I 

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. 

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

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

4 TABLE OF CONTENTS. 

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

6 ‘‘Fair Flat Tax Act of 2006’’. 

7 (b) AMENDMENT OF 1986 CODE.—Except as other8 wise expressly provided, whenever in this Act an amend9 ment or repeal is expressed in terms of an amendment 


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1 to, or repeal of, a section or other provision, the reference 

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986. 

4 (c) TABLE OF CONTENTS.—The table of contents for 

5 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. 


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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. 

1 SEC. 2. PURPOSE. 

2 The purpose of this Act is to amend the Internal Rev3 enue Code of 1986— 

4 (1) to make the Federal individual income tax 

5 system simpler, fairer, and more transparent by— 

6 (A) recognizing the overall tax burden on 

7 individual Americans, 

8 (B) repealing the individual alternative 

9 minimum tax, 

10 (C) increasing the basic standard deduc11 tion and maintaining itemized deductions for 

12 principal residence mortgage interest and chari13 table contributions, 

14 (D) reducing the number of exclusions, ex15 emptions, deductions, and credits, and 

16 (E) treating all income equally, 


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1 (2) to make the Federal corporate income tax 

2 rate a flat 35 percent and eliminate special tax pref3 erences that favor particular types of businesses or 

4 activities, and 

5 (3) to partially offset the Federal budget deficit 

6 through the increased revenues resulting from these 

7 reforms. 

8 TITLE I—INDIVIDUAL INCOME 

9 TAX REFORMS 

10 SEC. 101. 3 PROGRESSIVE INDIVIDUAL INCOME TAX RATES 

11 FOR ALL FORMS OF INCOME. 

12 (a) MARRIED INDIVIDUALS FILING JOINT RETURNS

13 AND SURVIVING SPOUSES.—The table contained in sec14 tion 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.’’. 

15 (b) HEADS OF HOUSEHOLDS.—The table contained 

16 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.’’. 

17 (c) UNMARRIED INDIVIDUALS (OTHER THAN SUR18 VIVING SPOUSES AND HEADS OF HOUSEHOLDS).—The 

19 table contained in section 1(c) is amended to read as fol20 lows: 


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‘‘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.’’. 

1 (d) MARRIED INDIVIDUALS FILING SEPARATE RE2 TURNS.—The table contained in section 1(d) is amended 

3 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.’’. 

4 (e) CONFORMING AMENDMENTS TO INFLATION AD5 JUSTMENT.—Section 1(f) is amended— 

6 (1) by striking ‘‘1993’’in paragraph (1) and in7 serting ‘‘2006’’, 

8 (2) by striking ‘‘except as provided in para9 graph (8)’’ in paragraph (2)(A), 

10 (3) by striking ‘‘1992’’ in paragraph (3)(B) and 

11 inserting ‘‘2005’’, 

12 (4) by striking paragraphs (7) and (8), and 

13 (5) by striking ‘‘Phaseout of Marriage Penalty 

14 in 15–Percent Bracket;’’ in the heading thereof. 

15 (f) REPEAL OF RATE DIFFERENTIAL FOR CAPITAL

16 GAINS AND DIVIDENDS.— 

17 (1) REPEAL OF 2003 RATE REDUCTION.—Sec18 tion 303 of the Jobs and Growth Tax Relief Rec19 onciliation Act of 2003 is amended by striking ‘‘DeVerDate Aug 31 2005 08:33 Apr 28, 2006 Jkt 049200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H5176.IH H5176

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1 cember 3, 2008’’ and inserting ‘‘December 31, 

2 2005’’. 

3 (2) TERMINATION OF PRE-2003 CAPITAL GAIN

4 RATE DIFFERENTIAL.—Section 1(h) is amended 

5 (after the application of paragraph (1)) by adding at 

6 the end the following new paragraph: 

7 ‘‘(13) TERMINATION.—This section shall not 

8 apply to taxable years beginning after December 31, 

9 2005.’’. 

10 (g) ADDITIONAL CONFORMING AMENDMENTS.— 

11 (1) Section 1 is amended by striking subsection 

12 (i). 

13 (2) The Internal Revenue Code of 1986 is 

14 amended by striking ‘‘calendar year 1992’’ each 

15 place it appears and inserting ‘‘calendar year 2005’’. 

16 (3) Section 1445(e)(1) (after the application of 

17 subsection (g)(1)) is amended by striking ‘‘(or, to 

18 the extent provided in regulations, 20 percent)’’. 

19 (h) EFFECTIVE DATE.—The amendments made by 

20 this section shall apply to taxable years beginning after 

21 December 31, 2005. 

22 SEC. 102. INCREASE IN BASIC STANDARD DEDUCTION. 

23 (a) IN GENERAL.—Paragraph (2) of section 63(c) 

24 (defining standard deduction) is amended to read as fol25 lows: 


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1 ‘‘(2) BASIC STANDARD DEDUCTION.—For pur2 poses of paragraph (1), the basic standard deduction 

3 is— 

4 ‘‘(A) 200 percent of the dollar amount in 

5 effect under subparagraph (C) for the taxable 

6 year in the case of— 

7 ‘‘(i) a joint return, or 

8 ‘‘(ii) a surviving spouse (as defined in 

9 section 2(a)), 

10 ‘‘(B) $26,250 in the case of a head of 

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

12 ‘‘(C) $15,000 in any other case.’’. 

13 (b) CONFORMING AMENDMENT TO INFLATION AD14 JUSTMENT.—Section 63(c)(4)(B)(i) is amended by strik15 ing ‘‘(2)(B), (2)(C), or’’. 

16 (c) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years beginning after 

18 December 31, 2005. 

19 SEC. 103. SIMPLIFIED FAMILY CREDIT. 

20 (a) IN GENERAL.—Section 32 (relating to earned in21 come credit) is amended to read as follows: 

22 ‘‘SEC. 32. SIMPLIFIED FAMILY CREDIT. 

23 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an eli24 gible individual, there shall be allowed as a credit against 


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1 the tax imposed by this subtitle for the taxable year an 

2 amount equal to the lesser of— 

3 ‘‘(1) $2,500 multiplied by the number of quali4 fying children of the taxpayer, or 

5 ‘‘(2) 50 percent of modified adjusted gross in6 come. 

7 ‘‘(b) LIMITATIONS.— 

8 ‘‘(1) LIMITATION BASED ON MODIFIED AD9 JUSTED GROSS INCOME.— 

10 ‘‘(A) IN GENERAL.—The amount of the 

11 credit allowable under subsection (a) shall be 

12 reduced (but not below zero) by $50 for each 

13 $1,000 (or fraction thereof) by which the tax14 payer’s modified adjusted gross income exceeds 

15 the threshold amount. 

16 ‘‘(B) THRESHOLD AMOUNT.—For purposes 

17 of paragraph (1), the term ‘threshold amount’ 

18 means $60,000 ($120,000 in the case of a joint 

19 return). For purposes of this paragraph, mar20 ital status shall be determined under section 

21 7703. 

22 ‘‘(3) LIMITATION ON NUMBER OF QUALIFYING

23 CHILDREN TAKEN INTO ACCOUNT.—For purposes of 

24 subsection (a), not more than 3 qualifying children 

25 of the taxpayer may be taken into account. 


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1 ‘‘(4) LIMITATION ON AMOUNT OF REFUNDABLE

2 CREDIT.— 

3 ‘‘(A) IN GENERAL.—The amount of the 

4 credit allowed under subsection (a) for a tax5 able year which is allowed under this subpart 

6 shall not exceed the modified adjusted gross in7 come of the taxpayer for such year. 

8 ‘‘(B) ALLOWANCE OF REMAINING AMOUNT

9 OF CREDIT.—The excess of— 

10 ‘‘(i) the amount of the credit allowed 

11 under subsection (a), over 

12 ‘‘(ii) the amount of the credit allowed 

13 under this subpart by reason of subpara14 graph (A), shall be treated as a credit al15 lowed under subpart B for such taxable 

16 year and not under this subpart. 

17 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur18 poses of this section— 

19 ‘‘(1) ELIGIBLE INDIVIDUAL.— 

20 ‘‘(A) IN GENERAL.—The term ‘eligible in21 dividual’ means any individual who has a quali22 fying child for the taxable year. 

23 ‘‘(B) INDIVIDUAL WHO IS QUALIFYING

24 CHILD INELIGIBLE.—If an individual is the 

25 qualifying child of a taxpayer for any taxable 


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1 year of such taxpayer beginning in a calendar 

2 year, such individual shall not be treated as an 

3 eligible individual for any taxable year of such 

4 individual beginning in such calendar year. 

5 ‘‘(C) EXCEPTION FOR INDIVIDUAL CLAIM6 ING BENEFITS UNDER SECTION 911.—The 

7 term ‘eligible individual’ does not include any 

8 individual who claims the benefits of section 

9 911 (relating to citizens or residents living 

10 abroad) for the taxable year. 

11 ‘‘(D) LIMITATION ON ELIGIBILITY OF NON12 RESIDENT ALIENS.—The term ‘eligible indi13 vidual’ shall not include any individual who is 

14 a nonresident alien individual for any portion of 

15 the taxable year unless such individual is treat16 ed for such taxable year as a resident of the 

17 United States for purposes of this chapter by 

18 reason of an election under subsection (g) or 

19 (h) of section 6013. 

20 ‘‘(E) IDENTIFICATION NUMBER REQUIRE21 MENT.—No credit shall be allowed under this 

22 section to an eligible individual who does not in23 clude on the return of tax for the taxable 

24 year— 


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1 ‘‘(i) such individual’s taxpayer identi2 fication number, and 

3 ‘‘(ii) if the individual is married (with4 in the meaning of section 7703), the tax5 payer identification number of such indi6 vidual’s spouse. 

7 ‘‘(F) INDIVIDUALS WHO DO NOT INCLUDE

8 TIN, ETC., OF ANY QUALIFYING CHILD.—No 

9 credit shall be allowed under this section to any 

10 eligible individual who has one or more quali11 fying children if no qualifying child of such in12 dividual is taken into account under subsection 

13 (b) by reason of paragraph (2)(B). 

14 ‘‘(2) QUALIFYING CHILD.— 

15 ‘‘(A) IN GENERAL.—The term ‘qualifying 

16 child’ has the meaning given such term by sec17 tion 152, determined without regard to sub18 sections (b)(1), (b)(2), and (d)(1)(B) thereof. 

19 ‘‘(B) IDENTIFICATION REQUIREMENTS.— 

20 ‘‘(i) IN GENERAL.—A qualifying child 

21 shall not be taken into account under sub22 section (b) unless the taxpayer includes the 

23 name, age, and TIN of the qualifying child 

24 on the return of tax for the taxable year. 


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1 ‘‘(ii) OTHER METHODS.—The Sec2 retary may prescribe other methods for 

3 providing the information described in 

4 clause (i). 

5 ‘‘(C) ABODE MUST BE IN THE UNITED

6 STATES.—An individual shall not be treated as 

7 a qualifying child for purposes of this section 

8 unless the principal place of abode of such indi9 vidual is in the United States. 

10 ‘‘(3) MODIFIED ADJUSTED GROSS INCOME.— 

11 The term ‘modified adjusted gross income’ means 

12 adjusted gross income— 

13 ‘‘(A) determined without regard to sections 

14 135, 137, 221, 911, 931, and 933, and 

15 ‘‘(B) increased by the amount of interest 

16 received or accrued by the taxpayer during the 

17 taxable year which is exempt from tax. 

18 ‘‘(d) MARRIED INDIVIDUALS.—In the case of an indi19 vidual who is married (within the meaning of section 

20 7703), this section shall apply only if a joint return is filed 

21 for the taxable year under section 6013. 

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

23 YEAR.—Except in the case of a taxable year closed by rea24 son of the death of the taxpayer, no credit shall be allowVerDate Aug 31 2005 08:33 Apr 28, 2006 Jkt 049200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\H5176.IH H5176

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1 able under this section in the case of a taxable year cov2 ering a period of less than 12 months. 

3 ‘‘(f) INFLATION ADJUSTMENTS.— 

4 ‘‘(1) IN GENERAL.—In the case of any taxable 

5 year beginning after 2006, each of the dollar 

6 amounts in subsection (b)(1)(B) shall be increased 

7 by an amount equal to— 

8 ‘‘(A) such dollar amount, multiplied by 

9 ‘‘(B) the cost-of-living adjustment deter10 mined under section 1(f)(3) for the calendar 

11 year in which the taxable year begins, deter12 mined by substituting ‘calendar year 2005’ for 

13 ‘calendar year 1992’ in subparagraph (B) 

14 thereof. 

15 ‘‘(2) ROUNDING.—If any dollar amount in sub16 section (b)(1)(B) after being increased under para17 graph (1) is not a multiple of $1,000, such dollar 

18 amount shall be rounded to the nearest multiple of 

19 $1,000. 

20 ‘‘(i) COORDINATION WITH CERTAIN MEANS-TESTED

21 PROGRAMS.—For purposes of— 

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

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

24 ‘‘(3) section 101 of the Housing and Urban De25 velopment Act of 1965, 


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

2 National Housing Act, and 

3 ‘‘(5) the Food Stamp Act of 1977, 

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

5 individual) by reason of this section, and any payment 

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

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

8 shall not be taken into account in determining resources 

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

10 ‘‘(j) IDENTIFICATION NUMBERS.—Solely for pur11 poses of subsections (c)(1)(F) and (c)(3)(D), a taxpayer 

12 identification number means a social security number 

13 issued to an individual by the Social Security Administra14 tion (other than a social security number issued pursuant 

15 to clause (II) (or that portion of clause (III) that relates 

16 to clause (II)) of section 205(c)(2)(B)(i) of the Social Se17 curity Act).’’. 

18 (b) REPEALS OF OTHER PROVISIONS.— 

19 (1) CHILD CREDIT.—Section 24 is hereby re20 pealed. 

21 (2) DEDUCTION FOR EXEMPTION FOR DEPEND22 ENTS DISALLOWED TO CREDIT RECIPIENTS.—Sub23 section (c) of section 151 is amended by adding at 

24 the end the following new sentence: ‘‘No exemption 

25 shall be allowed under this section for a dependent 


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1 for a taxable year if a credit is allowed under section 

2 32 with respect to such dependent for such taxable 

3 year.’’. 

4 (c) CONFORMING AMENDMENTS.— 

5 (1) AMENDMENTS RELATING TO REPEAL OF

6 CHILD CREDIT.— 

7 (A) Sections 25(e)(1)(C) and 1400C(d) are 

8 both amended by striking ‘‘24,’’. 

9 (B) Section 501(c)(26) is amended by in10 serting ‘‘(as in effect before the enactment of 

11 the Fair Flat Tax Act of 2006)’’ after ‘‘section 

12 24(c)’’. 

13 (C) Section 6213(g)(2) is amended— 

14 (i) by striking subparagraph (I), and 

15 (ii) in subparagraph (L), by striking 

16 ‘‘21, 24, or 32’’ and inserting ‘‘21 or 32’’. 

17 (2) AMENDMENTS RELATING TO REPEAL OF

18 DEDUCTION FOR EXEMPTION FOR DEPENDENTS.— 

19 (A) Section 2(a) is amended by striking ‘‘a 

20 deduction for the taxable year under section 

21 151’’ and inserting ‘‘a credit for the taxable 

22 year under section 32’’. 

23 (B) Section 2(b) is amended by striking ‘‘a 

24 deduction for the taxable year for such person 

25 under section 151’’ and inserting ‘‘a credit for 


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1 the taxable year for such person under section 

2 32’’. 

3 (C) Section 21(b)(1)(A) is amended by 

4 striking ‘‘a deduction under section 151(c)’’ 

5 and inserting ‘‘a credit under section 32’’. 

6 (D) Section 21(e)(6)(A) is amended by 

7 striking ‘‘deduction under section 151(c)’’ and 

8 inserting ‘‘credit under section 32’’. 

9 (E) Section 25B(c)(2)(A) is amended by 

10 striking ‘‘deduction under section 151’’ and in11 serting ‘‘credit under section 32’’. 

12 (F) Section 35(d)(1)(B) is amended by 

13 striking ‘‘deduction under section 151(c)’’ and 

14 inserting ‘‘credit under section 32’’. 

15 (G) Section 35(g)(4) is amended by strik16 ing ‘‘deduction under section 151’’ and insert17 ing ‘‘credit under section 32’’. 

18 (H) Section 63(c)(5) is amended by strik19 ing ‘‘deduction under section 151’’ and insert20 ing ‘‘credit under section 32’’. 

21 (I) Section 129(c)(1) is amended by strik22 ing ‘‘deduction is allowable under section 151(c) 

23 (relating to personal exemptions for depend24 ents) ’’ and inserting ‘‘credit is allowable under 


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1 section 32 (relating to simplified family cred2 it)’’. 

3 (J) Section 135(c)(2)(A)(iii) is amended by 

4 striking ‘‘deduction under section 151’’ and in5 serting ‘‘credit under section 32’’. 

6 (K) Section 220(b)(6) is amended by strik7 ing ‘‘deduction under section 151’’ and insert8 ing ‘‘credit under section 32’’. 

9 (L) Section 221(c) is amended by striking 

10 ‘‘deduction under section 151’’ and inserting 

11 ‘‘credit under section 32’’. 

12 (M) Section 2032A(c)(7)(D) is amended by 

13 striking ‘‘section 151(c)(4)’’ and inserting ‘‘sec14 tion 32(c)(3)(F)’’. 

15 (N) Section 6012(a)(1)(A) is amended by 

16 striking ‘‘an exemption for such spouse under 

17 section 151(c)’’ and inserting ‘‘a credit for such 

18 spouse under section 32’’. 

19 (O) Section 7703(b)(1) is amended by 

20 striking ‘‘deduction for the taxable year under 

21 section 151’’ and inserting ‘‘credit for the tax22 able year under section 32’’. 

23 (d) CLERICAL AMENDMENT.—The table of sections 

24 for subpart C of part IV of subchapter A of chapter 1 


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1 is amended by striking the item relating to section 32 and 

2 inserting the following: 

‘‘Sec. 32. Simplified family credit.’’. 

3 (e) EFFECTIVE DATE.— 

4 (1) IN GENERAL.—The amendments made by 

5 this section shall apply to taxable years beginning 

6 after December 31, 2005. 

7 (2) TRANSITIONAL RULE FOR NONCUSTODIAL

8 PARENTS.— 

9 (A) IN GENERAL.—If, on the last day of 

10 the taxable year, an eligible individual is the 

11 noncustodial parent of a qualifying child, the 

12 Internal Revenue Code of 1986 shall be applied 

13 to such individual without regard to the amend14 ments made by this section. 

15 (B) DEFINITIONS.—For purposes of sub16 paragraph (A), the terms ‘‘eligible individual’’ 

17 and ‘‘qualifying child’’ shall have the meanings 

18 given such terms by section 32(c) of the Inter19 nal Revenue Code of 1986 (as amended by this 

20 section). 

21 (3) TAXPAYERS HELD HARMLESS.—In the case 

22 of a taxpayer who, for the first taxable year ending 

23 after the date of the enactment of this Act, would 

24 be allowed a deduction of the exemption amount 

25 under section 151(c) of the Internal Revenue Code 


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1 of 1986 (determined without regard to the amend2 ments made by this section) with respect to any de3 pendent of the taxpayer, the taxpayer may elect to 

4 apply the Internal Revenue Code of 1986 with re5 spect to such dependent as if amendments made by 

6 this section had not been enacted. 

7 SEC. 104. EXPANDED ACCESS TO COLLEGE. 

8 (a) REPLACEMENT WITH REFUNDABLE CREDIT FOR

9 HIGHER EDUCATION EXPENSES.—Subpart C of part IV 

10 of subchapter A of chapter 1 (relating to refundable cred11 its) is amended by redesignating section 36 as section 37 

12 and by inserting after section 35 the following new section: 

13 ‘‘SEC. 36. HIGHER EDUCATION EXPENSES. 

14 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in15 dividual, there shall be allowed as a credit against the tax 

16 imposed by this subtitle for the taxable year the amount 

17 equal to the qualified tuition and related expenses paid 

18 by the taxpayer during the taxable year (for education fur19 nished to the eligible student during any academic period 

20 beginning in such taxable year). 

21 ‘‘(b) LIMITATIONS.— 

22 ‘‘(1) DOLLAR LIMITATION.—The amount al23 lowed as a credit under subsection (a) for a taxable 

24 year shall not exceed $3,000. 


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1 ‘‘(2) ACADEMIC LIMITATIONS.—Expenses may 

2 not be taken into account under subsection (a) with 

3 respect to an eligible student for an academic year 

4 if— 

5 ‘‘(A) in the case of a program at the un6 dergraduate level, expenses have been taken 

7 into account under this section in all prior tax8 able years with respect to such student for any 

9 program at the undergraduate level for the full10 time equivalent of 4 academic years, and 

11 ‘‘(B) in the case of a program at the grad12 uate level, expenses have been taken into ac13 count under this section in all prior taxable 

14 years with respect to such student for any pro15 gram at the graduate level for the full-time 

16 equivalent of 2 academic years. 

17 For purposes of the preceding sentence, the deter18 mination of full-time equivalent of academic years 

19 shall be under regulations issued by the Secretary. 

20 ‘‘(c) ELIGIBLE STUDENT.—For purposes of this sub21 section, the term ‘eligible student’ means, with respect to 

22 any academic period, a student who— 

23 ‘‘(1) meets the requirements of section 

24 484(a)(1) of the Higher Education Act of 1965 (20 


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1 U.S.C. 1091(a)(1)), as in effect on the date of the 

2 enactment of this section, and 

3 ‘‘(2) is carrying at least 1/2 the normal full4 time work load for the course of study the student 

5 is pursuing. 

6 ‘‘(d) ELECTION NOT TO HAVE SECTION APPLY.—A 

7 taxpayer may elect not to have this section apply with re8 spect to the qualified tuition and related expenses of an 

9 individual for any taxable year. 

10 ‘‘(e) DEFINITIONS.—For purposes of this section— 

11 ‘‘(1) QUALIFIED TUITION AND RELATED EX12 PENSES.— 

13 ‘‘(A) IN GENERAL.—The term ‘qualified 

14 tuition and related expenses’ means tuition and 

15 fees required for the enrollment or attendance 

16 of— 

17 ‘‘(i) the taxpayer, 

18 ‘‘(ii) the taxpayer’s spouse, or 

19 ‘‘(iii) any dependent of the taxpayer 

20 with respect to whom the taxpayer is al21 lowed a deduction under section 151, at an 

22 eligible educational institution for courses 

23 of instruction of such individual at such in24 stitution. 


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1 ‘‘(B) EXCEPTION FOR EDUCATION INVOLV2 ING SPORTS, ETC.—Such term does not include 

3 expenses with respect to any course or other 

4 education involving sports, games, or hobbies, 

5 unless such course or other education is part of 

6 the individual’s degree program. 

7 ‘‘(C) EXCEPTION FOR NONACADEMIC

8 FEES.—Such term does not include student ac9 tivity fees, athletic fees, insurance expenses, or 

10 other expenses unrelated to an individual’s aca11 demic course of instruction. 

12 ‘‘(2) ELIGIBLE EDUCATIONAL INSTITUTION.— 

13 The term ‘eligible educational institution’ means an 

14 institution— 

15 ‘‘(A) which is described in section 481 of 

16 the Higher Education Act of 1965 (20 U.S.C. 

17 1088), as in effect on the date of the enactment 

18 of this section, and 

19 ‘‘(B) which is eligible to participate in a 

20 program under title IV of such Act. 

21 ‘‘(3) ACADEMIC YEAR.—The term ‘academic 

22 year’ has the meaning given such term by section 

23 481(a)(2) of the Higher Education Act of 1965 (20 

24 U.S.C. 1088(a)(2)). 

25 ‘‘(f) SPECIAL RULES.— 


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1 ‘‘(1) IDENTIFICATION REQUIREMENT.—No 

2 credit shall be allowed under subsection (a) to a tax3 payer with respect to the qualified tuition and re4 lated expenses of an individual unless the taxpayer 

5 includes the name and taxpayer identification num6 ber of such individual on the return of tax for the 

7 taxable year. 

8 ‘‘(2) ADJUSTMENT FOR CERTAIN SCHOLAR9 SHIPS, ETC.—The amount of qualified tuition and 

10 related expenses otherwise taken into account under 

11 subsection (a) with respect to an individual for an 

12 academic period shall be reduced by the sum of any 

13 amounts paid for the benefit of such individual 

14 which are allocable to such period as— 

15 ‘‘(A) a qualified scholarship which is ex16 cludable from gross income under section 117, 

17 ‘‘(B) an educational assistance allowance 

18 under chapter 30, 31, 32, 34, or 35 of title 38, 

19 United States Code, or under chapter 1606 of 

20 title 10, United States Code, and 

21 ‘‘(C) a payment (other than a gift, be22 quest, devise, or inheritance within the meaning 

23 of section 102(a) for such individual’s edu24 cational expenses, or attributable to such indi25 vidual’s enrollment at an eligible educational inVerDate Aug 31 2005 08:33 Apr 28, 2006 Jkt 049200 PO 00000 Frm 00023 Fmt 6652 Sfmt 6201 E:\BILLS\H5176.IH H5176

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1 stitution, which is excludable from gross income 

2 under any law of the United States. 

3 ‘‘(3) TREATMENT OF EXPENSES PAID BY DE4 PENDENT.—If a deduction under section 151 with 

5 respect to an individual is allowed to another tax6 payer for a taxable year beginning in the calendar 

7 year in which such individual’s taxable year begins— 

8 ‘‘(A) no credit shall be allowed under sub9 section (a) to such individual for such individ10 ual’s taxable year, and 

11 ‘‘(B) qualified tuition and related expenses 

12 paid by such individual during such individual’s 

13 taxable year shall be treated for purposes of 

14 this section as paid by such other taxpayer. 

15 ‘‘(4) TREATMENT OF CERTAIN PREPAY16 MENTS.—If qualified tuition and related expenses 

17 are paid by the taxpayer during a taxable year for 

18 an academic period which begins during the first 3 

19 months following such taxable year, such academic 

20 period shall be treated for purposes of this section 

21 as beginning during such taxable year. 

22 ‘‘(5) DENIAL OF DOUBLE BENEFIT.—No credit 

23 shall be allowed under this section for any expense 

24 for which a deduction is allowed under any other 

25 provision of this chapter. 


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1 ‘‘(6) NO CREDIT FOR MARRIED INDIVIDUALS

2 FILING SEPARATE RETURNS.—If the taxpayer is a 

3 married individual (within the meaning of section 

4 7703, this section shall apply only if the taxpayer 

5 and the taxpayer’s spouse file a joint return for the 

6 taxable year. 

7 ‘‘(7) NONRESIDENT ALIENS.—If the taxpayer is 

8 a nonresident alien individual for any portion of the 

9 taxable year, this section shall apply only if such in10 dividual is treated as a resident alien of the United 

11 States for purposes of this chapter by reason of an 

12 election under subsection (g) or (h) of section 6013. 

13 ‘‘(g) REGULATIONS.—The Secretary may prescribe 

14 such regulations as may be necessary or appropriate to 

15 carry out this section, including regulations providing for 

16 a recapture of the credit allowed under this section in 

17 cases where there is a refund in a subsequent taxable year 

18 of any amount which was taken into account in deter19 mining the amount of such credit.’’. 

20 (b) REPEAL OF CERTAIN CREDITS, EXCLUSIONS, 

21 AND DEDUCTIONS RELATING TO HIGHER EDUCATION

22 EXPENSES.—The following sections of the Internal Rev23 enue Code of 1986 are hereby repealed: 

24 (1) Section 25A (relating to Hope and Lifetime 

25 Learning Credits). 


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1 (2) Section 127 (relating to educational assist2 ance programs). 

3 (3) Section 222 (relating to qualified tuition 

4 and related expenses). 

5 (4) Section 117(d) (relating to qualified tuition 

6 reduction). 

7 (c) TECHNICAL AND CONFORMING AMENDMENTS.— 

8 (1) Section 62(a) is amended by striking para9 graph (18). 

10 (2) The following sections are amended by 

11 striking ‘‘222,’’: 86(b)(2)(A), 135(c)(4)(A), 

12 137(b)(3)(A), 199(d)(2)(A), 219(g)(3)(A)(2), 

13 221(b)(2)(C)(i), and 469(i)(F). 

14 (3) Section 51A(b)(5)(B) is amended by insert15 ing ‘‘or’’ after clause (ii), by striking clause (iii), and 

16 by redesignating clause (iv) as clause (iii). 

17 (4) Sections 125(f), 221(d)(2)(A), 

18 414(n)(3)(C), 3121(a)(18), 3401(a)(18), and 

19 6039D(d)(1) are each amended by striking ‘‘127,’’. 

20 (5) Section 132(j)(8) is amended by striking 

21 ‘‘which are not excludable from gross income under 

22 section 127’’. 

23 (6) Section 137(c)(2) is amended by inserting 

24 ‘‘(as in effect on the date of enactment of the Fair 

25 Flat Tax Act of 2006)’’ after ‘‘127(b)’’. 


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1 (7) Section 1397(a)(2)(A) is amended by strik2 ing clause (i). 

3 (8) Section 3306(b)(13) is amended by striking 

4 ‘‘127, or’’. 

5 (9) Subparagraph (B) of section 72(t)(7) is 

6 amended by striking ‘‘section 25A(g)(2)’’ and insert7 ing ‘‘section 36(c)(3)(B)(2)(v)(I)’’. 

8 (10) Subparagraph (A) of section 135(d)(2) is 

9 amended by striking ‘‘section 25A’’ and inserting 

10 ‘‘section 36’’. 

11 (11) Section 221(e) is amended— 

12 (A) in paragraph (2)(B), by striking ‘‘sec13 tion 25A(g)(2)’’ and inserting ‘‘section 

14 36(c)(3)(B)(2)(v)(I)’’ and by striking ‘‘section 

15 25A(f)(2)’’ and inserting ‘‘section 

16 36(c)(3)(B)(2)(v)(I)’’, and 

17 (B) in paragraph (3), by striking ‘‘section 

18 25A(b)(3)’’ and inserting ‘‘section 36(c)’’. 

19 (12) Section 529 is amended— 

20 (A) by amending clause (v) of subsection 

21 (c)(3)(B) to read as follows: 

22 ‘‘(v) COORDINATION WITH SCHOLAR23 SHIPS AND HIGHER EDUCATION REFUND24 ABLE CREDIT.—The total amount of quali25 fied higher education expenses with respect 


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1 to an individual for the taxable year shall 

2 be reduced with respect to an individual 

3 for an academic period— 

4 ‘‘(I) by the sum of any amounts 

5 paid for the benefit of such individual 

6 which are allocable to such period 

7 as— 

8 ‘‘(aa) a qualified scholarship 

9 which is excludable from gross 

10 income under section 117, 

11 ‘‘(bb) an educational assist12 ance allowance under chapter 30, 

13 31, 32, 34, or 35 of title 38, 

14 United States Code, or under 

15 chapter 1606 of title 10, United 

16 States Code, and 

17 ‘‘(cc) a payment (other than 

18 a gift, bequest, devise, or inherit19 ance within the meaning of sec20 tion 102(a) for such individual’s 

21 educational expenses, or attrib22 utable to such individual’s enroll23 ment at an eligible educational 

24 institution, which is excludable 


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1 from gross income under any law 

2 of the United States, and 

3 ‘‘(II) by the amount of such ex4 penses which were taken into account 

5 in determining the credit allowed to 

6 the taxpayer or any other person 

7 under section 36.’’, and 

8 (B) in subsection (e)(3)(B)(i) by striking 

9 ‘‘section 25A(b)(3)’’ and inserting ‘‘section 

10 36(c)’’. 

11 (13) Section 530(d) is amended— 

12 (A) in paragraph (2)(C)(i)(I) by striking 

13 ‘‘section 25A(g)(2)’’ and inserting ‘‘section 

14 36(c)(3)(B)(2)(v)(I)’’, 

15 (B) in paragraph (2)(C)(i)(II) by striking 

16 ‘‘section 25A’’ and inserting ‘‘section 36’’, and 

17 (C) in paragraph (4)(B)(iii) by striking 

18 ‘‘section 25A(g)(2)’’ and inserting ‘‘section 

19 36(c)(3)(B)(2)(v)(I)’’. 

20 (14) Subsection (e) of section 6050S is amend21 ed by striking ‘‘section 25A (without regard to sub22 section (g)(2) thereof)’’ and inserting ‘‘section 36 

23 (without regard to clause (v)(I) of subsection 

24 (c)(3)(B)(2) thereof)’’. 


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1 (15) Subparagraph (J) of section 6213(g)(2) is 

2 amended by striking ‘‘section 25A(g)(1)’’ and insert3 ing ‘‘section 36(f)(1)’’. 

4 (16) Paragraph (2) of section 1324(b) of title 

5 31, United States Code, is amended by inserting ‘‘or 

6 36’’ after ‘‘section 35’’. 

7 (17) The table of sections for subpart C of part 

8 IV of subchapter A of chapter 1 is amended by re9 designating the item relating to section 36 as an 

10 item relating to section 37 and by inserting after the 

11 item relating to section 35 the following new item: 

‘‘Sec. 36. Higher education expenses’’. 

12 (18) The table of sections for subpart A of such 

13 part IV is amended by striking the item relating to 

14 section 25A. 

15 (19) The table of sections for part III of sub16 chapter B of chapter 1 is amended by striking the 

17 item relating to section 127. 

18 (20) The table of sections for part VII of sub19 chapter B of chapter 1 is amended by striking the 

20 item relating to section 222. 

21 (d) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to taxable years beginning after 

23 December 31, 2005. 


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1 SEC. 105. DEDUCTION FOR MORTGAGE INTEREST WHETH2 ER OR NOT INDIVIDUAL ITEMIZES. 

3 (a) IN GENERAL.—Subsection (a) of section 62 (de4 fining adjusted gross income) is amended by redesignating 

5 paragraph (19) (as added by section 703(a) of the Amer6 ican Jobs Creation Act of 2004) as paragraph (20) and 

7 by inserting after paragraph (20) (as so redesignated) the 

8 following new paragraph: 

9 ‘‘(21) QUALIFIED RESIDENCE INTEREST.—The 

10 deduction allowed under section 163 by reason of 

11 subsection (h)(2)(D) thereof.’’. 

12 (b) EFFECTIVE DATE.—The amendment made by 

13 subsection (a) shall apply to interest paid in taxable years 

14 beginning after the date of the enactment of this Act. 

15 SEC. 106. UNIVERSAL PENSION ACCOUNTS. 

16 (a) DEDUCTION FOR CONTRIBUTIONS.— 

17 (1) IN GENERAL.—Part VII of subchapter B of 

18 chapter 1 (relating to additional itemized deductions 

19 for individuals) is amended by inserting after section 

20 219 the following new section: 

21 ‘‘SEC. 219A. CONTRIBUTIONS TO UNIVERSAL PENSION AC22 COUNTS. 

23 ‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an 

24 individual, there shall be allowed as a deduction an 

25 amount equal to the qualified universal pension contribu26 tions of the individual for the taxable year. 


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1 ‘‘(b) MAXIMUM AMOUNT OF DEDUCTION.— 

2 ‘‘(1) IN GENERAL.—The amount allowable as a 

3 deduction under subsection (a) to any individual for 

4 any taxable year shall not exceed the lesser of— 

5 ‘‘(A) the deductible amount, or 

6 ‘‘(B) an amount equal to the compensation 

7 includible in the individual’s gross income for 

8 such taxable year. 

9 ‘‘(2) DEDUCTIBLE AMOUNT.—For purposes of 

10 paragraph (1)(A), the deductible amount shall be de11 termined in accordance with the following table: 

‘‘For taxable years beginning in calendar 

year—

The deductible 

amount 

is—

2006 or 2007 ............................................................... $4,000

2008 or thereafter ........................................................ $5,000. 

12 ‘‘(3) COST-OF-LIVING ADJUSTMENT.— 

13 ‘‘(A) IN GENERAL.—In the case of any 

14 taxable year beginning in a calendar year after 

15 2008, the $5,000 amount in paragraph (2) 

16 shall be increased by an amount equal to— 

17 ‘‘(i) such dollar amount, multiplied by 

18 ‘‘(ii) the cost-of-living adjustment de19 termined under section 1(f)(3) for the cal20 endar year in which the taxable year be21 gins, determined by substituting ‘calendar 


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1 year 2007’ for ‘calendar year 1992’ in sub2 paragraph (B) thereof. 

3 ‘‘(B) ROUNDING.—If any amount after ad4 justment under clause (i) is not a multiple of 

5 $500, such amount shall be rounded to the next 

6 lower multiple of $500. 

7 ‘‘(c) LIMITATION BASED ON ADJUSTED GROSS IN8 COME.— 

9 ‘‘(1) IN GENERAL.—The deductible amount oth10 erwise applicable under subsection (b) for any tax11 able year shall be reduced (but not below zero) by 

12 the amount determined under paragraph (2). 

13 ‘‘(2) AMOUNT OF REDUCTION.— 

14 ‘‘(A) IN GENERAL.—The amount deter15 mined under this paragraph with respect to any 

16 dollar limitation shall be the amount which 

17 bears the same ratio to such limitation as— 

18 ‘‘(i) the excess of— 

19 ‘‘(I) the taxpayer’s adjusted 

20 gross income for such taxable year, 

21 over 

22 ‘‘(II) the applicable dollar 

23 amount, bears to 


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1 ‘‘(ii) $15,000 ($10,000 in the case of 

2 a joint return or a married individual filing 

3 a separate return). 

4 ‘‘(B) APPLICABLE DOLLAR AMOUNT.—For 

5 purposes of subparagraph (A), the applicable 

6 dollar amount is— 

7 ‘‘(i) in the case of a taxpayer filing a 

8 joint return, $150,000, 

9 ‘‘(ii) in the case of any other taxpayer 

10 (other than a married individual filing a 

11 separate return), $95,000, and 

12 ‘‘(iii) in the case of a married indi13 vidual filing a separate return, zero. 

14 ‘‘(C) NO REDUCTION BELOW $200 UNTIL

15 COMPLETE PHASE-OUT.—No dollar limitation 

16 shall be reduced below $200 under subpara17 graph (A) unless (without regard to this sub18 paragraph) such limitation is reduced to zero. 

19 ‘‘(D) ROUNDING.—Any amount deter20 mined under this paragraph which is not a mul21 tiple of $10 shall be rounded to the next lowest 

22 $10. 

23 ‘‘(3) ADJUSTED GROSS INCOME.—For purposes 

24 of this subsection, adjusted gross income of any tax25 payer shall be determined— 


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1 ‘‘(A) after application of sections 86, 219, 

2 and 469, and 

3 ‘‘(B) without regard to sections 135, 137, 

4 221, and 911 or the deduction allowable under 

5 this section. 

6 ‘‘(4) MARRIED INDIVIDUALS FILING SEPARATE

7 RETURNS.— 

8 ‘‘(A) IN GENERAL.—In the case of a mar9 ried individual filing a separate return, the 

10 amount applicable under paragraph 

11 (2)(A)(i)(II) is zero. 

12 ‘‘(B) SPECIAL RULE FOR MARRIED INDI13 VIDUALS FILING SEPARATELY AND LIVING

14 APART.—A husband and wife who— 

15 ‘‘(i) file separate returns for any tax16 able year, and 

17 ‘‘(ii) live apart at all times during 

18 such taxable year, 

19 shall not be treated as married individuals for 

20 purposes of this subsection. 

21 ‘‘(d) SPECIAL RULES FOR CERTAIN MARRIED INDI22 VIDUALS.— 

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

24 to whom this paragraph applies for the taxable year, 


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1 the limitation of paragraph (1) of subsection (b) 

2 shall be equal to the lesser of— 

3 ‘‘(A) the dollar amount in effect under 

4 subsection (b)(1)(A) for the taxable year, or 

5 ‘‘(B) the sum of— 

6 ‘‘(i) the compensation includible in 

7 such individual’s gross income for the tax8 able year, plus 

9 ‘‘(ii) the compensation includible in 

10 the gross income of such individual’s 

11 spouse for the taxable year reduced by the 

12 amount allowed as a deduction under sub13 section (a) to such spouse for such taxable 

14 year. 

15 ‘‘(2) INDIVIDUALS TO WHOM PARAGRAPH (1)

16 APPLIES.—Paragraph (1) shall apply to any indi17 vidual if— 

18 ‘‘(A) such individual files a joint return for 

19 the taxable year, and 

20 ‘‘(B) the amount of compensation (if any) 

21 includible in such individual’s gross income for 

22 the taxable year is less than the compensation 

23 includible in the gross income of such individ24 ual’s spouse for the taxable year. 


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1 ‘‘(e) QUALIFIED UNIVERSAL PENSION CONTRIBU2 TIONS.—For purposes of this section, the term ‘qualified 

3 universal pension contribution’ means any amount paid in 

4 cash for the taxable year by or on behalf of an individual 

5 to a Universal PensionAccount for such individual’s ben6 efit. 

7 ‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.— 

‘‘(1) ATTAINMENT OF AGE 701 8 ⁄2.—No deduction 

9 shall be allowed under this section with respect to 

10 any qualified retirement contribution for the benefit 

11 of an individual if such individual has attained age 

701 12 ⁄2 before the close of such individual’s taxable 

13 year for which the contribution was made. 

14 ‘‘(2) RECONTRIBUTED AMOUNTS.—No deduc15 tion shall be allowed under this section with respect 

16 to a rollover contribution to a Universal Pension Ac17 count. 

18 ‘‘(3) DENIAL OF DEDUCTION FOR AMOUNT

19 CONTRIBUTED TO INHERITED ACCOUNTS.—No de20 duction shall be allowed under this section with re21 spect to any amount paid to an inherited Universal 

22 Pension Account. 

23 ‘‘(g) OTHER DEFINITIONS AND SPECIAL RULES.— 


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1 ‘‘(1) COMPENSATION.—For purposes of this 

2 section, the term ‘compensation’ has the meaning 

3 given to such term by section 219(f)(1). 

4 ‘‘(2) MARRIED INDIVIDUALS.—The maximum 

5 deduction under subsection (b) shall be computed 

6 separately for each individual, and this section shall 

7 be applied without regard to any community prop8 erty laws. 

9 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

10 MADE.—A taxpayer shall be deemed to have made a 

11 contribution to a Universal Pension Account on the 

12 last day of the preceding taxable year if the con13 tribution is made on account of such taxable year 

14 and is made not later than the time prescribed by 

15 law for filing the return for such taxable year (not 

16 including extensions thereof). 

17 ‘‘(4) EMPLOYER PAYMENTS.—For purposes of 

18 this title, any amount paid by an employer to a Uni19 versal Pension Account shall be treated as payment 

20 of compensation to the employee (other than a self21 employed individual who is an employee within the 

22 meaning of section 401(c)(1)) includible in the em23 ployee’s gross income in the taxable year for which 

24 the amount was contributed, whether or not a deVerDate Aug 31 2005 08:33 Apr 28, 2006 Jkt 049200 PO 00000 Frm 00038 Fmt 6652 Sfmt 6201 E:\BILLS\H5176.IH H5176

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1 duction for such payment is allowable under this sec2 tion to the employee. 

3 ‘‘(5) EXCESS CONTRIBUTIONS TREATED AS

4 CONTRIBUTION MADE DURING SUBSEQUENT YEAR

5 FOR WHICH THERE IS AN UNUSED LIMITATION.—A 

6 rule similar to the rule of section 219(f)(5) shall 

7 apply for purposes of this section.’’. 

8 (2) DEDUCTION ALLOWED WHETHER OR NOT

9 TAXPAYER ITEMIZES DEDUCTIONS.—Subsection (a) 

10 of section 62 is amended by inserting after para11 graph (20) the following new paragraph: 

12 ‘‘(21) CONTRIBUTIONS TO UNIVERSAL PENSION

13 ACCOUNTS.—The deduction allowed by section 

14 219A.’’. 

15 (3) TECHNICAL AMENDMENTS.— 

16 (A) Subparagraph (B) of section 135(c)(4) 

17 is amended by striking ‘‘and 219’’ and inserting 

18 ‘‘219, and 219A’’. 

19 (B) Subparagraph (B) of section 137(b)(3) 

20 is amended by inserting ‘‘219A,’’ after ‘‘219,’’. 

21 (C) Subparagraph (A) of section 199(d)(2) 

22 is amended by inserting ‘‘219A,’’ after ‘‘219,’’. 

23 (D) Clause (ii) of section 219(g)(3)(A) is 

24 amended by inserting ‘‘219A,’’ after ‘‘137,’’. 


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1 (E) Clause (ii) of section 221(b)(2)(C) is 

2 amended by inserting ‘‘219A,’’ after ‘‘219,’’. 

3 (F) Clause (ii) of section 222(b)(2)(C) is 

4 amended by inserting ‘‘219A,’’ after ‘‘219,’’. 

5 (G) Clause (iii) of section 469(i)(3)(F) is 

6 amended by inserting ‘‘219A,’’ after ‘‘219,’’. 

7 (4) CLERICAL AMENDMENT.—The table of sec8 tions for part VII of subchapter B of chapter 1 is 

9 amended by inserting after the item relating to sec10 tion 219 the following new item: 

‘‘Sec. 219A. Contributions to Universal Pension Accounts.’’. 

11 (b) UNIVERSAL PENSION ACCOUNTS.— 

12 (1) IN GENERAL.—Subpart A of part I of sub13 chapter D of chapter 1 is amended by inserting after 

14 section 408A the following new section: 

15 ‘‘SEC. 408B. UNIVERSAL PENSION ACCOUNTS. 

16 ‘‘(a) IN GENERAL.—For purposes of this title, the 

17 term ‘Universal Pension Account’ means a trust created 

18 or organized in the United States for the exclusive benefit 

19 of an individual or such individual’s beneficiaries, but only 

20 if the written governing instrument creating the trust 

21 meets the following requirements: 

22 ‘‘(1) Except in the case of a rollover contribu23 tion described in subsection (b)(3) or in section 

24 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), no con25 tribution will be accepted unless it is in cash, and 


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1 contributions will not be accepted for the taxable 

2 year on behalf of any individual in excess of the de3 ductible amount in effect for such taxable year 

4 under section 219A(b)(2). 

5 ‘‘(2) The trustee is a bank (as defined in sec6 tion 408(n)) or such other person who demonstrates 

7 to the satisfaction of the Secretary that the manner 

8 in which such other person will administer the trust 

9 will be consistent with the requirements of this sec10 tion. 

11 ‘‘(3) No part of the trust funds will be invested 

12 in life insurance contracts. 

13 ‘‘(4) The interest of an individual in the bal14 ance in such individual’s account is nonforfeitable. 

15 ‘‘(5) The assets of the trust will not be commin16 gled with other property except in a common trust 

17 fund or common investment fund. 

18 ‘‘(6) Under regulations prescribed by the Sec19 retary, rules similar to the rules of section 401(a)(9) 

20 and the incidental death benefit requirements of sec21 tion 401(a) shall apply to the distribution of the en22 tire interest of an individual for whose benefit the 

23 trust is maintained. 

24 ‘‘(b) TAX TREATMENT OF DISTRIBUTIONS.— 


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1 ‘‘(1) IN GENERAL.—Except as otherwise pro2 vided in this subsection, any amount distributed out 

3 of a Universal Pension Account shall be included in 

4 gross income by the distributee without regard to 

5 basis. 

6 ‘‘(2) EXCEPTION FOR IMMEDIATE ANNU7 ITIES.—If any distribution is a part of a series of 

8 substantially equal periodic payments (not less fre9 quently than annually) made for the life (or life ex10 pectancy) of the distributee or the joint lives (or 

11 joint life expectancies) of such distributee and such 

12 distributee’s designated beneficiary, the amount in13 cludible in gross income under paragraph (1) shall 

14 be determined in the manner provided under section 

15 72. The rules of section 408(d)(2) shall apply for 

16 purposes of the preceding sentence. 

17 ‘‘(3) EXCEPTION FOR ROLLOVERS.— 

18 ‘‘(A) IN GENERAL.—Paragraph (1) shall 

19 not apply to any amount distributed out of a 

20 Universal Pension Account to the individual for 

21 whose benefit the account is maintained if the 

22 entire amount received (including money and 

23 any other property) is paid into a Universal 

24 Pension Account (other than an endowment 

25 contract) for the benefit of such individual not 


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1 later than the 60th day after the day on which 

2 the individual receives the distribution. 

3 ‘‘(B) LIMITATION.—This paragraph does 

4 not apply to any amount described in subpara5 graph (A) received by an individual from a Uni6 versal Pension Account if at any time during 

7 the 1-year period ending on the day of such re8 ceipt such individual received any other amount 

9 described in that subparagraph from a Uni10 versal Pension Account which was not includible 

11 in such individual’s gross income because of the 

12 application of this paragraph. 

13 ‘‘(C) SPECIAL RULES.—Rules similar to 

14 the rules of subparagraphs (C), (D), (E), (F), 

15 and (I) of section 408(d)(3) shall apply for pur16 poses of this paragraph. 

17 ‘‘(4) EXCEPTION FOR QUALIFIED DISTRIBU18 TIONS.— 

19 ‘‘(A) DISTRIBUTIONS FOR HIGHER EDU20 CATION EXPENSES.—Paragraph (1) shall not 

21 apply to distributions to an individual to the ex22 tent such distributions do not exceed the quali23 fied higher education expenses (as defined in 

24 section 72(t)(7)) of the taxpayer for the taxable 

25 year. 


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1 ‘‘(B) DISTRIBUTIONS FOR FIRST HOME

2 PURCHASES.—Paragraph (1) shall not apply to 

3 distributions to an individual which are quali4 fied first-time homebuyer distributions (as de5 fined in section 72(t)(8)). 

6 ‘‘(5) OTHER DISTRIBUTIONS.—Rules similar to 

7 the rules of paragraphs (4) and (6) of section 

8 408(d) shall apply for purposes of this subsection. 

9 ‘‘(c) TAX TREATMENT OF ACCOUNTS.— 

10 ‘‘(1) EXEMPTION FROM TAX.—Any Universal 

11 Pension Account is exempt from taxation under this 

12 subtitle unless such account has ceased to be a Uni13 versal Pension Account by reason of paragraph (2). 

14 Notwithstanding the preceding sentence, any such 

15 account is subject to the taxes imposed by section 

16 511 (relating to imposition of tax on unrelated busi17 ness income of charitable, etc. organizations). 

18 ‘‘(2) LOSS OF EXEMPTION FOR PROHIBITED

19 TRANSACTION.—Rules similar to the rules of section 

20 408(e)(2) shall apply for purposes of this subsection. 

21 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU22 RITY; PURCHASE OF ENDOWMENT CONTRACT; COM23 MINGLING AMOUNTS IN CERTAIN COMMON TRUST

24 FUNDS AND COMMON INVESTMENT FUNDS.—Rules 

25 similar to the rules of paragraphs (4), (5), and (6) 


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1 of section 408(e) shall apply for purposes of this 

2 subsection. 

3 ‘‘(d) ROLLOVERS PERMITTED FROM IRA’S, ETC.— 

4 Solely for purposes of determining whether any rollover 

5 may be made to a Universal Pension Account, a Universal 

6 Pension Account shall be treated as if it were an individual 

7 retirement plan. No amount may be distributed in a roll8 over other than to a Universal Pension Account. 

9 ‘‘(e) SPECIAL RULES.— 

10 ‘‘(1) COMMUNITY PROPERTY LAWS.—This sec11 tion shall be applied without regard to any commu12 nity property laws. 

13 ‘‘(2) CUSTODIAL ACCOUNTS.—Rules similar to 

14 the rules of section 408(g) shall apply for purposes 

15 of this subsection. 

16 ‘‘(3) INVESTMENT IN COLLECTIBLES TREATED

17 AS DISTRIBUTIONS.—The acquisition by a Universal 

18 Pension Account of any collectible (as defined in sec19 tion 408(m)) shall be treated (for purposes of this 

20 section and section 402) as a distribution from such 

21 account in an amount equal to the cost to such ac22 count of such collectible. 

23 ‘‘(f) REPORTS.—The trustee of a Universal Pension 

24 Account shall make such reports regarding such Account 

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1 count is, or is to be, maintained with respect to contribu2 tions (and the years to which they relate), distributions, 

3 aggregating $10 or more in any calendar year and such 

4 other matters as the Secretary may require. The reports 

5 required by this subsection— 

6 ‘‘(1) shall be filed at such time and in such 

7 manner as the Secretary prescribes, and 

8 ‘‘(2) shall be furnished to individuals— 

9 ‘‘(A) not later than January 31 of the cal10 endar year following the calendar year to which 

11 such reports relate, and 

12 ‘‘(B) in such manner as the Secretary pre13 scribes.’’. 

14 (2) TECHNICAL AMENDMENTS.— 

15 (A) EXCESS CONTRIBUTIONS.— 

16 (i) IN GENERAL.—Subsection (a) of 

17 section 4973 is amended by redesignating 

18 paragraphs (2), (3), and (4) as paragraphs 

19 (3), (4), and (5), respectively, and by in20 serting after paragraph (1) the following 

21 new paragraph: 

22 ‘‘(2) a Universal Pension Account (as defined in 

23 section 408B),’’. 


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1 (ii) DETERMINATION OF EXCESS.— 

2 Section 4973 is amended by adding at the 

3 end the following new subsection: 

4 ‘‘(i) EXCESS CONTRIBUTIONS TO UNIVERSAL PEN5 SION ACCOUNTS.—Rules similar to the rules under sub6 section (b) shall apply to any Universal Pension Account 

7 (as defined in section 408B).’’. 

8 (B) EARLY WITHDRAWAL PENALTY, 

9 ETC.—Subsection (c) of section 4974 is amend10 ed by striking ‘‘or’’ at the end of paragraph (4), 

11 by striking the period at the end of paragraph 

12 (5) and inserting ‘‘, or’’, and by inserting after 

13 paragraph (5) the following new paragraph: 

14 ‘‘(6) a Universal Pension Account described in 

15 section 408B.’’. 

16 (C) PROHIBITED TRANSACTIONS.— 

17 (i) IN GENERAL.—Paragraph (1) of 

18 section 4975(e) is amended by redesig19 nating subparagraphs (D), (E), and (F) as 

20 subparagraphs (E), (F), and (G), respec21 tively, and by inserting after subparagraph 

22 (C) the following new subparagraph: 

23 ‘‘(D) a Universal Pension Account de24 scribed in section 408B,’’. 


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1 (ii) EXCEPTION.—Subsection (c) of 

2 section 4975 is amended by adding at the 

3 end the following new paragraph: 

4 ‘‘(5) SPECIAL RULE FOR UNIVERSAL PENSION

5 ACCOUNTS.—An individual for whose benefit a Uni6 versal Pension Account is established shall be ex7 empt from the tax imposed by this section with re8 spect to any transaction concerning such Account 

9 (which would otherwise be taxable under this sec10 tion) if section 408B(d)(2) applies with respect to 

11 such transaction.’’. 

12 (D) FAILURE TO PROVIDE REPORTS.— 

13 Paragraph (2) of section 6693(a) (relating to 

14 failure to provide reports on individual retire15 ment accounts or annuities) is amended by re16 designating subparagraphs (C) and (D) as sub17 paragraphs (D) and (E), respectively, and by 

18 inserting after subparagraph (B) the following 

19 new subparagraph: 

20 ‘‘(C) a Universal Pension Account de21 scribed in section 408B,’’. 

22 (E) W–2 REPORTING.—Subsection (a) of 

23 section 6051 is amended by striking ‘‘and’’ at 

24 the end of paragraph (10), by striking the pe25 riod at the end of paragraph (11) and inserting 


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1 ‘‘, and’’, and by inserting after paragraph (11) 

2 the following new paragraph: 

3 ‘‘(12) the total amount of elective employer con4 tributions under section 408B(f)(2)(A).’’. 

5 (F) OTHER TECHNICAL AMENDMENTS.— 

6 The following provisions are each amended by 

7 inserting ‘‘408B(f),’’ after ‘‘408(p),’’: 

8 (i) Subsections (b) and (c) of section 

9 414. 

10 (ii) Section 414(m)(4)(B). 

11 (iii) Section 414(n)(3)(B). 

12 (iv) Section 414(u)(1)(C). 

13 (G) ELECTIVE CONTRIBUTIONS SUBJECT

14 TO FICA AND FUTA.— 

15 (i) Paragraph (5) of section 3121(a) 

16 is amended by striking ‘‘or’’ at the end of 

17 subparagraph (H), by striking the semi18 colon at the end of subparagraph (I) and 

19 inserting ‘‘, or’’, and by adding at the end 

20 the following new subparagraph: 

21 ‘‘(J) under an arrangement to which sec22 tion 408B(f) applies, other than any elective 

23 contributions under paragraph (2)(A) thereof;’’. 

24 (ii) Paragraph (4) of section 209(a) of 

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1 ing at the end ‘‘or (J) under an arrange2 ment to which section 408B(f) of such 

3 Code applies, other than any elective con4 tributions under paragraph (2)(A) there5 of;’’. 

6 (iii) Paragraph (5) of section 3306(b) 

7 is amended by striking ‘‘or’’ at the end of 

8 subparagraph (G), by striking the semi9 colon at the end of subparagraph (H) and 

10 inserting ‘‘, or’’, and by adding at the end 

11 the following new subparagraph: 

12 ‘‘(I) under an arrangement to which sec13 tion 408B(f) applies, other than any elective 

14 contributions under paragraph (2)(A) thereof;’’. 

15 (iv) Paragraph (12) of section 

16 3401(a) is amended by adding at the end 

17 the following new subparagraph: 

18 ‘‘(F) under an arrangement to which sec19 tion 408B(f) applies; or’’. 

20 (3) CLERICAL AMENDMENT.—The table of sec21 tions for subpart A of part I of subchapter D of 

22 chapter 1 is amended by inserting after the item re23 lating to section 408A the following new item: 

‘‘Sec. 408B. Universal Pension Accounts.’’. 

24 (c) TERMINATION OF CONTRIBUTIONS TO INDI25 VIDUAL RETIREMENT PLANS, INCLUDING ROTH IRA’S.— 


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1 (1) Subsection (a) of section 408 is amended by 

2 adding at the end the following new paragraph: 

3 ‘‘(7) No contribution (other than a rollover con4 tribution referred to in paragraph (1)) shall be ac5 cepted for any taxable year beginning after Decem6 ber 31, 2005, unless such account is a simplified 

7 employee pension or a simple retirement account.’’. 

8 (2) Subsection (b) of section 408 is amended by 

9 inserting after paragraph (4) the following new 

10 paragraph: 

11 ‘‘(5) No contribution shall be accepted for any 

12 taxable year beginning after December 31, 2005, un13 less such annuity is a simplified employee pension or 

14 a simple retirement account.’’. 

15 (d) CREDIT FOR SMALL EMPLOYERS MAINTAINING

16 SALARY REDUCTION ARRANGEMENTS FOR UNIVERSAL

17 PENSION ACCOUNTS.— 

18 (1) IN GENERAL.—Subpart D of part IV of 

19 subchapter A of chapter 1 (relating to business re20 lated credits) is amended by adding at the end the 

21 following new section: 

22 ‘‘SEC. 45N. SMALL EMPLOYER UNIVERSAL PENSION AC23 COUNT COSTS. 

24 ‘‘(a) GENERAL RULE.—For purposes of section 38, 

25 in the case of an eligible employer, the small employer 


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1 Universal Pension Account cost credit determined under 

2 this section for any taxable year is the aggregate of the 

3 amount determined under subsection (b) for each em4 ployee participating in an arrangement meeting the re5 quirements of section 408B(f). 

6 ‘‘(b) AMOUNT OF CREDIT.—The amount of the credit 

7 determined under this section for any taxable year with 

8 respect to an employee shall be— 

9 ‘‘(1) $50 for the taxable year which includes the 

10 date that the arrangement referred to subsection (a) 

11 becomes effective, 

12 ‘‘(2) $20 for each of the 3 taxable years fol13 lowing the taxable year described in paragraph (1), 

14 and 

15 ‘‘(3) zero for any other taxable year. 

16 ‘‘(c) ELIGIBLE EMPLOYER.—For purposes of this 

17 section, the term ‘eligible employer’ means, with respect 

18 to any taxable year, an employer which had no more than 

19 100 employees on a typical business day during the most 

20 recent calendar year ending before such taxable year. For 

21 purposes of the preceding sentence, all persons treated as 

22 a single employer under subsection (a) or (b) of section 

23 52, or subsection (n) or (o) of section 414, shall be treated 

24 as one person.’’. 


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1 (2) CREDIT ALLOWED AS PART OF GENERAL

2 BUSINESS CREDIT.—Section 38(b) (defining current 

3 year business credit) is amended by striking ‘‘plus’’ 

4 at the end of paragraph (25), by striking the period 

5 at the end of paragraph (26) and inserting ‘‘, plus’’, 

6 and by adding at the end the following new para7 graph: 

8 ‘‘(27) in the case of an eligible employer (as de9 fined in section 45J(c)), the small employer Uni10 versal Pension Account cost credit determined under 

11 section 45J(a).’’. 

12 (3) CLERICAL AMENDMENT.—The table of sec13 tions for subpart D of part IV of subchapter A of 

14 chapter 1 is amended by adding at the end the fol15 lowing new item: 

‘‘Sec. 45N. Small employer Universal Pension Account costs’’. 

16 (e) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years beginning after 

18 December 31, 2005. 

19 SEC. 107. REPEAL OF INDIVIDUAL ALTERNATIVE MINIMUM 

20 TAX. 

21 (a) IN GENERAL.—Section 55(a) (relating to alter22 native minimum tax imposed) is amended by adding at 

23 the end the following new flush sentence: 


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1 ‘‘For purposes of this title, the tentative minimum tax on 

2 any taxpayer other than a corporation for any taxable year 

3 beginning after December 31, 2005, shall be zero.’’. 

4 (b) MODIFICATION OF LIMITATION ON USE OF

5 CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY.— 

6 Subsection (c) of section 53 (relating to credit for prior 

7 year minimum tax liability) is amended to read as follows: 

8 ‘‘(c) LIMITATION.— 

9 ‘‘(1) IN GENERAL.—Except as provided in para10 graph (2), the credit allowable under subsection (a) 

11 for any taxable year shall not exceed the excess (if 

12 any) of— 

13 ‘‘(A) the regular tax liability of the tax14 payer for such taxable year reduced by the sum 

15 of the credits allowable under subparts A, B, D, 

16 E, and F of this part, over 

17 ‘‘(B) the tentative minimum tax for the 

18 taxable year. 

19 ‘‘(2) TAXABLE YEARS BEGINNING AFTER

20 2005.—In the case of any taxable year beginning 

21 after 2005, the credit allowable under subsection (a) 

22 to a taxpayer other than a corporation for any tax23 able year shall not exceed 90 percent of the regular 

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1 duced by the sum of the credits allowable under sub2 parts A, B, D, E, and F of this part.’’. 

3 (c) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to taxable years beginning after 

5 December 31, 2005. 

6 TITLE II—INCOME TAX 

7 REFORMS 

8 Subtitle A—Provisions Relating to 

9 Corporate and Business Income 

10 Tax 

11 SEC. 201. CORPORATE FLAT TAX. 

12 (a) IN GENERAL.—Subsection (b) of section 11 (re13 lating to tax imposed) is amended to read as follows: 

14 ‘‘(b) AMOUNT OF TAX.—The amount of tax imposed 

15 by subsection (a) shall be equal to 35 percent of the tax16 able income.’’. 

17 (b) CONFORMING AMENDMENTS.— 

18 (1) Section 280C(c)(3)(B)(ii)(II) is amended by 

19 striking ‘‘maximum rate of tax under section 

20 11(b)(1)’’ and inserting ‘‘rate of tax under section 

21 11(b)’’. 

22 (2) Sections 860E(e)(2)(B), 860E(e)(6)(A)(ii), 

23 860K(d)(2)(A)(ii), 860K(e)(1)(B)(ii), 

24 1446(b)(2)(B), and 7874(e)(1)(B) are each amended 

25 by striking ‘‘highest rate of tax specified in section 


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1 11(b)(1)’’ and inserting ‘‘rate of tax specified in sec2 tion 11(b)’’. 

3 (3) Section 904(b)(3)(D)(ii) is amended by 

4 striking ‘‘(determined without regard to the last sen5 tence of section 11(b)(1))’’. 

6 (4) Section 962 is amended by striking sub7 section (c) and by redesignating subsection (d) as 

8 subsection (c). 

9 (5) Section 1201(a) is amended by striking 

10 ‘‘(determined without regard to the last 2 sentences 

11 of section 11(b)(1))’’. 

12 (6) Section 1561(a) is amended— 

13 (A) by striking paragraph (1) and by re14 designating paragraphs (2), (3), and (4) as 

15 paragraphs (1), (2), and (3), respectively, 

16 (B) by striking ‘‘The amounts specified in 

17 paragraph (1), the’’ and inserting ‘‘The’’, 

18 (C) by striking ‘‘paragraph (2)’’ and in19 serting ‘‘paragraph (1)’’, 

20 (D) by striking ‘‘paragraph (3)’’ both 

21 places it appears and inserting ‘‘paragraph 

22 (2)’’, 

23 (E) by striking ‘‘paragraph (4)’’ and in24 serting ‘‘paragraph (3)’’, and 

25 (F) by striking the fourth sentence. 


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1 (7) Subsection (b) of section 1561 is amended 

2 to read as follows: 

3 ‘‘(b) CERTAIN SHORT TAXABLE YEARS.—If a cor4 poration has a short taxable year which does not include 

5 a December 31 and is a component member of a controlled 

6 group of corporations with respect to such taxable year, 

7 then for purposes of this subtitle, the amount to be used 

8 in computing the accumulated earnings credit under sec9 tion 535(c)(2) and (3) of such corporation for such taxable 

10 year shall be the amount specified in subsection (a)(1) di11 vided by the number of corporations which are component 

12 members of such group on the last day of such taxable 

13 year. For purposes of the preceding sentence, section 

14 1563(b) shall be applied as if such last day were sub15 stituted for December 31.’’. 

16 (c) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years beginning after 

18 December 31, 2005. 

19 SEC. 202. TREATMENT OF TRAVEL ON CORPORATE AIR20 CRAFT. 

21 (a) IN GENERAL.—Section 162 (relating to trade or 

22 business expenses) is amended by redesignating subsection 

23 (q) as subsection (r) and b inserting after subsection (p) 

24 the following new subsection: 


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1 ‘‘(q) TREATMENT OF TRAVEL ON CORPORATE AIR2 CRAFT.—The rate at which an amount allowable as a de3 duction under this chapter for the use of an aircraft owned 

4 by the taxpayer is determined shall not exceed the rate 

5 at which an amount paid or included in income by an em6 ployee of such taxpayer for the personal use of such air7 craft is determined.’’. 

8 (b) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to taxable years beginning after 

10 December 31, 2005. 

11 SEC. 203. VALUATION OF EMPLOYEE PERSONAL USE OF 

12 NONCOMMERCIAL AIRCRAFT. 

13 (a) IN GENERAL.—For purposes of Federal income 

14 tax inclusion, the value of any employee personal use of 

15 noncommercial aircraft shall equal the excess (if any) of— 

16 (1) greater of— 

17 (A) the fair market value of such use, or 

18 (B) the actual cost of such use (including 

19 all fixed and variable costs), over 

20 (2) any amount paid by or on behalf of such 

21 employee for such use. 

22 (b) EFFECTIVE DATE.—Subsection (a) shall apply to 

23 use after the date of the enactment of this Act. 


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1 SEC. 204. ELIMINATION OF TAX EXPENDITURES THAT SUB2 SIDIZE INEFFICIENCIES IN THE HEALTH 

3 CARE SYSTEM. 

4 Not later than 180 days after the date of the enact5 ment of this Act, the Secretary of the Treasury shall re6 port to the Committee on Finance of the Senate and the 

7 Committee on Ways and Means of the House of Rep8 resentatives recommendations regarding the elimination of 

9 Federal tax incentives which subsidize inefficiencies in the 

10 health care system and if eliminated would result in Fed11 eral budget savings of not less than $10,000,000,000 an12 nually. 

13 SEC. 205. PASS-THROUGH BUSINESS ENTITY TRANS14 PARENCY. 

15 Not later than 90 days after the date of the enact16 ment of this Act, the Secretary of the Treasury shall re17 port to the Committee on Finance of the Senate and the 

18 Committee on Ways and Means of the House of Rep19 resentatives regarding the implementation of additional 

20 reporting requirements with respect to any pass-through 

21 entity with the goal of the reduction of tax avoidance 

22 through the use of such entities, In addition, the Secretary 

23 shall develop procedures to share such report data with 

24 State revenue agencies under the disclosure requirements 

25 of section 6103(d) of the Internal Revenue Code of 1986. 


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1 SEC. 206. BROKER REPORTING OF CUSTOMER’S BASIS IN 

2 SECURITIES TRANSACTIONS. 

3 (a) IN GENERAL.—Section 6045 (relating to returns 

4 of brokers) is amended by adding at the end the following 

5 new subsection: 

6 ‘‘(g) ADDITIONAL INFORMATION REQUIRED IN THE

7 CASE OF SECURITIES TRANSACTIONS.— 

8 ‘‘(1) IN GENERAL.—If a broker is otherwise re9 quired to make a return under subsection (a) with 

10 respect to any applicable security, the broker shall 

11 include in such return the information described in 

12 paragraph (2). 

13 ‘‘(2) ADDITIONAL INFORMATION REQUIRED.— 

14 ‘‘(A) IN GENERAL.—The information re15 quired under paragraph (1) to be shown on a 

16 return with respect to an applicable security of 

17 a customer shall include for each reported ap18 plicable security the customer’s adjusted basis 

19 in such security. 

20 ‘‘(B) EXEMPTION FROM REQUIREMENT.— 

21 The Secretary shall issue such regulations or 

22 guidance as necessary concerning the applica23 tion of the requirement under subparagraph (A) 

24 in cases in which a broker in making a return 

25 does not have sufficient information to meet 

26 such requirement with respect to the reported 


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1 applicable security. Such regulations or guid2 ance may— 

3 ‘‘(i) require such other information re4 lated to such adjusted basis as the Sec5 retary may prescribe, and 

6 ‘‘(ii) exempt classes of cases in which 

7 the broker does not have sufficient infor8 mation to meet either the requirement 

9 under subparagraph (A) or the require10 ment under clause (i). 

11 ‘‘(3) INFORMATION TRANSFERS.—To the extent 

12 provided in regulations, there shall be such ex13 changes of information between brokers as such reg14 ulations may require for purposes of enabling such 

15 brokers to meet the requirements of this subsection. 

16 ‘‘(4) DEFINITIONS.—For purposes of this sub17 section, the term ‘applicable security’ means any— 

18 ‘‘(A) security described in subparagraph 

19 (A) or (C) of section 475(c)(2), 

20 ‘‘(B) interest in a regulated investment 

21 company (as defined in section 851), or 

22 ‘‘(C) other financial instrument designated 

23 in regulations prescribed by the Secretary.’’. 

24 (b) EFFECTIVE DATE.—The amendment made by 

25 this section shall apply to returns the due date for which 


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1 (determined without regard to extensions) is after Decem2 ber 31, 2008, with respect to securities acquired after De3 cember 31, 2007. 

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

5 METHOD. 

6 (a) IN GENERAL.—Section 471 (relating to general 

7 rule for inventories) is amended by redesignating sub8 section (c) as subsection (d) and by inserting after sub9 section (b) the following new subsection: 

10 ‘‘(c) PROHIBITION ON USE OF LOWER COST OR MAR11 KET METHOD.— 

12 ‘‘(1) IN GENERAL.—For any taxable year be13 ginning after December 31, 2006, a taxpayer may 

14 not use any method which values inventories at cost 

15 or market, whichever is lower. 

16 ‘‘(2) 3-YEAR AVERAGING FOR INCREASES IN IN17 VENTORY VALUE.—In the case of a taxpayer that 

18 used a method which values inventories at cost or 

19 market, whichever is lower, for the taxable year end20 ing with or within December 31, 2006, the begin21 ning inventory for the first taxable year beginning 

22 after such date shall be valued both with and with23 out the application of paragraph (1). Any change in 

24 the inventory amount resulting from the application 

25 of the preceding sentence shall be taken into account 


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1 ratably in each of the 3 taxable years beginning with 

2 the first taxable year for which the method described 

3 in subsection (b) is first used. 

4 ‘‘(3) CERTAIN ADJUSTMENTS NOT TO APPLY.— 

5 Section 481 shall not apply with respect to any 

6 change in the method of accounting which is re7 quired by this subsection.’’. 

8 (b) EFFECTIVE DATE.—The amendment made by 

9 subsection (a) shall apply to taxable years beginning after 

10 December 31, 2006. 

11 SEC. 208. IMPOSITION OF WITHHOLDING ON CERTAIN PAY12 MENTS MADE BY GOVERNMENT ENTITIES. 

13 (a) IN GENERAL.—Section 3402 is amended by add14 ing at the end the following new subsection: 

15 ‘‘(t) EXTENSION OF WITHHOLDING TO CERTAIN

16 PAYMENTS MADE BY GOVERNMENT ENTITIES.— 

17 ‘‘(1) GENERAL RULE.—The Government of the 

18 United States, every State, every political subdivi19 sion thereof, and every instrumentality of the fore20 going (including multi-State agencies) making any 

21 payment for goods and services which is subject to 

22 withholding shall deduct and withhold form such 

23 payment a tax in an amount equal to 3 percent of 

24 such payment. 


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1 ‘‘(2) EXCEPTIONS.—Paragraph (1) shall not 

2 apply to any payment— 

3 ‘‘(A) except as provided in subparagraph 

4 (B), which is subject to withholding under any 

5 other provision of this chapter or chapter 3, 

6 ‘‘(B) which is subject to withholding under 

7 section 3406 and from which amounts are being 

8 withheld under such section, 

9 ‘‘(C) of interest, 

10 ‘‘(D) for real property, 

11 ‘‘(E) to any tax-exempt entity, foreign gov12 ernment, or other entity subject to the require13 ments of paragraph (1), 

14 ‘‘(F) made pursuant to a classified or con15 fidential contract (as defined in section 

16 6050M(e)(3)), and 

17 ‘‘(G) made by a political subdivision of a 

18 State (or any instrumentality thereof) which 

19 makes less than $100,000,000 of such pay20 ments annually. 

21 ‘‘(3) COORDINATION WITH OTHER SECTIONS.— 

22 For purposes of sections 3403 and 3404 and for 

23 purposes of so much of subtitle F (except section 

24 7205) as relates to this chapter, payments to any 

25 person of any payment for goods and services which 


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1 is subject to withholding shall be treated as if such 

2 payments were wages paid by an employer to an em3 ployee.’’. 

4 (b) EFFECTIVE DATE.—The amendment made by 

5 this section shall apply to payments made after December 

6 31, 2006. 

7 Subtitle B—Provisions Designed to 

8 Curtail Tax Shelters 

9 SEC. 211. PENALTY FOR PROMOTING ABUSIVE TAX SHEL10 TERS. 

11 (a) PENALTY FOR PROMOTING ABUSIVE TAX SHEL12 TERS.—Section 6700 (relating to promoting abusive tax 

13 shelters, etc.) is amended— 

14 (1) by redesignating subsections (b) and (c) as 

15 subsections (d) and (e), respectively, 

16 (2) by striking ‘‘a penalty’’ and all that follows 

17 through the period in the first sentence of subsection 

18 (a) and inserting ‘‘a penalty determined under sub19 section (b)’’, and 

20 (3) by inserting after subsection (a) the fol21 lowing new subsections: 

22 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN23 ALTY; LIABILITY FOR PENALTY.— 

24 ‘‘(1) AMOUNT OF PENALTY.—The amount of 

25 the penalty imposed by subsection (a) shall be 100 


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1 percent of the gross income derived (or to be de2 rived) from such activity by the person or persons 

3 subject to such penalty. 

4 ‘‘(2) CALCULATION OF PENALTY.—The penalty 

5 amount determined under paragraph (1) shall be 

6 calculated with respect to each instance of an activ7 ity described in subsection (a), each instance in 

8 which income was derived by the person or persons 

9 subject to such penalty, and each person who par10 ticipated in such an activity. 

11 ‘‘(3) LIABILITY FOR PENALTY.—If more than 1 

12 person is liable under subsection (a) with respect to 

13 such activity, all such persons shall be jointly and 

14 severally liable for the penalty under such sub15 section. 

16 ‘‘(c) PENALTY NOT DEDUCTIBLE.—The payment of 

17 any penalty imposed under this section or the payment 

18 of any amount to settle or avoid the imposition of such 

19 penalty shall not be considered an ordinary and necessary 

20 expense in carrying on a trade or business for purposes 

21 of this title and shall not be deductible by the person who 

22 is subject to such penalty or who makes such payment.’’. 

23 (b) CONFORMING AMENDMENT.—Section 6700(a) is 

24 amended by striking the last sentence. 


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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to the activities described in para3 graphs (1) and (2) of section 6700(a) of the Internal Rev4 enue Code of 1986 and after the date of the enactment 

5 of this Act. 

6 SEC. 212. PENALTY FOR AIDING AND ABETTING THE UN7 DERSTATEMENT OF TAX LIABILITY. 

8 (a) IN GENERAL.—Section 6701(a) (relating to impo9 sition of penalty) is amended— 

10 (1) by inserting ‘‘, or tax liability reflected in,’’ 

11 after ‘‘the preparation or presentation of’’ in para12 graph (1), 

13 (2) by inserting ‘‘aid, assistance, procurement, 

14 or advice with respect to such’’ before ‘‘portion’’ 

15 both places it appears in paragraphs (2) and (3), 

16 and 

17 (3) by inserting ‘‘instance of aid, assistance, 

18 procurement, or advice or each such’’ before ‘‘docu19 ment’’ in the matter following paragraph (3). 

20 (b) AMOUNT OF PENALTY.—Subsection (b) of section 

21 6701 (relating to penalties for aiding and abetting under22 statement of tax liability) is amended to read as follows: 

23 ‘‘(b) AMOUNT OF PENALTY; CALCULATION OF PEN24 ALTY; LIABILITY FOR PENALTY.— 


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1 ‘‘(1) AMOUNT OF PENALTY.—The amount of 

2 the penalty imposed by subsection (a) shall be 100 

3 percent of the gross income derived (or to be de4 rived) from such aid, assistance, procurement, or ad5 vice provided by the person or persons subject to 

6 such penalty. 

7 ‘‘(2) CALCULATION OF PENALTY.—The penalty 

8 amount determined under paragraph (1) shall be 

9 calculated with respect to each instance of aid, as10 sistance, procurement, or advice described in sub11 section (a), each instance in which income was de12 rived by the person or persons subject to such pen13 alty, and each person who made such an understate14 ment of the liability for tax. 

15 ‘‘(3) LIABILITY FOR PENALTY.—If more than 1 

16 person is liable under subsection (a) with respect to 

17 providing such aid, assistance, procurement, or ad18 vice, all such persons shall be jointly and severally 

19 liable for the penalty under such subsection.’’. 

20 (c) PENALTY NOT DEDUCTIBLE.—Section 6701 is 

21 amended by adding at the end the following new sub22 section: 

23 ‘‘(g) PENALTY NOT DEDUCTIBLE.—The payment of 

24 any penalty imposed under this section or the payment 

25 of any amount to settle or avoid the imposition of such 


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1 penalty shall not be considered an ordinary and necessary 

2 expense in carrying on a trade or business for purposes 

3 of this title and shall not be deductible by the person who 

4 is subject to such penalty or who makes such payment.’’. 

5 (d) EFFECTIVE DATE.—The amendments made by 

6 this section shall apply to the activities described in sec7 tion 6701(a) of the Internal Revenue Code of 1986 after 

8 the date of the enactment of this Act. 

9 SEC. 213. INCREASE IN CRIMINAL MONETARY PENALTY 

10 LIMITATION FOR THE UNDERPAYMENT OR 

11 OVERPAYMENT OF TAX DUE TO FRAUD. 

12 (a) IN GENERAL.—Section 7206 (relating to fraud 

13 and false statements) is amended— 

14 (1) by striking ‘‘Any person who—’’ and insert15 ing ‘‘(a) IN GENERAL.—Any person who—’’, and 

16 (2) by adding at the end the following new sub17 section: 

18 ‘‘(b) INCREASE IN MONETARY LIMITATION FOR UN19 DERPAYMENT OR OVERPAYMENT OF TAX DUE TO

20 FRAUD.—If any portion of any underpayment (as defined 

21 in section 6664(a)) or overpayment (as defined in section 

22 6401(a)) of tax required to be shown on a return is attrib23 utable to fraudulent action described in subsection (a), the 

24 applicable dollar amount under subsection (a) shall in no 

25 event be less than an amount equal to such portion. A 


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1 rule similar to the rule under section 6663(b) shall apply 

2 for purposes of determining the portion so attributable.’’. 

3 (b) INCREASE IN PENALTIES.— 

4 (1) ATTEMPT TO EVADE OR DEFEAT TAX.— 

5 Section 7201 is amended— 

6 (A) by striking ‘‘$100,000’’ and inserting 

7 ‘‘$500,000’’, 

8 (B) by striking ‘‘$500,000’’ and inserting 

9 ‘‘$1,000,000’’, and 

10 (C) by striking ‘‘5 years’’ and inserting 

11 ‘‘10 years’’. 

12 (2) WILLFUL FAILURE TO FILE RETURN, SUP13 PLY INFORMATION, OR PAY TAX.—Section 7203 is 

14 amended— 

15 (A) in the first sentence— 

16 (i) by striking ‘‘Any person’’ and in17 serting the following: 

18 ‘‘(a) IN GENERAL.—Any person’’, and 

19 (ii) by striking ‘‘$25,000’’ and insert20 ing ‘‘$50,000’’, 

21 (B) in the third sentence, by striking ‘‘sec22 tion’’ and inserting ‘‘subsection’’, and 

23 (C) by adding at the end the following new 

24 subsection: 

25 ‘‘(b) AGGRAVATED FAILURE TO FILE.— 


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1 ‘‘(1) IN GENERAL.—In the case of any failure 

2 described in paragraph (2), the first sentence of sub3 section (a) shall be applied by substituting— 

4 ‘‘(A) ‘felony’ for ‘misdemeanor’ 

5 ‘‘(B) ‘$500,000 ($1,000,000’ for ‘$25,000 

6 ($100,000’, and 

7 ‘‘(C) ‘10 years’ for ‘1 year’. 

8 ‘‘(2) FAILURE DESCRIBED.—A failure described 

9 in this paragraph is a failure to make a return de10 scribed in subsection (a) for a period of 3 or more 

11 consecutive taxable years.’’. 

12 (3) FRAUD AND FALSE STATEMENTS.—Section 

13 7206(a) (as redesignated by subsection (a)) is 

14 amended— 

15 (A) by striking ‘‘$100,000’’ and inserting 

16 ‘‘$500,000’’, 

17 (B) by striking ‘‘$500,000’’ and inserting 

18 ‘‘$1,000,000’’, and 

19 (C) by striking ‘‘3 years’’ and inserting ‘‘5 

20 years’’. 

21 (c) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to actions, and failures to act, oc23 curring after the date of the enactment of this Act. 


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1 Subtitle C—Economic Substance 

2 Doctrine 

3 SEC. 221. CLARIFICATION OF ECONOMIC SUBSTANCE DOC4 TRINE. 

5 (a) IN GENERAL.—Section 7701 is amended by re6 designating subsection (o) as subsection (p) and by insert7 ing after subsection (n) the following new subsection: 

8 ‘‘(o) CLARIFICATION OF ECONOMIC SUBSTANCE

9 DOCTRINE; ETC.— 

10 ‘‘(1) GENERAL RULES.— 

11 ‘‘(A) IN GENERAL.—In any case in which 

12 a court determines that the economic substance 

13 doctrine is relevant for purposes of this title to 

14 a transaction (or series of transactions), such 

15 transaction (or series of transactions) shall have 

16 economic substance only if the requirements of 

17 this paragraph are met. 

18 ‘‘(B) DEFINITION OF ECONOMIC SUB19 STANCE.—For purposes of subparagraph (A)— 

20 ‘‘(i) IN GENERAL.—A transaction has 

21 economic substance only if— 

22 ‘‘(I) the transaction changes in a 

23 meaningful way (apart from Federal 

24 tax effects) the taxpayer’s economic 

25 position, and 


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1 ‘‘(II) the taxpayer has a substan2 tial nontax purpose for entering into 

3 such transaction and the transaction 

4 is a reasonable means of accom5 plishing such purpose. 

6 In applying subclause (II), a purpose of 

7 achieving a financial accounting benefit 

8 shall not be taken into account in deter9 mining whether a transaction has a sub10 stantial nontax purpose if the origin of 

11 such financial accounting benefit is a re12 duction of income tax. 

13 ‘‘(ii) SPECIAL RULE WHERE TAX14 PAYER RELIES ON PROFIT POTENTIAL.—A 

15 transaction shall not be treated as having 

16 economic substance by reason of having a 

17 potential for profit unless— 

18 ‘‘(I) the present value of the rea19 sonably expected pre-tax profit from 

20 the transaction is substantial in rela21 tion to the present value of the ex22 pected net tax benefits that would be 

23 allowed if the transaction were re24 spected, and 


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1 ‘‘(II) the reasonably expected 

2 pre-tax profit from the transaction ex3 ceeds a risk-free rate of return. 

4 ‘‘(C) TREATMENT OF FEES AND FOREIGN

5 TAXES.—Fees and other transaction expenses 

6 and foreign taxes shall be taken into account as 

7 expenses in determining pre-tax profit under 

8 subparagraph (B)(ii). 

9 ‘‘(2) SPECIAL RULES FOR TRANSACTIONS WITH

10 TAX-INDIFFERENT PARTIES.— 

11 ‘‘(A) SPECIAL RULES FOR FINANCING

12 TRANSACTIONS.—The form of a transaction 

13 which is in substance the borrowing of money 

14 or the acquisition of financial capital directly or 

15 indirectly from a tax-indifferent party shall not 

16 be respected if the present value of the deduc17 tions to be claimed with respect to the trans18 action is substantially in excess of the present 

19 value of the anticipated economic returns of the 

20 person lending the money or providing the fi21 nancial capital. A public offering shall be treat22 ed as a borrowing, or an acquisition of financial 

23 capital, from a tax-indifferent party if it is rea24 sonably expected that at least 50 percent of the 


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1 offering will be placed with tax-indifferent par2 ties. 

3 ‘‘(B) ARTIFICIAL INCOME SHIFTING AND

4 BASIS ADJUSTMENTS.—The form of a trans5 action with a tax-indifferent party shall not be 

6 respected if— 

7 ‘‘(i) it results in an allocation of in8 come or gain to the tax-indifferent party in 

9 excess of such party’s economic income or 

10 gain, or 

11 ‘‘(ii) it results in a basis adjustment 

12 or shifting of basis on account of over13 stating the income or gain of the tax-indif14 ferent party. 

15 ‘‘(3) DEFINITIONS AND SPECIAL RULES.—For 

16 purposes of this subsection— 

17 ‘‘(A) ECONOMIC SUBSTANCE DOCTRINE.— 

18 The term ‘economic substance doctrine’ means 

19 the common law doctrine under which tax bene20 fits under subtitle A with respect to a trans21 action are not allowable if the transaction does 

22 not have economic substance or lacks a business 

23 purpose. 

24 ‘‘(B) TAX-INDIFFERENT PARTY.—The 

25 term ‘tax-indifferent party’ means any person 


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1 or entity not subject to tax imposed by subtitle 

2 A. A person shall be treated as a tax-indifferent 

3 party with respect to a transaction if the items 

4 taken into account with respect to the trans5 action have no substantial impact on such per6 son’s liability under subtitle A. 

7 ‘‘(C) EXCEPTION FOR PERSONAL TRANS8 ACTIONS OF INDIVIDUALS.—In the case of an 

9 individual, this subsection shall apply only to 

10 transactions entered into in connection with a 

11 trade or business or an activity engaged in for 

12 the production of income. 

13 ‘‘(D) TREATMENT OF LESSORS.—In apply14 ing paragraph (1)(B)(ii) to the lessor of tan15 gible property subject to a lease— 

16 ‘‘(i) the expected net tax benefits with 

17 respect to the leased property shall not in18 clude the benefits of— 

19 ‘‘(I) depreciation, 

20 ‘‘(II) any tax credit, or 

21 ‘‘(III) any other deduction as 

22 provided in guidance by the Secretary, 

23 and 

24 ‘‘(ii) subclause (II) of paragraph 

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1 mining whether any of such benefits are al2 lowable. 

3 ‘‘(4) OTHER COMMON LAW DOCTRINES NOT AF4 FECTED.—Except as specifically provided in this 

5 subsection, the provisions of this subsection shall not 

6 be construed as altering or supplanting any other 

7 rule of law, and the requirements of this subsection 

8 shall be construed as being in addition to any such 

9 other rule of law. 

10 ‘‘(5) REGULATIONS.—The Secretary shall pre11 scribe such regulations as may be necessary or ap12 propriate to carry out the purposes of this sub13 section. Such regulations may include exemptions 

14 from the application of this subsection.’’. 

15 (b) EFFECTIVE DATE.—The amendments made by 

16 this section shall apply to transactions entered into after 

17 the date of the enactment of this Act. 

18 SEC. 222. PENALTY FOR UNDERSTATEMENTS ATTRIB19 UTABLE TO TRANSACTIONS LACKING ECO20 NOMIC SUBSTANCE, ETC. 

21 (a) IN GENERAL.—Subchapter A of chapter 68 is 

22 amended by inserting after section 6662A the following 

23 new section: 


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1 ‘‘SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIB2 UTABLE TO TRANSACTIONS LACKING ECO3 NOMIC SUBSTANCE, ETC. 

4 ‘‘(a) IMPOSITION OF PENALTY.—If a taxpayer has an 

5 noneconomic substance transaction understatement for 

6 any taxable year, there shall be added to the tax an 

7 amount equal to 40 percent of the amount of such under8 statement. 

9 ‘‘(b) REDUCTION OF PENALTY FOR DISCLOSED

10 TRANSACTIONS.—Subsection (a) shall be applied by sub11 stituting ‘20 percent’ for ‘40 percent’ with respect to the 

12 portion of any noneconomic substance transaction under13 statement with respect to which the relevant facts affect14 ing the tax treatment of the item are adequately disclosed 

15 in the return or a statement attached to the return. 

16 ‘‘(c) NONECONOMIC SUBSTANCE TRANSACTION UN17 DERSTATEMENT.—For purposes of this section— 

18 ‘‘(1) IN GENERAL.—The term ‘noneconomic 

19 substance transaction understatement’ means any 

20 amount which would be an understatement under 

21 section 6662A(b)(1) if section 6662A were applied 

22 by taking into account items attributable to non23 economic substance transactions rather than items 

24 to which section 6662A would apply without regard 

25 to this paragraph. 


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1 ‘‘(2) NONECONOMIC SUBSTANCE TRANS2 ACTION.—The term ‘noneconomic substance trans3 action’ means any transaction if— 

4 ‘‘(A) there is a lack of economic substance 

5 (within the meaning of section 7701(o)(1)) for 

6 the transaction giving rise to the claimed ben7 efit or the transaction was not respected under 

8 section 7701(o)(2), or 

9 ‘‘(B) the transaction fails to meet the re10 quirements of any similar rule of law. 

11 ‘‘(d) RULES APPLICABLE TO COMPROMISE OF PEN12 ALTY.— 

13 ‘‘(1) IN GENERAL.—If the 1st letter of pro14 posed deficiency which allows the taxpayer an oppor15 tunity for administrative review in the Internal Rev16 enue Service Office of Appeals has been sent with 

17 respect to a penalty to which this section applies, 

18 only the Commissioner of Internal Revenue may 

19 compromise all or any portion of such penalty. 

20 ‘‘(2) APPLICABLE RULES.—The rules of para21 graphs (2) and (3) of section 6707A(d) shall apply 

22 for purposes of paragraph (1). 

23 ‘‘(e) COORDINATION WITH OTHER PENALTIES.—Ex24 cept as otherwise provided in this part, the penalty imVerDate Aug 31 2005 08:33 Apr 28, 2006 Jkt 049200 PO 00000 Frm 00079 Fmt 6652 Sfmt 6201 E:\BILLS\H5176.IH H5176

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1 posed by this section shall be in addition to any other pen2 alty imposed by this title. 

3 ‘‘(f) CROSS REFERENCES.— 

4 ‘‘(1) For coordination of penalty with under5 statements under section 6662 and other special 

6 rules, see section 6662A(e). 

7 ‘‘(2) For reporting of penalty imposed under 

8 this section to the Securities and Exchange Commis9 sion, see section 6707A(e).’’. 

10 (b) COORDINATION WITH OTHER UNDERSTATE11 MENTS AND PENALTIES.— 

12 (1) The second sentence of section 

13 6662(d)(2)(A) is amended by inserting ‘‘and without 

14 regard to items with respect to which a penalty is 

15 imposed by section 6662B’’ before the period at the 

16 end. 

17 (2) Subsection (e) of section 6662A is amend18 ed— 

19 (A) in paragraph (1), by inserting ‘‘and 

20 noneconomic substance transaction understate21 ments’’ after ‘‘reportable transaction under22 statements’’ both places it appears, 

23 (B) in paragraph (2)(A), by inserting ‘‘and 

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1 statement’’ after ‘‘reportable transaction under2 statement’’, 

3 (C) in paragraph (2)(B), by inserting 

4 ‘‘6662B or’’ before ‘‘6663’’, 

5 (D) in paragraph (2)(C)(i), by inserting 

6 ‘‘or section 6662B’’ before the period at the 

7 end, 

8 (E) in paragraph (2)(C)(ii), by inserting 

9 ‘‘and section 6662B’’ after ‘‘This section’’, 

10 (F) in paragraph (3), by inserting ‘‘or non11 economic substance transaction understate12 ment’’ after ‘‘reportable transaction understate13 ment’’, and 

14 (G) by adding at the end the following new 

15 paragraph: 

16 ‘‘(4) NONECONOMIC SUBSTANCE TRANSACTION

17 UNDERSTATEMENT.—For purposes of this sub18 section, the term ‘noneconomic substance trans19 action understatement’ has the meaning given such 

20 term by section 6662B(c).’’. 

21 (3) Subsection (e) of section 6707A is amend22 ed— 

23 (A) by striking ‘‘or’’ at the end of subpara24 graph (B), and 


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1 (B) by striking subparagraph (C) and in2 serting the following new subparagraphs: 

3 ‘‘(C) is required to pay a penalty under 

4 section 6662B with respect to any noneconomic 

5 substance transaction, or 

6 ‘‘(D) is required to pay a penalty under 

7 section 6662(h) with respect to any transaction 

8 and would (but for section 6662A(e)(2)(C)) 

9 have been subject to penalty under section 

10 6662A at a rate prescribed under section 

11 6662A(c) or under section 6662B,’’. 

12 (c) CLERICAL AMENDMENT.—The table of sections 

13 for part II of subchapter A of chapter 68 is amended by 

14 inserting after the item relating to section 6662A the fol15 lowing new item: 

‘‘6662B. Penalty for understatements attributable to transactions lacking economic substance, etc.’’. 

16 (d) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to transactions entered into after 

18 the date of the enactment of this Act. 

19 SEC. 223. DENIAL OF DEDUCTION FOR INTEREST ON UN20 DERPAYMENTS ATTRIBUTABLE TO NON21 ECONOMIC SUBSTANCE TRANSACTIONS. 

22 (a) IN GENERAL.—Section 163(m) (relating to inter23 est on unpaid taxes attributable to nondisclosed reportable 

24 transactions) is amended— 


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1 (1) by striking ‘‘attributable’’ and all that fol2 lows and inserting the following: ‘‘attributable to— 

3 ‘‘(1) the portion of any reportable transaction 

4 understatement (as defined in section 6662A(b)) 

5 with respect to which the requirement of section 

6 6664(d)(2)(A) is not met, or 

7 ‘‘(2) any noneconomic substance transaction 

8 understatement (as defined in section 6662B(c)).’’, 

9 and 

10 (2) by inserting ‘‘And Noneconomic Substance 

11 Transactions’’ in the heading thereof after ‘‘Trans12 actions’’. 

13 (b) EFFECTIVE DATE.—The amendments made by 

14 this section shall apply to transactions after the date of 

15 the enactment of this Act in taxable years ending after 

16 such date. 

17 Subtitle D—Provisions Relating to 

18 Oil and Gas 

19 SEC. 231. ELIMINATION OF AMORTIZATION OF GEOLOGI20 CAL AND GEOPHYSICAL EXPENDITURES FOR 

21 MAJOR INTEGRATED OIL COMPANIES. 

22 (a) IN GENERAL.—Section 167(h) is amended by 

23 adding at the end the following new paragraph: 

24 ‘‘(5) NONAPPLICATION TO MAJOR INTEGRATED

25 OIL COMPANIES.—This subsection shall not apply 


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1 with respect to any expenses paid or incurred for 

2 any taxable year by any integrated oil company (as 

3 defined in section 291(b)(4)) which has an average 

4 daily worldwide production of crude oil of at least 

5 500,000 barrels for such taxable year.’’. 

6 (b) EFFECTIVE DATE.—The amendment made by 

7 this section shall take effect as if included in the amend8 ment made by section 1329(a) of the Energy Policy Act 

9 of 2005. 

10 SEC. 232. REVALUATION OF LIFO INVENTORIES OF LARGE 

11 INTEGRATED OIL COMPANIES. 

12 (a) GENERAL RULE.—Notwithstanding any other 

13 provision of law, if a taxpayer is an applicable integrated 

14 oil company for its last taxable year ending in calendar 

15 year 2005, the taxpayer shall— 

16 (1) increase, effective as of the close of such 

17 taxable year, the value of each historic LIFO layer 

18 of inventories of crude oil, natural gas, or any other 

19 petroleum product (within the meaning of section 

20 4611) by the layer adjustment amount, and 

21 (2) decrease its cost of goods sold for such tax22 able year by the aggregate amount of the increases 

23 under paragraph (1). 

24 If the aggregate amount of the increases under paragraph 

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1 able year, the taxpayer’s gross income for such taxable 

2 year shall be increased by the amount of such excess. 

3 (b) LAYER ADJUSTMENT AMOUNT.—For purposes of 

4 this section— 

5 (1) IN GENERAL.—The term ‘‘layer adjustment 

6 amount’’ means, with respect to any historic LIFO 

7 layer, the product of— 

8 (A) $18.75, and 

9 (B) the number of barrels of crude oil (or 

10 in the case of natural gas or other petroleum 

11 products, the number of barrel-of-oil equiva12 lents) represented by the layer. 

13 (2) BARREL-OF-OIL EQUIVALENT.—The term 

14 ‘‘barrel-of-oil equivalent’’ has the meaning given 

15 such term by section 29(d)(5) (as in effect before its 

16 redesignation by the Energy Tax Incentives Act of 

17 2005). 

18 (c) APPLICATION OF REQUIREMENT.— 

19 (1) NO CHANGE IN METHOD OF ACCOUNTING.— 

20 Any adjustment required by this section shall not be 

21 treated as a change in method of accounting. 

22 (2) UNDERPAYMENTS OF ESTIMATED TAX.—No 

23 addition to the tax shall be made under section 6655 

24 of the Internal Revenue Code of 1986 (relating to 

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1 spect to any underpayment of an installment re2 quired to be paid with respect to the taxable year 

3 described in subsection (a) to the extent such under4 payment was created or increased by this section. 

5 (d) APPLICABLE INTEGRATED OIL COMPANY.—For 

6 purposes of this section, the term ‘‘applicable integrated 

7 oil company’’ means an integrated oil company (as defined 

8 in section 291(b)(4) of the Internal Revenue Code of 

9 1986) which had gross receipts in excess of 

10 $1,000,000,000 for its last taxable year ending during cal11 endar year 2005. For purposes of this subsection, all per12 sons treated as a single employer under subsections (a) 

13 and (b) of section 52 of the Internal Revenue Code of 

14 1986 shall be treated as 1 person and, in the case of a 

15 short taxable year, the rule under section 448(c)(3)(B) 

16 shall apply. 

17 Subtitle E—Uniform Definition of 

18 Child 

19 SEC. 241. REPEAL OF UNIFORM DEFINITION OF CHILD AND 

20 RESTORATION OF PRIOR RULE. 

21 (a) IN GENERAL.—Title II of the Working Families 

22 Tax Relief Act of 2004 (relating to uniform definition of 

23 child), and the amendments made by such title, are hereby 

24 repealed. 


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1 (b) ADMINISTRATION OF INTERNAL REVENUE CODE

2 OF 1986.—The Internal Revenue Code of 1986 shall be 

3 applied and administered as if the provisions, and amend4 ments, specified in subsection (a) had never been enacted. 

5 (c) CONFORMING AMENDMENT.—Section 

6 32(c)(2)(A), as added by section 102 of this Act, is 

7 amended to read as follows: 

8 ‘‘(2) QUALIFYING CHILD.— 

9 ‘‘(A) IN GENERAL.—The term ‘qualifying 

10 child’ means any individual if— 

11 ‘‘(i) the taxpayer is allowed a deduc12 tion under section 151 (determined without 

13 regard to paragraphs (1)(A) and (2) of 

14 subsection (c) and subsection 152(e)), with 

15 respect to such individual for the taxable 

16 year, and 

17 ‘‘(ii) such individual bears a relation18 ship to the taxpayer described in para19 graph (1), (2), or (3) of section 152(a). ’’. 

20 (d) EFFECTIVE DATE.—This section shall apply to 

21 taxable years beginning after December 31, 2006. 


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1 Subtitle F—Other Revenue 

2 Provisions 

3 SEC. 251. INFLATION ADJUSTMENT OF TAX ON DISTILLED 

4 SPIRITS, BEER, WINE, AND TOBACCO. 

5 (a) DISTILLED SPIRITS.—Section 5001 is amended 

6 by redesignating subsection (c) as subsection (d) and by 

7 inserting after subsection (b) the following new subsection: 

8 ‘‘(c) ADJUSTMENT OF TAX RATES FOR INFLA9 TION.—In the case of any calendar year beginning after 

10 2006, each of the rates of tax in subsection (a), and the 

11 dollar amount in section 5010(a)(1)(A), shall be increased 

12 by an amount equal to— 

13 ‘‘(1) such rate of tax or dollar amount (as the 

14 case may be), multiplied by 

15 ‘‘(2) the cost-of-living adjustment determined 

16 under section 1(f)(3) for the calendar year in which 

17 the taxable year begins, by substituting ‘calendar 

18 year 2005’ for ‘calendar year 1992’ in subparagraph 

19 (B) thereof.’’. 

20 (b) WINE.—Section 5041 is amended by adding at 

21 the end the following new subsection: 

22 ‘‘(g) ADJUSTMENT OF TAX RATES FOR INFLA23 TION.—In the case of any calendar year beginning after 

24 2006, each of the rates of tax in subsection (b) shall be 

25 increased by an amount equal to— 


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1 ‘‘(1) such rate of tax, multiplied by 

2 ‘‘(2) the cost-of-living adjustment determined 

3 under section 1(f)(3) for the calendar year in which 

4 the taxable year begins, by substituting ‘calendar 

5 year 2005’ for ‘calendar year 1992’ in subparagraph 

6 (B) thereof.’’. 

7 (c) BEER.—Section 5041 is amended by adding at 

8 the end the following new subsection: 

9 ‘‘(d) ADJUSTMENT OF TAX RATES FOR INFLA10 TION.—In the case of any calendar year beginning after 

11 2006, each of the rates of tax in subsection (a) shall be 

12 increased by an amount equal to— 

13 ‘‘(1) such rate of tax, multiplied by 

14 ‘‘(2) the cost-of-living adjustment determined 

15 under section 1(f)(3) for the calendar year in which 

16 the taxable year begins, by substituting ‘calendar 

17 year 2005’ for ‘calendar year 1992’ in subparagraph 

18 (B) thereof.’’. 

19 (d) TOBACCO PRODUCTS.—Section 5701 is amended 

20 by adding at the end the following new subsection: 

21 ‘‘(i) ADJUSTMENT OF TAX RATES FOR INFLATION.— 

22 In the case of any calendar year beginning after 2006, 

23 each of the rates of tax in subsections (a), (b), (c), (d), 

24 (e), (f), and (g) shall be increased by an amount equal 

25 to— 


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1 ‘‘(1) such rate of tax or dollar amount (as the 

2 case may be), multiplied by 

3 ‘‘(2) the cost-of-living adjustment determined 

4 under section 1(f)(3) for the calendar year in which 

5 the taxable year begins, by substituting ‘calendar 

6 year 2005’ for ‘calendar year 1992’ in subparagraph 

7 (B) thereof.’’. 

8 (e) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to years beginning after December 

10 31, 2006. 

11 SEC. 252. TERMINATION OF VARIOUS EXCLUSIONS, EXEMP12 TIONS, DEDUCTIONS, AND CREDITS. 

13 (a) IN GENERAL.—Subchapter C of chapter 90 (re14 lating to provisions affecting more than one subtitle) is 

15 amended by adding at the end the following new section: 

16 ‘‘SEC. 7875. TERMINATION OF CERTAIN PROVISIONS. 

17 ‘‘The following provisions shall not apply to taxable 

18 years beginning after December 31, 2005: 

19 ‘‘(1) Section 44 (relating to credit for expendi20 tures to provide access to disabled individuals). 

21 ‘‘(2) Section 62(a)(2)(D) (relating to deduction 

22 for certain expenses of elementary and secondary 

23 school teachers). 

24 ‘‘(3) Section 67 (relating to 2-percent floor on 

25 miscellaneous itemized deductions). 


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1 ‘‘(4) Section 74(c) (relating to exclusion of cer2 tain employee achievement awards). 

3 ‘‘(5) Section 79 (relating to exclusion of group4 term life insurance purchased for employees). 

5 ‘‘(6) Section 104(a)(1) (relating to exclusion of 

6 workmen’s compensation). 

7 ‘‘(7) Section 104(a)(2) (relating to exclusion of 

8 damages for physical injuries and sickness). 

9 ‘‘(8) Section 107 (relating to exclusion of rental 

10 value of parsonages). 

11 ‘‘(9) Section 119 (relating to exclusion of meals 

12 or lodging furnished for the convenience of the em13 ployer). 

14 ‘‘(10) Section 125 (relating to exclusion of cafe15 teria plan benefits). 

16 ‘‘(11) Section 132 (relating to certain fringe 

17 benefits), except with respect to subsection (a)(5) 

18 thereof (relating to exclusion of qualified transpor19 tation fringe). 

20 ‘‘(12) Section 163(h)(4)(A)(i)(II) (relating to 

21 definition of qualified residence). 

22 ‘‘(13) Section 165(d) (relating to deduction for 

23 wagering losses). 

24 ‘‘(14) Section 217 (relating to deduction for 

25 moving expenses). 


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1 ‘‘(15) Section 454 (relating to deferral of tax 

2 on obligations issued at discount). 

3 ‘‘(16) Section 501(c)(9) (relating to tax-exempt 

4 status of voluntary employees’ beneficiary associa5 tions). 

6 ‘‘(17) Section 911 (relating to exclusion of 

7 earned income of citizens or residents of the United 

8 States living abroad). 

9 ‘‘(18) Section 912 (relating to exemption for 

10 certain allowances).’’. 

11 (b) CONFORMING AMENDMENT.—The table of sec12 tions for subchapter C of chapter 90 is amended by adding 

13 at the end the following new item: 

‘‘Sec. 7875. Termination of certain provisions.’’. 

14 SEC. 253. TERMINATION OF VARIOUS PREFERENTIAL 

15 TREATMENTS. 

16 (a) IN GENERAL.—Section 7875, as added by section 

17 106, is amended— 

18 (1) by inserting ‘‘(or transactions in the case of 

19 sections referred to in paragraphs (21), (22), (23), 

20 (24), and (27))’’ after ‘‘taxable years beginning’’, 

21 and 

22 (2) by adding at the end the following new 

23 paragraphs: 

24 ‘‘(19) Section 43 (relating to enhanced oil re25 covery credit). 


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1 ‘‘(20) Section 263(c) (relating to intangible 

2 drilling and development costs in the case of oil and 

3 gas wells and geothermal wells). 

4 ‘‘(21) Section 382(l)(5) (relating to exception 

5 from net operating loss limitations for corporations 

6 in bankruptcy proceeding). 

7 ‘‘(22) Section 451(i) (relating to special rules 

8 for sales or dispositions to implement Federal En9 ergy Regulatory Commission or State electric re10 structuring policy). 

11 ‘‘(23) Section 453A (relating to special rules for 

12 nondealers), but only with respect to the dollar limi13 tation under subsection (b)(1) thereof and sub14 section (b)(3) thereof (relating to exception for per15 sonal use and farm property). 

16 ‘‘(24) Section 460(e)(1) (relating to special 

17 rules for long-term home construction contracts or 

18 other short-term construction contracts). 

19 ‘‘(25) Section 613A (relating to percentage de20 pletion in case of oil and gas wells). 

21 ‘‘(26) Section 616 (relating to development 

22 costs). 

23 ‘‘(27) Sections 861(a)(6), 862(a)(6), 863(b)(2), 

24 863(b)(3), and 865(b) (relating to inventory prop25 erty sales source rule exception).’’. 


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1 (b) FULL TAX RATE ON NUCLEAR DECOMMIS2 SIONING RESERVE FUND.—Subparagraph (B) of section 

3 468A(e)(2) is amended to read as follows: 

4 ‘‘(B) RATE OF TAX.—For purposes of sub5 paragraph (A), the rate set forth in this sub6 paragraph is 35 percent.’’. 

7 (c) DEFERRAL OF ACTIVE INCOME OF CONTROLLED

8 FOREIGN CORPORATIONS.—Section 952 (relating to sub9 part F income defined) is amended by adding at the end 

10 the following new subsection: 

11 ‘‘(e) SPECIAL APPLICATION OF SUBPART.— 

12 ‘‘(1) IN GENERAL.—For taxable years begin13 ning after December 31, 2005, notwithstanding any 

14 other provision of this subpart, the term ‘subpart F 

15 income’ means, in the case of any controlled foreign 

16 corporation, the income of such corporation derived 

17 from any foreign country. 

18 ‘‘(2) APPLICABLE RULES.—Rules similar to the 

19 rules under the last sentence of subsection (a) and 

20 subsection (d) shall apply to this subsection.’’. 

21 (d) DEFERRAL OF ACTIVE FINANCING INCOME.— 

22 Section 953(e)(10) is amended— 

23 (1) by striking ‘‘2006’’ and inserting ‘‘2005’’, 

24 and 

25 (2) by striking ‘‘2007’’ and inserting ‘‘2006’’. 


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1 (e) DEPRECIATION ON EQUIPMENT IN EXCESS OF

2 ALTERNATIVE DEPRECIATION SYSTEM.—Section 

3 168(g)(1) (relating to alternative depreciation system) is 

4 amended by striking ‘‘and’’ at the end of subparagraph 

5 (D), by adding ‘‘and’’ at the end of subparagraph (E), 

6 and by inserting after subparagraph (E) the following new 

7 subparagraph: 

8 ‘‘(F) notwithstanding subsection (a), any 

9 tangible property placed in service after Decem10 ber 31, 2005,’’. 

11 (f) EFFECTIVE DATE.—The amendments made by 

12 subsections (b), (c), and (d) shall apply to taxable years 

13 beginning after December 31, 2005. 

14 TITLE III—TECHNICAL AND CON15 FORMING AMENDMENTS; 

16 SUNSET 

17 SEC. 301. TECHNICAL AND CONFORMING AMENDMENTS. 

18 The Secretary of the Treasury or the Secretary’s del19 egate shall not later than 90 days after the date of the 

20 enactment of this Act, submit to the Committee on Ways 

21 and Means of the House of Representatives and the Com22 mittee on Finance of the Senate a draft of any technical 

23 and conforming changes in the Internal Revenue Code of 

24 1986 which are necessary to reflect throughout such Code 


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1 the purposes of the provisions of, and amendments made 

2 by, this Act. 

3 SEC. 302. SUNSET. 

4 (a) IN GENERAL.—All provisions of, and amend5 ments made by, this Act shall not apply to taxable years 

6 beginning after December 31, 2010. 

7 (b) APPLICATION OF CODE.—The Internal Revenue 

8 Code of 1986 shall be applied and administered to taxable 

9 years described in subsection (a) as if the provisions of, 

10 and amendments made by, this Act had never been en11 acted. 

Æ 


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