d) Controlling Business Entity.--A business entity is a 
`controlling business entity' with respect to another business entity 
if it owns directly or indirectly more than 50 percent of the profits 
or capital interest in the other business entity.
    ``(e) Application of This Section.--This section applies to both 
liquidating and nonliquidating distributions. Property shall be treated 
as distributed if the property is used for a nonbusiness purpose (as 
defined in section 232) for more than an insubstantial period of time 
during a taxable year. See section 232 for rules relating to certain 
rental property.

``SEC. 212. ASSET ACQUISITIONS.

    ``(a) In General.--If a business entity transfers some or all of 
its assets, the consideration received for such assets shall be 
allocated among the assets transferred in the same manner as was 
required by section 1060 of the Internal Revenue Code of 1986. If the 
transferee and transferor agree in writing on the allocation of any 
consideration, or as to the fair market value of any of the assets, 
such agreement shall be binding on both the transferor and transferee 
unless the Secretary determines that such allocation (or fair market 
value) is not appropriate.
    ``(b) Tax Consequences.--The tax consequences of an asset 
acquisition shall be determined in accordance with the rules of this 
chapter and shall be dependent upon allocations made under subsection 
(a). In general, consideration allocable to savings assets, such as 
stock in another business entity, would not be included in taxable 
receipts of the transferor and would not be a business purchase of the 
purchaser, but consideration allocable to the sale of tangible property 
and intangible property (other than savings assets) will constitute 
taxable receipts of the seller and a business purchase of the 
purchaser.
    ``(c) Election To Treat Asset Acquisition as a Stock Acquisition.--
In the case of the sale of substantially all of the assets of a 
business entity or substantially all of the assets of a line of 
business or a separately standing business of a business entity, the 
transferee and transferor can jointly elect to treat the acquisition as 
if it were an acquisition of the stock of a business entity holding the 
assets so transferred. In such case, the rules of section 213 shall 
apply.
    ``(d) Authority To Require Allocation Agreement and Notice to the 
Secretary.--If the Secretary determines that certain types of asset 
acquisitions have significant possibilities of tax avoidance, the 
Secretary may require--
            ``(1) parties to such types of acquisitions to enter into 
        agreements allocating consideration,
            ``(2) parties to acquisitions involving certain kinds of 
        assets to enter into agreements allocating part of the 
        consideration to those assets, or
            ``(3) parties to certain acquisitions to report information 
        to the Secretary.
    ``(e) Asset Acquisition Rules Do Not Apply If Consideration 
Includes Equity In Purchaser.--
            ``(1) In general.--If a business entity issues its own 
        equity or equity in a subsidiary or other controlled entity as 
        part of the consideration for the transfer of assets to it, the 
        transaction shall not be treated as an asset acquisition and 
        the rules of section 213 shall apply.
            ``(2) Equity.--For purposes of this subsection, equity 
        means--
                    ``(A) stock, in the case of a corporation,
                    ``(B) a partnership or similar interest, in the 
                case of a partnership or limited liability company, and
                    ``(C) an ownership interest or interest in profits 
                in the case of any other business entity.

``SEC. 213. MERGERS AND STOCK ACQUISITIONS.

    ``(a) Mergers.--A merger of 1 business entity into another or 2 
businesses entities into a 3rd business entity or any other similar 
transaction shall have no direct consequences under the business tax. 
The surviving entity shall assume the tax attributes of the merged 
corporations, including any loss carryovers and credit carryovers.
    ``(b) Stock Acquisition.--The acquisition of all or substantially 
all of the ownership interest in 1 business entity either for cash or 
in exchange for ownership in the acquiring entity or an entity 
controlled by the acquired entity shall have no direct consequences 
under the business tax.

``SEC. 214. SPINOFFS, SPLITOFFS, ETC.

    ``A spinoff, splitoff, or split-up of a business entity shall have 
no direct tax consequences under the business tax.

``SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES.

    ``The Secretary shall prescribe rules for allocation of loss 
carryovers and payroll tax credit carryovers in cases of substantial 
shifts of assets from 1 business entity to another business entity. 
Under such rules, a portion of a business entity's carryovers may be 
deemed transferred when assets are transferred.

                ``Subchapter D--Accounting Method Rules

        ``Sec. 220. General accounting rules.
        ``Sec. 221. Use of the cash method of accounting.
        ``Sec. 222. Taxable year.
        ``Sec. 223. Long-term contracts.
        ``Sec. 224. Post-sale price adjustments and refunds.
        ``Sec. 225. Bad debts.
        ``Sec. 226. Transition rules.

``SEC. 220. GENERAL ACCOUNTING RULES.

    ``(a) In General.--Except as provided in section 221, a business 
entity shall use an accrual method of accounting for purposes of 
determining the timing of recognition of taxable receipts and 
deductions of business purchases. All business purchases shall be 
deducted when incurred (in the case of a business entity using an 
accrual method of accounting) or when paid (in case of a business 
entity using the cash receipts and disbursements method of accounting) 
without regard to whether the business purchases are for or relate to--
            ``(1) inventory,
            ``(2) assets with a useful life of more than 1 year, or
            ``(3) property that will be used to produce other property.
    ``(b) Economic Performance.--For purposes of determining whether an 
amount has been incurred, the all events test shall not be treated as 
met any earlier than when economic performance with respect to such 
item occurs.
    ``(c) Change in Accounting Methods.--Except as otherwise expressly 
provided in this chapter, a business entity shall secure the consent of 
the Secretary before changing the method of accounting by which it 
determines gross profits. This provision shall not apply to changes 
required by the adoption of the business tax.

``SEC. 221. USE OF THE CASH RECEIPTS AND DISBURSEMENTS METHOD OF 
              ACCOUNTING.

    ``(a) In General.--A business entity that was permitted to use and 
used the cash receipts and disbursements method of accounting under the 
Internal Revenue Code of 1986 shall be permitted to continue to use the 
cash receipts and disbursements method of accounting.
    ``(b) New Business Entities.--A new business entity shall be 
permitted to use the cash receipts and disbursements method of 
accounting if permitted to under regulations prescribed by the 
Secretary.
    ``(c) Change or Expansion of Business.--Subsection (a) shall cease 
to apply to a business entity that changes or expands its business such 
that under regulations prescribed by the Secretary it is no longer 
eligible to use the cash receipts and disbursements method of 
accounting.
    ``(d) Regulations.--
            ``(1) Use of cash receipts and disbursements method.--The 
        Secretary shall prescribe regulations defining which business 
        entities may use the cash receipts and disbursements method of 
        accounting. In general, those regulations shall be consistent 
        with the rules under sections 447 and 448 of the Internal 
        Revenue Code of 1986, except that all corporations shall be 
        treated as C corporations were treated under those sections. 
        The regulations shall not require a business entity described 
        in subsection (a) to convert to the accrual method prior to 
        January 1, 1997.
            ``(2) Change in accounting method.--The Secretary shall 
        prescribe regulations to prevent double counting of taxable 
        receipts and deductible expenses in the case of a change in 
        accounting method.

``SEC. 222. TAXABLE YEAR.

    ``(a) Computation of Gross Profits.--Gross profits shall be 
computed on the basis of a business entity's taxable year.
    ``(b) Taxable Year.--`Taxable year' means--
            ``(1) the taxpayer's annual accounting period, if it is a 
        calendar year or a fiscal year;
            ``(2) the calendar year, if subsection (g) applies; or
            ``(3) the period for which the return is made if the return 
        is made for a period of less than 12 months.
    ``(c) Annual Accounting Period.--`Annual accounting period' means 
the annual period on the basis of which the business entity regularly 
keeps its books.
    ``(d) Calendar Year.--`Calendar year' means a period of 12 months 
ending on December 31.
    ``(e) Fiscal Year.--`Fiscal year' means a period of 12 months 
ending on the last day of any month other than December. In the case of 
any business entity that has made the election provided by subsection 
(f), the term means the annual period (varying from 52 to 53 weeks) so 
elected.
    ``(f) Election of 52-53 Week Year.--
            ``(1) General rule.--A business entity which, in keeping 
        its books, regularly computes its income or profits on a basis 
        of an annual period which varies from 52 to 53 weeks and ends 
        always on the same day of the week and ends always--
                    ``(A) on whatever date such same day of the week 
                last occurs in a calendar month, or
                    ``(B) on whatever date such same day of the week 
                falls which is nearest to the last day of a calendar 
                month, may elect to compute its gross profits on the 
                basis of such annual period.
            ``(2) Regulations.--The Secretary shall prescribe such 
        regulations as he deems necessary for the application of this 
        subsection, including regulations relating to the application 
        of effective dates to taxpayers using a 52-53 week year.
    ``(g) Calendar Year Required.--
            ``(1) No accounting period.--A business entity's taxable 
        year shall be the calendar year if the business entity does not 
        have an annual accounting period or has an annual accounting 
        period that does not qualify as a fiscal year.
            ``(2) New business entity.--The taxable year of a business 
        entity that begins business activity after December 31, 1995, 
        shall be the calendar year (or a 52-53 week fiscal year ending 
        in December) unless the business entity can demonstrate a 
        business reason for selecting an accounting period other than 
        the calendar year.
    ``(h) Transition Rule for Business Entities With a Fiscal Year.--
            ``(1) In general.--A business entity with a taxable year 
        that is not the calendar year shall have a short taxable year 
        ending on December 31, 1995, and a subsequent taxable year 
beginning on January 1, 1996, and ending on the day immediately 
preceding the beginning of the business entity's next fiscal year.
            ``(2) Business entities with 52-53 week year ending in 
        december.--
                    ``(A) In general.--If a business entity has a 52-53 
                week taxable year (under the Internal Revenue Code of 
                1986) that ends in December 1995, it may elect to begin 
                its first taxable year for the business tax on the 
                first day immediately following the last day of such 
                taxable year.
                    ``(B) No election.--If a business entity that has a 
                52-53 week taxable year that ends in December 1995, 
                does not make the election under subparagraph (A) or is 
                prohibited from making such election by subparagraph 
                (C), the business entity's taxable year under the 
                Internal Revenue Code of 1986 that would end in 
                December 1995 shall end on December 31, 1995.
                    ``(C) Anti-abuse rule.--Subparagraph (A) shall not 
                apply to any taxpayer that enters into business 
                transactions in 1995 following the scheduled end of its 
                fiscal year with business entities that are not subject 
                to the business tax at the time of such transactions if 
                such transactions deviate from the normal course of 
                business in order to achieve some tax benefit.

``SEC. 223. LONG-TERM CONTRACTS.

    ``(a) In General.--In the case of a long-term contract--
            ``(1) Contractor expenses.--The contractor shall be 
        entitled to deduct its business purchases when paid or 
        incurred.
            ``(2) Contractor receipts.--The contractor shall recognize 
        taxable receipts--
                    ``(A) in the case of a project in which the 
                acquirer has no ownership interest in the project until 
                delivery--
                            ``(i) upon delivery of the project, in the 
                        case of an accrual basis contractor, or
                            ``(ii) upon the later of delivery of the 
                        project or the receipt of payment, in the case 
                        of a cash-basis contractor,
                    ``(B) in the case of a project in which the 
                acquirer obtains an ownership interest as the project 
                is constructed--
                            ``(i) when the contractor has the right to 
                        payments, in the case of an accrual basis 
                        contractor, or
                            ``(ii) upon the later of when the 
                        contractor receives the cash or has the right 
                        to payments, in the case of a cash basis 
                        contractor.
            ``(3) Acquirer expenses.--The acquirer that is a business 
        entity shall be entitled to deduct its costs of the business 
        purchase--
                    ``(A) in the case of a cash-basis acquirer, at such 
                time as a cash basis contractor would be required to 
                treat the amounts paid as taxable receipts, or
                    ``(B) in the case of an accrual-basis acquirer, at 
                such time as an accrual basis contractor would be 
                required to treat the amounts paid or due as taxable 
                receipts.
    ``(b) Right to Payments.--
            ``(1) In general.--A contractor shall be treated as having 
        a right to payments with respect to a project at any time to 
        the extent that the contractor would not be required to return 
        payments received (or would be entitled to collect payments not 
        yet received) if the project were terminated at such time by 
        the contractor.
            ``(2) Contractual provisions.--If a long-term contract 
        includes a procedure for paying the contractor as work is 
        completed (for example, by reason of a draw down from a trust 
        account), the contractual provisions shall generally govern 
        when a contractor has a right to payment.
            ``(3) Percentage completion method of accounting.--If a 
        long-term contract does not include a mechanism for paying the 
        contractor as work is completed, the percentage-of-completion 
        method of accounting shall be used to determine the timing of 
        taxable receipts of the contractor and business purchases of 
        the acquirer.
    ``(c) Long-Term Contract.--
            ``(1) In general.--`Long-term contract' means--
                    ``(A) any contract that covers service or 
                production through parts of 2 different calendar years 
                if the contract includes a formal deposit and draw-down 
                mechanism, and
                    ``(B) any contract for the manufacture, building, 
                installation, or construction of property if such 
                contract is not completed within the taxable year of 
the contractor in which such contract is entered into.
            ``(2) Exception.--A contract for the manufacture of 
        property shall not be treated as a long-term contract unless 
        such contract involves the manufacture of--
                    ``(A) any unique item of a type which is not 
                normally included in the finished goods inventory of 
                the taxpayer, or
                    ``(B) any item which normally requires more than 12 
                calendar months to complete.
    ``(d) Consistency.--The Secretary may require business entities to 
file statements containing such information with respect to long-term 
contracts as the Secretary may prescribe to ensure consistency in 
reporting.
    ``(e) Foreign Contracts.--This section shall not be construed to 
permit a deduction for a business purchase for the cost of property 
produced outside the United States pursuant to a long-term contract at 
any time prior to the import of such property into the United States.

``SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS.

    ``(a) Receipt of Price Adjustment.--In the case of a post-sale 
price adjustment attributable to a business purchase which was taken 
into account in computing gross profits for a prior taxable year, the 
amount of such adjustment shall be treated as a reduction or increase, 
as the case may be, in the cost of business purchases for the taxable 
year in which the adjustment is made or incurred.
    ``(b) Issuance of Price Adjustment.--In the case of a post-sale 
price adjustment attributable to a sale the receipts from which were 
taken into account in determining taxable receipts for a prior taxable 
year, the amount of such adjustment shall be treated as a reduction or 
increase, as the case may be, in taxable receipts for the taxable year 
in which the adjustment is made or incurred.
    ``(c) Post-Sale Price Adjustment.--`Post-sale price adjustment' 
means a refund, rebate, or other price allowance attributable to a sale 
of property or services or an upward adjustment in price that was not 
previously taken into account under the business entity's method of 
accounting.

``SEC. 225. BAD DEBTS.

    ``(a) Seller.--If an amount owed to an accrual basis business 
entity for property or services sold--
            ``(1) was taken into account as a taxable receipt in a 
        prior taxable year, and
            ``(2) becomes wholly or partially uncollectible during the 
        taxable year,
then the seller shall treat the amount as a reduction in taxable 
receipts for the taxable year in which it becomes wholly or partially 
uncollectible.
    ``(b) Notice Requirement.--No reduction shall be allowed under 
subsection (a) unless the seller notifies the purchaser of the amount 
which the seller has treated as wholly or partially uncollectible.
    ``(c) Subsequent Collection.--If an amount which was treated as 
uncollectible under subsection (a) is subsequently collected, it shall 
be treated as a taxable receipt when collected.
    ``(d) Purchaser.--If a purchaser receives notice under subsection 
(b) from a seller and the purchaser has treated the amount labeled 
uncollectible as a business purchase in a prior taxable year, then the 
purchaser shall treat such amount as a reduction in the cost of 
business purchases in the taxable year to which the notice relates. If 
the purchaser subsequently repays such amount, the repayment shall 
constitute the cost of a business purchase.

``SEC. 226. TRANSITION RULES.

    ``(a) No Double Deductions.--A business entity shall not be 
entitled to treat as a `cost of business purchase' any amount that the 
business entity deducted in computing taxable income under the income 
tax in effect prior to the effective date of the business tax.
    ``(b) No Double Inclusion.--A business entity shall not be required 
to include in taxable receipts any receipt that the business entity 
took into account in computing taxable income under the income tax in 
effect prior to the effect date of the business tax.
    ``(c) No Loss of Deduction.--An expense which--
            ``(1) a business entity would have been able to deduct as a 
        cost of a business purchase in an accounting period before the 
        effective date of the business tax if the business tax had been 
        in effect in such period, and
            ``(2) the business entity would have been able to deduct as 
        an expense in computing taxable income in a period after the 
        business tax is effective if the income tax had continued in 
        effect,
shall be treated as a cost of a business purchase incurred or paid at 
the time that it would have been paid or incurred under the income tax 
if the income tax had continued in effect. This subsection shall not 
apply to any amount which is to be taken into account under subchapter 
N (relating to amortization of transition basis, and inventory costs), 
any amounts which would have been deducted under the income tax through 
loss carryover deductions, or any deductions deferred by the uniform 
capitalization rules under section 263A of the Internal Revenue Code of 
1986.
    ``(d) All Taxable Receipts Taxed.--A receipt which--
            ``(1) a business entity would have been required to treat 
        as a taxable receipt in an accounting period before the 
        effective date of the business tax if the business tax had been 
        in effect in such period, and
            ``(2) the business entity would have been required to 
        include in gross income in a period after the business tax is 
        effective if the income tax had continued in effect,
shall be treated as a taxable receipt at the time that it would have 
been included in income if the income tax had continued in effect.

                ``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.

``SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR NONBUSINESS USE.

    ``(a) In General.--The acquisition of unimproved land shall not 
constitute a business purchase if the unimproved land is not acquired 
to be used in a business activity or if the land is acquired for--
            ``(1) speculation,
            ``(2) development (including subdivision),
            ``(3) temporary leasing or other use not commensurate with 
        the value of the land,
            ``(4) indefinite future use in a business activity, or
            ``(5) use in compensating employees.
    ``(b) Future Use in Business Activity.--Unimproved land will not be 
considered held for `indefinite future use in a business activity' if 
promptly upon acquisition, the purchaser or the lessee begins 
construction of improvements on the land (other than improvements, such 
as paving or sewage lines, intended for indefinite future development) 
that will be used in a business activity. Such improvement must be 
commensurate with the value of the land.
    ``(c) Unimproved Land.--`Unimproved land' means--
            ``(1) land with no buildings on it,
            ``(2) land with improvements if the value of the 
        improvements is relatively small in comparison to the value of 
        the land and it is anticipated that the improvements will be 
        demolished and not used, or
            ``(3) land in excess of the amount reasonably needed for 
        the buildings located on it.
    ``(d) Conversion to Business Use.--If the acquisition of land is 
not treated as a business purchase by reason of subsection (a) and the 
land is subsequently used in a manner for which it could have been 
treated as a business purchase, the cost of the land will be treated as 
a business purchase when the improvements on the land are placed in 
service (or in the case of construction for sale, substantially 
completed and advertised for sale).

``SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD FOR NONBUSINESS 
              USE.

    ``(a) Tax Basis.--A business entity shall have a tax basis in land 
equal to the cost of the land if such cost is not deductible by reason 
of section 30(a) and the land has not been converted to business use 
for purposes of section 230(d).
    ``(b) Taxable Receipts of a Land Sale.--The taxable receipts from 
the sale of land (or portion thereof) in which a business entity has a 
tax basis by reason of subsection (a) shall be the amount by which the 
proceeds exceed the basis of such land (or portion thereof).

``SEC. 232. CERTAIN RENTAL PROPERTY.

    ``(a) In General.--Except as provided in subsection (b), the 
activity of rental of real estate is a business activity to which the 
business tax applies.
    ``(b) Not Rental Property.--
            ``(1) In general.--If the owners of property use the 
        property for at least 14 days during the taxable year for a 
        nonbusiness purpose and rent the property for no more than 14 
        days during the taxable year, the property shall not be 
        considered rental property or used in the activity of rental of 
        real estate during the taxable year for purposes of the 
        business tax.
            ``(2) Nonbusiness use.--For purposes of this section, `use 
        for a nonbusiness purpose' means use other than--
                    ``(A) use for which fair rent is paid,
                    ``(B) use in connection with the preparation of the 
                property for rental, or
                    ``(C) use that serves a clear business purpose.
        Use during any part of a day shall constitute use for that day.
    ``(c) Rental Property Becomes Nonrental Property.--If property 
which is considered rental property for purposes of subsection (a) in 1 
taxable year ceases to be rental property (by reason of subsection (b)) 
in the following taxable year, the property (and any associated debt) 
shall be treated as distributed by the business entity to its owners. 
Section 211(a) shall apply to such distribution.

            ``Subchapter F--Insurance and Financial Products

        ``Sec. 235. General rules.
        ``Sec. 236. Fees for financial intermediation services.
        ``Sec. 237. Deductible insurance premiums.
        ``Sec. 238. Nondeductible insurance premiums.
        ``Sec. 239. Certain implicit fees for financial intermediation 
                            services.

``SEC. 235. GENERAL RULES.

    ``(a) Taxable Receipts.--Except in the case of a financial 
intermediation business, taxable receipts do not include financial 
receipts (as defined in section 203(e)(2)).
    ``(b) Business Purchases.--Except in the case of a financial 
intermediation business, business purchases do not include the cost of 
financial instruments (as defined in section 242(b)(3)) or payments for 
use of money or capital, other than fees for financial intermediation 
services.

``SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERVICES.

    ``(a) Business Purchases.--Business purchases include explicit fees 
and implicit fees for financial intermediation services (except to the 
extent that such fees are for services treated as performed outside the 
United States and not imported into the United States or for services 
treated as exported.).
    ``(b) Financial Intermediation Services.--The definition of 
`financial intermediation service' in section 241 applies for purposes 
of this section.
    ``(c) Explicit Fees.--
            ``(1) In general.--`Explicit fees for financial 
        intermediation services' means separately stated fees for 
        services provided by a business entity in the financial 
        intermediation business. Explicit fees do not include fees for 
        use of money or capital.
            ``(2) Examples.--Explicit fees for financial intermediation 
        services include (without limitation)--
                    ``(A) separately listed maintenance and service 
                charges of providers of financial intermediation 
                services,
                    ``(B) loan documentation fees,
                    ``(C) brokerage fees,
                    ``(D) loan origination fees,
                    ``(E) underwriting fees,
                    ``(F) trustees' fees, and
                    ``(G) fees for credit checks.
            ``(3) Exclusions.--Explicit fees for financial 
        intermediation services do not include prepaid interest and 
        other fees for use of money or capital even if such fees are 
        separately stated or are labeled as service fees.
    ``(d) Implicit Fees.--
            ``(1) Implicit fees attributable to borrowing.--
                    ``(A) In general.--Implicit fees attributable to 
                borrowing from banks and other financial institutions 
                shall include the portion of interest payments that the 
                Secretary designates as constituting service fees.
                    ``(B) Timing.--Implicit fees determined under this 
                paragraph shall not be deductible in any taxable year 
                prior to the taxable year in which the interest is 
                paid. If the amount of the interest to which implicit 
                fees relate was deducted as original issue discount 
                under the Internal Revenue Code of 1986, the implicit 
                fees with respect to such interest shall not constitute 
                a deductible business purchase.
                    ``(C) Designation by secretary.--
                            ``(i) Estimate of differential.--The 
                        Secretary shall estimate for each calendar year 
                        the difference between the cost of funds for 
                        banks and the rates of interest (including 
                        discount points) charged to the most credit-
                        worthy depositors of banks. The determinations 
                        shall be made separately for--
                                    ``(I) loans with terms of not more 
                                than 3 years,
                                    ``(II) loans with terms of over 3 
                                but not over 9 years, and
                                    ``(III) loans with terms of over 9 
                                years.
                            ``(ii) Designation of implicit fees.--The 
                        Secretary shall designate the differences 
                        determined under clause (i) as the portion of 
                        interest expense on loans from banks and other 
                        financial institutions that constitutes an 
                        implicit fee for term loans originated during 
                        the following calendar year for the respective 
                        periods listed in subclauses (I) through (III) 
                        of clause (i). The difference determined for 
                        loans described in subclause (I) of clause (i) 
                        shall apply to determine the implicit fee 
                        portion of interest on demand loans outstanding 
                        during the following calendar year.
                            ``(iii) Historical determination.--The 
                        Secretary shall make an historical 
                        determination in accordance with the principles 
                        of this subparagraph to designate the portion 
                        of interest on term loans made before January 
                        1, 1996, that will constitute implicit fees.
            ``(2) Implicit fees for other financial intermediation 
        activity.--Implicit fees for financial intermediation services 
        include the portion of the fees or other charges paid to a 
        provider of financial intermediation services (other than 
        lending) as such provider designates in accordance with section 
        39.

``SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS.

    ``(a) In General.--The cost of insurance premiums on business loss 
policies to the extent that such policies insure risks in the United 
States constitute costs of business purchases. Proceeds from such 
policies constitute taxable receipts.
    ``(b) Business Loss Policy.--A `business loss policy' is an 
insurance policy--
            ``(1) owned by a business entity,
            ``(2) the beneficiary of which is the business entity or 
        another business entity doing business with the owner of the 
        policy,
            ``(3) that has no inside buildup or other savings 
        component,
            ``(4) that covers losses on a loss incurred or claims made 
        basis during the term of the policy,
            ``(5) that has a term of not more than 2 years,
            ``(6) that is not a direct or indirect form of 
        compensation, and
            ``(7) that covers direct losses of the business, such as--
                    ``(A) damage to or theft of property used in the 
                business activity,
                    ``(B) tort claims against the business,
                    ``(C) loss of use of business premises or services,
                    ``(D) malpractice, or
                    ``(E) alleged or actual breach of fiduciary 
                obligations.

``SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS.

    ``(a) Nondeductibility.--The cost of insurance policies that are 
not business loss policy policies are not deductible costs of business 
purchases.
    ``(b) Proceeds of Nondeductible Policies.--Insurance proceeds from 
policies described in subsection (a) do not constitute taxable 
receipts.
    ``(c) Application of This Section to Certain Insurance.--This 
section shall apply to life insurance policies.

``SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL INTERMEDIATION 
              SERVICES.

    ``(a) Deductibility of Fees.--If a financial intermediation 
business (as defined in section 241(b)) elects to determine implicit 
fees for financial intermediation services pursuant to this section and 
notify its business customers of their share of the implicit fees in 
accordance with this section, a business entity which receives such 
notice may treat the amount reported in the notice as an implicit fee 
for financial intermediation services in the calendar year to which 
such notice relates.
    ``(b) Allocation and Reporting.--
            ``(1) In general.--A financial intermediation business 
        may--
                    ``(A) allocate fees received for services for which 
                no separately stated fees (or implicit fees for 
                borrowing determined under section 236(d)(1)) are 
                charged among recipients of such services on a 
                reasonable and consistent basis, and
                    ``(B) report to each recipient not later than 
                February 15th of each year the amount so allocated to 
                it with respect to the immediately preceding calendar 
                year.
            ``(2) Maximum fees allocated.--The maximum amount that may 
        be allocated by a financial intermediation business for a 
        calendar year is the excess of--
                    ``(A) the gross profits of the financial 
                intermediation business for the calendar year (as 
                reasonably estimated by the financial intermediation 
                business), over
                    ``(B) the explicit fees for financial 
                intermediation services received by the financial 
                intermediation business.
            ``(3) Reasonable allocation.--An allocation will not be 
        considered reasonable unless it takes into account and 
        allocates fees to--
                    ``(A) both services provided to business entities 
                and services provided to individuals (other than in a 
                business capacity), and
                    ``(B) both persons who receive money from the 
                financial intermediation business and persons who pay 
                money to the financial intermediation business (even 
                though amounts allocated to the former do not 
                constitute implicit fees).
            ``(4) Regulations.--The Secretary shall prescribe 
        regulations relating to the allocations under this subsection, 
        including regulations addressing--
                    ``(A) rules for timing of deductions of implicit 
                fees paid by fiscal year recipients,
                    ``(B) subsequent year adjustments if a financial 
                intermediation business allocates too much in a 
                calendar year,
                    ``(C) rules for advance approval from the Secretary 
                for allocation procedures, and
                    ``(D) safe-harbor alternatives to the allocation 
                procedures described in this subsection.
    ``(c) Not Applicable to Lending Services.--This section shall not 
apply to lending services.

  ``Subchapter G--Financial Intermediation 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.

``SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL INTERMEDIATION 
              BUSINESS.

    ``(a) Financial Intermediation Business.--The providing of 
financial intermediation services shall be considered a business 
activity. The gross profit of a business entity providing financial 
intermediation services shall be determined by taking into account the 
rules of this subchapter.
    ``(b) Separate Business Activity.--The provision of financial 
intermediation services for unrelated persons shall be considered a 
separate business activity and a business shall be considered a 
separate entity with respect to such activity. An entity engaging in 
such business is referred to in this chapter as a `financial 
intermediation business'.
    ``(c) Internal Financial Intermediation by a Business.--Section 246 
shall apply to a business that provides financial intermediation 
services for itself and related parties but generally does not provide 
such services for unrelated parties.
    ``(d) Definitions.--
            ``(1) Financial intermediation services.--`Financial 
        intermediation services' include--
                    ``(A) lending services,
                    ``(B) insurance services,
                    ``(C) market-making and dealer services, and
                    ``(D) any other service provided as business 
                activity in which a person acts as an intermediary in--
                            ``(i) the transfer of property, services, 
                        or financial assets, liabilities, risks or 
                        instruments (or income or expense derived 
                        therefrom) between 2 or more persons, or
                            ``(ii) the pooling of economic risk among 
                        other persons
                and derives all or a portion of such person's gross 
                receipts from streams of income or expense, discounts, 
                or other financial flows associated with the matter 
                with respect to which such person is acting as an 
                intermediary.
            ``(2) Lending services.--`Lending services' means the 
        regular making of loans and providing credit to, or taking 
        deposits from customers, but does not include an installment or 
        delayed payment arrangement provided by a seller of property or 
        services under which additional charges or fees are imposed by 
        the seller for the late payment.
            ``(3) Market-making or dealer services.--`Market-making or 
        dealer services' means services provided by a person who--
                    ``(A) regularly purchases financial instruments 
                from or sells financial instruments to customers in the 
                ordinary course of a trade or business, or
                    ``(B) regularly offers to enter into, assume, 
                offset, assign, or otherwise terminate positions in 
                financial instruments with customers in the ordinary 
                course of a trade or business.

``SEC. 242. GENERAL RULE FOR TAXATION.

    ``(a) In General.--In the case of a financial intermediation 
business, gross profits shall be computed by--
            ``(1) substituting financial receipts for taxable receipts, 
        and
            ``(2) including financial expenses as business purchases.
    ``(b) Definitions.--
            ``(1) Financial receipts.--`Financial receipts' means all 
        receipts other than amounts received as contributions to 
        capital.
            ``(2) Financial expenses.--`Financial expenses' include--
                    ``(A) payments for principal and interest that is 
                properly allocable to the provision of financial 
                intermediation services,
                    ``(B) the cost of and payments under financial 
                instruments (other than financial instruments in the 
                person subject to the tax imposed under this chapter 
                and any person related to such person),
                    ``(C) claims and cash surrender values paid in 
                connection with insurance or reinsurance services, and
                    ``(D) amounts paid for reinsurance.
            ``(3) Financial instrument.--`Financial instrument' means 
        any--
                    ``(A) share of stock in a corporation,
                    ``(B) equity ownership in any widely held or 
                publicly traded partnership, trust, or other business 
                entity,
                    ``(C) note, bond, debenture, or other evidence of 
                indebtedness,
                    ``(D) interest rate, currency, or equity notional 
                principal contract,
                    ``(E) evidence or interest in, or a derivative 
                financial instrument in, any financial instrument 
                described in subparagraph (A), (B), (C), or (D), or any 
                currency, including any option, forward contract, short 
                position, and any similar financial instrument in such 
                a financial instrument or currency, and
                    ``(F) a position which--
                            ``(i) is not a financial instrument 
                        described in subparagraph (A), (B), (C), (D) or 
                        (E),
                            ``(ii) is a hedge with respect to such a 
                        financial instrument, and
                            ``(iii) is clearly identified in the 
                        dealer's records as being described in this 
                        subparagraph before the close of the day on 
                        which it was acquired or entered into.
    ``(c) International Matters.--For purposes of this section in the 
case of a financial intermediation business with activity in and 
outside the United States--
            ``(1) Inclusion regardless of source.--
                    ``(A) Financial receipts shall be determined 
                without regard to whether such receipts are received 
                for property or service provided in or outside the 
                United States, except that financial receipts do not 
                include amounts that--
                            ``(i) are not taxable receipts (as 
                        determined without regard to this section), but
                            ``(ii) would have been taxable receipts (as 
                        determined without regard to this section) if 
                        such receipts had been received for services or 
                        property in the United States.
                    ``(B) Financial expenses shall be determined 
                without regard to whether such expenses are received 
                for property or services acquired in or outside the 
                United States.
            ``(2) Allocation.--Under regulations prescribed by the 
        Secretary, gross profits (as determined without regard to this 
        paragraph) shall be reduced by the amount of financial 
        intermediation gross profit attributable to financial 
        intermediation activity provided outside the United States.
            ``(3) Gross profit attributable to financial intermediation 
        activity.--`Gross profits attributable to financial 
        intermediation activity' means the excess of--
                    ``(A) gross profits as determined under this 
                section (but without regard to paragraph (2)), over
                    ``(B) gross profits as determined without regard to 
                this subchapter.

``SEC. 243. SPECIAL RULES FOR BANKS.

    ``(a) In General.--In the case of a bank, gross profits shall be 
determined in accordance with section 242, except that--
            ``(1) Financial receipts.--Financial receipts shall include 
        only--
                    ``(A) taxable receipts (as determined without 
                regard to this subchapter),
                    ``(B) interest on loans made or acquired by the 
                bank,
                    ``(C) gain on the sale of loans,
                    ``(D) discount points received, and
                    ``(E) any explicit fees for financial or fiduciary 
                services not included in subparagraphs (A) through (E).
            ``(2) Financial expenses.--Financial expenses shall include 
        only--
                    ``(A) interest paid to depositors and on other 
                funds borrowed by the bank, and
                    ``(B) reasonable additions to reserves for bad 
                debts.
            ``(3) Foreclosure property.--Gross profits shall properly 
        take into account proceeds from the operation or sale of 
        foreclosure property.
    ``(b) Bank.--
            ``(1) In general.--`Bank' means a bank or trust company 
        incorporated and doing business under the laws of the United 
        States, the District of Columbia, or any State, a substantial 
        part of the business of which consists of receiving deposits 
        and making loans and discounts, or of exercising fiduciary 
        powers similar to those exercised by national banks under the 
        authority of the Comptroller of the Currency, and which is 
        subject by law to supervision and examination by State or 
        Federal authority having supervision over banking institutions 
        or credit unions. Such term includes domestic building and loan 
        associations and credit unions.
            ``(2) Other activities.--If a bank is engaged in 
        significant amounts of activities other than those described in 
        paragraph (1), the bank shall be considered as a separate 
        business entity with respect to such other activity.

``SEC. 244. INSURANCE COMPANIES.

    ``(a) In General.--In the case of companies providing insurance 
services, gross profits shall be determined in accordance with section 
242, except--
            ``(1) subsection (c) of section 242 (relating to 
        international operations) shall not apply,
            ``(2) the rules of subchapter J (sourcing rules) shall 
        apply to determine financial receipts and financial expenses.
    ``(b) Result Inconsistent With Statutory Intent.--If an insurance 
company determines that the application of subsection (a) produces 
results inconsistent with the territorial approach of the business tax, 
it may apply to the Secretary for permission to apply section 242(c) in 
lieu of subsection (a).

``SEC. 245. FINANCIAL PASS-THRU ENTITIES.

    ``(a) In General.--In the case of a financial pass-thru entity, 
gross profits shall be determined in accordance with section 242, 
except--
            ``(1) financial receipts shall include contributions to 
        capital,
            ``(2) financial expenses shall include--
                    ``(A) distributions to persons holding interests in 
                the pass-thru entity, and
                    ``(B) investments in related entities (including 
                wholly owned entities) engaging in real estate 
                investment.
    ``(b) Pass-Thru Entity.--
            ``(1) In general.--`Pass-thru entity' means a business 
        entity that is intended to serve as a conduit. The Secretary 
        shall prescribe regulations defining pass-thru entity. Such 
        term shall include--
                    ``(A) entities that would qualify as regulated 
                investment companies under the Internal Revenue Code of 
                1986,
                    ``(B) entities that would qualify as real estate 
                investment trusts under the Internal Revenue Code of 
                1986,
                    ``(C) entities that would qualify as REMICs under 
                the Internal Revenue Code of 1986, and
                    ``(D) partnerships whose purposes are to invest the 
                funds of the partners in financial instruments, 
                distribute or reinvest the income from such 
                investments, and distribute or reinvest the proceeds 
                from the sale of such instruments.
            ``(2) Engagement in business activity.--An entity will not 
        qualify as a pass-thru entity if it engages in more than an 
        insubstantial amount of business activity (other than investing 
        in and selling financial instruments). The preceding sentence 
        will not apply if the business entity treats the business 
        activity as engaged in by a separate business entity 
        (separately subject to tax under this chapter).

``SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSINESSES.

    ``(a) In General.--If a business entity that is not regularly in 
the business of providing financial intermediation services to 
unrelated parties engages in significant financial intermediation 
activity, its gross profits shall be increased by its gross profits 
from financial intermediation activity (determined as if such activity 
were an activity of a pass-thru entity that paid all costs of such 
financial intermediation activity including--
            ``(1) compensation for persons engaging in such activity,
            ``(2) equipment involved in such activity, and
            ``(3) office space for persons involved in such activity).
    ``(b) Proxy.--A business entity to which subsection (a) applies 
will be treated as satisfying the requirements of that subsection if it 
increases its gross receipts by the portion of employee compensation 
properly allocable to the provision of financial intermediation 
services.
    ``(c) Significant Financial Intermediation.--A business will be 
considered as engaging in substantial financial intermediation if--
            ``(1) more than 5 percent of the compensation paid by the 
        business to its employees is for employees whose primary 
        activity is the management of the business's investments in 
        financial instruments, or
            ``(2) at all times during the taxable year and the 
        immediately preceding full taxable year, more than 10 percent 
        of its assets are financial instruments other than--
                    ``(A) equity interests in business entities in 
                which it holds more than 50 percent in value of the 
                outstanding equity,
                    ``(B) equity interests in joint ventures in which 
                the company is actively participating,
                    ``(C) purchase money loans to its customers, and
                    ``(D) business loans and equity investments that 
                serve a direct business purpose.

                ``Subchapter H--Tax-Exempt Organizations

        ``Sec. 251. Exemption for governmental entities.
        ``Sec. 252. Taxable activity of governmental entities.
        ``Sec. 253. Tax-exempt organizations.
        ``Sec. 254. Special rules for (c)(3) organizations.
        ``Sec. 255. Tax on unrelated business activity.
        ``Sec. 256. Unrelated business activity.

``SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES.

    ``(a) States.--Except as provided in section 252, a State, 
political subdivision thereof and the District of Columbia shall be 
exempt from taxation under this chapter on any gross profits derived 
from the exercise of any essential governmental function.
    ``(b) Possessions.--The government of any possession of the United 
States shall be exempt from taxation under this chapter on any gross 
profits earned by the possession.

``SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTITIES.

    ``(a) Certain Activities Taxable.--A governmental entity shall be 
considered a business and subject to tax on any business activity of a 
type frequently provided by business entities subject to tax under this 
chapter.
    ``(b) Certain Activities Treated as Essential Government 
Functions.--Subsection (a) shall not apply to the following activities, 
which shall be treated as essential government functions:
            ``(1) Provision of mass transportation services.
            ``(2) Provision of public utility services.

``SEC. 253. TAX-EXEMPT ORGANIZATIONS.

    ``(a) Exemption From Taxation.--An organization described in 
subsection (c) or (d) shall be exempt from taxation under this chapter.
    ``(b) Tax on Unrelated Business Activity.--An organization exempt 
from taxation under subsection (a) shall be subject to tax to the 
extent provided in sections 55 and 56, but shall be considered a tax-
exempt organization for purposes of any law that refers to tax-exempt 
organizations.
    ``(c) List of Exempt Organizations.--The following organizations 
are referred to in subsection (a):
            ``(1) Instrumentality of the united states.--Any 
        corporation organized under Act of Congress which is an 
        instrumentality of the United States but only if such 
        corporation--
                    ``(A) is exempt from Federal income taxes--
                            ``(i) under such Act as amended and 
                        supplemented before July 18, 1984, or
                            ``(ii) under this title without regard to 
                        any provision of law which is not contained in 
                        this title and which is not contained in a 
                        revenue Act, or
                    ``(B) is described in subsection (g).
            ``(2) Title holding companies.--Corporations organized for 
        the exclusive purpose of holding title to property, collecting 
        income therefrom, and turning over the entire amount thereof, 
        less expenses, to an organization which itself is exempt under 
        this section. Rules similar to the rules of subparagraph (G) of 
        paragraph (5) shall apply for purposes of this paragraph.
            ``(3) Charitable, religious and educational 
        organizations.--Corporations, and any community chest, fund, or 
        foundation, organized and operated exclusively for religious, 
        charitable, scientific, literary, or educational purposes, or 
        for the prevention of cruelty to children or animals, no part 
        of the net earnings of which inures to the benefit of any 
        private shareholder or individual, no substantial part of the 
        activities of which is carrying on propaganda, or otherwise 
        attempting, to influence legislation (except as otherwise 
        provided in subsection (f)), and which does not participate in, 
        or intervene in (including the publishing or distributing of 
        statements), any political campaign on behalf of (or in 
        opposition to) any candidate for public office.
            ``(4) Qualified benefit plan or trust.--A corporation, 
        trust, or other organization described in--
                    ``(A) section 401(a),
                    ``(B) any of the following paragraphs of section 
                501(c) of the Internal Revenue Code of 1986--
                            ``(i) paragraph (9) (relating to voluntary 
                        employees' beneficiary associations),
                            ``(ii) paragraph (11) (relating to 
                        teachers' retirement funds),
                            ``(iii) paragraph (17) (relating to 
                        supplemental unemployment compensation 
                        benefits),
                            ``(iv) paragraph (18) (certain 
                        grandfathered pension trusts),
                            ``(v) paragraph (21) (relating to Black 
                        Lung Act trusts),
                            ``(vi) paragraph (22) (relating to certain 
                        multiemployer trusts), or
                            ``(vii) paragraph (24) (relating to certain 
                        grandfathered ERISA trusts).
            ``(5) Real estate holding companies.--
                    ``(A) Any corporation or trust which--
                            ``(i) has no more than 35 shareholders or 
                        beneficiaries,
                            ``(ii) has only 1 class of stock or 
                        beneficial interest, and
                            ``(iii) is organized for the exclusive 
                        purposes of--
                                    ``(I) acquiring real property and 
                                holding title to, and collecting income 
                                from, such property, and
                                    ``(II) remitting the entire amount 
                                of income from such property (less 
                                expenses) to 1 or more organizations 
                                described in paragraph (1), (3) or (4) 
                                which are shareholders of such 
                                corporation or beneficiaries of such 
                                trust.
        For purposes of clause (iii), the term `real property' shall 
        not include any interest as a tenant in common (or similar 
        interest) and shall not include any indirect interest.
                    ``(B) A corporation or trust shall in no event be 
                treated as described in subparagraph (A) unless such 
                corporation or trust permits its shareholders or 
                beneficiaries--
                            ``(i) to dismiss the corporation's or 
                        trust's investment adviser, following 
                        reasonable notice, upon a vote of the 
                        shareholders or beneficiaries holding a 
                        majority of interest in the corporation or 
                        trust, and
                            ``(ii) to terminate their interest in the 
                        corporation or trust by either, or both, of the 
                        following alternatives, as determined by the 
                        corporation or trust:
                                    ``(I) by selling or exchanging 
                                their stock in the corporation or 
                                interest in the trust (subject to any 
                                Federal or State securities law) to any 
                                organization described in paragraph 
                                (1), (3) or (4) so long as the sale or 
                                exchange does not increase the number 
                                of shareholders or beneficiaries in 
                                such corporation or trust above 35, or
                                    ``(II) by having their stock or 
                                interest redeemed by the corporation or 
                                trust after the shareholder or 
                                beneficiary has provided 90 days notice 
                                to such corporation or trust.
                    ``(C) For purposes of subparagraph (A), the term 
                `real property' includes any personal property which is 
                leased under, or in connection with, a lease of real 
                property, but only if the rent attributable to such 
                personal property for the taxable year does not exceed 
                15 percent of the total rent for the taxable year 
                attributable to both the real and personal property 
                leased under, or in connection with, such lease.
                    ``(D) An organization shall not be treated as 
                failing to be described in this paragraph merely by 
                reason of the receipt of any otherwise disqualifying 
                income which is incidentally derived from the holding 
                of real property. If the amount of otherwise 
                disqualifying income exceeds 10 percent of the 
                organization's gross income for the taxable year, it 
                shall not be treated as `incidentally derived' unless 
                the organization establishes to the satisfaction of the 
                Secretary that the receipt of such disqualifying income 
                in excess of such limitation was inadvertent and 
                reasonable steps are being taken to correct the 
                circumstances giving rise to such income.
            ``(6) Religious and apostolic organizations.--Religious or 
        apostolic associations or corporations, if such associations or 
        corporations have a common treasury or community treasury, even 
        if such associations or corporations engage in business for the 
        common benefit of the members, but only if such activity is 
        treated as unrelated business activity.
            ``(7) Cemetery companies.--Cemetery companies owned and 
        operated exclusively for the benefit of their members or which 
        are not operated for profit; and any corporation chartered 
        solely for the purpose of the disposal of bodies by burial or 
        cremation which is not permitted by its charter to engage in 
        any business not necessarily incident to that purpose, no part 
        of the net earnings of which inures to the benefit of any 
        private shareholder or individual.
    ``(d) Cooperative Hospital Service Organizations.--For purposes of 
this chapter, an organization shall be treated as an organization 
organized and operated exclusively for charitable purposes, if--
            ``(1) such organization is organized and operated solely--
                    ``(A) to perform, on a centralized basis, 1 or more 
                of the following services which, if performed on its 
                own behalf by a hospital which is an organization 
                described in subsection (c)(3) and exempt from taxation 
                under subsection (a), would constitute activities in 
                exercising or performing the purpose or function 
                constituting the basis for its exemption: data 
                processing, purchasing (including the purchasing of 
                insurance on a group basis), warehousing, billing and 
                collection, food, clinical, industrial engineering, 
                laboratory, printing, communications, record center, 
                and personnel (including selection, testing, training, 
                and education of personnel) services; and
                    ``(B) to perform such services solely for 2 or more 
                hospitals each of which is--
                            ``(i) an organization described in 
                        subsection (c)(3) which is exempt from taxation 
                        under subsection (a),
                            ``(ii) a constituent part of an 
                        organization described in subsection (c)(3) 
                        which is exempt from taxation under subsection 
                        (a) and which, if organized and operated as a 
                        separate entity, would constitute an 
                        organization described in subsection (c)(3), or
                            ``(iii) owned and operated by the United 
                        States, a State, the District of Columbia, or a 
                        possession of the United States, or a political 
                        subdivision or an agency or instrumentality of 
                        any of the foregoing;
            ``(2) such organization is organized and operated on a 
        cooperative basis and allocates or pays, within 8\1/2\ months 
        after the close of its taxable year, all net earnings to 
        patrons on the basis of services performed for them; and
            ``(3) if such organization has capital stock, all of such 
        stock outstanding is owned by its patrons.
For purposes of this title, any organization which, by reason of the 
preceding sentence, is an organization described in subsection (c)(3) 
and exempt from taxation under subsection (a), shall be treated as a 
hospital and as an organization referred to in section 
101(b)(1)(A)(iii).
    ``(e) Cooperative Service Organizations of Operating Educational 
Organizations.--For purposes of this chapter, if an organization is--
            ``(1) organized and operated solely to hold, commingle, and 
        collectively invest and reinvest (including arranging for and 
        supervising the performance by independent contractors of 
        investment services related thereto) in stocks and securities, 
        the moneys contributed thereto by each of the members of such 
        organization, and to collect income therefrom and turn over the 
        entire amount thereof, less expenses, to such members,
            ``(2) organized and controlled by 1 or more such members, 
        and
            ``(3) comprised solely of members that are organizations 
        described in clause (ii) or (iv) of section 101(b)(1)(A)--
                    ``(A) which are exempt from taxation under 
                subsection (a), or
                    ``(B) the gross profits of which are excluded from 
                taxation under section 251(a), then such organization 
                shall be treated as an organization organized and 
                operated exclusively for charitable purposes.
    ``(f) Expenditures by Public Charities To Influence Legislation.--
            ``(1) General rule.--In the case of an organization to 
        which this subsection applies, exemption from taxation under 
        subsection (a) shall be denied because a substantial part of 
        the activities of such organization consists of carrying on 
        propaganda, or otherwise attempting, to influence legislation, 
        but only if such organization normally--
                    ``(A) makes lobbying expenditures in excess of the 
                lobbying ceiling amount for such organization for each 
                taxable year, or
                    ``(B) makes grass roots expenditures in excess of 
                the grass roots ceiling amount for such organization 
                for each taxable year.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Lobbying expenditures.--`Lobbying 
                expenditures' means expenditures for the purpose of 
                influencing legislation (as defined in section 
                4911(d)).
                    ``(B) Lobbying ceiling amount.--The lobbying 
                ceiling amount for any organization for any taxable 
                year is 150 percent of the lobbying nontaxable amount 
                for such organization for such taxable year, determined 
                under section 4911.
                    ``(C) Grass roots expenditures.--`Grass roots 
                expenditures' means expenditures for the purpose of 
                influencing legislation (as defined in section 4911(d) 
                without regard to paragraph (1)(B) thereof).
                    ``(D) Grass roots ceiling amount.--The grass roots 
                ceiling amount for any organization for any taxable 
                year is 150 percent of the grass roots nontaxable 
                amount for such organization for such taxable year, 
                determined under section 4911.
            ``(3) Organizations to which this subsection applies.--This 
        subsection shall apply to any organization which has elected 
        (in such manner and at such time as the Secretary may 
        prescribe) to have the provisions of this subsection apply to 
        such organization and which, for the taxable year which 
        includes the date the election is made, is described in 
        subsection (c)(3) and is not described in paragraph (4) and is 
        not a private foundation.
            ``(4) Disqualified organizations.--This subsection does not 
        apply to--
                    ``(A) a church,
                    ``(B) an integrated auxiliary of a church or of a 
                convention or association of churches, or
                    ``(C) a member of an affiliated group of 
                organizations (within the meaning of section 
                4911(f)(2)) if 1 or more members of such group is 
                described in subparagraph (A) or (B).
            ``(5) Years for which election is effective.--An election 
        by an organization under this subsection shall be effective for 
        all taxable years of such organization which--
                    ``(A) end after the date the election is made, and
                    ``(B) begin before the date the election is revoked 
                by such organization (under regulations prescribed by 
                the Secretary).
            ``(6) No effect on certain organizations.--With respect to 
        any organization for a taxable year for which--
                    ``(A) such organization is described in paragraph 
                (5), or
                    ``(B) an election under this subsection is not in 
                effect for such organization, nothing in this 
                subsection or in section 4911 shall be construed to 
                affect the interpretation of the phrase, `no 
                substantial part of the activities of which is carrying 
                on propaganda, or otherwise attempting, to influence 
                legislation,' under subsection (c)(3).
    ``(g) Government Corporations Exempt Under Subsection (c)(1).--For 
purposes of subsection (c)(1), the following organizations are 
described in this subsection:
            ``(1) The Central Liquidity Facility established under 
        title III of the Federal Credit Union Act (12 U.S.C. 1795 et 
        seq.).
            ``(2) The Resolution Trust Corporation established under 
        section 21A of the Federal Home Loan Bank Act.
            ``(3) The Resolution Funding Corporation established under 
        section 21B of the Federal Home Loan Bank Act.
    ``(h) Certain Educational Organizations.--An organization shall not 
be eligible for exemption as an educational organization under 
subsection (c)(3) if a substantial amount of its activities and funds 
are devoted to--
            ``(1) conducting seminars and other similar programs,
            ``(2) conducting research to educate Congress or the 
        general public about public policy issues,
            ``(3) producing books and pamphlets, or
            ``(4) a combination of the foregoing.

``SEC. 254. SPECIAL RULES FOR (C)(3) ORGANIZATIONS.

    ``(a) New Organizations Must Notify Secretary.--Except as provided 
in subsection (c), an organization shall not be treated as an 
organization described in section 253(c)(3)--
            ``(1) unless such organization has given notice to the 
        Secretary, in such manner as the Secretary may prescribe, that 
        it is applying for recognition of such status, or
            ``(2) for any period before giving of such notice, if such 
        notice is given after the time prescribed by the Secretary by 
        regulations for giving notice under this subsection.
    ``(b) Presumption That Organizations Are Private Foundations.--
Except as provided in subsection (c), any organization described in 
section 253(c)(3) and which does not notify the Secretary, at such time 
and in such manner as the Secretary may by regulations prescribe, that 
it is not a private foundation (as defined in section 102) shall be 
presumed to be a private foundation.
    ``(c) Exceptions.--Subsections (a) and (b) shall not apply to--
            ``(1) organizations organized before October 10, 1969;
            ``(2) organizations which obtained recognition of tax-
        exempt status under section 501(c)(3) of the Internal Revenue 
        Code of 1986 (in the case of subsection (a) only);
            ``(3) organizations which were determined not to be private 
        foundations under the Internal Revenue Code of 1986;
            ``(4) churches, their integrated auxiliaries, and 
        conventions and associations of churches;
            ``(5) any organization that is not a private foundation and 
        the gross receipts of which in each taxable year are not more 
        than $25,000; or
            ``(6) such other classes of organizations which the 
        Secretary may exempt.

``SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY.

    ``(a) In General.--Each organization described in subsection (b) 
shall be subject to the business tax under section 201 on its gross 
profits from its unrelated business activity.
    ``(b) Organizations Subject to Tax.--This section shall apply to--
            ``(1) organizations exempt from the business tax under 
        section 253(a), other than instrumentalities of the United 
        States described in section 253(c)(1), and
            ``(2) colleges and universities which are instrumentalities 
        of any government and corporations owned by 1 or more such 
        colleges or universities.

``SEC. 256. UNRELATED BUSINESS ACTIVITY.

    ``(a) In General.--`Unrelated business activity' means any trade or 
business the conduct of which is not substantially related (aside from 
the need of such organization for income or funds or the use it makes 
of the profits derived) to the exercise or performance by such 
organization of its charitable, educational, or other purpose or 
function constituting the basis for its exemption under section 253, 
except that such term does not include any trade or business--
            ``(1) in which substantially all the work in carrying on 
        such trade or business is performed for the organization 
        without compensation;
            ``(2) which is carried on, in the case of an organization 
        described in section 253(c)(3) or in the case of a college or 
        university described in section 255(b), by the organization 
        primarily for the convenience of its members, students, 
        patients, officers, or employees, which is the selling by the 
        organization of items of work-related clothes and equipment and 
        items normally sold through vending machines, through food 
        dispensing facilities, or by snack bars, for the convenience of 
        its members at their usual places of employment; or
            ``(3) which is the selling of merchandise, substantially 
        all of which has been received by the organization as gifts or 
        contributions.
    ``(b) Advertising, Etc., Activities.--For purposes of this section, 
`trade or business' includes any activity which is carried on for the 
production of income from the sale of goods or the performance of 
services. For purposes of the preceding sentence, an activity does not 
lose identity as a trade or business merely because it is carried on 
within a larger aggregate of similar activities or within a larger 
complex of other endeavors which may, or may not, be related to the 
exempt purposes of the organization. Where an activity carried on for 
profit constitutes an unrelated trade or business, no part of such 
trade or business shall be excluded from such classification merely 
because it does not result in profit.
    ``(c) Trade or Business.--
            ``(1) Certain business activities.--An activity shall not 
        be considered a `trade or business' solely because the activity 
        is a business activity (such as certain passive rental 
        activity) that would be subject to the business tax if 
        conducted by a business entity other than a tax-exempt 
        organization.
            ``(2) Regulations.--The Secretary shall prescribe 
        regulations defining a `trade or business.' Such regulations 
        shall be consistent with the provisions under sections 511 
        through 513 of the Internal Revenue Code of 1986, except to the 
        extent such provisions are inconsistent with other principles 
        of the business tax. The regulations shall include exclusions 
        from the definition of `trade or business' similar to those 
        contained in section 513 of the Internal Revenue Code for--
                    ``(A) certain bingo games,
                    ``(B) certain hospital services, and
                    ``(C) certain public entertainment activity at 
                fairs and expositions by an organization which 
                regularly conducts, as 1 of its substantial exempt 
                purposes, an agricultural or educational fair or 
                exhibition.
            ``(3) Trade shows.--The conduct of trade shows and 
        conventions shall not be excluded from the definition of trade 
        or business.

                      ``Subchapter I--Cooperatives

        ``Sec. 260. Patronage dividends of cooperatives.

``SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES.

    ``(a) Patronage Dividends Paid by Supply Cooperatives.--A qualified 
patronage dividend paid by a supply cooperative to a patron shall be 
treated as if it is a refund of a portion of the amounts paid by the 
patron for goods, services, or use of capital. In general, if the 
supply cooperative included the amount received from the patron in 
taxable receipts, the dividend shall reduce taxable receipts in the 
year incurred. If the recipient of the dividend is a business entity 
which deducted the cost of business purchases to which the dividend 
related, the recipient will reduce its cost of business purchases by 
the amount of the dividend in the year the dividend is paid or 
incurred.
    ``(b) Patronage Dividends Paid by Marketing Cooperatives.--A 
qualified patronage dividend paid to a patron by a marketing 
cooperative shall be treated as an upward price adjustment in the 
amount received by the patron for its goods marketed by the 
cooperative. In general, the cooperative will increase its cost of 
business purchases by the amount of the qualified patronage dividend 
and the recipient will increase its taxable receipts by the amount of 
the qualified patronage dividend.
    ``(c) Dividend Treatment.--Only the portion of a patronage dividend 
that is not a qualified patronage dividend shall be treated as a 
dividend under this chapter and chapter 1.
    ``(d) Definitions.--
            ``(1) Qualified patronage dividend.--A `qualified patronage 
        dividend' is that part of a patronage dividend that is 
        attributable to the patron's allocable share of patronage 
        earnings of a marketing cooperative or a supply cooperative.
            ``(2) Supply cooperative.--A `supply cooperative' is a 
        cooperative that sells goods or service to patrons and provided 
patronage dividends with respect to the quantity of purchases of the 
patrons.
            ``(3) Marketing cooperative.--A `marketing cooperative' is 
        a cooperative that sells goods produced by its members and 
        provides patronage dividends to the members based on the 
        quantities of goods sold or provided for sale.
    ``(e) Special Rules.--
            ``(1) Notices of allocation and per-unit retain 
        certificates.--Except as provided in paragraph (2), a notice of 
        allocation, per-unit retain certificate, or other similar 
        document shall not be treated as a patronage dividend until it 
        is redeemed in cash or property.
            ``(2) Opportunity to receive cash.--If a patron is given an 
        opportunity to receive a patronage dividend in cash, but 
        instead chooses to accept a per-unit retain certificate or a 
        qualified notice of allocation, the patron will be treated as 
        receiving cash and simultaneously contributing to the capital 
        of the cooperative.
            ``(3) Application limited to qualified cooperatives.--Under 
        rules to be prescribed by the Secretary, this section shall 
        apply only to cooperatives to which 1 of the following 
        provisions of the Internal Revenue Code of 1986 would have 
        applied:
                    ``(A) Section 501(c)(12) (relating to cooperative 
                telephone companies and similar organizations).
                    ``(B) Section 501(c)(14) (relating to certain 
                cooperative banks).
                    ``(C) Section 521 (relating to farm cooperatives).
                    ``(D) Section 1381 (relating to cooperatives 
                generally).
            ``(4) Regulations.--The Secretary shall prescribe 
        regulations for the application of this section. The 
        regulations shall generally be consistent with subchapter T of 
        chapter 1 of the Internal Revenue Code of 1986 except to the 
        extent that such rules are inconsistent with provisions of this 
        chapter.

                     ``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.

``SEC. 265. EXPORTS OF PROPERTY OR SERVICES.

    ``(a) General Rule.--Taxable receipts do not include amounts 
received for property or services exported from the United States by 
the exporter thereof for use or consumption outside the United States.
    ``(b) Export Through Nonbusiness Entity.--For purposes of 
subsection (a), if property or services are sold to a governmental 
entity or a tax-exempt organization for export and are exported other 
than in an activity of such entity which is subject to the business 
tax, then the seller of such property or services is deemed to be the 
exporter thereof.
    ``(c) Export of Services.--See section 267 for rules for 
determining whether services are exported or imported.

``SEC. 266. IMPORTS OF PROPERTY OR SERVICES.

    ``(a) In General.--The import of property or services for 
consumption in the United States shall constitute a business purchase 
if such property or service is to be used in a business activity in the 
United States. Property being held for sale or retail by a business 
entity that is in the business of selling goods shall be considered 
held for `use in a business activity'.
    ``(b) Amount of Business Purchase.--
            ``(1) In general.--The cost of business purchases with 
        respect to the import of property or services for use or 
        consumption in the United States is the customs value, price or 
        other amount used for purposes of determining the import tax 
        under section 286 or section 287.
            ``(2) Import tax.--The cost of business purchases does not 
        include any import tax paid. No deduction shall be allowed with 
        respect to property or service imported by a business entity 
        unless the import tax is paid with respect to such import.

``SEC. 267. IMPORT OR EXPORT OF SERVICES.

    ``(a) In General.--Except as otherwise provided in this subchapter 
or in rules prescribed under subchapter G (relating to financial 
intermediation business), services shall not be treated as imported or 
exported from the location in which such services are performed.
    ``(b) Import of Services.--A business entity shall be treated as 
importing a service if--
            ``(1) the benefit of the service will be realized in the 
        United States, and
            ``(2) the benefit will be realized solely in connection 
        with the United States business activities of the business 
        entity.
    ``(c) Export of Services.--A business will be treated as exporting 
a service if--
            ``(1) the benefit of the service will be realized outside 
        of the United States, and
            ``(2) the benefit will be realized solely in connection 
        with the activities of the purchaser occurring outside the 
        United States.
    ``(d) Services Acquired From Service Provider That Provides 
Services In and Outside the United States.--
            ``(1) In general.--If a business entity acquires services 
        from a service provider that provides services both in and 
        outside the United States and the service provider shows on the 
        invoice where the services are provided--
                    ``(A) the business entity shall treat the services 
                as provided where stated on the invoice, and
                    ``(B) the service provider shall treat as taxable 
                receipts any services listed as provided in the United 
                States.
            ``(2) No invoice.--If a business entity acquires services 
        from a service provider that provides services both in and 
        outside the United States and the service provider does not 
        show on an invoice where such services are provided--
                    ``(A) the business entity shall treat the services 
                as if provided in the location to which payment is 
                sent, and
                    ``(B) the service provider shall treat as taxable 
                receipts any payments received in the United States.
    ``(e) Special Rules Prevail.--See sections 268 and 269 for special 
rule relating to transportation and communication services.

``SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES.

    ``(a) Transportation of Property.--
            ``(1) Taxable receipts.--
                    ``(A) Exports.--Taxable receipts do not include 
                receipts from the transportation of property exported 
                from the United States.
                    ``(B) Imports.--Taxable receipts include receipts 
                from transportation of property imported into the 
                United States only if such costs are not taken into 
                account in determining the import tax.
                    ``(C) Presumptions.--The Secretary shall prescribe 
                regulations describing situations in which a 
                transporter of property must presume that no import tax 
                has been paid on the cost of its services.
            ``(2) Business purchases.--
                    ``(A) Exports.--Business purchases do not include 
                amounts paid or incurred for the cost of transportation 
                of property exported from the United States.
                    ``(B) Imports.--Amounts paid or incurred for 
                transportation of goods imported into the United 
                States, shall constitute a cost of business purchase 
                only to the extent that such amounts are taken into 
                account in determining the customs value for purposes 
                of section 286(a) (relating to the import tax).
    ``(b) Transportation of Passengers.--
            ``(1) Taxable receipts.--Taxable receipts--
                    ``(A) include receipts from the transportation of 
                passengers from the United States to a destination 
                outside the United States, but
                    ``(B) do not include receipts from the 
                transportation of passengers from outside the United 
                States to a destination in the United States.
            ``(2) Business purchases.--Business purchases--
                    ``(A) include amounts paid or incurred in a 
                business activity for the transportation of passengers 
                from the United States to a destination outside the 
                United States, but
                    ``(B) do not include amounts paid or incurred for 
                transportation of passengers from outside the United 
                States to a destination in the United States.
            ``(3) Simplifying rules.--The Secretary may provide rules 
        that simplify this subsection, including rules under which--
                    ``(A) half of receipts attributable to 
                transportation to or from the United States are treated 
                as taxable receipts,
                    ``(B) half of the cost for business trips to and 
                from the United States are treated as business 
                purchases, and
                    ``(C) all transportation expenses of a business 
                entity that has no regular business outside the United 
                States are treated as business purchases.

``SEC. 269. INTERNATIONAL COMMUNICATIONS.

    ``(a) In General.--For purposes of section 266, communications 
services shall be treated as provided at the point of origin of the 
communications and shall not be treated as imported or exported.
    ``(b) Communications Services.--Communications services include--
            ``(1) telephone communications services,
            ``(2) courier services (except in the case of 
        transportation of property that is imported or exported),
            ``(3) satellite transmission services,
            ``(4) telegraph services,
            ``(5) facsimile transmission services, and
            ``(6) other similar services.

``SEC. 270. INSURANCE.

    ``(a) In General.--Insurance services will be treated as provided 
at the location of the insurance company providing the services. Except 
as the Secretary may prescribe by regulations, insurance companies will 
be treated as providing services at the location to which insurance 
payments are made.
    ``(b) Insured Risks in the United States.--If insurance services 
are provided outside the United States and the insured risk is located 
in the United States--
            ``(1) the insurance service shall be treated as imported,
            ``(2) the insurance premiums shall be subject to the import 
        tax, and
            ``(3) payments of insurance benefits shall not be treated 
        as imported.
    ``(c) Insured Risk Outside the United States.--If insurance 
services are provided inside the United States and the insured risk is 
located outside the United States--
            ``(1) insurance services shall be treated as exported, and
            ``(2) payments of insurance benefits shall be treated as 
        payments for services outside the United States, and shall not 
        be deducted as business purchases.
    ``(d) Insurance Services.--Insurance services means the provision 
of insurance and services related to insurance other than insurance 
that is treated as a savings asset under section 53(b).

``SEC. 271. BANKING SERVICES.

    The Secretary shall prescribe regulations on the location of 
banking services and the extent to which such services are to be 
treated as imported or exported.

           ``Subchapter K--Business Conducted in a Possession

        ``Sec. 276. Treatment of possessions.

``SEC. 276. TREATMENT OF POSSESSIONS.

    ``(a) In General.--For purposes of the business tax imposed by this 
chapter, the U.S. possessions shall not be treated as part of the 
United States.
    ``(b) Effect on Payroll Tax Credit.--Except as provided in 
subsection (c), a business entity may not claim a payroll tax credit 
with respect to any payroll taxes paid with respect to income of 
residents of the U.S. possessions.
    ``(c) Possession.--For purposes of this subchapter, `U.S. 
possession' or `possession' means a possession of the United States and 
includes the Commonwealth of Puerto Rico and the Virgin Islands.

                   ``Subchapter L--Payroll Tax Credit

        ``Sec. 281. Amount of credit.
        ``Sec. 282. Current-year payroll tax credit.
        ``Sec. 283. Credit carryover.

``SEC. 281. AMOUNT OF CREDIT.

    ``(a) Amount of Credit.--The payroll tax credit for a business 
entity for a taxable year is the lesser of--
            ``(1) the sum of--
                    ``(A) the current-year payroll tax credit, and
                    ``(B) the credit carryovers to the taxable year, or
            ``(2) the business entity's business tax for the taxable 
        year (determined without regard to the payroll tax credit).
    ``(b) Consolidated Returns.--In the case of business entities 
filing consolidated returns, the amount of the credit shall be 
determined using the combined payroll tax credits and credit carryovers 
of the business entities and the combined business tax of the business 
entities.

``SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT.

    ``(a) In General.--The `current-year payroll tax credit' is an 
amount equal to the sum of--
            ``(1) the employer's share of the FICA tax imposed on wages 
        of its employees during the taxable year,
            ``(2) the employer's share of the tier 1 railroad 
        retirement tax for its employees during the taxable year, and
            ``(3) one-half of the allocable portion of the SECA tax (as 
        described in subsection (b)(3)).
    ``(b) Definitions.--
            ``(1) Employer's share of the fica tax.--`Employer's share 
        of the FICA tax' means the old-age, survivors, disability and 
        hospital insurance taxes imposed by section 3111.
            ``(2) Employer's share of the tier 1 railroad retirement 
        tax.--`Employer's share of the tier 1 railroad retirement tax' 
        means--
                    ``(A) the tier 1 railroad retirement tax imposed by 
                section 3221(a), and
                    ``(B) the portion of the tax imposed by section 
                3211(a)(1) on employee representatives attributable to 
                the tax imposed by section 3111.
            ``(3) One-half of the allocable portion of the seca tax.--
                    ``(A) SECA tax.--`SECA tax' means the self-
                employment tax imposed by section 1401.
                    ``(B) Partnerships.--Until such time as the SECA 
                tax and the Federal Insurance Contributions Acts are 
                amended to treat partners of partnerships as employees, 
                if a partner designates a partnership as a principal 
                source of employment income for the taxable year, one-
                half of the partnership's allocable portion of the SECA 
                tax of such partner equals the FICA tax that the 
                employer would have been required to pay under section 
                3111 with respect to such partner if the partner's 
                self-employment income as reported by the partnership 
                were wages subject to the FICA tax. A partner and 
                partnership can agree to treat no portion of a 
                partner's SECA tax as allocable to the partnership.
                    ``(C) Proprietorship.--In the case of an individual 
                who is a proprietor or sole owner and provider of 
                service to a business entity, the individual shall 
                allocate the portion of one-half of his SECA tax not 
                allocated pursuant to subparagraph (B) to his business 
                entities in accordance with rules prescribed by the 
                Secretary.
    ``(c) Special Rule.--Under rules prescribed by the Secretary, an 
individual subject to the self-employment tax shall pay half of the 
self-employment tax on an amount of self employment income not less 
than the amount of the individual's self-employment income taken into 
account by partnerships under subparagraph (B) of subsection (b)(3).

``SEC. 283. CREDIT CARRYOVER.

    ``(a) Carryover.--A current-year payroll credit that is not applied 
in the taxable year in which earned shall constitute a credit carryover 
until applied but for no more than 15 taxable years.
    ``(b) Order of Use.--For purposes of determining which credits are 
applied under section 281, if the total credit allowable in a taxable 
year is less than the sum of the current-year payroll credit and the 
carryover credits, the current-year payroll credit shall be considered 
applied first and then credit carryovers shall be considered applied in 
the order earned.

                       ``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.

``SEC. 286. IMPOSITION OF TAX ON PROPERTY.

    ``(a) General Rule.--There is hereby imposed a tax equal to 11 
percent of the customs value of all property entered into the United 
States for consumption, use or warehousing.
    ``(b) Liability for Tax.--The tax imposed on the import of property 
by subsection (a) shall be paid by the person entering the property 
into the United States for consumption, use or warehousing. Such tax 
shall be due and payable at the time of import.
    ``(c) Imports of Previously Exported Property.--In the case of any 
article that is classified under a heading or subheading of subchapter 
I or II of chapter 98 of the Tariff Schedules of the United States, the 
tax under this section shall be imposed only on that portion of the 
customs value of such article that is dutiable under such heading or 
subheading.
    ``(d) Imports for Personal Consumption.--The import tax imposed by 
this section shall not apply to any article entered into the United 
States duty free under subchapters I through VII of chapter 98 of the 
Tariff Schedules of the United States.

``SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES.

    ``(a) General Rule.--There is hereby imposed a tax equal to 11 
percent of the cost of all services treated as imported into the United 
States during the taxable year of the service recipient.
    ``(b) Liability for the Tax.--The tax on the import of services 
imposed by subsection (a) shall be paid by the person who receives the 
imported services. The tax shall be payable as if it were an addition 
to the business tax imposed by section 201.
    ``(c) Imported Services.--For purposes of this section, services 
shall be treated as imported if such services are treated as imported 
under section 267 (general rules on import of services) or section 270 
(related to insurance).
    ``(d) Special Rule for Insurance.--The seller of insurance that is 
treated as imported under section 270 shall be liable for the 
collection of the tax imposed by subsection (a) on the insurance and 
for paying such tax to the Secretary. The first sentence of subsection 
(b) (relating to the person liable for the tax) shall apply to 
insurance only to the extent that the seller of the insurance services 
does not collect such tax.

``SEC. 288. GENERAL RULES FOR THE IMPORT TAX.

    ``(a) Import Tax.--`Import tax' means the tax imposed by section 
286 on the import of property and the tax imposed by section 287 on the 
import of services.
    ``(b) No Credits.--No credits shall be allowed against the import 
tax, other than credit for prior overpayment or credits for deposits of 
the import tax.

                    ``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.

``SEC. 290. AMORTIZATION OF TRANSITION BASIS.

    ``(a) Transition Basis Deduction.--The `transition basis deduction' 
for a taxable year is the sum of the amortization allowance determined 
under this section for the taxable year.
    ``(b) Amortization Rules.--The amortization allowance for each 
category of amortizable basis shall be determined by amortizing the 
amortizable basis of such category ratably over the amortization period 
for the category beginning January 1, 1996.
    ``(c) Amortization Period.--The amortization periods shall be 
determined in accordance with the following 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.
    ``(d) Categories.--
            ``(1) Category i basis.--`Category I basis' is the sum of 
        the unrecovered bases as of January 1, 1996, of all depreciable 
        property placed in service prior to January 1, 1996, and the 
        unamortized portion of amortizable costs incurred before 
        January 1, 1996, if--
                    ``(A) cost recovery or amortization began before 
                January 1, 1996, and
                    ``(B) the remaining recovery period or amortization 
                period as of January 1, 1996, is less than 15 years.
            ``(2) Category ii basis.--`Category II basis' is the sum of 
        the unrecovered bases as of January 1, 1996, of all depreciable 
        property placed in service prior to January 1, 1996, and the 
        unamortized portion of amortizable costs incurred before 
        January 1, 1996, if--
                    ``(A) cost recovery or amortization began before 
                January 1, 1996, and
                    ``(B) the remaining recovery period or amortization 
                period as of January 1, 1996, is than 15 years or more.
            ``(3) Category iii basis.--`Category III basis' is the sum 
        of the adjusted basis of each asset satisfying the following 
        requirements:
                    ``(A) The asset was placed in service prior to 
                January 1, 1996,
                    ``(B) The asset was used in a business activity in 
                1996,
                    ``(C) The cost of the asset was capitalized and not 
                depreciable or otherwise recoverable under the Internal 
                Revenue Code of 1986, and
                    ``(D) The cost of the asset would have constituted 
                deductible expenses under the business tax if such cost 
                had been incurred after 1995.
            ``(4) Unrecovered inventory costs.--`Unrecovered inventory 
        costs' means the cost of goods sold (as determined under the 
        Internal Revenue Code of 1986) if a business entity sold all of 
        its inventory (including inventory being produced) on the 
        effective date of the business tax.
    ``(e) Rules of Application.--
            ``(1) Remaining recovery period.--
                    ``(A) Time of measure.--The remaining recovery 
                period shall be determined as of December 31, 1995, and 
                shall include each taxable year ending after such date 
                in which a deduction would have been allowed under the 
                Internal Revenue Code of 1986.
                    ``(B) Accounting method.--The remaining recovery 
                period shall be determined using the cost recovery 
                method and rules applicable for determining taxable 
                income under the Internal Revenue Code of 1986.
            ``(2) Depletable assets.--Under rules prescribed by the 
        Secretary, this section shall apply to the remaining cost basis 
        of depletable property and to other property for which a cost 
        recovery method other than 1 based on time is used.

``SEC. 291. SALES OF TRANSITION BASIS PROPERTY.

    ``(a) In General.--Except as provided in subsection (b), for 
purposes of determining the tax consequences of a sale, retirement, 
casualty or conversion to personal use of an asset whose basis or cost 
is taken into account under section 290, the amount to be amortized 
shall be treated as fully deducted upon the adoption of the business 
tax.
    ``(b) Substantial Sales.--
            ``(1) In general.--In the case of a substantial sale of 
        assets to which the amortization rules of section 290 apply, 
        the purchaser and seller may jointly elect to have the 
        purchaser assume the amortization deductions attributable to 
        such assets, in which case--
                    ``(A) the seller's taxable receipts from such sale 
                shall be reduced by the amount of unamortized basis or 
                cost assumed by the purchaser,
                    ``(B) the purchaser may treat as a cost of a 
                business purchase only the portion of the purchase 
                price in excess of the amount of unamortized basis or 
                cost assumed, and
                    ``(C) the unamortized basis or cost assumed shall 
                continue to be amortized in the manner amortized by the 
                seller.
            ``(2) Substantial sale.--A sale of assets by a business 
        entity to another business entity is a substantial sale if--
                    ``(A) more than 20 percent (in fair market value or 
                in original cost) of the assets of the seller are sold,
                    ``(B) the total consideration for the sale exceeds 
                $1 million or 20 percent of the taxable receipts of the 
                seller for the taxable year preceding the year of the 
                sale, or
                    ``(C) the sale satisfies other criteria established 
                by the Secretary to prevent distortions in gross 
                profits resulting from asset sales.

``SEC. 292. CARRYOVERS.

    ``(a) No Loss Carryovers.--No deduction shall be allowed under the 
business tax for net operating loss carryovers, capital loss 
carryovers, or any other loss carryovers from the income tax under the 
Internal Revenue Code of 1986.
    ``(b) No Credit Carryovers.--No credits shall be allowed under the 
business tax for business credit carryovers, minimum tax credit 
carryovers, or any other credit carryovers from the income tax under 
the Internal Revenue Code of 1986.

``SEC. 293. SECTION 481 ADJUSTMENTS.

    ``(a) Positive Net Section 481 Adjustment Amount.--If, as of 
January 1, 1996, a business entity has a positive net section 481 
adjustment amount, the amount shall be applied to reduce the transition 
basis in accounts (for purposes of section 290) in the following order:
            ``(1) First, to reduce the category I basis (but not below 
        zero).
            ``(2) Second, to reduce the category II basis (but not 
        below zero).
            ``(3) Third, to reduce the unrecovered inventory costs.
    ``(b) Negative Net Section 481 Adjustment Amount.--If, as of 
January 1, 1996, a business entity has a negative net section 481 
adjustment amount, the amount shall be applied to increase category I 
basis for purposes of section 290.
    ``(c) Section 481 Adjustment.--A business entity's net section 481 
adjustment is determined by subtracting--
            ``(1) the sum of all additional deductions to which a 
        business entity would be entitled by reason of section 481 of 
        the Internal Revenue Code of 1986 for periods beginning on or 
        after the effective date of the business tax with respect to 
        changes in accounting methods made before such effective date, 
        from
            ``(2) the sum of all additional income which a business 
        entity would recognize by reason of section 481 of the Internal 
        Revenue Code of 1986 for periods beginning on or after the 
        effective date of the business tax with respect to changes in 
        accounting methods made before such effective date,
in each case assuming that the income tax under the Internal Revenue 
Code of 1986 remained in effect.

     ``Subchapter O--Rules for Administration, Consolidated Returns

        ``Sec. 301. Returns, due dates, etc.
        ``Sec. 302. Consolidated returns.

``SEC. 301. RETURNS, DUE DATES, ETC.

    ``(a) In General.--Until subtitle F is amended to reflect the 
adoption of this chapter, the rules of subtitle F relating to C 
corporations shall apply to business entities with respect to--
            ``(1) returns and records;
            ``(2) time and place for paying tax;
            ``(3) assessment of taxes;
            ``(4) collections and liens;
            ``(5) abatements, credits, and refunds;
            ``(6) interest on underpayments and overpayments;
            ``(7) additions to tax and penalties;
            ``(8) closing agreements and compromises;
            ``(9) crimes;
            ``(10) judicial proceedings;
            ``(11) discovery of liability and enforcement; and
            ``(12) estimated taxes.
    ``(b) Individuals Engaging in Business Activities.--Under rules 
prescribed by the Secretary, individuals engaging in business 
activities on their own or with their spouses shall be permitted to 
file their business tax returns with their individual tax returns and 
shall be subject to estimated tax rules for individual income tax 
returns.

``SEC. 302. CONSOLIDATED RETURNS.

    ``(a) In General.--Business entities may file consolidated returns 
of business tax if such entities would have been permitted to file 
consolidated returns under section 1501 of the Internal Revenue Code of 
1986 and such section were applied by treating each business entity as 
a corporation and its owners or partners as shareholders.
    ``(b) Financial Institutions.--Financial intermediation businesses 
may be included in consolidated returns, but each financial 
intermediation business must compute its gross profits separately.
    ``(c) Intercompany Transactions.--In computing the gross profits of 
a consolidated group, intercompany transactions can be taken into 
account, or at the election of the filer, be disregarded (except in the 
case of transactions with financial intermediation businesses).

          ``Subchapter P--Definitions and Rules of Application

        ``Sec. 310. Definitions.
        ``Sec. 311. Rules of application.

``SEC. 310. DEFINITIONS.

    ``(a) In General.--When used in this chapter, where not otherwise 
distinctly expressed or manifestly incompatible with the intent 
thereof--
            ``(1) USA income tax.--`USA Income Tax' means the tax 
        imposed by chapter 1.
            ``(2) Internal revenue code of 1986.--`Internal Revenue 
        Code of 1986' means the Internal Revenue Code of 1986 as in 
        effect immediately before the enactment of the business tax and 
        the USA Income Tax.
            ``(3) United states.--`United States' means the States and 
        the District of Columbia.
    ``(b) Terms Defined in Chapter 2.--If a term that is used but not 
defined in this chapter or in section 7701 is defined in chapter 1, the 
definition in chapter 1 shall apply except if manifestly incompatible 
with the intent of the provision in which the term is used.

``SEC. 311. RULES OF APPLICATION.

    ``(a) Definitions.--Any definition included in this chapter shall 
apply for all purposes of this chapter unless--
            ``(1) such definition is limited to the purposes of a 
        particular chapter, section, or subsection, or
            ``(2) the definition clearly would not be applicable in a 
        particular context.
    ``(b) Interpretations Consistent With the Internal Revenue Code of 
1986.--Terms not defined in this chapter or elsewhere in this title, 
but defined in the Internal Revenue Code of 1986, shall be interpreted 
in a manner consistent with the Internal Revenue Code of 1986, except 
to the extent such interpretation would be inconsistent with the 
principles and purposes of this chapter.''
    (b) The amendments made by this section shall be effective on 
January 1, 1996, except to the extent otherwise specifically provided 
in the text of such amendments.

SEC. 302. REPEAL OF CHAPTER 6.

    Chapter 6 of the Code (relating to consolidated returns) is 
repealed as of January 1, 1996.

                 TITLE IV--DEFERRED COMPENSATION PLANS

SEC. 401. PROVISIONS SAVED.

    (a) In General.--The sections contained in subchapter D of chapter 
1 of the Code (relating to deferred compensation, etc.) are 
redesignated as chapter 3.
    (b) Limitations on Chapter 3.--Chapter 3 of the Code (as 
redesignated by subsection (a)) is amended by inserting before section 
401 the following new section:

``SEC. 400. EFFECT OF CHAPTER 3.

    ``(a) In General.--The provisions of chapter 3 (sections 401 
through 420) are included in this subtitle primarily for purposes of 
cross-reference and for purposes of determining whether plans are 
exempt from the business tax.
    ``(b) Effect on Income Tax Deductions.--Notwithstanding any 
provisions to the contrary in this chapter, no provision of this 
chapter shall operate to create a deduction from taxable income for 
purposes of the individual tax imposed by chapter 1, nor shall any 
provision of this chapter operate to cause any amount which would be 
considered an addition to savings under chapter 1 to not be considered 
an addition to savings.
    ``(c) Effect on Business Tax Deductions.--Notwithstanding any 
provision to the contrary in this chapter, no provision of this chapter 
shall cause any amount to be treated as a cost of business purchase or 
to otherwise be deducted from gross receipts for purposes of computing 
the business tax under chapter 2.
    ``(d) No Credits.--Notwithstanding any provision to the contrary in 
this chapter, no provision of this chapter shall result in a tax credit 
against any tax imposed by chapter 1 or chapter 2.
    ``(e) Effect of Failure To Comply With Provisions.--A failure to 
comply with applicable provisions in this chapter could cause a plan to 
lose its exemption from the business tax and, thereby subject certain 
business activities of the plan to the business tax.''
    (c) Clerical Amendments.--The table of sections for subpart A of 
part 1 of chapter 3 of the Code is amended by inserting before the item 
relating to section 401 the following new item:

        ``Sec. 400. Effect of chapter 3.''
    (d) Effective Date.--The amendments made by this section shall be 
effective on January 1, 1996.

             TITLE V--TECHNICAL AND ADMINISTRATIVE CHANGES

SEC. 501. USA TAX CODE.

    (a) Redesignation of the Code.--The Internal Revenue Code enacted 
August 16, 1954, and as heretofore hereby, and hereafter amended may be 
cited as the ``USA Tax Code''.
    (b) References in Laws, Etc.--Except where inappropriate, any 
reference in any law, Executive order, or other document--
            (1) to the Internal Revenue Code of 1954 or the Internal 
        Revenue Code of 1986 shall include a reference to the USA Tax 
        Code, and
            (2) to the USA Tax Code shall include a reference, with 
        respect to periods before January 1, 1996, to the Internal 
        Revenue Code of 1954 or the Internal Revenue Code of 1986.

SEC. 502. REVISIONS TO THE CODE.

    Not later than January 1, 1997, the Secretary shall submit to 
Congress proposed changes in the USA Tax Code that--
            (1) eliminate cross-references to the Internal Revenue Code 
        of 1986 (except with respect to transition issues) and insert 
        provisions similar to the cross-referenced sections of the 
        Internal Revenue Code of 1986,
            (2) revise subtitles B through J of the Internal Revenue 
        Code of 1986 to fully reflect the new subtitle A of the 
        Internal Revenue Code,
            (3) include statutory definitions or rules in cases where 
        the Secretary concludes that the definitions or rules cannot or 
        should not be addressed by regulation,
            (4) revise chapter 4 of the USA Tax Code (relating to the 
        self-employment tax) to conform to changes made by this Act, 
        and
            (5) revise chapter 5 of the USA Tax Code to reflect changes 
        made in this Act.

SEC. 503. APPLICATION OF SUBTITLE F.

    Until such time as subtitle F of the Code is amended to reflect the 
amendments made by this Act, the provisions of subtitle F shall be 
treated as generally applying to the USA Income Tax and the business 
tax imposed by such amendments--
            (1) without regard to specific cross references,
            (2) without regard to provisions relating to partnerships, 
        and
            (3) as if the business tax were the corporate income tax 
        and all business entities were corporations (except for 
        purposes of collection, in which case the owners of 
        noncorporate entities shall be obligated for taxes owed by the 
        entities to the same extent as such owners would if the entity 
        owed the tax prior to the amendment of such Code.

SEC. 504. CLERICAL AMENDMENT.

    The table of chapters for subtitle A of the Code is 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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