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[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 5176 Introduced in House (IH)]

109th CONGRESS
  2d Session
                                H. R. 5176

 To amend the Internal Revenue Code of 1986 to make the Federal income 
  tax system simpler, fairer, and more fiscally responsible, and for 
                            other purposes.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                             April 25, 2006

 Mr. Emanuel introduced the following bill; which was referred to the 
                      Committee on Ways and Means

_______________________________________________________________________

                                 A BILL

 
 To amend the Internal Revenue Code of 1986 to make the Federal income 
  tax system simpler, fairer, and more fiscally responsible, 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 ``Fair Flat Tax Act 
of 2006''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; amendment of 1986 Code; table of contents.
Sec. 2. Purpose.
                 TITLE I--INDIVIDUAL INCOME TAX REFORMS

Sec. 101. 3 progressive individual income tax rates for all forms of 
                            income.
Sec. 102. Increase in basic standard deduction.
Sec. 103. Simplified family credit.
Sec. 104. Expanded access to college.
Sec. 105. Deduction for mortgage interest whether or not individual 
                            itemizes.
Sec. 106. Universal pension accounts.
Sec. 107. Repeal of individual alternative minimum tax.
                      TITLE II--INCOME TAX REFORMS

  Subtitle A--Provisions Relating to Corporate and Business Income Tax

Sec. 201. Corporate flat tax.
Sec. 202. Treatment of travel on corporate aircraft.
Sec. 203. Valuation of employee personal use of noncommercial aircraft.
Sec. 204. Elimination of tax expenditures that subsidize inefficiencies 
                            in the health care system.
Sec. 205. Pass-through business entity transparency.
Sec. 206. Broker reporting of customer's basis in securities 
                            transactions.
Sec. 207. Repeal of lower cost or market inventory method.
Sec. 208. Imposition of withholding on certain payments made by 
                            government entities.
        Subtitle B--Provisions Designed to Curtail Tax Shelters

Sec. 211. Penalty for promoting abusive tax shelters.
Sec. 212. Penalty for aiding and abetting the understatement of tax 
                            liability.
Sec. 213. Increase in criminal monetary penalty limitation for the 
                            underpayment or overpayment of tax due to 
                            fraud.
                Subtitle C--Economic Substance Doctrine

Sec. 221. Clarification of economic substance doctrine.
Sec. 222. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.
Sec. 223. Denial of deduction for interest on underpayments 
                            attributable to noneconomic substance 
                            transactions.
             Subtitle D--Provisions Relating to Oil and Gas

Sec. 231. Elimination of amortization of geological and geophysical 
                            expenditures for major integrated oil 
                            companies.
Sec. 232. Revaluation of lifo inventories of large integrated oil 
                            companies.
                Subtitle E--Uniform Definition of Child

Sec. 241. Repeal of uniform definition of child and restoration of 
                            prior rule.
                  Subtitle F--Other Revenue Provisions

Sec. 251. Inflation adjustment of tax on distilled spirits, beer, wine, 
                            and tobacco.
Sec. 252. Termination of various exclusions, exemptions, deductions, 
                            and credits.
Sec. 253. Termination of various preferential treatments.
         TITLE III--TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

Sec. 301. Technical and conforming amendments.
Sec. 302. Sunset.

SEC. 2. PURPOSE.

    The purpose of this Act is to amend the Internal Revenue Code of 
1986--
            (1) to make the Federal individual income tax system 
        simpler, fairer, and more transparent by--
                    (A) recognizing the overall tax burden on 
                individual Americans,
                    (B) repealing the individual alternative minimum 
                tax,
                    (C) increasing the basic standard deduction and 
                maintaining itemized deductions for principal residence 
                mortgage interest and charitable contributions,
                    (D) reducing the number of exclusions, exemptions, 
                deductions, and credits, and
                    (E) treating all income equally,
            (2) to make the Federal corporate income tax rate a flat 35 
        percent and eliminate special tax preferences that favor 
        particular types of businesses or activities, and
            (3) to partially offset the Federal budget deficit through 
        the increased revenues resulting from these reforms.

                 TITLE I--INDIVIDUAL INCOME TAX REFORMS

SEC. 101. 3 PROGRESSIVE INDIVIDUAL INCOME TAX RATES FOR ALL FORMS OF 
              INCOME.

    (a) Married Individuals Filing Joint Returns and Surviving 
Spouses.--The table contained in section 1(a) is amended to read as 
follows:
``If taxable income is:             The tax is:
    Not over $25,000...............
                                        15% of taxable income. 
    Over $25,000 but not over 
        $120,000.
                                        $3,750, plus 25% of the excess 
                                                over $25,000 
    Over $120,000..................
                                        $27,500, plus 35% of the excess 
                                                over $120,000.''.
    (b) Heads of Households.--The table contained in section 1(b) is 
amended to read as follows:
``If taxable income is:             The tax is:
    Not over $16,000...............
                                        15% of taxable income. 
    Over $16,000 but not over 
        $105,000.
                                        $2,400, plus 25% of the excess 
                                                over $16,000 
    Over $105,000..................
                                        $24,650, plus 35% of the excess 
                                                over $105,000.''.
    (c) Unmarried Individuals (Other Than Surviving Spouses and Heads 
of Households).--The table contained in section 1(c) is amended to read 
as follows:
``If taxable income is:             The tax is:
    Not over $15,000...............
                                        15% of taxable income. 
    Over $15,000 but not over 
        $70,000.
                                        $2,250, plus 25% of the excess 
                                                over $15,000 
    Over $70,000...................
                                        $16,000, plus 35% of the excess 
                                                over $70,000.''.
    (d) Married Individuals Filing Separate Returns.--The table 
contained in section 1(d) is amended to read as follows:
``If taxable income is:             The tax is:
    Not over $12,500...............
                                        15% of taxable income. 
    Over $12,500 but not over 
        $60,000.
                                        $1,875, plus 25% of the excess 
                                                over $12,500 
    Over $60,000...................
                                        $13,750, plus 35% of the excess 
                                                over $60,000.''.
    (e) Conforming Amendments to Inflation Adjustment.--Section 1(f) is 
amended--
            (1) by striking ``1993''in paragraph (1) and inserting 
        ``2006'',
            (2) by striking ``except as provided in paragraph (8)'' in 
        paragraph (2)(A),
            (3) by striking ``1992'' in paragraph (3)(B) and inserting 
        ``2005'',
            (4) by striking paragraphs (7) and (8), and
            (5) by striking ``Phaseout of Marriage Penalty in 15-
        Percent Bracket;'' in the heading thereof.
    (f) Repeal of Rate Differential for Capital Gains and Dividends.--
            (1) Repeal of 2003 rate reduction.--Section 303 of the Jobs 
        and Growth Tax Relief Reconciliation Act of 2003 is amended by 
        striking ``December 3, 2008'' and inserting ``December 31, 
        2005''.
            (2) Termination of pre-2003 capital gain rate 
        differential.--Section 1(h) is amended (after the application 
        of paragraph (1)) by adding at the end the following new 
        paragraph:
            ``(13) Termination.--This section shall not apply to 
        taxable years beginning after December 31, 2005.''.
    (g) Additional Conforming Amendments.--
            (1) Section 1 is amended by striking subsection (i).
            (2) The Internal Revenue Code of 1986 is amended by 
        striking ``calendar year 1992'' each place it appears and 
        inserting ``calendar year 2005''.
            (3) Section 1445(e)(1) (after the application of subsection 
        (g)(1)) is amended by striking ``(or, to the extent provided in 
        regulations, 20 percent)''.
    (h) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 102. INCREASE IN BASIC STANDARD DEDUCTION.

    (a) In General.--Paragraph (2) of section 63(c) (defining standard 
deduction) is amended to read as follows:
            ``(2) Basic standard deduction.--For purposes of paragraph 
        (1), the basic standard deduction is--
                    ``(A) 200 percent of the dollar amount in effect 
                under subparagraph (C) for the taxable year in the case 
                of--
                            ``(i) a joint return, or
                            ``(ii) a surviving spouse (as defined in 
                        section 2(a)),
                    ``(B) $26,250 in the case of a head of household 
                (as defined in section 2(b)), or
                    ``(C) $15,000 in any other case.''.
    (b) Conforming Amendment to Inflation Adjustment.--Section 
63(c)(4)(B)(i) is amended by striking ``(2)(B), (2)(C), or''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 103. SIMPLIFIED FAMILY CREDIT.

    (a) In General.--Section 32 (relating to earned income credit) is 
amended to read as follows:

``SEC. 32. SIMPLIFIED FAMILY CREDIT.

    ``(a) Allowance of Credit.--In the case of an eligible individual, 
there shall be allowed as a credit against the tax imposed by this 
subtitle for the taxable year an amount equal to the lesser of--
            ``(1) $2,500 multiplied by the number of qualifying 
        children of the taxpayer, or
            ``(2) 50 percent of modified adjusted gross income.
    ``(b) Limitations.--
            ``(1) Limitation based on modified adjusted gross income.--
                    ``(A) In general.--The amount of the credit 
                allowable under subsection (a) shall be reduced (but 
                not below zero) by $50 for each $1,000 (or fraction 
                thereof) by which the taxpayer's modified adjusted 
                gross income exceeds the threshold amount.
                    ``(B) Threshold amount.--For purposes of paragraph 
                (1), the term `threshold amount' means $60,000 
                ($120,000 in the case of a joint return). For purposes 
                of this paragraph, marital status shall be determined 
                under section 7703.
            ``(3) Limitation on number of qualifying children taken 
        into account.--For purposes of subsection (a), not more than 3 
        qualifying children of the taxpayer may be taken into account.
            ``(4) Limitation on amount of refundable credit.--
                    ``(A) In general.--The amount of the credit allowed 
                under subsection (a) for a taxable year which is 
                allowed under this subpart shall not exceed the 
                modified adjusted gross income of the taxpayer for such 
                year.
                    ``(B) Allowance of remaining amount of credit.--The 
                excess of--
                            ``(i) the amount of the credit allowed 
                        under subsection (a), over
                            ``(ii) the amount of the credit allowed 
                        under this subpart by reason of subparagraph 
                        (A), shall be treated as a credit allowed under 
                        subpart B for such taxable year and not under 
                        this subpart.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Eligible individual.--
                    ``(A) In general.--The term `eligible individual' 
                means any individual who has a qualifying child for the 
                taxable year.
                    ``(B) Individual who is qualifying child 
                ineligible.--If an individual is the qualifying child 
                of a taxpayer for any taxable year of such taxpayer 
                beginning in a calendar year, such individual shall not 
                be treated as an eligible individual for any taxable 
                year of such individual beginning in such calendar 
                year.
                    ``(C) Exception for individual claiming benefits 
                under section 911.--The term `eligible individual' does 
                not include any individual who claims the benefits of 
                section 911 (relating to citizens or residents living 
                abroad) for the taxable year.
                    ``(D) Limitation on eligibility of nonresident 
                aliens.--The term `eligible individual' shall not 
                include any individual who is a nonresident alien 
                individual for any portion of the taxable year unless 
                such individual is treated for such taxable year as a 
                resident of the United States for purposes of this 
                chapter by reason of an election under subsection (g) 
                or (h) of section 6013.
                    ``(E) Identification number requirement.--No credit 
                shall be allowed under this section to an eligible 
                individual who does not include on the return of tax 
                for the taxable year--
                            ``(i) such individual's taxpayer 
                        identification number, and
                            ``(ii) if the individual is married (within 
                        the meaning of section 7703), the taxpayer 
                        identification number of such individual's 
                        spouse.
                    ``(F) Individuals who do not include tin, etc., of 
                any qualifying child.--No credit shall be allowed under 
                this section to any eligible individual who has one or 
                more qualifying children if no qualifying child of such 
                individual is taken into account under subsection (b) 
                by reason of paragraph (2)(B).
            ``(2) Qualifying child.--
                    ``(A) In general.--The term `qualifying child' has 
                the meaning given such term by section 152, determined 
                without regard to subsections (b)(1), (b)(2), and 
                (d)(1)(B) thereof.
                    ``(B) Identification requirements.--
                            ``(i) In general.--A qualifying child shall 
                        not be taken into account under subsection (b) 
                        unless the taxpayer includes the name, age, and 
                        TIN of the qualifying child on the return of 
                        tax for the taxable year.
                            ``(ii) Other methods.--The Secretary may 
                        prescribe other methods for providing the 
                        information described in clause (i).
                    ``(C) Abode must be in the united states.--An 
                individual shall not be treated as a qualifying child 
                for purposes of this section unless the principal place 
                of abode of such individual is in the United States.
            ``(3) Modified adjusted gross income.--The term `modified 
        adjusted gross income' means adjusted gross income--
                    ``(A) determined without regard to sections 135, 
                137, 221, 911, 931, and 933, and
                    ``(B) increased by the amount of interest received 
                or accrued by the taxpayer during the taxable year 
                which is exempt from tax.
    ``(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) Inflation Adjustments.--
            ``(1) In general.--In the case of any taxable year 
        beginning after 2006, each of the dollar amounts in subsection 
        (b)(1)(B) shall be increased by an amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 2005' for `calendar year 1992' in 
                subparagraph (B) thereof.
            ``(2) Rounding.--If any dollar amount in subsection 
        (b)(1)(B) after being increased under paragraph (1) is not a 
        multiple of $1,000, such dollar amount shall be rounded to the 
        nearest multiple of $1,000.
    ``(i) 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).
    ``(j) Identification Numbers.--Solely for purposes of subsections 
(c)(1)(F) and (c)(3)(D), a taxpayer identification number means a 
social security number issued to an individual by the Social Security 
Administration (other than a social security number issued pursuant to 
clause (II) (or that portion of clause (III) that relates to clause 
(II)) of section 205(c)(2)(B)(i) of the Social Security Act).''.
    (b) Repeals of Other Provisions.--
            (1) Child credit.--Section 24 is hereby repealed.
            (2) Deduction for exemption for dependents disallowed to 
        credit recipients.--Subsection (c) of section 151 is amended by 
        adding at the end the following new sentence: ``No exemption 
        shall be allowed under this section for a dependent for a 
        taxable year if a credit is allowed under section 32 with 
        respect to such dependent for such taxable year.''.
    (c) Conforming Amendments.--
            (1) Amendments relating to repeal of child credit.--
                    (A) Sections 25(e)(1)(C) and 1400C(d) are both 
                amended by striking ``24,''.
                    (B) Section 501(c)(26) is amended by inserting 
                ``(as in effect before the enactment of the Fair Flat 
                Tax Act of 2006)'' after ``section 24(c)''.
                    (C) Section 6213(g)(2) is amended--
                            (i) by striking subparagraph (I), and
                            (ii) in subparagraph (L), by striking ``21, 
                        24, or 32'' and inserting ``21 or 32''.
            (2) Amendments relating to repeal of deduction for 
        exemption for dependents.--
                    (A) Section 2(a) is amended by striking ``a 
                deduction for the taxable year under section 151'' and 
                inserting ``a credit for the taxable year under section 
                32''.
                    (B) Section 2(b) is amended by striking ``a 
                deduction for the taxable year for such person under 
                section 151'' and inserting ``a credit for the taxable 
                year for such person under section 32''.
                    (C) Section 21(b)(1)(A) is amended by striking ``a 
                deduction under section 151(c)'' and inserting ``a 
                credit under section 32''.
                    (D) Section 21(e)(6)(A) is amended by striking 
                ``deduction under section 151(c)'' and inserting 
                ``credit under section 32''.
                    (E) Section 25B(c)(2)(A) is amended by striking 
                ``deduction under section 151'' and inserting ``credit 
                under section 32''.
                    (F) Section 35(d)(1)(B) is amended by striking 
                ``deduction under section 151(c)'' and inserting 
                ``credit under section 32''.
                    (G) Section 35(g)(4) is amended by striking 
                ``deduction under section 151'' and inserting ``credit 
                under section 32''.
                    (H) Section 63(c)(5) is amended by striking 
                ``deduction under section 151'' and inserting ``credit 
                under section 32''.
                    (I) Section 129(c)(1) is amended by striking 
                ``deduction is allowable under section 151(c) (relating 
                to personal exemptions for dependents) '' and inserting 
                ``credit is allowable under section 32 (relating to 
                simplified family credit)''.
                    (J) Section 135(c)(2)(A)(iii) is amended by 
                striking ``deduction under section 151'' and inserting 
                ``credit under section 32''.
                    (K) Section 220(b)(6) is amended by striking 
                ``deduction under section 151'' and inserting ``credit 
                under section 32''.
                    (L) Section 221(c) is amended by striking 
                ``deduction under section 151'' and inserting ``credit 
                under section 32''.
                    (M) Section 2032A(c)(7)(D) is amended by striking 
                ``section 151(c)(4)'' and inserting ``section 
                32(c)(3)(F)''.
                    (N) Section 6012(a)(1)(A) is amended by striking 
                ``an exemption for such spouse under section 151(c)'' 
                and inserting ``a credit for such spouse under section 
                32''.
                    (O) Section 7703(b)(1) is amended by striking 
                ``deduction for the taxable year under section 151'' 
                and inserting ``credit for the taxable year under 
                section 32''.
    (d) Clerical Amendment.--The table of sections for subpart C of 
part IV of subchapter A of chapter 1 is amended by striking the item 
relating to section 32 and inserting the following:

``Sec. 32. Simplified family credit.''.
    (e) Effective Date.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2005.
            (2) Transitional rule for noncustodial parents.--
                    (A) In general.--If, on the last day of the taxable 
                year, an eligible individual is the noncustodial parent 
                of a qualifying child, the Internal Revenue Code of 
                1986 shall be applied to such individual without regard 
                to the amendments made by this section.
                    (B) Definitions.--For purposes of subparagraph (A), 
                the terms ``eligible individual'' and ``qualifying 
                child'' shall have the meanings given such terms by 
                section 32(c) of the Internal Revenue Code of 1986 (as 
                amended by this section).
            (3) Taxpayers held harmless.--In the case of a taxpayer 
        who, for the first taxable year ending after the date of the 
        enactment of this Act, would be allowed a deduction of the 
        exemption amount under section 151(c) of the Internal Revenue 
        Code of 1986 (determined without regard to the amendments made 
        by this section) with respect to any dependent of the taxpayer, 
        the taxpayer may elect to apply the Internal Revenue Code of 
        1986 with respect to such dependent as if amendments made by 
        this section had not been enacted.

SEC. 104. EXPANDED ACCESS TO COLLEGE.

    (a) Replacement With Refundable Credit for Higher Education 
Expenses.--Subpart C of part IV of subchapter A of chapter 1 (relating 
to refundable credits) is amended by redesignating section 36 as 
section 37 and by inserting after section 35 the following new section:

``SEC. 36. HIGHER EDUCATION EXPENSES.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this subtitle 
for the taxable year the amount equal to the qualified tuition and 
related expenses paid by the taxpayer during the taxable year (for 
education furnished to the eligible student during any academic period 
beginning in such taxable year).
    ``(b) Limitations.--
            ``(1) Dollar limitation.--The amount allowed as a credit 
        under subsection (a) for a taxable year shall not exceed 
        $3,000.
            ``(2) Academic limitations.--Expenses may not be taken into 
        account under subsection (a) with respect to an eligible 
        student for an academic year if--
                    ``(A) in the case of a program at the undergraduate 
                level, expenses have been taken into account under this 
                section in all prior taxable years with respect to such 
                student for any program at the undergraduate level for 
                the full-time equivalent of 4 academic years, and
                    ``(B) in the case of a program at the graduate 
                level, expenses have been taken into account under this 
                section in all prior taxable years with respect to such 
                student for any program at the graduate level for the 
                full-time equivalent of 2 academic years.
        For purposes of the preceding sentence, the determination of 
        full-time equivalent of academic years shall be under 
        regulations issued by the Secretary.
    ``(c) Eligible Student.--For purposes of this subsection, the term 
`eligible student' means, with respect to any academic period, a 
student who--
            ``(1) meets the requirements of section 484(a)(1) of the 
        Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in 
        effect on the date of the enactment of this section, and
            ``(2) is carrying at least 1/2 the normal full-time work 
        load for the course of study the student is pursuing.
    ``(d) Election not to Have Section Apply.--A taxpayer may elect not 
to have this section apply with respect to the qualified tuition and 
related expenses of an individual for any taxable year.
    ``(e) Definitions.--For purposes of this section--
            ``(1) Qualified tuition and related expenses.--
                    ``(A) In general.--The term `qualified tuition and 
                related expenses' means tuition and fees required for 
                the enrollment or attendance of--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) any dependent of the taxpayer with 
                        respect to whom the taxpayer is allowed a 
                        deduction under section 151, at an eligible 
                        educational institution for courses of 
                        instruction of such individual at such 
                        institution.
                    ``(B) Exception for education involving sports, 
                etc.--Such term does not include expenses with respect 
                to any course or other education involving sports, 
                games, or hobbies, unless such course or other 
                education is part of the individual's degree program.
                    ``(C) Exception for nonacademic fees.--Such term 
                does not include student activity fees, athletic fees, 
                insurance expenses, or other expenses unrelated to an 
                individual's academic course of instruction.
            ``(2) Eligible educational institution.--The term `eligible 
        educational institution' means an institution--
                    ``(A) which is described in section 481 of the 
                Higher Education Act of 1965 (20 U.S.C. 1088), as in 
                effect on the date of the enactment of this section, 
                and
                    ``(B) which is eligible to participate in a program 
                under title IV of such Act.
            ``(3) Academic year.--The term `academic year' has the 
        meaning given such term by section 481(a)(2) of the Higher 
        Education Act of 1965 (20 U.S.C. 1088(a)(2)).
    ``(f) Special Rules.--
            ``(1) Identification requirement.--No credit shall be 
        allowed under subsection (a) to a taxpayer with respect to the 
        qualified tuition and related expenses of an individual unless 
        the taxpayer includes the name and taxpayer identification 
        number of such individual on the return of tax for the taxable 
        year.
            ``(2) Adjustment for certain scholarships, etc.--The amount 
        of qualified tuition and related expenses otherwise taken into 
        account under subsection (a) with respect to an individual for 
        an academic period shall be reduced by the sum of any amounts 
        paid for the benefit of such individual which are allocable to 
        such period as--
                    ``(A) a qualified scholarship which is excludable 
                from gross income under section 117,
                    ``(B) an educational assistance allowance under 
                chapter 30, 31, 32, 34, or 35 of title 38, United 
                States Code, or under chapter 1606 of title 10, United 
                States Code, and
                    ``(C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of section 
                102(a) for such individual's educational expenses, or 
                attributable to such individual's enrollment at an 
                eligible educational institution, which is excludable 
                from gross income under any law of the United States.
            ``(3) Treatment of expenses paid by dependent.--If a 
        deduction under section 151 with respect to an individual is 
        allowed to another taxpayer for a taxable year beginning in the 
        calendar year in which such individual's taxable year begins--
                    ``(A) no credit shall be allowed under subsection 
                (a) to such individual for such individual's taxable 
                year, and
                    ``(B) qualified tuition and related expenses paid 
                by such individual during such individual's taxable 
                year shall be treated for purposes of this section as 
                paid by such other taxpayer.
            ``(4) Treatment of certain prepayments.--If qualified 
        tuition and related expenses are paid by the taxpayer during a 
        taxable year for an academic period which begins during the 
        first 3 months following such taxable year, such academic 
        period shall be treated for purposes of this section as 
        beginning during such taxable year.
            ``(5) Denial of double benefit.--No credit shall be allowed 
        under this section for any expense for which a deduction is 
        allowed under any other provision of this chapter.
            ``(6) No credit for married individuals filing separate 
        returns.--If the taxpayer is a married individual (within the 
        meaning of section 7703, this section shall apply only if the 
        taxpayer and the taxpayer's spouse file a joint return for the 
        taxable year.
            ``(7) Nonresident aliens.--If the taxpayer is a nonresident 
        alien individual for any portion of the taxable year, this 
        section shall apply only if such individual is treated as a 
        resident alien of the United States for purposes of this 
        chapter by reason of an election under subsection (g) or (h) of 
        section 6013.
    ``(g) Regulations.--The Secretary may prescribe such regulations as 
may be necessary or appropriate to carry out this section, including 
regulations providing for a recapture of the credit allowed under this 
section in cases where there is a refund in a subsequent taxable year 
of any amount which was taken into account in determining the amount of 
such credit.''.
    (b) Repeal of Certain Credits, Exclusions, and Deductions Relating 
to Higher Education Expenses.--The following sections of the Internal 
Revenue Code of 1986 are hereby repealed:
            (1) Section 25A (relating to Hope and Lifetime Learning 
        Credits).
            (2) Section 127 (relating to educational assistance 
        programs).
            (3) Section 222 (relating to qualified tuition and related 
        expenses).
            (4) Section 117(d) (relating to qualified tuition 
        reduction).
    (c) Technical and Conforming Amendments.--
            (1) Section 62(a) is amended by striking paragraph (18).
            (2) The following sections are amended by striking 
        ``222,'': 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), 
        199(d)(2)(A), 219(g)(3)(A)(2), 221(b)(2)(C)(i), and 469(i)(F).
            (3) Section 51A(b)(5)(B) is amended by inserting ``or'' 
        after clause (ii), by striking clause (iii), and by 
        redesignating clause (iv) as clause (iii).
            (4) Sections 125(f), 221(d)(2)(A), 414(n)(3)(C), 
        3121(a)(18), 3401(a)(18), and 6039D(d)(1) are each amended by 
        striking ``127,''.
            (5) Section 132(j)(8) is amended by striking ``which are 
        not excludable from gross income under section 127''.
            (6) Section 137(c)(2) is amended by inserting ``(as in 
        effect on the date of enactment of the Fair Flat Tax Act of 
        2006)'' after ``127(b)''.
            (7) Section 1397(a)(2)(A) is amended by striking clause 
        (i).
            (8) Section 3306(b)(13) is amended by striking ``127, or''.
            (9) Subparagraph (B) of section 72(t)(7) is amended by 
        striking ``section 25A(g)(2)'' and inserting ``section 
        36(c)(3)(B)(2)(v)(I)''.
            (10) Subparagraph (A) of section 135(d)(2) is amended by 
        striking ``section 25A'' and inserting ``section 36''.
            (11) Section 221(e) is amended--
                    (A) in paragraph (2)(B), by striking ``section 
                25A(g)(2)'' and inserting ``section 
                36(c)(3)(B)(2)(v)(I)'' and by striking ``section 
                25A(f)(2)'' and inserting ``section 
                36(c)(3)(B)(2)(v)(I)'', and
                    (B) in paragraph (3), by striking ``section 
                25A(b)(3)'' and inserting ``section 36(c)''.
            (12) Section 529 is amended--
                    (A) by amending clause (v) of subsection (c)(3)(B) 
                to read as follows:
                            ``(v) Coordination with scholarships and 
                        higher education refundable credit.--The total 
                        amount of qualified higher education expenses 
                        with respect to an individual for the taxable 
                        year shall be reduced with respect to an 
                        individual for an academic period--
                                    ``(I) by the sum of any amounts 
                                paid for the benefit of such individual 
                                which are allocable to such period as--
                                            ``(aa) a qualified 
                                        scholarship which is excludable 
                                        from gross income under section 
                                        117,
                                            ``(bb) an educational 
                                        assistance allowance under 
                                        chapter 30, 31, 32, 34, or 35 
                                        of title 38, United States 
                                        Code, or under chapter 1606 of 
                                        title 10, United States Code, 
                                        and
                                            ``(cc) a payment (other 
                                        than a gift, bequest, devise, 
                                        or inheritance within the 
                                        meaning of section 102(a) for 
                                        such individual's educational 
                                        expenses, or attributable to 
                                        such individual's enrollment at 
                                        an eligible educational 
                                        institution, which is 
                                        excludable from gross income 
                                        under any law of the United 
                                        States, and
                                    ``(II) by the amount of such 
                                expenses which were taken into account 
                                in determining the credit allowed to 
                                the taxpayer or any other person under 
                                section 36.'', and
                    (B) in subsection (e)(3)(B)(i) by striking 
                ``section 25A(b)(3)'' and inserting ``section 36(c)''.
            (13) Section 530(d) is amended--
                    (A) in paragraph (2)(C)(i)(I) by striking ``section 
                25A(g)(2)'' and inserting ``section 
                36(c)(3)(B)(2)(v)(I)'',
                    (B) in paragraph (2)(C)(i)(II) by striking 
                ``section 25A'' and inserting ``section 36'', and
                    (C) in paragraph (4)(B)(iii) by striking ``section 
                25A(g)(2)'' and inserting ``section 
                36(c)(3)(B)(2)(v)(I)''.
            (14) Subsection (e) of section 6050S is amended by striking 
        ``section 25A (without regard to subsection (g)(2) thereof)'' 
        and inserting ``section 36 (without regard to clause (v)(I) of 
        subsection (c)(3)(B)(2) thereof)''.
            (15) Subparagraph (J) of section 6213(g)(2) is amended by 
        striking ``section 25A(g)(1)'' and inserting ``section 
        36(f)(1)''.
            (16) Paragraph (2) of section 1324(b) of title 31, United 
        States Code, is amended by inserting ``or 36'' after ``section 
        35''.
            (17) The table of sections for subpart C of part IV of 
        subchapter A of chapter 1 is amended by redesignating the item 
        relating to section 36 as an item relating to section 37 and by 
        inserting after the item relating to section 35 the following 
        new item:

``Sec. 36. Higher education expenses''.
            (18) The table of sections for subpart A of such part IV is 
        amended by striking the item relating to section 25A.
            (19) The table of sections for part III of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        127.
            (20) The table of sections for part VII of subchapter B of 
        chapter 1 is amended by striking the item relating to section 
        222.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 105. DEDUCTION FOR MORTGAGE INTEREST WHETHER OR NOT INDIVIDUAL 
              ITEMIZES.

    (a) In General.--Subsection (a) of section 62 (defining adjusted 
gross income) is amended by redesignating paragraph (19) (as added by 
section 703(a) of the American Jobs Creation Act of 2004) as paragraph 
(20) and by inserting after paragraph (20) (as so redesignated) the 
following new paragraph:
            ``(21) Qualified residence interest.--The deduction allowed 
        under section 163 by reason of subsection (h)(2)(D) thereof.''.
    (b)  Effective Date.--The amendment made by subsection (a) shall 
apply to interest paid in taxable years beginning after the date of the 
enactment of this Act.

SEC. 106. UNIVERSAL PENSION ACCOUNTS.

    (a) Deduction for Contributions.--
            (1) In general.--Part VII of subchapter B of chapter 1 
        (relating to additional itemized deductions for individuals) is 
        amended by inserting after section 219 the following new 
        section:

``SEC. 219A. CONTRIBUTIONS TO UNIVERSAL PENSION ACCOUNTS.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction an amount equal to the qualified 
universal pension contributions of the individual for the taxable year.
    ``(b) Maximum Amount of Deduction.--
            ``(1) In general.--The amount allowable as a deduction 
        under subsection (a) to any individual for any taxable year 
        shall not exceed the lesser of--
                    ``(A) the deductible amount, or
                    ``(B) an amount equal to the compensation 
                includible in the individual's gross income for such 
                taxable year.
            ``(2) Deductible amount.--For purposes of paragraph (1)(A), 
        the deductible amount shall be determined in accordance with 
        the following table:

 
                                                                 The
      ``For taxable years beginning in calendar year--        deductible
                                                             amount is--
 
2006 or 2007...............................................       $4,000
2008 or thereafter.........................................      $5,000.
 

            ``(3) Cost-of-living adjustment.--
                    ``(A) In general.--In the case of any taxable year 
                beginning in a calendar year after 2008, the $5,000 
                amount in paragraph (2) shall be increased by an amount 
                equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 2007' 
                        for `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--If any amount after adjustment 
                under clause (i) is not a multiple of $500, such amount 
                shall be rounded to the next lower multiple of $500.
    ``(c) Limitation Based on Adjusted Gross Income.--
            ``(1) In general.--The deductible amount otherwise 
        applicable under subsection (b) for any taxable year shall be 
        reduced (but not below zero) by the amount determined under 
        paragraph (2).
            ``(2) Amount of reduction.--
                    ``(A) In general.--The amount determined under this 
                paragraph with respect to any dollar limitation shall 
                be the amount which bears the same ratio to such 
                limitation as--
                            ``(i) the excess of--
                                    ``(I) the taxpayer's adjusted gross 
                                income for such taxable year, over
                                    ``(II) the applicable dollar 
                                amount, bears to
                            ``(ii) $15,000 ($10,000 in the case of a 
                        joint return or a married individual filing a 
                        separate return).
                    ``(B) Applicable dollar amount.--For purposes of 
                subparagraph (A), the applicable dollar amount is--
                            ``(i) in the case of a taxpayer filing a 
                        joint return, $150,000,
                            ``(ii) in the case of any other taxpayer 
                        (other than a married individual filing a 
                        separate return), $95,000, and
                            ``(iii) in the case of a married individual 
                        filing a separate return, zero.
                    ``(C) No reduction below $200 until complete phase-
                out.--No dollar limitation shall be reduced below $200 
                under subparagraph (A) unless (without regard to this 
                subparagraph) such limitation is reduced to zero.
                    ``(D) Rounding.--Any amount determined under this 
                paragraph which is not a multiple of $10 shall be 
                rounded to the next lowest $10.
            ``(3) Adjusted gross income.--For purposes of this 
        subsection, adjusted gross income of any taxpayer shall be 
        determined--
                    ``(A) after application of sections 86, 219, and 
                469, and
                    ``(B) without regard to sections 135, 137, 221, and 
                911 or the deduction allowable under this section.
            ``(4) Married individuals filing separate returns.--
                    ``(A) In general.--In the case of a married 
                individual filing a separate return, the amount 
                applicable under paragraph (2)(A)(i)(II) is zero.
                    ``(B) Special rule for married individuals filing 
                separately and living apart.--A husband and wife who--
                            ``(i) file separate returns for any taxable 
                        year, and
                            ``(ii) live apart at all times during such 
                        taxable year,
                shall not be treated as married individuals for 
                purposes of this subsection.
    ``(d) Special Rules for Certain Married Individuals.--
            ``(1) In general.--In the case of an individual to whom 
        this paragraph applies for the taxable year, the limitation of 
        paragraph (1) of subsection (b) shall be equal to the lesser 
        of--
                    ``(A) the dollar amount in effect under subsection 
                (b)(1)(A) for the taxable year, or
                    ``(B) the sum of--
                            ``(i) the compensation includible in such 
                        individual's gross income for the taxable year, 
                        plus
                            ``(ii) the compensation includible in the 
                        gross income of such individual's spouse for 
                        the taxable year reduced by the amount allowed 
                        as a deduction under subsection (a) to such 
                        spouse for such taxable year.
            ``(2) Individuals to whom paragraph (1) applies.--Paragraph 
        (1) shall apply to any individual if--
                    ``(A) such individual files a joint return for the 
                taxable year, and
                    ``(B) the amount of compensation (if any) 
                includible in such individual's gross income for the 
                taxable year is less than the compensation includible 
                in the gross income of such individual's spouse for the 
                taxable year.
    ``(e) Qualified Universal Pension Contributions.--For purposes of 
this section, the term `qualified universal pension contribution' means 
any amount paid in cash for the taxable year by or on behalf of an 
individual to a Universal PensionAccount for such individual's benefit.
    ``(f) Other Definitions and Special Rules.--
            ``(1) Attainment of age 70\1/2\.--No deduction shall be 
        allowed under this section with respect to any qualified 
        retirement contribution for the benefit of an individual if 
        such individual has attained age 70\1/2\ before the close of 
        such individual's taxable year for which the contribution was 
        made.
            ``(2) Recontributed amounts.--No deduction shall be allowed 
        under this section with respect to a rollover contribution to a 
        Universal Pension Account.
            ``(3) Denial of deduction for amount contributed to 
        inherited accounts.--No deduction shall be allowed under this 
        section with respect to any amount paid to an inherited 
        Universal Pension Account.
    ``(g) Other Definitions and Special Rules.--
            ``(1) Compensation.--For purposes of this section, the term 
        `compensation' has the meaning given to such term by section 
        219(f)(1).
            ``(2) Married individuals.--The maximum deduction under 
        subsection (b) shall be computed separately for each 
        individual, and this section shall be applied without regard to 
        any community property laws.
            ``(3) Time when contributions deemed made.--A taxpayer 
        shall be deemed to have made a contribution to a Universal 
        Pension Account on the last day of the preceding taxable year 
        if the contribution is made on account of such taxable year and 
        is made not later than the time prescribed by law for filing 
        the return for such taxable year (not including extensions 
        thereof).
            ``(4) Employer payments.--For purposes of this title, any 
        amount paid by an employer to a Universal Pension Account shall 
        be treated as payment of compensation to the employee (other 
        than a self-employed individual who is an employee within the 
        meaning of section 401(c)(1)) includible in the employee's 
        gross income in the taxable year for which the amount was 
        contributed, whether or not a deduction for such payment is 
        allowable under this section to the employee.
            ``(5) Excess contributions treated as contribution made 
        during subsequent year for which there is an unused 
        limitation.--A rule similar to the rule of section 219(f)(5) 
        shall apply for purposes of this section.''.
            (2) Deduction allowed whether or not taxpayer itemizes 
        deductions.--Subsection (a) of section 62 is amended by 
        inserting after paragraph (20) the following new paragraph:
            ``(21) Contributions to universal pension accounts.--The 
        deduction allowed by section 219A.''.
            (3) Technical amendments.--
                    (A) Subparagraph (B) of section 135(c)(4) is 
                amended by striking ``and 219'' and inserting ``219, 
                and 219A''.
                    (B) Subparagraph (B) of section 137(b)(3) is 
                amended by inserting ``219A,'' after ``219,''.
                    (C) Subparagraph (A) of section 199(d)(2) is 
                amended by inserting ``219A,'' after ``219,''.
                    (D) Clause (ii) of section 219(g)(3)(A) is amended 
                by inserting ``219A,'' after ``137,''.
                    (E) Clause (ii) of section 221(b)(2)(C) is amended 
                by inserting ``219A,'' after ``219,''.
                    (F) Clause (ii) of section 222(b)(2)(C) is amended 
                by inserting ``219A,'' after ``219,''.
                    (G) Clause (iii) of section 469(i)(3)(F) is amended 
                by inserting ``219A,'' after ``219,''.
            (4) Clerical amendment.--The table of sections for part VII 
        of subchapter B of chapter 1 is amended by inserting after the 
        item relating to section 219 the following new item:

``Sec. 219A. Contributions to Universal Pension Accounts.''.
    (b) Universal Pension Accounts.--
            (1) In general.--Subpart A of part I of subchapter D of 
        chapter 1 is amended by inserting after section 408A the 
        following new section:

``SEC. 408B. UNIVERSAL PENSION ACCOUNTS.

    ``(a) In General.--For purposes of this title, the term `Universal 
Pension Account' means a trust created or organized in the United 
States for the exclusive benefit of an individual or such individual's 
beneficiaries, but only if the written governing instrument creating 
the trust meets the following requirements:
            ``(1) Except in the case of a rollover contribution 
        described in subsection (b)(3) or in section 402(c), 403(a)(4), 
        403(b)(8), or 457(e)(16), no contribution will be accepted 
        unless it is in cash, and contributions will not be accepted 
        for the taxable year on behalf of any individual in excess of 
        the deductible amount in effect for such taxable year under 
        section 219A(b)(2).
            ``(2) The trustee is a bank (as defined in section 408(n)) 
        or such other person who demonstrates to the satisfaction of 
        the Secretary that the manner in which such other person will 
        administer the trust will be consistent with the requirements 
        of this section.
            ``(3) No part of the trust funds will be invested in life 
        insurance contracts.
            ``(4) The interest of an individual in the balance in such 
        individual's account is nonforfeitable.
            ``(5) The assets of the trust will not be commingled with 
        other property except in a common trust fund or common 
        investment fund.
            ``(6) Under regulations prescribed by the Secretary, rules 
        similar to the rules of section 401(a)(9) and the incidental 
        death benefit requirements of section 401(a) shall apply to the 
        distribution of the entire interest of an individual for whose 
        benefit the trust is maintained.
    ``(b) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount distributed out of a Universal Pension 
        Account shall be included in gross income by the distributee 
        without regard to basis.
            ``(2) Exception for immediate annuities.--If any 
        distribution is a part of a series of substantially equal 
        periodic payments (not less frequently than annually) made for 
        the life (or life expectancy) of the distributee or the joint 
        lives (or joint life expectancies) of such distributee and such 
        distributee's designated beneficiary, the amount includible in 
        gross income under paragraph (1) shall be determined in the 
        manner provided under section 72. The rules of section 
        408(d)(2) shall apply for purposes of the preceding sentence.
            ``(3) Exception for rollovers.--
                    ``(A) In general.--Paragraph (1) shall not apply to 
                any amount distributed out of a Universal Pension 
                Account to the individual for whose benefit the account 
                is maintained if the entire amount received (including 
                money and any other property) is paid into a Universal 
                Pension Account (other than an endowment contract) for 
                the benefit of such individual not later than the 60th 
                day after the day on which the individual receives the 
                distribution.
                    ``(B) Limitation.--This paragraph does not apply to 
                any amount described in subparagraph (A) received by an 
                individual from a Universal Pension Account if at any 
                time during the 1-year period ending on the day of such 
                receipt such individual received any other amount 
                described in that subparagraph from a Universal Pension 
                Account which was not includible in such individual's 
                gross income because of the application of this 
                paragraph.
                    ``(C) Special rules.--Rules similar to the rules of 
                subparagraphs (C), (D), (E), (F), and (I) of section 
                408(d)(3) shall apply for purposes of this paragraph.
            ``(4) Exception for qualified distributions.--
                    ``(A) Distributions for higher education 
                expenses.--Paragraph (1) shall not apply to 
                distributions to an individual to the extent such 
                distributions do not exceed the qualified higher 
                education expenses (as defined in section 72(t)(7)) of 
                the taxpayer for the taxable year.
                    ``(B) Distributions for first home purchases.--
                Paragraph (1) shall not apply to distributions to an 
                individual which are qualified first-time homebuyer 
                distributions (as defined in section 72(t)(8)).
            ``(5) Other distributions.--Rules similar to the rules of 
        paragraphs (4) and (6) of section 408(d) shall apply for 
        purposes of this subsection.
    ``(c) Tax Treatment of Accounts.--
            ``(1) Exemption from tax.--Any Universal Pension Account is 
        exempt from taxation under this subtitle unless such account 
        has ceased to be a Universal Pension Account by reason of 
        paragraph (2). Notwithstanding the preceding sentence, any such 
        account is subject to the taxes imposed by section 511 
        (relating to imposition of tax on unrelated business income of 
        charitable, etc. organizations).
            ``(2) Loss of exemption for prohibited transaction.--Rules 
        similar to the rules of section 408(e)(2) shall apply for 
        purposes of this subsection.
            ``(3) Effect of pledging account as security; purchase of 
        endowment contract; commingling amounts in certain common trust 
        funds and common investment funds.--Rules similar to the rules 
        of paragraphs (4), (5), and (6) of section 408(e) shall apply 
        for purposes of this subsection.
    ``(d) Rollovers Permitted From IRA's, Etc.--Solely for purposes of 
determining whether any rollover may be made to a Universal Pension 
Account, a Universal Pension Account shall be treated as if it were an 
individual retirement plan. No amount may be distributed in a rollover 
other than to a Universal Pension Account.
    ``(e) Special Rules.--
            ``(1) Community property laws.--This section shall be 
        applied without regard to any community property laws.
            ``(2) Custodial accounts.--Rules similar to the rules of 
        section 408(g) shall apply for purposes of this subsection.
            ``(3) Investment in collectibles treated as 
        distributions.--The acquisition by a Universal Pension Account 
        of any collectible (as defined in section 408(m)) shall be 
        treated (for purposes of this section and section 402) as a 
        distribution from such account in an amount equal to the cost 
        to such account of such collectible.
    ``(f) Reports.--The trustee of a Universal Pension Account shall 
make such reports regarding such Account to the Secretary and to the 
individuals for whom the Account is, or is to be, maintained with 
respect to contributions (and the years to which they relate), 
distributions, aggregating $10 or more in any calendar year and such 
other matters as the Secretary may require. The reports required by 
this subsection--
            ``(1) shall be filed at such time and in such manner as the 
        Secretary prescribes, and
            ``(2) shall be furnished to individuals--
                    ``(A) not later than January 31 of the calendar 
                year following the calendar year to which such reports 
                relate, and
                    ``(B) in such manner as the Secretary 
                prescribes.''.
            (2) Technical amendments.--
                    (A) Excess contributions.--
                            (i) In general.--Subsection (a) of section 
                        4973 is amended by redesignating paragraphs 
                        (2), (3), and (4) as paragraphs (3), (4), and 
                        (5), respectively, and by inserting after 
                        paragraph (1) the following new paragraph:
            ``(2) a Universal Pension Account (as defined in section 
        408B),''.
                            (ii) Determination of excess.--Section 4973 
                        is amended by adding at the end the following 
                        new subsection:
    ``(i) Excess Contributions to Universal Pension Accounts.--Rules 
similar to the rules under subsection (b) shall apply to any Universal 
Pension Account (as defined in section 408B).''.
                    (B) Early withdrawal penalty, etc.--Subsection (c) 
                of section 4974 is amended by striking ``or'' at the 
                end of paragraph (4), by striking the period at the end 
                of paragraph (5) and inserting ``, or'', and by 
                inserting after paragraph (5) the following new 
                paragraph:
            ``(6) a Universal Pension Account described in section 
        408B.''.
                    (C) Prohibited transactions.--
                            (i) In general.--Paragraph (1) of section 
                        4975(e) is amended by redesignating 
                        subparagraphs (D), (E), and (F) as 
                        subparagraphs (E), (F), and (G), respectively, 
                        and by inserting after subparagraph (C) the 
                        following new subparagraph:
                    ``(D) a Universal Pension Account described in 
                section 408B,''.
                            (ii) Exception.--Subsection (c) of section 
                        4975 is amended by adding at the end the 
                        following new paragraph:
            ``(5) Special rule for universal pension accounts.--An 
        individual for whose benefit a Universal Pension Account is 
        established shall be exempt from the tax imposed by this 
        section with respect to any transaction concerning such Account 
        (which would otherwise be taxable under this section) if 
        section 408B(d)(2) applies with respect to such transaction.''.
                    (D) Failure to provide reports.--Paragraph (2) of 
                section 6693(a) (relating to failure to provide reports 
                on individual retirement accounts or annuities) is 
                amended by redesignating subparagraphs (C) and (D) as 
                subparagraphs (D) and (E), respectively, and by 
                inserting after subparagraph (B) the following new 
                subparagraph:
                    ``(C) a Universal Pension Account described in 
                section 408B,''.
                    (E) W-2 reporting.--Subsection (a) of section 6051 
                is amended by striking ``and'' at the end of paragraph 
                (10), by striking the period at the end of paragraph 
                (11) and inserting ``, and'', and by inserting after 
                paragraph (11) the following new paragraph:
            ``(12) the total amount of elective employer contributions 
        under section 408B(f)(2)(A).''.
                    (F) Other technical amendments.--The following 
                provisions are each amended by inserting ``408B(f),'' 
                after ``408(p),'':
                            (i) Subsections (b) and (c) of section 414.
                            (ii) Section 414(m)(4)(B).
                            (iii) Section 414(n)(3)(B).
                            (iv) Section 414(u)(1)(C).
                    (G) Elective contributions subject to fica and 
                futa.--
                            (i) Paragraph (5) of section 3121(a) is 
                        amended by striking ``or'' at the end of 
                        subparagraph (H), by striking the semicolon at 
                        the end of subparagraph (I) and inserting ``, 
                        or'', and by adding at the end the following 
                        new subparagraph:
                    ``(J) under an arrangement to which section 408B(f) 
                applies, other than any elective contributions under 
                paragraph (2)(A) thereof;''.
                            (ii) Paragraph (4) of section 209(a) of the 
                        Social Security Act is amended by adding at the 
                        end ``or (J) under an arrangement to which 
                        section 408B(f) of such Code applies, other 
                        than any elective contributions under paragraph 
                        (2)(A) thereof;''.
                            (iii) Paragraph (5) of section 3306(b) is 
                        amended by striking ``or'' at the end of 
                        subparagraph (G), by striking the semicolon at 
                        the end of subparagraph (H) and inserting ``, 
                        or'', and by adding at the end the following 
                        new subparagraph:
                    ``(I) under an arrangement to which section 408B(f) 
                applies, other than any elective contributions under 
                paragraph (2)(A) thereof;''.
                            (iv) Paragraph (12) of section 3401(a) is 
                        amended by adding at the end the following new 
                        subparagraph:
                    ``(F) under an arrangement to which section 408B(f) 
                applies; or''.
            (3) Clerical amendment.--The table of sections for subpart 
        A of part I of subchapter D of chapter 1 is amended by 
        inserting after the item relating to section 408A the following 
        new item:

``Sec. 408B. Universal Pension Accounts.''.
    (c) Termination of Contributions to Individual Retirement Plans, 
Including Roth IRA's.--
            (1) Subsection (a) of section 408 is amended by adding at 
        the end the following new paragraph:
            ``(7) No contribution (other than a rollover contribution 
        referred to in paragraph (1)) shall be accepted for any taxable 
        year beginning after December 31, 2005, unless such account is 
        a simplified employee pension or a simple retirement 
        account.''.
            (2) Subsection (b) of section 408 is amended by inserting 
        after paragraph (4) the following new paragraph:
            ``(5) No contribution shall be accepted for any taxable 
        year beginning after December 31, 2005, unless such annuity is 
        a simplified employee pension or a simple retirement 
        account.''.
    (d) Credit for Small Employers Maintaining Salary Reduction 
Arrangements for Universal Pension Accounts.--
            (1) In general.--Subpart D of part IV of subchapter A of 
        chapter 1 (relating to business related credits) is amended by 
        adding at the end the following new section:

``SEC. 45N. SMALL EMPLOYER UNIVERSAL PENSION ACCOUNT COSTS.

    ``(a) General Rule.--For purposes of section 38, in the case of an 
eligible employer, the small employer Universal Pension Account cost 
credit determined under this section for any taxable year is the 
aggregate of the amount determined under subsection (b) for each 
employee participating in an arrangement meeting the requirements of 
section 408B(f).
    ``(b) Amount of Credit.--The amount of the credit determined under 
this section for any taxable year with respect to an employee shall 
be--
            ``(1) $50 for the taxable year which includes the date that 
        the arrangement referred to subsection (a) becomes effective,
            ``(2) $20 for each of the 3 taxable years following the 
        taxable year described in paragraph (1), and
            ``(3) zero for any other taxable year.
    ``(c) Eligible Employer.--For purposes of this section, the term 
`eligible employer' means, with respect to any taxable year, an 
employer which had no more than 100 employees on a typical business day 
during the most recent calendar year ending before such taxable year. 
For purposes of the preceding sentence, all persons treated as a single 
employer under subsection (a) or (b) of section 52, or subsection (n) 
or (o) of section 414, shall be treated as one person.''.
            (2) Credit allowed as part of general business credit.--
        Section 38(b) (defining current year business credit) is 
        amended by striking ``plus'' at the end of paragraph (25), by 
        striking the period at the end of paragraph (26) and inserting 
        ``, plus'', and by adding at the end the following new 
        paragraph:
            ``(27) in the case of an eligible employer (as defined in 
        section 45J(c)), the small employer Universal Pension Account 
        cost credit determined under section 45J(a).''.
            (3) Clerical amendment.--The table of sections for subpart 
        D of part IV of subchapter A of chapter 1 is amended by adding 
        at the end the following new item:

``Sec. 45N. Small employer Universal Pension Account costs''.
    (e) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 107. REPEAL OF INDIVIDUAL ALTERNATIVE MINIMUM TAX.

    (a) In General.--Section 55(a) (relating to alternative minimum tax 
imposed) is amended by adding at the end the following new flush 
sentence:
``For purposes of this title, the tentative minimum tax on any taxpayer 
other than a corporation for any taxable year beginning after December 
31, 2005, shall be zero.''.
    (b) Modification of Limitation on Use of Credit for Prior Year 
Minimum Tax Liability.--Subsection (c) of section 53 (relating to 
credit for prior year minimum tax liability) is amended to read as 
follows:
    ``(c) Limitation.--
            ``(1) In general.--Except as provided in paragraph (2), the 
        credit allowable under subsection (a) for any taxable year 
        shall not exceed the excess (if any) of--
                    ``(A) the regular tax liability of the taxpayer for 
                such taxable year reduced by the sum of the credits 
                allowable under subparts A, B, D, E, and F of this 
                part, over
                    ``(B) the tentative minimum tax for the taxable 
                year.
            ``(2) Taxable years beginning after 2005.--In the case of 
        any taxable year beginning after 2005, the credit allowable 
        under subsection (a) to a taxpayer other than a corporation for 
        any taxable year shall not exceed 90 percent of the regular tax 
        liability of the taxpayer for such taxable year reduced by the 
        sum of the credits allowable under subparts A, B, D, E, and F 
        of this part.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

                      TITLE II--INCOME TAX REFORMS

  Subtitle A--Provisions Relating to Corporate and Business Income Tax

SEC. 201. CORPORATE FLAT TAX.

    (a) In General.--Subsection (b) of section 11 (relating to tax 
imposed) is amended to read as follows:
    ``(b) Amount of Tax.--The amount of tax imposed by subsection (a) 
shall be equal to 35 percent of the taxable income.''.
    (b) Conforming Amendments.--
            (1) Section 280C(c)(3)(B)(ii)(II) is amended by striking 
        ``maximum rate of tax under section 11(b)(1)'' and inserting 
        ``rate of tax under section 11(b)''.
            (2) Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 
        860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 1446(b)(2)(B), and 
        7874(e)(1)(B) are each amended by striking ``highest rate of 
        tax specified in section 11(b)(1)'' and inserting ``rate of tax 
        specified in section 11(b)''.
            (3) Section 904(b)(3)(D)(ii) is amended by striking 
        ``(determined without regard to the last sentence of section 
        11(b)(1))''.
            (4) Section 962 is amended by striking subsection (c) and 
        by redesignating subsection (d) as subsection (c).
            (5) Section 1201(a) is amended by striking ``(determined 
        without regard to the last 2 sentences of section 11(b)(1))''.
            (6) Section 1561(a) is amended--
                    (A) by striking paragraph (1) and by redesignating 
                paragraphs (2), (3), and (4) as paragraphs (1), (2), 
                and (3), respectively,
                    (B) by striking ``The amounts specified in 
                paragraph (1), the'' and inserting ``The'',
                    (C) by striking ``paragraph (2)'' and inserting 
                ``paragraph (1)'',
                    (D) by striking ``paragraph (3)'' both places it 
                appears and inserting ``paragraph (2)'',
                    (E) by striking ``paragraph (4)'' and inserting 
                ``paragraph (3)'', and
                    (F) by striking the fourth sentence.
            (7) Subsection (b) of section 1561 is amended to read as 
        follows:
    ``(b) Certain Short Taxable Years.--If a corporation has a short 
taxable year which does not include a December 31 and is a component 
member of a controlled group of corporations with respect to such 
taxable year, then for purposes of this subtitle, the amount to be used 
in computing the accumulated earnings credit under section 535(c)(2) 
and (3) of such corporation for such taxable year shall be the amount 
specified in subsection (a)(1) divided by the number of corporations 
which are component members of such group on the last day of such 
taxable year. For purposes of the preceding sentence, section 1563(b) 
shall be applied as if such last day were substituted for December 
31.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 202. TREATMENT OF TRAVEL ON CORPORATE AIRCRAFT.

    (a) In General.--Section 162 (relating to trade or business 
expenses) is amended by redesignating subsection (q) as subsection (r) 
and b inserting after subsection (p) the following new subsection:
    ``(q) Treatment of Travel on Corporate Aircraft.--The rate at which 
an amount allowable as a deduction under this chapter for the use of an 
aircraft owned by the taxpayer is determined shall not exceed the rate 
at which an amount paid or included in income by an employee of such 
taxpayer for the personal use of such aircraft is determined.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 203. VALUATION OF EMPLOYEE PERSONAL USE OF NONCOMMERCIAL AIRCRAFT.

    (a) In General.--For purposes of Federal income tax inclusion, the 
value of any employee personal use of noncommercial aircraft shall 
equal the excess (if any) of--
            (1) greater of--
                    (A) the fair market value of such use, or
                    (B) the actual cost of such use (including all 
                fixed and variable costs), over
            (2) any amount paid by or on behalf of such employee for 
        such use.
    (b) Effective Date.--Subsection (a) shall apply to use after the 
date of the enactment of this Act.

SEC. 204. ELIMINATION OF TAX EXPENDITURES THAT SUBSIDIZE INEFFICIENCIES 
              IN THE HEALTH CARE SYSTEM.

    Not later than 180 days after the date of the enactment of this 
Act, the Secretary of the Treasury shall report to the Committee on 
Finance of the Senate and the Committee on Ways and Means of the House 
of Representatives recommendations regarding the elimination of Federal 
tax incentives which subsidize inefficiencies in the health care system 
and if eliminated would result in Federal budget savings of not less 
than $10,000,000,000 annually.

SEC. 205. PASS-THROUGH BUSINESS ENTITY TRANSPARENCY.

    Not later than 90 days after the date of the enactment of this Act, 
the Secretary of the Treasury shall report to the Committee on Finance 
of the Senate and the Committee on Ways and Means of the House of 
Representatives regarding the implementation of additional reporting 
requirements with respect to any pass-through entity with the goal of 
the reduction of tax avoidance through the use of such entities, In 
addition, the Secretary shall develop procedures to share such report 
data with State revenue agencies under the disclosure requirements of 
section 6103(d) of the Internal Revenue Code of 1986.

SEC. 206. BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES 
              TRANSACTIONS.

    (a) In General.--Section 6045 (relating to returns of brokers) is 
amended by adding at the end the following new subsection:
    ``(g) Additional Information Required in the Case of Securities 
Transactions.--
            ``(1) In general.--If a broker is otherwise required to 
        make a return under subsection (a) with respect to any 
        applicable security, the broker shall include in such return 
        the information described in paragraph (2).
            ``(2) Additional information required.--
                    ``(A) In general.--The information required under 
                paragraph (1) to be shown on a return with respect to 
                an applicable security of a customer shall include for 
                each reported applicable security the customer's 
                adjusted basis in such security.
                    ``(B) Exemption from requirement.--The Secretary 
                shall issue such regulations or guidance as necessary 
                concerning the application of the requirement under 
                subparagraph (A) in cases in which a broker in making a 
                return does not have sufficient information to meet 
                such requirement with respect to the reported 
                applicable security. Such regulations or guidance may--
                            ``(i) require such other information 
                        related to such adjusted basis as the Secretary 
                        may prescribe, and
                            ``(ii) exempt classes of cases in which the 
                        broker does not have sufficient information to 
                        meet either the requirement under subparagraph 
                        (A) or the requirement under clause (i).
            ``(3) Information transfers.--To the extent provided in 
        regulations, there shall be such exchanges of information 
        between brokers as such regulations may require for purposes of 
        enabling such brokers to meet the requirements of this 
        subsection.
            ``(4) Definitions.--For purposes of this subsection, the 
        term `applicable security' means any--
                    ``(A) security described in subparagraph (A) or (C) 
                of section 475(c)(2),
                    ``(B) interest in a regulated investment company 
                (as defined in section 851), or
                    ``(C) other financial instrument designated in 
                regulations prescribed by the Secretary.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to returns the due date for which (determined without regard to 
extensions) is after December 31, 2008, with respect to securities 
acquired after December 31, 2007.

SEC. 207. REPEAL OF LOWER COST OR MARKET INVENTORY METHOD.

    (a) In General.--Section 471 (relating to general rule for 
inventories) is amended by redesignating subsection (c) as subsection 
(d) and by inserting after subsection (b) the following new subsection:
    ``(c) Prohibition on Use of Lower Cost or Market Method.--
            ``(1) In general.--For any taxable year beginning after 
        December 31, 2006, a taxpayer may not use any method which 
        values inventories at cost or market, whichever is lower.
            ``(2) 3-year averaging for increases in inventory value.--
        In the case of a taxpayer that used a method which values 
        inventories at cost or market, whichever is lower, for the 
        taxable year ending with or within December 31, 2006, the 
        beginning inventory for the first taxable year beginning after 
        such date shall be valued both with and without the application 
        of paragraph (1). Any change in the inventory amount resulting 
        from the application of the preceding sentence shall be taken 
        into account ratably in each of the 3 taxable years beginning 
        with the first taxable year for which the method described in 
        subsection (b) is first used.
            ``(3) Certain adjustments not to apply.--Section 481 shall 
        not apply with respect to any change in the method of 
        accounting which is required by this subsection.''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 2006.

SEC. 208. IMPOSITION OF WITHHOLDING ON CERTAIN PAYMENTS MADE BY 
              GOVERNMENT ENTITIES.

    (a) In General.--Section 3402 is amended by adding at the end the 
following new subsection:
    ``(t) Extension of Withholding to Certain Payments Made by 
Government Entities.--
            ``(1) General rule.--The Government of the United States, 
        every State, every political subdivision thereof, and every 
        instrumentality of the foregoing (including multi-State 
        agencies) making any payment for goods and services which is 
        subject to withholding shall deduct and withhold form such 
        payment a tax in an amount equal to 3 percent of such payment.
            ``(2) Exceptions.--Paragraph (1) shall not apply to any 
        payment--
                    ``(A) except as provided in subparagraph (B), which 
                is subject to withholding under any other provision of 
                this chapter or chapter 3,
                    ``(B) which is subject to withholding under section 
                3406 and from which amounts are being withheld under 
                such section,
                    ``(C) of interest,
                    ``(D) for real property,
                    ``(E) to any tax-exempt entity, foreign government, 
                or other entity subject to the requirements of 
                paragraph (1),
                    ``(F) made pursuant to a classified or confidential 
                contract (as defined in section 6050M(e)(3)), and
                    ``(G) made by a political subdivision of a State 
                (or any instrumentality thereof) which makes less than 
                $100,000,000 of such payments annually.
            ``(3) Coordination with other sections.--For purposes of 
        sections 3403 and 3404 and for purposes of so much of subtitle 
        F (except section 7205) as relates to this chapter, payments to 
        any person of any payment for goods and services which is 
        subject to withholding shall be treated as if such payments 
        were wages paid by an employer to an employee.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to payments made after December 31, 2006.

        Subtitle B--Provisions Designed to Curtail Tax Shelters

SEC. 211. PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS.

    (a) Penalty for Promoting Abusive Tax Shelters.--Section 6700 
(relating to promoting abusive tax shelters, etc.) is amended--
            (1) by redesignating subsections (b) and (c) as subsections 
        (d) and (e), respectively,
            (2) by striking ``a penalty'' and all that follows through 
        the period in the first sentence of subsection (a) and 
        inserting ``a penalty determined under subsection (b)'', and
            (3) by inserting after subsection (a) the following new 
        subsections:
    ``(b) Amount of Penalty; Calculation of Penalty; Liability for 
Penalty.--
            ``(1) Amount of penalty.--The amount of the penalty imposed 
        by subsection (a) shall be 100 percent of the gross income 
        derived (or to be derived) from such activity by the person or 
        persons subject to such penalty.
            ``(2) Calculation of penalty.--The penalty amount 
        determined under paragraph (1) shall be calculated with respect 
        to each instance of an activity described in subsection (a), 
        each instance in which income was derived by the person or 
        persons subject to such penalty, and each person who 
        participated in such an activity.
            ``(3) Liability for penalty.--If more than 1 person is 
        liable under subsection (a) with respect to such activity, all 
        such persons shall be jointly and severally liable for the 
        penalty under such subsection.
    ``(c) Penalty not Deductible.--The payment of any penalty imposed 
under this section or the payment of any amount to settle or avoid the 
imposition of such penalty shall not be considered an ordinary and 
necessary expense in carrying on a trade or business for purposes of 
this title and shall not be deductible by the person who is subject to 
such penalty or who makes such payment.''.
    (b) Conforming Amendment.--Section 6700(a) is amended by striking 
the last sentence.
    (c) Effective Date.--The amendments made by this section shall 
apply to the activities described in paragraphs (1) and (2) of section 
6700(a) of the Internal Revenue Code of 1986 and after the date of the 
enactment of this Act.

SEC. 212. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT OF TAX 
              LIABILITY.

    (a) In General.--Section 6701(a) (relating to imposition of 
penalty) is amended--
            (1) by inserting ``, or tax liability reflected in,'' after 
        ``the preparation or presentation of'' in paragraph (1),
            (2) by inserting ``aid, assistance, procurement, or advice 
        with respect to such'' before ``portion'' both places it 
        appears in paragraphs (2) and (3), and
            (3) by inserting ``instance of aid, assistance, 
        procurement, or advice or each such'' before ``document'' in 
        the matter following paragraph (3).
    (b) Amount of Penalty.--Subsection (b) of section 6701 (relating to 
penalties for aiding and abetting understatement of tax liability) is 
amended to read as follows:
    ``(b) Amount of Penalty; Calculation of Penalty; Liability for 
Penalty.--
            ``(1) Amount of penalty.--The amount of the penalty imposed 
        by subsection (a) shall be 100 percent of the gross income 
        derived (or to be derived) from such aid, assistance, 
        procurement, or advice provided by the person or persons 
        subject to such penalty.
            ``(2) Calculation of penalty.--The penalty amount 
        determined under paragraph (1) shall be calculated with respect 
        to each instance of aid, assistance, procurement, or advice 
        described in subsection (a), each instance in which income was 
        derived by the person or persons subject to such penalty, and 
        each person who made such an understatement of the liability 
        for tax.
            ``(3) Liability for penalty.--If more than 1 person is 
        liable under subsection (a) with respect to providing such aid, 
        assistance, procurement, or advice, all such persons shall be 
        jointly and severally liable for the penalty under such 
        subsection.''.
    (c) Penalty not Deductible.--Section 6701 is amended by adding at 
the end the following new subsection:
    ``(g) Penalty not Deductible.--The payment of any penalty imposed 
under this section or the payment of any amount to settle or avoid the 
imposition of such penalty shall not be considered an ordinary and 
necessary expense in carrying on a trade or business for purposes of 
this title and shall not be deductible by the person who is subject to 
such penalty or who makes such payment.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to the activities described in section 6701(a) of the Internal 
Revenue Code of 1986 after the date of the enactment of this Act.

SEC. 213. INCREASE IN CRIMINAL MONETARY PENALTY LIMITATION FOR THE 
              UNDERPAYMENT OR OVERPAYMENT OF TAX DUE TO FRAUD.

    (a) In General.--Section 7206 (relating to fraud and false 
statements) is amended--
            (1) by striking ``Any person who--'' and inserting ``(a) In 
        General.--Any person who--'', and
            (2) by adding at the end the following new subsection:
    ``(b) Increase in Monetary Limitation for Underpayment or 
Overpayment of Tax Due to Fraud.--If any portion of any underpayment 
(as defined in section 6664(a)) or overpayment (as defined in section 
6401(a)) of tax required to be shown on a return is attributable to 
fraudulent action described in subsection (a), the applicable dollar 
amount under subsection (a) shall in no event be less than an amount 
equal to such portion. A rule similar to the rule under section 6663(b) 
shall apply for purposes of determining the portion so attributable.''.
    (b) Increase in Penalties.--
            (1) Attempt to evade or defeat tax.--Section 7201 is 
        amended--
                    (A) by striking ``$100,000'' and inserting 
                ``$500,000'',
                    (B) by striking ``$500,000'' and inserting 
                ``$1,000,000'', and
                    (C) by striking ``5 years'' and inserting ``10 
                years''.
            (2) Willful failure to file return, supply information, or 
        pay tax.--Section 7203 is amended--
                    (A) in the first sentence--
                            (i) by striking ``Any person'' and 
                        inserting the following:
    ``(a) In General.--Any person'', and
                            (ii) by striking ``$25,000'' and inserting 
                        ``$50,000'',
                    (B) in the third sentence, by striking ``section'' 
                and inserting ``subsection'', and
                    (C) by adding at the end the following new 
                subsection:
    ``(b) Aggravated Failure to File.--
            ``(1) In general.--In the case of any failure described in 
        paragraph (2), the first sentence of subsection (a) shall be 
        applied by substituting--
                    ``(A) `felony' for `misdemeanor'
                    ``(B) `$500,000 ($1,000,000' for `$25,000 
                ($100,000', and
                    ``(C) `10 years' for `1 year'.
            ``(2) Failure described.--A failure described in this 
        paragraph is a failure to make a return described in subsection 
        (a) for a period of 3 or more consecutive taxable years.''.
            (3) Fraud and false statements.--Section 7206(a) (as 
        redesignated by subsection (a)) is amended--
                    (A) by striking ``$100,000'' and inserting 
                ``$500,000'',
                    (B) by striking ``$500,000'' and inserting 
                ``$1,000,000'', and
                    (C) by striking ``3 years'' and inserting ``5 
                years''.
    (c) Effective Date.--The amendments made by this section shall 
apply to actions, and failures to act, occurring after the date of the 
enactment of this Act.

                Subtitle C--Economic Substance Doctrine

SEC. 221. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

    (a) In General.--Section 7701 is amended by redesignating 
subsection (o) as subsection (p) and by inserting after subsection (n) 
the following new subsection:
    ``(o) Clarification of Economic Substance Doctrine; Etc.--
            ``(1) General rules.--
                    ``(A) In general.--In any case in which a court 
                determines that the economic substance doctrine is 
                relevant for purposes of this title to a transaction 
                (or series of transactions), such transaction (or 
                series of transactions) shall have economic substance 
                only if the requirements of this paragraph are met.
                    ``(B) Definition of economic substance.--For 
                purposes of subparagraph (A)--
                            ``(i) In general.--A transaction has 
                        economic substance only if--
                                    ``(I) the transaction changes in a 
                                meaningful way (apart from Federal tax 
                                effects) the taxpayer's economic 
                                position, and
                                    ``(II) the taxpayer has a 
                                substantial nontax purpose for entering 
                                into such transaction and the 
                                transaction is a reasonable means of 
                                accomplishing such purpose.
                        In applying subclause (II), a purpose of 
                        achieving a financial accounting benefit shall 
                        not be taken into account in determining 
                        whether a transaction has a substantial nontax 
                        purpose if the origin of such financial 
                        accounting benefit is a reduction of income 
                        tax.
                            ``(ii) Special rule where taxpayer relies 
                        on profit potential.--A transaction shall not 
                        be treated as having economic substance by 
                        reason of having a potential for profit 
                        unless--
                                    ``(I) the present value of the 
                                reasonably expected pre-tax profit from 
                                the transaction is substantial in 
                                relation to the present value of the 
                                expected net tax benefits that would be 
                                allowed if the transaction were 
                                respected, and
                                    ``(II) the reasonably expected pre-
                                tax profit from the transaction exceeds 
                                a risk-free rate of return.
                    ``(C) Treatment of fees and foreign taxes.--Fees 
                and other transaction expenses and foreign taxes shall 
                be taken into account as expenses in determining pre-
                tax profit under subparagraph (B)(ii).
            ``(2) Special rules for transactions with tax-indifferent 
        parties.--
                    ``(A) Special rules for financing transactions.--
                The form of a transaction which is in substance the 
                borrowing of money or the acquisition of financial 
                capital directly or indirectly from a tax-indifferent 
                party shall not be respected if the present value of 
                the deductions to be claimed with respect to the 
                transaction is substantially in excess of the present 
                value of the anticipated economic returns of the person 
                lending the money or providing the financial capital. A 
                public offering shall be treated as a borrowing, or an 
                acquisition of financial capital, from a tax-
                indifferent party if it is reasonably expected that at 
                least 50 percent of the offering will be placed with 
                tax-indifferent parties.
                    ``(B) Artificial income shifting and basis 
                adjustments.--The form of a transaction with a tax-
                indifferent party shall not be respected if--
                            ``(i) it results in an allocation of income 
                        or gain to the tax-indifferent party in excess 
                        of such party's economic income or gain, or
                            ``(ii) it results in a basis adjustment or 
                        shifting of basis on account of overstating the 
                        income or gain of the tax-indifferent party.
            ``(3) Definitions and special rules.--For purposes of this 
        subsection--
                    ``(A) Economic substance doctrine.--The term 
                `economic substance doctrine' means the common law 
                doctrine under which tax benefits under subtitle A with 
                respect to a transaction are not allowable if the 
                transaction does not have economic substance or lacks a 
                business purpose.
                    ``(B) Tax-indifferent party.--The term `tax-
                indifferent party' means any person or entity not 
                subject to tax imposed by subtitle A. A person shall be 
                treated as a tax-indifferent party with respect to a 
                transaction if the items taken into account with 
                respect to the transaction have no substantial impact 
                on such person's liability under subtitle A.
                    ``(C) Exception for personal transactions of 
                individuals.--In the case of an individual, this 
                subsection shall apply only to transactions entered 
                into in connection with a trade or business or an 
                activity engaged in for the production of income.
                    ``(D) Treatment of lessors.--In applying paragraph 
                (1)(B)(ii) to the lessor of tangible property subject 
                to a lease--
                            ``(i) the expected net tax benefits with 
                        respect to the leased property shall not 
                        include the benefits of--
                                    ``(I) depreciation,
                                    ``(II) any tax credit, or
                                    ``(III) any other deduction as 
                                provided in guidance by the Secretary, 
                                and
                            ``(ii) subclause (II) of paragraph 
                        (1)(B)(ii) shall be disregarded in determining 
                        whether any of such benefits are allowable.
            ``(4) Other common law doctrines not affected.--Except as 
        specifically provided in this subsection, the provisions of 
        this subsection shall not be construed as altering or 
        supplanting any other rule of law, and the requirements of this 
        subsection shall be construed as being in addition to any such 
        other rule of law.
            ``(5) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this subsection. Such regulations may include 
        exemptions from the application of this subsection.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.

SEC. 222. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

    (a) In General.--Subchapter A of chapter 68 is amended by inserting 
after section 6662A the following new section:

``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO TRANSACTIONS 
              LACKING ECONOMIC SUBSTANCE, ETC.

    ``(a) Imposition of Penalty.--If a taxpayer has an noneconomic 
substance transaction understatement for any taxable year, there shall 
be added to the tax an amount equal to 40 percent of the amount of such 
understatement.
    ``(b) Reduction of Penalty for Disclosed Transactions.--Subsection 
(a) shall be applied by substituting `20 percent' for `40 percent' with 
respect to the portion of any noneconomic substance transaction 
understatement with respect to which the relevant facts affecting the 
tax treatment of the item are adequately disclosed in the return or a 
statement attached to the return.
    ``(c) Noneconomic Substance Transaction Understatement.--For 
purposes of this section--
            ``(1) In general.--The term `noneconomic substance 
        transaction understatement' means any amount which would be an 
        understatement under section 6662A(b)(1) if section 6662A were 
        applied by taking into account items attributable to 
        noneconomic substance transactions rather than items to which 
        section 6662A would apply without regard to this paragraph.
            ``(2) Noneconomic substance transaction.--The term 
        `noneconomic substance transaction' means any transaction if--
                    ``(A) there is a lack of economic substance (within 
                the meaning of section 7701(o)(1)) for the transaction 
                giving rise to the claimed benefit or the transaction 
                was not respected under section 7701(o)(2), or
                    ``(B) the transaction fails to meet the 
                requirements of any similar rule of law.
    ``(d) Rules Applicable to Compromise of Penalty.--
            ``(1) In general.--If the 1st letter of proposed deficiency 
        which allows the taxpayer an opportunity for administrative 
        review in the Internal Revenue Service Office of Appeals has 
        been sent with respect to a penalty to which this section 
        applies, only the Commissioner of Internal Revenue may 
        compromise all or any portion of such penalty.
            ``(2) Applicable rules.--The rules of paragraphs (2) and 
        (3) of section 6707A(d) shall apply for purposes of paragraph 
        (1).
    ``(e) Coordination With Other Penalties.--Except as otherwise 
provided in this part, the penalty imposed by this section shall be in 
addition to any other penalty imposed by this title.
    ``(f) Cross References.--
            ``(1) For coordination of penalty with understatements 
        under section 6662 and other special rules, see section 
        6662A(e).
            ``(2) For reporting of penalty imposed under this section 
        to the Securities and Exchange Commission, see section 
        6707A(e).''.
    (b) Coordination With Other Understatements and Penalties.--
            (1) The second sentence of section 6662(d)(2)(A) is amended 
        by inserting ``and without regard to items with respect to 
        which a penalty is imposed by section 6662B'' before the period 
        at the end.
            (2) Subsection (e) of section 6662A is amended--
                    (A) in paragraph (1), by inserting ``and 
                noneconomic substance transaction understatements'' 
                after ``reportable transaction understatements'' both 
                places it appears,
                    (B) in paragraph (2)(A), by inserting ``and a 
                noneconomic substance transaction understatement'' 
                after ``reportable transaction understatement'',
                    (C) in paragraph (2)(B), by inserting ``6662B or'' 
                before ``6663'',
                    (D) in paragraph (2)(C)(i), by inserting ``or 
                section 6662B'' before the period at the end,
                    (E) in paragraph (2)(C)(ii), by inserting ``and 
                section 6662B'' after ``This section'',
                    (F) in paragraph (3), by inserting ``or noneconomic 
                substance transaction understatement'' after 
                ``reportable transaction understatement'', and
                    (G) by adding at the end the following new 
                paragraph:
            ``(4) Noneconomic substance transaction understatement.--
        For purposes of this subsection, the term `noneconomic 
        substance transaction understatement' has the meaning given 
        such term by section 6662B(c).''.
            (3) Subsection (e) of section 6707A is amended--
                    (A) by striking ``or'' at the end of subparagraph 
                (B), and
                    (B) by striking subparagraph (C) and inserting the 
                following new subparagraphs:
                    ``(C) is required to pay a penalty under section 
                6662B with respect to any noneconomic substance 
                transaction, or
                    ``(D) is required to pay a penalty under section 
                6662(h) with respect to any transaction and would (but 
                for section 6662A(e)(2)(C)) have been subject to 
                penalty under section 6662A at a rate prescribed under 
                section 6662A(c) or under section 6662B,''.
    (c) Clerical Amendment.--The table of sections for part II of 
subchapter A of chapter 68 is amended by inserting after the item 
relating to section 6662A the following new item:

``6662B. Penalty for understatements attributable to transactions 
                            lacking economic substance, etc.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to transactions entered into after the date of the enactment of 
this Act.

SEC. 223. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
              ATTRIBUTABLE TO NONECONOMIC SUBSTANCE TRANSACTIONS.

    (a) In General.--Section 163(m) (relating to interest on unpaid 
taxes attributable to nondisclosed reportable transactions) is 
amended--
            (1) by striking ``attributable'' and all that follows and 
        inserting the following: ``attributable to--
            ``(1) the portion of any reportable transaction 
        understatement (as defined in section 6662A(b)) with respect to 
        which the requirement of section 6664(d)(2)(A) is not met, or
            ``(2) any noneconomic substance transaction understatement 
        (as defined in section 6662B(c)).'', and
            (2) by inserting ``And Noneconomic Substance Transactions'' 
        in the heading thereof after ``Transactions''.
    (b) Effective Date.--The amendments made by this section shall 
apply to transactions after the date of the enactment of this Act in 
taxable years ending after such date.

             Subtitle D--Provisions Relating to Oil and Gas

SEC. 231. ELIMINATION OF AMORTIZATION OF GEOLOGICAL AND GEOPHYSICAL 
              EXPENDITURES FOR MAJOR INTEGRATED OIL COMPANIES.

    (a) In General.--Section 167(h) is amended by adding at the end the 
following new paragraph:
            ``(5) Nonapplication to major integrated oil companies.--
        This subsection shall not apply with respect to any expenses 
        paid or incurred for any taxable year by any integrated oil 
        company (as defined in section 291(b)(4)) which has an average 
        daily worldwide production of crude oil of at least 500,000 
        barrels for such taxable year.''.
    (b) Effective Date.--The amendment made by this section shall take 
effect as if included in the amendment made by section 1329(a) of the 
Energy Policy Act of 2005.

SEC. 232. REVALUATION OF LIFO INVENTORIES OF LARGE INTEGRATED OIL 
              COMPANIES.

    (a) General Rule.--Notwithstanding any other provision of law, if a 
taxpayer is an applicable integrated oil company for its last taxable 
year ending in calendar year 2005, the taxpayer shall--
            (1) increase, effective as of the close of such taxable 
        year, the value of each historic LIFO layer of inventories of 
        crude oil, natural gas, or any other petroleum product (within 
        the meaning of section 4611) by the layer adjustment amount, 
        and
            (2) decrease its cost of goods sold for such taxable year 
        by the aggregate amount of the increases under paragraph (1).
If the aggregate amount of the increases under paragraph (1) exceed the 
taxpayer's cost of goods sold for such taxable year, the taxpayer's 
gross income for such taxable year shall be increased by the amount of 
such excess.
    (b) Layer Adjustment Amount.--For purposes of this section--
            (1) In general.--The term ``layer adjustment amount'' 
        means, with respect to any historic LIFO layer, the product 
        of--
                    (A) $18.75, and
                    (B) the number of barrels of crude oil (or in the 
                case of natural gas or other petroleum products, the 
                number of barrel-of-oil equivalents) represented by the 
                layer.
            (2) Barrel-of-oil equivalent.--The term ``barrel-of-oil 
        equivalent'' has the meaning given such term by section 
        29(d)(5) (as in effect before its redesignation by the Energy 
        Tax Incentives Act of 2005).
    (c) Application of Requirement.--
            (1) No change in method of accounting.--Any adjustment 
        required by this section shall not be treated as a change in 
        method of accounting.
            (2) Underpayments of estimated tax.--No addition to the tax 
        shall be made under section 6655 of the Internal Revenue Code 
        of 1986 (relating to failure by corporation to pay estimated 
        tax) with respect to any underpayment of an installment 
        required to be paid with respect to the taxable year described 
        in subsection (a) to the extent such underpayment was created 
        or increased by this section.
    (d) Applicable Integrated Oil Company.--For purposes of this 
section, the term ``applicable integrated oil company'' means an 
integrated oil company (as defined in section 291(b)(4) of the Internal 
Revenue Code of 1986) which had gross receipts in excess of 
$1,000,000,000 for its last taxable year ending during calendar year 
2005. For purposes of this subsection, all persons treated as a single 
employer under subsections (a) and (b) of section 52 of the Internal 
Revenue Code of 1986 shall be treated as 1 person and, in the case of a 
short taxable year, the rule under section 448(c)(3)(B) shall apply.

                Subtitle E--Uniform Definition of Child

SEC. 241. REPEAL OF UNIFORM DEFINITION OF CHILD AND RESTORATION OF 
              PRIOR RULE.

    (a) In General.--Title II of the Working Families Tax Relief Act of 
2004 (relating to uniform definition of child), and the amendments made 
by such title, are hereby repealed.
    (b) Administration of Internal Revenue Code of 1986.--The Internal 
Revenue Code of 1986 shall be applied and administered as if the 
provisions, and amendments, specified in subsection (a) had never been 
enacted.
    (c) Conforming Amendment.--Section 32(c)(2)(A), as added by section 
102 of this Act, is amended to read as follows:
            ``(2) Qualifying child.--
                    ``(A) In general.--The term `qualifying child' 
                means any individual if--
                            ``(i) the taxpayer is allowed a deduction 
                        under section 151 (determined without regard to 
                        paragraphs (1)(A) and (2) of subsection (c) and 
                        subsection 152(e)), with respect to such 
                        individual for the taxable year, and
                            ``(ii) such individual bears a relationship 
                        to the taxpayer described in paragraph (1), 
                        (2), or (3) of section 152(a). ''.
    (d) Effective Date.--This section shall apply to taxable years 
beginning after December 31, 2006.

                  Subtitle F--Other Revenue Provisions

SEC. 251. INFLATION ADJUSTMENT OF TAX ON DISTILLED SPIRITS, BEER, WINE, 
              AND TOBACCO.

    (a) Distilled Spirits.--Section 5001 is amended by redesignating 
subsection (c) as subsection (d) and by inserting after subsection (b) 
the following new subsection:
    ``(c) Adjustment of Tax Rates for Inflation.--In the case of any 
calendar year beginning after 2006, each of the rates of tax in 
subsection (a), and the dollar amount in section 5010(a)(1)(A), shall 
be increased by an amount equal to--
            ``(1) such rate of tax or dollar amount (as the case may 
        be), multiplied by
            ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which the taxable year 
        begins, by substituting `calendar year 2005' for `calendar year 
        1992' in subparagraph (B) thereof.''.
    (b) Wine.--Section 5041 is amended by adding at the end the 
following new subsection:
    ``(g) Adjustment of Tax Rates for Inflation.--In the case of any 
calendar year beginning after 2006, each of the rates of tax in 
subsection (b) shall be increased by an amount equal to--
            ``(1) such rate of tax, multiplied by
            ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which the taxable year 
        begins, by substituting `calendar year 2005' for `calendar year 
        1992' in subparagraph (B) thereof.''.
    (c) Beer.--Section 5041 is amended by adding at the end the 
following new subsection:
    ``(d) Adjustment of Tax Rates for Inflation.--In the case of any 
calendar year beginning after 2006, each of the rates of tax in 
subsection (a) shall be increased by an amount equal to--
            ``(1) such rate of tax, multiplied by
            ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which the taxable year 
        begins, by substituting `calendar year 2005' for `calendar year 
        1992' in subparagraph (B) thereof.''.
    (d) Tobacco Products.--Section 5701 is amended by adding at the end 
the following new subsection:
    ``(i) Adjustment of Tax Rates for Inflation.--In the case of any 
calendar year beginning after 2006, each of the rates of tax in 
subsections (a), (b), (c), (d), (e), (f), and (g) shall be increased by 
an amount equal to--
            ``(1) such rate of tax or dollar amount (as the case may 
        be), multiplied by
            ``(2) the cost-of-living adjustment determined under 
        section 1(f)(3) for the calendar year in which the taxable year 
        begins, by substituting `calendar year 2005' for `calendar year 
        1992' in subparagraph (B) thereof.''.
    (e) Effective Date.--The amendments made by this section shall 
apply to years beginning after December 31, 2006.

SEC. 252. TERMINATION OF VARIOUS EXCLUSIONS, EXEMPTIONS, DEDUCTIONS, 
              AND CREDITS.

    (a) In General.--Subchapter C of chapter 90 (relating to provisions 
affecting more than one subtitle) is amended by adding at the end the 
following new section:

``SEC. 7875. TERMINATION OF CERTAIN PROVISIONS.

    ``The following provisions shall not apply to taxable years 
beginning after December 31, 2005:
            ``(1) Section 44 (relating to credit for expenditures to 
        provide access to disabled individuals).
            ``(2) Section 62(a)(2)(D) (relating to deduction for 
        certain expenses of elementary and secondary school teachers).
            ``(3) Section 67 (relating to 2-percent floor on 
        miscellaneous itemized deductions).
            ``(4) Section 74(c) (relating to exclusion of certain 
        employee achievement awards).
            ``(5) Section 79 (relating to exclusion of group-term life 
        insurance purchased for employees).
            ``(6) Section 104(a)(1) (relating to exclusion of workmen's 
        compensation).
            ``(7) Section 104(a)(2) (relating to exclusion of damages 
        for physical injuries and sickness).
            ``(8) Section 107 (relating to exclusion of rental value of 
        parsonages).
            ``(9) Section 119 (relating to exclusion of meals or 
        lodging furnished for the convenience of the employer).
            ``(10) Section 125 (relating to exclusion of cafeteria plan 
        benefits).
            ``(11) Section 132 (relating to certain fringe benefits), 
        except with respect to subsection (a)(5) thereof (relating to 
        exclusion of qualified transportation fringe).
            ``(12) Section 163(h)(4)(A)(i)(II) (relating to definition 
        of qualified residence).
            ``(13) Section 165(d) (relating to deduction for wagering 
        losses).
            ``(14) Section 217 (relating to deduction for moving 
        expenses).
            ``(15) Section 454 (relating to deferral of tax on 
        obligations issued at discount).
            ``(16) Section 501(c)(9) (relating to tax-exempt status of 
        voluntary employees' beneficiary associations).
            ``(17) Section 911 (relating to exclusion of earned income 
        of citizens or residents of the United States living abroad).
            ``(18) Section 912 (relating to exemption for certain 
        allowances).''.
    (b) Conforming Amendment.--The table of sections for subchapter C 
of chapter 90 is amended by adding at the end the following new item:

``Sec. 7875. Termination of certain provisions.''.

SEC. 253. TERMINATION OF VARIOUS PREFERENTIAL TREATMENTS.

    (a) In General.--Section 7875, as added by section 106, is 
amended--
            (1) by inserting ``(or transactions in the case of sections 
        referred to in paragraphs (21), (22), (23), (24), and (27))'' 
        after ``taxable years beginning'', and
            (2) by adding at the end the following new paragraphs:
            ``(19) Section 43 (relating to enhanced oil recovery 
        credit).
            ``(20) Section 263(c) (relating to intangible drilling and 
        development costs in the case of oil and gas wells and 
        geothermal wells).
            ``(21) Section 382(l)(5) (relating to exception from net 
        operating loss limitations for corporations in bankruptcy 
        proceeding).
            ``(22) Section 451(i) (relating to special rules for sales 
        or dispositions to implement Federal Energy Regulatory 
        Commission or State electric restructuring policy).
            ``(23) Section 453A (relating to special rules for 
        nondealers), but only with respect to the dollar limitation 
        under subsection (b)(1) thereof and subsection (b)(3) thereof 
        (relating to exception for personal use and farm property).
            ``(24) Section 460(e)(1) (relating to special rules for 
        long-term home construction contracts or other short-term 
        construction contracts).
            ``(25) Section 613A (relating to percentage depletion in 
        case of oil and gas wells).
            ``(26) Section 616 (relating to development costs).
            ``(27) Sections 861(a)(6), 862(a)(6), 863(b)(2), 863(b)(3), 
        and 865(b) (relating to inventory property sales source rule 
        exception).''.
    (b) Full Tax Rate on Nuclear Decommissioning Reserve Fund.--
Subparagraph (B) of section 468A(e)(2) is amended to read as follows:
                    ``(B) Rate of tax.--For purposes of subparagraph 
                (A), the rate set forth in this subparagraph is 35 
                percent.''.
    (c) Deferral of Active Income of Controlled Foreign Corporations.--
Section 952 (relating to subpart F income defined) is amended by adding 
at the end the following new subsection:
    ``(e) Special Application of Subpart.--
            ``(1) In general.--For taxable years beginning after 
        December 31, 2005, notwithstanding any other provision of this 
        subpart, the term `subpart F income' means, in the case of any 
        controlled foreign corporation, the income of such corporation 
        derived from any foreign country.
            ``(2) Applicable rules.--Rules similar to the rules under 
        the last sentence of subsection (a) and subsection (d) shall 
        apply to this subsection.''.
    (d) Deferral of Active Financing Income.--Section 953(e)(10) is 
amended--
            (1) by striking ``2006'' and inserting ``2005'', and
            (2) by striking ``2007'' and inserting ``2006''.
    (e) Depreciation on Equipment in Excess of Alternative Depreciation 
System.--Section 168(g)(1) (relating to alternative depreciation 
system) is amended by striking ``and'' at the end of subparagraph (D), 
by adding ``and'' at the end of subparagraph (E), and by inserting 
after subparagraph (E) the following new subparagraph:
                    ``(F) notwithstanding subsection (a), any tangible 
                property placed in service after December 31, 2005,''.
    (f) Effective Date.--The amendments made by subsections (b), (c), 
and (d) shall apply to taxable years beginning after December 31, 2005.

         TITLE III--TECHNICAL AND CONFORMING AMENDMENTS; SUNSET

SEC. 301. TECHNICAL AND CONFORMING AMENDMENTS.

    The Secretary of the Treasury or the Secretary's delegate shall not 
later than 90 days after the date of the enactment of this Act, submit 
to the Committee on Ways and Means of the House of Representatives and 
the Committee on Finance of the Senate a draft of any technical and 
conforming changes in the Internal Revenue Code of 1986 which are 
necessary to reflect throughout such Code the purposes of the 
provisions of, and amendments made by, this Act.

SEC. 302. SUNSET.

    (a) In General.--All provisions of, and amendments made by, this 
Act shall not apply to taxable years beginning after December 31, 2010.
    (b) Application of Code.--The Internal Revenue Code of 1986 shall 
be applied and administered to taxable years described in subsection 
(a) as if the provisions of, and amendments made by, this Act had never 
been enacted.
                                 <all>
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