II

106TH CONGRESS

2D SESSION S. 2642

To amend the Internal Revenue Code of 1986 to provide major tax

simplification.

IN THE SENATE OF THE UNITED STATES

MAY 25, 2000

Mr. HATCH introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

major tax simplification.

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; ETC.

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

5 ‘‘Tax Ease and Modernization Act—Part I’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

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

4 this Act is as follows:

Sec. 1. Short title; etc.

TITLE I—ALTERNATIVE MINIMUM TAX

Sec. 101. Repeal of alternative minimum tax on individuals.

TITLE II—SIMPLIFICATION OF CAPITAL GAINS TAX

Sec. 201. Capital gains deduction.

Sec. 202. Indexing of exclusion for capital gains on sale of principal residence.

TITLE III—SIMPLIFICATION AND EXPANSION OF THE EARNED

INCOME TAX CREDIT

Sec. 301. Modification of definition of earned income.

Sec. 302. Simplification of definition of child dependent.

Sec. 303. Credit allowed for taxpayers who reside with other eligible individuals.

Sec. 304. Expansion of credit.

TITLE IV—LIMITATIONS ON ITEMIZED DEDUCTIONS AND

PERSONAL EXEMPTIONS

Sec. 401. Repeal of overall limitation on itemized deductions.

Sec. 402. Repeal of phaseout of personal exemptions.

TITLE V—BUSINESS TAX SIMPLIFICATION PROVISIONS

Sec. 501. Single rate of interest on corporate and individual overpayments and

underpayments.

Sec. 502. Clarification of interest netting.

Sec. 503. Expensing allowed for certain computer software.

TITLE VI—MISCELLANEOUS SIMPLIFICATION PROVISIONS

Subtitle A—Penalty and Interest Provisions

Sec. 601. Failure by individual to pay estimated tax penalty converted to interest charge on accumulated unpaid balance.

Sec. 602. Exclusion from gross income for interest on overpayments of income

tax by individuals.

Sec. 603. Reductions of penalty for failure to pay tax.

Sec. 604. Abatement of interest.

Sec. 605. Annual report on abatement of penalties.

Subtitle B—Procedural Provisions

Sec. 611. Authority to correct errors by the IRS with respect to taxpayer.

Sec. 612. Modification of filing date.

Sec. 613. Waiver of addition to tax for early withdrawal from IRA.

Sec. 614. Fixed rate of interest for installment agreement.
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Sec. 615. Exception to tax on early withdrawal from IRA.

Subtitle C—Small Investors Tax Simplification Act

Sec. 621. Election to use simplified method for qualified investment clubs.

Subtitle D—Other Provisions

Sec. 631. Above-the-line deduction for unreimbursed business expenses.

Sec. 632. Expensing of certain personal property used in connection with residential rental property.

Sec. 633. Inclusion of certain older foster children in definition of dependent.

Sec. 634. Exclusion for foster care payments to apply to payments by qualified

placement agencies.

Sec. 635. Simplification and increase in standard deduction for dependents.

Sec. 636. 2-percent floor on miscellaneous itemized deductions not to apply to

qualified professional development expenses of elementary and

secondary school teachers.

1 TITLE I—ALTERNATIVE

2 MINIMUM TAX

3 SEC. 101. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDI4 VIDUALS.

5 (a) IN GENERAL.—Subsection (a) of section 55 (re6 lating to alternative minimum tax imposed) is amended

7 by adding at the end the following new flush sentence:

8 ‘‘Except in the case of a corporation, no tax shall be im9 posed by this section for any taxable year beginning after

10 December 31, 2000, and the tentative minimum tax of any

11 taxpayer other than a corporation shall be zero for pur12 poses of this title.’’.

13 (b) CONFORMING AMENDMENTS.—

14 (1) Subparagraph (B) of section 1(g)(7) is

15 amended by adding ‘‘and’’ at the end of clause (i),

16 by striking ‘‘, and’’ at the end of clause (ii) and in17 serting a period, and by striking clause (iii).
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1 (2) Section 2(d) is amended by striking ‘‘sec2 tions 1 and 55’’ and inserting ‘‘section 1’’.

3 (3) Section 5(a) is amended by striking para4 graph (4).

5 (4) Subsection (c) of section 26 is amended by

6 inserting before the period ‘‘; except that such

7 amount shall be treated as being zero in the case of

8 a taxpayer other than a corporation.’’

9 (5) Paragraph (6) of section 29(b) is amended

10 to read as follows:

11 ‘‘(6) APPLICATION WITH OTHER CREDITS.—

12 The credit allowed by subsection (a) for any taxable

13 year shall not exceed the regular tax for the taxable

14 year reduced by the sum of the credits allowable

15 under subpart A and section 27. In the case of a

16 corporation, the limitation under the preceding sen17 tence shall be reduced (but not below zero) by the

18 tentative minimum tax for the taxable year.’’.

19 (6) Paragraph (3) of section 30(b) is amended

20 to read as follows:

21 ‘‘(3) APPLICATION WITH OTHER CREDITS.—

22 The credit allowed by subsection (a) for any taxable

23 year shall not exceed the regular tax for the taxable

24 year reduced by the sum of the credits allowable

25 under subpart A and sections 27 and 29. In the case
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1 of a corporation, the limitation under the preceding

2 sentence shall be reduced (but not below zero) by the

3 tentative minimum tax for the taxable year.’’.

4 (7) Section 32 is amended by striking sub5 section (h).

6 (8) Subsection (d) of section 53 is amended to

7 read as follows:

8 ‘‘(d) DEFINITIONS.—For purposes of this section—

9 ‘‘(1) NET MINIMUM TAX.—The term ‘net min10 imum tax’ means the tax imposed by section 55 in11 creased by the amount of the credit not allowed

12 under section 29 (relating to credit for producing

13 fuel from a nonconventional source) solely by reason

14 of the application of the last sentence of section

15 29(b)(6), or not allowed under section 30 solely by

16 reason of the application of the last sentence of sec17 tion 30(b)(3).

18 ‘‘(2) TENTATIVE MINIMUM TAX.—The term

19 ‘tentative minimum tax’ has the meaning given to

20 such term by section 55(b); except that such tax

21 shall be treated as being zero in the case of a tax22 payer other than a corporation.’’.

23 (9)(A) Subsection (b) of section 55 (relating to

24 alternative minimum tax imposed) is amended to

25 read as follows:
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1 ‘‘(b) TENTATIVE MINIMUM TAX.—For purposes of

2 this part—

3 ‘‘(1) AMOUNT OF TENTATIVE TAX.—The ten4 tative minimum tax for the taxable year is—

5 ‘‘(A) 20 percent of so much of the alter6 native minimum taxable income for the taxable

7 year as exceeds the exemption amount, reduced

8 by

9 ‘‘(B) the alternative minimum tax foreign

10 tax credit for the taxable year.

11 ‘‘(2) ALTERNATIVE MINIMUM TAXABLE IN12 COME.—The term ‘alternative minimum taxable in13 come’ means the taxable income of the taxpayer for

14 the taxable year—

15 ‘‘(A) determined with the adjustments pro16 vided in section 56, and

17 ‘‘(B) increased by the amount of the items

18 of tax preference described in section 57.

19 If a taxpayer is subject to the regular tax, such tax20 payer shall be subject to the tax imposed by this sec21 tion (and, if the regular tax is determined by ref22 erence to an amount other than taxable income, such

23 amount shall be treated as the taxable income of

24 such taxpayer for purposes of the preceding sen25 tence).’’.
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1 (B) Subsection (d) of section 55 is amended to

2 read as follows:

3 ‘‘(d) EXEMPTION AMOUNT.—For purposes of this

4 section—

5 ‘‘(1) IN GENERAL.—The term ‘exemption

6 amount’ means $40,000.

7 ‘‘(2) PHASE-OUT OF EXEMPTION AMOUNT.—

8 The exemption amount of any taxpayer shall be re9 duced (but not below zero) by an amount equal to

10 25 percent of the amount by which the alternative

11 minimum taxable income of the taxpayer exceeds

12 $150,000.’’.

13 (10)(A) Paragraph (6) of section 56(a) is

14 amended to read as follows:

15 ‘‘(6) ADJUSTED BASIS.—The adjusted basis of

16 any property to which paragraph (1) or (5) applies

17 (or with respect to which there are any expenditures

18 to which paragraph (2) applies) shall be determined

19 on the basis of the treatment prescribed in para20 graph (1), (2), or (5), whichever applies.’’.

21 (B) Section 56 is amended by striking sub22 section (b).

23 (C) Subsection (c) of section 56 is amended by

24 striking so much of the subsection as precedes para25 graph (1), by redesignating paragraphs (1), (2), and
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1 (3) as paragraphs (8), (9), and (10), respectively,

2 and moving them to the end of subsection (a).

3 (D) Paragraph (8) of section 56(a), as redesig4 nating by subparagraph (C), is amended by striking

5 ‘‘subsection (g)’’ and inserting ‘‘subsection (c)’’.

6 (E) Section 56 is amended by striking sub7 section (e) and by redesignating subsections (d) and

8 (g) as subsections (b) and (c), respectively.

9 (11)(A) Section 58 is repealed.

10 (B) Clause (i) of section 56(b)(2)(A) (as redes11 ignated by paragraph (10)(E), is amended by insert12 ing ‘‘, in the case of taxable years beginning before

13 January 1, 2001,’’ before ‘‘section 58’’.

14 (C) Subsection (h) of section 59 is amended—

15 (i) by striking ‘‘, 465, and 1366(d)’’ and

16 inserting ‘‘and 465’’, and

17 (ii) by striking ‘‘56, 57, and 58’’ and in18 serting ‘‘56 and 57’’.

19 (12)(A) Subparagraph (C) of section 59(a)(1)

20 is amended by striking ‘‘subparagraph (A)(i) or

21 (B)(i) of section 55(b)(1) (whichever applies)’’ and

22 inserting ‘‘section 55(b)(1)(A)’’.

23 (B) Paragraph (3) of section 59(a) is amended

24 to read as follows:
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1 ‘‘(3) PRE-CREDIT TENTATIVE MINIMUM TAX.—

2 For purposes of this subsection, the term ‘pre-credit

3 tentative minimum tax’ means the amount deter4 mined under section 55(b)(1)(A).’’.

5 (C) Section 59 is amended by striking sub6 section (c).

7 (D) Section 59 is amended by striking sub8 section (j).

9 (13) Paragraph (7) of section 382(l) is amend10 ed by striking ‘‘section 56(d)’’ and inserting ‘‘section

11 56(b)’’.

12 (14) Paragraph (2) of section 641(c) is amend13 ed by striking subparagraph (B) and by redesig14 nating subparagraphs (C) and (D) as subparagraphs

15 (B) and (C), respectively.

16 (15) Subsections (b) and (c) of section 666 are

17 each amended by striking ‘‘(other than the tax im18 posed by section 55)’’.

19 (16) Subsections (c)(5) and (d)(3)(B) of section

20 772 are each amended by striking ‘‘56, 57, and 58’’

21 and inserting ‘‘56 and 57’’.

22 (17) Sections 847 and 848(i) are each amended

23 by striking ‘‘section 56(g)’’ and inserting ‘‘section

24 56(c)’’.
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1 (18) Sections 871(b)(1) and 877(b) are each

2 amended by striking ‘‘or 55’’.

3 (19) Subsection (a) of section 897 is amended

4 to read as follows:

5 ‘‘(a) GENERAL RULE.—For purposes of this title,

6 gain or loss of a nonresident alien individual or a foreign

7 corporation from the disposition of a United States real

8 property interest shall be taken into account—

9 ‘‘(1) in the case of a nonresident alien indi10 vidual, under section 871(b)(1), or

11 ‘‘(2) in the case of a foreign corporation, under

12 section 882(a)(1),

13 as if the taxpayer were engaged in a trade or business

14 within the United States during the taxable year and as

15 if such gain or loss were effectively connected with such

16 trade or business.’’.

17 (20) Paragraph (1) of section 962(a) is amend18 ed by striking ‘‘sections 1 and 55’’ and inserting

19 ‘‘section 1’’.

20 (21) Paragraph (1) of section 1397E(c) is

21 amended to read as follows:

22 ‘‘(1) the regular tax liability (as defined in sec23 tion 26(b), over’’
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1 (22) The last sentence of section 1563(a) is

2 amended by striking ‘‘section 55(d)(3)’’ and insert3 ing ‘‘section 55(d)(2)’’.

4 (23) Subparagraph (B) of section 6015(d)(2) is

5 amended by striking ‘‘or 55’’.

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

7 this section shall apply to taxable years beginning after

8 December 31, 2000.

9 (d) TRANSITIONAL RULE RELATING TO MINIMUM

10 TAX CREDIT.—

11 (1) IN GENERAL.—The pre-effective date min12 imum tax credit of a taxpayer other than a corpora13 tion shall not be allowed under section 53 of the In14 ternal Revenue Code of 1986 but shall be allowed

15 under this subsection.

16 (2) PRE-EFFECTIVE DATE MINIMUM TAX CRED17 IT.—For purposes of this subsection, the term ‘‘pre18 effective date minimum tax credit’’ means the

19 amount determined under section 53(b) of such

20 Code for the first taxable year beginning after De21 cember 31, 2000.

22 (3) AMOUNT OF CREDIT.—

23 (A) IN GENERAL.—The pre-effective date

24 minimum tax credit of a taxpayer other than a

25 corporation shall be allowed ratably over the pe-
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1 riod of 10 taxable years beginning with the first

2 taxable year beginning after December 31,

3 2000.

4 (B) LIMITATION.—The credit allowable by

5 this subsection for any taxable year shall not

6 exceed the regular tax liability of the taxpayer

7 for such taxable year reduced by the sum of the

8 credits allowable under subparts A, B, D, E,

9 and F of part IV of subchapter A of chapter 1

10 of the Internal Revenue Code of 1986.

11 (C) CARRYFORWARD.—If the credit allow12 able by this subsection exceeds the limitation

13 imposed by subparagraph (B), such excess shall

14 be carried to the succeeding taxable year and

15 added to the credit allowable under this sub16 section for such succeeding taxable year.

17 (4) ACCELERATION OF CREDIT WHERE PRE18 VIOUSLY TAXED INCOME.—

19 (A) IN GENERAL.—The credit allowed

20 under this subsection for any taxable year shall

21 not be less than so much of the limitation de22 scribed in paragraph (3)(B) for the taxable year

23 as is attributable to previously taxed incentive

24 stock option gain. Proper adjustments shall be

25 made in the amount allowed under this sub-
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1 section for subsequent taxable years to take

2 into account any increased credit allowed by

3 reason of this paragraph.

4 (B) INCENTIVE STOCK OPTION GAIN.—For

5 purposes of subparagraph (A), the term ‘‘pre6 viously taxed incentive stock option gain’’

7 means the amount of gain recognized during

8 the taxable year on account of the disposition of

9 stock acquired by exercising an incentive stock

10 option (as defined in section 422 of such Code)

11 to the extent such gain does not exceed the

12 amount of gain previously taken into account

13 by reason of section 56(b)(3) of such Code (as

14 in effect on the day before the date of the en15 actment of this Act) with respect to such op16 tion.

17 (5) DEFINITIONS.—Terms used in this sub18 section which are also used in section 53 of such

19 Code shall have the respective meanings given to

20 such terms by such section 53.
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1 TITLE II—SIMPLIFICATION OF

2 CAPITAL GAINS TAX

3 SEC. 201. CAPITAL GAINS DEDUCTION.

4 (a) IN GENERAL.—Part I of subchapter P of chapter

5 1 (relating to treatment of capital gains) is amended by

6 adding at the end the following new section:

7 ‘‘SEC. 1203. CAPITAL GAINS DEDUCTION.

8 ‘‘If for any taxable year a taxpayer other than a cor9 poration has a net capital gain, 50 percent of such gain

10 shall be a deduction from gross income.’’.

11 (b) DEDUCTION ALLOWABLE WHETHER OR NOT

12 TAXPAYER ITEMIZES OTHER DEDUCTIONS.—

13 (1) Subsection (b) of section 63 is amended by

14 striking ‘‘and’’ at the end of paragraph (1), by strik15 ing the period at the end of paragraph (2) and in16 serting ‘‘, and’’, and by adding at the end the fol17 lowing new paragraph:

18 ‘‘(3) the deduction allowed by section 1203.’’.

19 (2) Subsection (d) of section 63 is amended by

20 striking ‘‘and’’ at the end of paragraph (1), by strik21 ing the period at the end of paragraph (2) and in22 serting ‘‘, and’’, and by adding at the end the fol23 lowing new paragraph:

24 ‘‘(3) the deduction allowed by section 1203.’’.
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1 (c) REPEAL OF TAX PREFERENCE FOR EXCLUSION

2 ON SMALL BUSINESS STOCK.—Subsection (a) of section

3 57 is amended by striking paragraph (7).

4 (d) TECHNICAL AND CONFORMING AMENDMENTS.—

5 (1) Section 1 is amended by striking subsection

6 (h).

7 (2) Subparagraph (E) of section 163(d)(4) is

8 amended to read as follows:

9 ‘‘(E) COORDINATION WITH CAPITAL GAINS

10 DEDUCTION.—The net capital gain taken into

11 account under section 1203 for any taxable

12 year shall be reduced (but not below zero) by

13 the amount which the taxpayer takes into ac14 count as investment income under subpara15 graph (B)(iii) for such year.’’.

16 (3) Paragraph (1) of section 170(e) is amended

17 by striking ‘‘the amount of gain’’ in the material fol18 lowing subparagraph (B)(ii) and inserting ‘‘50 per19 cent (100 percent in the case of a corporation) of

20 the amount of gain’’.

21 (4) Subparagraph (B) of section 172(d)(2) is

22 amended to read as follows:

23 ‘‘(B) the exclusion under section 1202 and

24 the deduction under section 1203 shall not be

25 allowed.’’.
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1 (5) The last sentence of section 453A(c)(3) is

2 amended by striking all that follows ‘‘long-term cap3 ital gain,’’ and inserting ‘‘the maximum rate on net

4 capital gain under section 1201 or the deduction

5 under section 1203 (whichever is appropriate) shall

6 be taken into account.’’.

7 (6)(A) Section 641(c)(2)(B), as redesignated by

8 section 101(b)(14), is amended by striking ‘‘Except

9 as provided in section 1(h), the’’ and inserting

10 ‘‘The’’.

11 (B) Section 641(c)(2)(B), as redesignated by

12 section 101(b)(14), is amended by inserting after

13 clause (iii) the following new clause:

14 ‘‘(iv) The deduction under section

15 1203.’’.

16 (7) Paragraph (4) of section 642(c) is amended

17 to read as follows:

18 ‘‘(4) ADJUSTMENTS.—To the extent that the

19 amount otherwise allowable as a deduction under

20 this subsection consists of gain from the sale or ex21 change of capital assets held for more than 1 year,

22 proper adjustment shall be made for any exclusion

23 allowable under section 1202 and any deduction al24 lowable under section 1203 to the estate or trust. In

25 the case of a trust, the deduction allowed by this
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1 subsection shall be subject to section 681 (relating

2 to unrelated business income).’’.

3 (8) Section 642 is amended by adding at the

4 end the following new subsection:

5 ‘‘(j) CAPITAL GAINS DEDUCTION.—The deduction

6 under section 1203 to an estate or trust shall be computed

7 by excluding the portion (if any) of the gains for the tax8 able year which is includible by the income beneficiaries

9 under sections 652 and 662 (relating to inclusions of

10 amounts in gross income of beneficiaries of trusts) as gain

11 derived from the sale or exchange of capital assets.’’.

12 (9) The last sentence of section 643(a)(3) is

13 amended to read as follows: ‘‘The exclusion under

14 section 1202 and the deduction under section 1203

15 shall not be taken into account.’’.

16 (10) Subparagraph (C) of section 643(a)(6) is

17 amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and

18 by inserting before the period ‘‘, and (ii) the deduc19 tion under section 1203 (relating to capital gains de20 duction) shall not be taken into account’’.

21 (11) Paragraph (4) of section 691(c) is amend22 ed by striking ‘‘1(h),’’ and by inserting ‘‘1203,’’

23 after ‘‘1202,’’.
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1 (12) The second sentence of paragraph (2) of

2 section 871(a) is amended by striking ‘‘section

3 1202’’ and inserting ‘‘sections 1202 and 1203’’.

4 (13)(A) Paragraph (2) of section 904(b) is

5 amended by striking subparagraphs (A) and (C), by

6 redesignating subparagraph (B) as subparagraph

7 (A), and by inserting after subparagraph (A) (as so

8 redesignated) the following new subparagraph:

9 ‘‘(B) OTHER TAXPAYERS.—In the case of

10 a taxpayer other than a corporation, taxable in11 come from sources outside the United States

12 shall include gain from the sale or exchange of

13 capital assets only to the extent of foreign

14 source capital gain net income.’’.

15 (B) Subparagraph (A) of section 904(b)(2), as

16 so redesignated, is amended—

17 (i) by striking all that precedes clause (i)

18 and inserting the following:

19 ‘‘(A) CORPORATIONS.—In the case of a

20 corporation—’’, and

21 (ii) by striking in clause (i) ‘‘in lieu of ap22 plying subparagraph (A),’’.

23 (C) Paragraph (3) of section 904(b) is amended

24 by striking subparagraphs (D) and (E) and inserting

25 the following new subparagraph:
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1 ‘‘(D) RATE DIFFERENTIAL PORTION.—The

2 rate differential portion of foreign source net

3 capital gain, net capital gain, or the excess of

4 net capital gain from sources within the United

5 States over net capital gain, as the case may

6 be, is the same proportion of such amount as

7 the excess of the highest rate of tax specified in

8 section 11(b) over the alternative rate of tax

9 under section 1201(a) bears to the highest rate

10 of tax specified in section 11(b).’’.

11 (14) Paragraph (1) of section 1402(i) is amend12 ed by inserting ‘‘, and the deduction provided by sec13 tion 1203 shall not apply’’ before the period at the

14 end thereof.

15 (15) Paragraph (1) of section 1445(e) is

16 amended by striking ‘‘20 percent’’ and inserting

17 ‘‘19.8 percent’’.

18 (16)(A) The second sentence of section

19 7518(g)(6)(A) is amended—

20 (i) by striking ‘‘during a taxable year to

21 which section 1(h) or 1201(a) applies’’, and

22 (ii) by striking ‘‘20 percent’’ and inserting

23 ‘‘19.8 percent’’.
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1 (B) The second sentence of section

2 607(h)(6)(A) of the Merchant Marine Act, 1936, is

3 amended—

4 (i) by striking ‘‘during a taxable year to

5 which section 1(h) or 1201(a) of such Code ap6 plies’’, and

7 (ii) by striking ‘‘20 percent’’ and inserting

8 ‘‘19.8 percent’’.

9 (e) CLERICAL AMENDMENT.—The table of sections

10 for part I of subchapter P of chapter 1 is amended by

11 adding at the end the following new item:

‘‘Sec. 1203. Capital gains deduction.’’.

12 (f) EFFECTIVE DATES.—

13 (1) IN GENERAL.—Except as otherwise pro14 vided in this subsection, the amendments made by

15 this section shall apply to taxable years beginning

16 after December 31, 2000.

17 (2) WITHHOLDING.—The amendments made by

18 subsection (e)(14) shall apply only to amounts paid

19 after December 31, 2000.

20 (3) REPEAL OF ELECTION.—Section 311 of the

21 Taxpayer Relief Act of 1997 is amended by striking

22 subsection (e).

23 (4) COORDINATION WITH PRIOR TRANSITION

24 RULE.—Any amount treated as long-term capital

25 gain by reason of paragraph (3) of section 1122(h)
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1 of the Tax Reform Act of 1986 shall not be taken

2 into account for purposes of applying section 1203

3 of the Internal Revenue Code of 1986 (as added by

4 this section).

5 SEC. 202. INDEXING OF EXCLUSION FOR CAPITAL GAINS ON

6 SALE OF PRINCIPAL RESIDENCE.

7 (a) IN GENERAL.—Section 121(b)(1) (relating to

8 limitations) is amended by striking ‘‘$250,000’’ and in9 serting ‘‘applicable amount’’.

10 (b) APPLICABLE AMOUNT.—Section 121(b) is

11 amended by adding at the end the following new para12 graph:

13 ‘‘(4) APPLICABLE AMOUNT.—

14 ‘‘(A) IN GENERAL.—For purposes of this

15 section, the term ‘applicable amount’ means

16 $250,000.

17 ‘‘(B) INFLATION ADJUSTMENT.—

18 ‘‘(i) IN GENERAL.—In the case of a

19 taxable year beginning in any calendar

20 year after 2000, the $250,000 amount

21 under subparagraph (a) shall be increased

22 by an amount equal to—

23 ‘‘(I) such dollar amount, multi24 plied by
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1 ‘‘(II) the cost-of-living adjust2 ment determined under section 1(f)(3)

3 for the calendar year in which the tax4 able year begins, determined by sub5 stituting ‘calendar year 1999’ for ‘cal6 endar year 1992’ in subparagraph (B)

7 thereof.

8 ‘‘(ii) ROUNDING.—If any amount as

9 adjusted under clause (i) is not a multiple

10 of $1,000, such amount shall be rounded

11 to the next lowest multiple of $1,000.’’.

12 (b) CONFORMING AMENDMENTS.—Section

13 121(b)(2)(A) (relating to $500,000 limitation for certain

14 joint returns) is amended—

15 (1) by striking ‘‘substituting’’ and all that fol16 lows through ‘‘if’’ and inserting ‘‘substituting an

17 amount equal to 200 percent of the applicable

18 amount in effect under such paragraph for the tax19 able year for ‘the applicable amount’ if’’, and

20 (2) by striking ‘‘$500,000’’ in the heading and

21 inserting ‘‘INCREASED’’.

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

23 this section shall apply to taxable years beginning after

24 December 31, 2000.
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1 TITLE III—SIMPLIFICATION AND

2 EXPANSION OF THE EARNED

3 INCOME TAX CREDIT

4 SEC. 301. MODIFICATION OF DEFINITION OF EARNED IN5 COME.

6 (a) IN GENERAL.—Section 32(c)(2)(A)(i) (defining

7 earned income) is amended by striking ‘‘tips, and other

8 employee compensation’’ and inserting ‘‘and tips, and

9 other employee compensation includible in gross income

10 for the taxable year’’.

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

12 subsection (a) shall apply to amounts received in taxable

13 years beginning after December 31, 2000.

14 SEC. 302. SIMPLIFICATION OF DEFINITION OF CHILD DE15 PENDENT.

16 (a) REMOVAL OF SUPPORT TEST FOR CERTAIN INDI17 VIDUALS.—Section 152(a) (relating to definition of de18 pendent) is amended to read as follows:

19 ‘‘(a) GENERAL DEFINITION.—For purposes of this

20 subtitle—

21 ‘‘(1) DEPENDENT.—The term ‘dependent’

22 means—

23 ‘‘(A) any individual described in paragraph

24 (2) over half of whose support, for the calendar

25 year in which the taxable year of the taxpayer
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1 begins, was received from the taxpayer (or is

2 treated under subsection (c) as received from

3 the taxpayer), and

4 ‘‘(B) any individual described in subsection

5 (d).

6 ‘‘(2) INDIVIDUALS.—An individual is described

7 in this paragraph if such individual is—

8 ‘‘(A) a brother, sister, stepbrother, or step9 sister of the taxpayer,

10 ‘‘(B) the father or mother of the taxpayer,

11 or an ancestor of either,

12 ‘‘(C) a stepfather or stepmother of the tax13 payer,

14 ‘‘(D) a son or daughter of a brother or sis15 ter of the taxpayer,

16 ‘‘(E) a brother or sister of the father or

17 mother of the taxpayer,

18 ‘‘(F) a son-in-law, daughter-in-law, father19 in-law, mother-in-law, brother-in-law, or sister20 in-law of the taxpayer, or

21 ‘‘(G) an individual (other than an indi22 vidual who at any time during the taxable year

23 was the spouse, determined without regard to

24 section 7703, of the taxpayer) who, for the tax25 able year of the taxpayer, has as their principal
25

•S 2642 IS

1 place of abode the home of the taxpayer and is

2 a member of the taxpayer’s household.’’.

3 (b) OTHER MODIFICATIONS.—Section 152(d) is

4 amended to read as follows:

5 ‘‘(d) SUBSECTION (d) DEPENDENTS.—

6 ‘‘(1) IN GENERAL.—An individual is described

7 in this subsection for the taxable year if such

8 individual—

9 ‘‘(A) bears a relationship to the taxpayer

10 described in paragraph (2), and

11 ‘‘(B) except in the case of an eligible foster

12 child or as provided in subsection (e), has the

13 same principal place of abode as the taxpayer

14 for more than one-half of such taxable year.

15 ‘‘(2) RELATIONSHIP TEST.—An individual bears

16 a relationship to the taxpayer described in this para17 graph if such individual is—

18 ‘‘(A) a son or daughter of the taxpayer, or

19 a descendant of either, or

20 ‘‘(B) a stepson or stepdaughter of the tax21 payer.

22 ‘‘(3) SPECIAL RULES.—

23 ‘‘(A) 2 OR MORE CLAIMING DEPENDENT.—

24 Except as provided in subparagraph (B), if an

25 individual may be claimed as a dependent by 2
26

•S 2642 IS

1 or more taxpayers (but for this subparagraph)

2 for a taxable year beginning in the same cal3 endar year, only the taxpayer with the highest

4 modified adjusted gross income for such taxable

5 year shall be allowed the deduction with respect

6 to such individual.

7 ‘‘(B) RELEASE OF CLAIM TO EXEMP8 TION.—Subparagraph (A) shall not apply with

9 respect to an individual if—

10 ‘‘(i) the taxpayer with the highest

11 modified adjusted gross income under sub12 paragraph (A), for any calendar year signs

13 a written declaration (in such manner and

14 form as the Secretary may by regulations

15 prescribe) that such taxpayer will not claim

16 such individual as a dependent for any tax17 able year beginning in such calendar year,

18 and

19 ‘‘(ii) such other taxpayer attaches

20 such written declaration to such taxpayer’s

21 return for the taxable year beginning dur22 ing such calendar year.’’.

23 (c) RULES RELATING TO FOSTER CHILD.—Section

24 152(b)(2) (relating to rules relating to general definition)

25 is amended by striking ‘‘a foster child’’ and all that follows
27

•S 2642 IS

1 through ‘‘individual)’’ and inserting ‘‘an eligible foster

2 child (as defined in section 32(c)(3)(B)(iii)) of an indi3 vidual’’.

4 (d) EXEMPTION FROM GROSS INCOME TEST.—Sec5 tion 151(c)(3) (relating to definition of child) is amended

6 by striking ‘‘or stepdaughter’’ and inserting ‘‘step7 daughter, or a descendant of such individual’’.

8 (e) WAIVER OF DEDUCTION FOR DIVORCED PAR9 ENTS.—

10 (1) IN GENERAL.—So much of section 152(e)

11 as precedes paragraph (4) (relating to support test

12 in case of child of divorced parents, etc.) is amended

13 to read as follows:

14 ‘‘(e) SPECIAL RULES FOR CHILD OF DIVORCED PAR15 ENTS.—

16 ‘‘(1) RELEASE OF CLAIM TO EXEMPTION.—In

17 the case of a child (as defined in section 151(c)(3))

18 of parents—

19 ‘‘(A) who are divorced or legally separated

20 under a decree of divorce or separate mainte21 nance,

22 ‘‘(B) who are separated under a written

23 separation agreement, or

24 ‘‘(C) who live apart at all times during the

25 last 6 months of the calendar year,
28

•S 2642 IS

1 the custodial parent who is entitled to the deduction

2 under section 151 for a taxable year with respect to

3 such child may release such deduction to such other

4 parent.

5 ‘‘(2) PROCEDURE.—Such other parent may

6 claim a child described in paragraph (1) as a de7 pendent for the taxable year if—

8 ‘‘(A) the custodial parent signs a written

9 declaration (in such manner and form as the

10 Secretary may by regulations prescribe) that

11 such parent will not claim such child as a de12 pendent for any taxable year beginning in such

13 calendar year, and

14 ‘‘(B) such other parent attaches such writ15 ten declaration to such taxpayer’s return for

16 the taxable year beginning during such calendar

17 year.

18 ‘‘(C) CUSTODIAL PARENT.—For purposes

19 of this subsection, the term ‘custodial parent’

20 means, with regard to an individual, a parent

21 who has custody of such individual for a greater

22 portion of the calendar year than such other

23 parent.’’.

24 (2) PRE-1985 INSTRUMENTS.—Section 152(e) is

25 amended by striking paragraph (5), by redesignating
29

•S 2642 IS

1 paragraphs (4) and (6) as paragraphs (3) and (4),

2 respectively, and by striking ‘‘A child’’ and all that

3 follows through ‘‘noncustodial parent’’ in paragraph

4 (3)(A), as so redesignated, and inserting ‘‘A non5 custodial parent described in paragraph (1) shall be

6 entitled to the deduction under section 151 for a

7 taxable year with respect to a child if’’.

8 (3) NONCUSTODIAL PARENT.—Section

9 152(e)(3)(A), as redesignated in paragraph (2), is

10 amended by adding at the end the following new

11 sentence: ‘‘For purposes of this subsection, the term

12 ‘noncustodial parent’ means the parent who is not

13 the custodial parent.’’.

14 (f) CONFORMING AMENDMENTS.—

15 (1) Section 1(g)(5)(A) is amended by inserting

16 ‘‘as in effect on the day before the date of the enact17 ment of the Tax Ease and Modernization Act-Part

18 I’’ after ‘‘152(e)’’.

19 (2) Section 2(b)(1)(A)(i) is amended by striking

20 ‘‘paragraph (2) or (4) of’’.

21 (3) Section 2(b)(3)(B)(i) is amended by striking

22 ‘‘paragraph (9)’’ and inserting ‘‘paragraph (2)(G)’’.

23 (4) Section 21(e)(5)(A) is amended by striking

24 ‘‘paragraph (2) or (4) of’’.
30

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1 (5) Section 21(e)(5) is amended in the matter

2 following subclause (B) by inserting ‘‘as in effect on

3 the day before the date of the enactment of the Tax

4 Ease and Modernization Act-Part I’’ after

5 ‘‘152(e)(1)’’.

6 (6) Section 32(c)(3)(B)(ii) is amended by strik7 ing ‘‘paragraph (2) or (4) of’’.

8 (7) Section 51(i)(1)(C) is amended by striking

9 ‘‘152(a)(9)’’ and inserting ‘‘152(a)(2)(G)’’.

10 (8) Section 152(b) is amended by striking

11 ‘‘specified in subsection (a)’’ and inserting ‘‘specified

12 in subsection (a)(2) or (d)(2)’’.

13 (9) Section 152(c) is amended by striking ‘‘(a)’’

14 and inserting ‘‘(a)(1)’’.

15 (10) Section 7703(b)(1) is amended by striking

16 ‘‘paragraph (2) or (4) of’’.

17 (11) The following provisions are each amended

18 by striking ‘‘paragraphs (1) through (8) of section

19 152(a)’’ and inserting ‘‘subparagraphs (A) through

20 (F) of subsection (a)(2) or subsection (d)(2) of sec21 tion 152’’:

22 (A) Section 170(g)(3).

23 (B) Subparagraphs (A) and (B) of section

24 51(i)(1).
31

•S 2642 IS

1 (C) The second sentence of section

2 213(d)(11).

3 (D) Section 529(e)(2)(B).

4 (E) Section 7702B(f)(2)(C)(iii).

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

6 this section shall apply to taxable years beginning after

7 December 31, 2000.

8 SEC. 303. CREDIT ALLOWED FOR TAXPAYERS WHO RESIDE

9 WITH OTHER ELIGIBLE INDIVIDUALS.

10 (a) IN GENERAL.—Section 32(c)(3)(A) (relating to

11 definition of qualifying child) is amended by striking

12 ‘‘and’’ at the end of clause (ii), by striking the period at

13 the end of clause (iii) and inserting ‘‘, and’’, and by adding

14 at the end the following new clause:

15 ‘‘(iv) in the case of an individual de16 scribed in subclause (I) or (II) of subpara17 graph (B)(i), with respect to whom the

18 taxpayer meets the identification require19 ments of subparagraph (D).’’.

20 (b) CONFORMING AMENDMENT.—Section

21 32(c)(1)(C) (relating to 2 or more eligible individuals) is

22 amended by inserting ‘‘and the requirement of paragraph

23 (3)(A)(iv)’’ after ‘‘subparagraph (B)’’.
32

•S 2642 IS

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

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

3 December 31, 2000.

4 SEC. 304. EXPANSION OF CREDIT.

5 (a) INCREASED CREDIT PERCENTAGE FOR 3 OR

6 MORE QUALIFYING CHILDREN.—The table in section

7 32(b)(1)(A) is amended—

8 (1) in the second item, by striking ‘‘or more’’,

9 and

10 (2) by inserting after the second item the fol11 lowing new item:

‘‘3 or more qualifying children 43 ............................. 21.06’’

12 (b) INCREASE IN PHASEOUT AMOUNTS.—

13 (1) IN GENERAL.—The table in section 32(b)(2)

14 is amended to read as follows:

‘‘In the case of an eligible individual with:The earned income

amount is: The phaseout amount is:

1 qualifying child ..................... $6,920 ...................... $15,000

2 or more qualifying children .. $9,720 ...................... $15,000

No qualifying children ............. $4,610 ...................... $5,770.’’.

15 (2) REDUCTION IN MARRIAGE PENALTY.—Para16 graph (2) of section 32(b) is amended—

17 (A) by striking ‘‘AMOUNTS.—The earned’’

18 and inserting ‘‘AMOUNTS.—

19 ‘‘(A) IN GENERAL.—Subject to subpara20 graph (B), the earned’’, and
33

•S 2642 IS

1 (B) by adding at the end the following new

2 subparagraph:

3 ‘‘(B) JOINT RETURNS.—In the case of a

4 joint return, the phaseout amount determined

5 under subparagraph (A) shall be increased by

6 $5,000.’’.

7 (3) INFLATION ADJUSTMENT.—Section 32(j)(1)

8 (relating to inflation adjustments) is amended—

9 (A) by striking ‘‘subsections (b)(2)’’ and

10 inserting ‘‘subsections (b)(2)(A)’’, and

11 (B) by striking ‘‘‘calendar year 1995’’’ in

12 subparagraph (A) and inserting ‘‘‘calendar year

13 1999’’’.

14 (4) ROUNDING.—Section 32(j)(2)(A) (relating

15 to rounding) is amended by striking ‘‘subsection

16 (b)(2)’’ and inserting ‘‘subsection (b)(2)(A) (after

17 being increased under subparagraph (B) thereof)’’.

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

19 this section shall apply to taxable years beginning after

20 December 31, 2000.
34

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1 TITLE IV—LIMITATIONS ON

2 ITEMIZED DEDUCTIONS AND

3 PERSONAL EXEMPTIONS

4 SEC. 401. REPEAL OF OVERALL LIMITATION ON ITEMIZED

5 DEDUCTIONS.

6 (a) IN GENERAL.—Section 68 (relating to overall

7 limitation on itemized deductions) is hereby repealed.

8 (b) CONFORMING AMENDMENTS.—

9 (1) Subparagraph (A) of section 1(f)(6) is

10 amended by striking ‘‘section 68(b)(2)’’.

11 (2) Subparagraph (B) of section 773(a)(3) is

12 amended by striking clause (i) and by redesignating

13 clauses (ii), (iii), and (iv), as clauses (i), (ii), and

14 (iii), respectively.

15 (3) The table of sections for subchapter B of

16 chapter 1 is amended by striking the item relating

17 to section 68.

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

19 this section shall apply to taxable years beginning after

20 December 31, 2000.

21 SEC. 402. REPEAL OF PHASEOUT OF PERSONAL EXEMP22 TIONS.

23 (a) IN GENERAL.—Subsection (d) of section 151 (re24 lating to allowance of deductions for personal exemptions)
35

•S 2642 IS

1 is amended by striking paragraph (3) and by redesig2 nating paragraph (4) as paragraph (3).

3 (b) CONFORMING AMENDMENTS.—

4 (1) Paragraph (6) of section 1(f) is amended—

5 (A) by striking ‘‘section 151(d)(4)’’ in sub6 paragraph (A) and inserting ‘‘section

7 151(d)(3)’’, and

8 (B) by striking ‘‘section 151(d)(4)(A)’’ in

9 subparagraph (B) and inserting ‘‘section

10 151(d)(3)’’.

11 (2) Paragraph (3) of section 151(d), as redesig12 nated by subsection (a), is amended to read as fol13 lows:

14 ‘‘(3) INFLATION ADJUSTMENT.—In the case of

15 any taxable year beginning in a calendar year after

16 1989, the dollar amount contained in paragraph (1)

17 shall be increased by an amount equal to—

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

19 ‘‘(B) the cost-of-living adjustment deter20 mined under section 1(f)(3) for the calendar

21 year in which the taxable year begins, by sub22 stituting ‘calendar year 1988’ for ‘calendar year

23 1992’ in subparagraph (B) thereof.’’.
36

•S 2642 IS

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

2 this section shall apply to taxable years beginning after

3 December 31, 2000.

4 TITLE V—BUSINESS TAX

5 SIMPLIFICATION PROVISIONS

6 SEC. 501. SINGLE RATE OF INTEREST ON CORPORATE AND

7 INDIVIDUAL OVERPAYMENTS AND UNDER8 PAYMENTS.

9 (a) OVERPAYMENT RATE.—Section 6621(a)(1) (re10 lating to overpayment rate) is amended—

11 (1) by striking ‘‘(2 percentage points in the

12 case of a corporation)’’ in subparagraph (B), and

13 (2) by striking the second sentence.

14 (b) UNDERPAYMENT RATE FOR LARGE CORPORATE

15 UNDERPAYMENTS.—Section 6621 (relating to determina16 tion of rate of interest) is amended by striking subsection

17 (c) and redesignating subsection (d) as subsection (c).

18 (c) CONFORMING AMENDMENT.—Section 6601(f) is

19 amended by striking ‘‘6621(d)’’ and inserting ‘‘6621(c)’’.

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

21 this section shall apply for purposes of determining inter22 est for periods after December 31, 2000.

23 SEC. 502. CLARIFICATION OF INTEREST NETTING.

24 (a) IN GENERAL.—Section 6621(c) (relating to elimi25 nation of interest on overlapping periods of tax overpay-
37

•S 2642 IS

1 ments and underpayments), as redesignated by section

2 501(b), is amended to read as follows:

3 ‘‘(c) ELIMINATION OF INTEREST ON OVERLAPPING

4 PERIODS OF TAX OVERPAYMENTS AND UNDERPAY5 MENTS.—To the extent that, for any period, there exist

6 equivalent overpayments and underpayments by the same

7 taxpayer of the tax imposed under this title, the net rate

8 of interest under this section on such amounts shall be

9 zero for such period, whether or not such overpayments

10 or underpayments are currently outstanding.’’.

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

12 subsection (a) shall take effect as if included in section

13 3301 of the Internal Revenue Service Restructuring and

14 Reform Act of 1998.

15 SEC. 503. EXPENSING ALLOWED FOR CERTAIN COMPUTER

16 SOFTWARE.

17 (a) IN GENERAL.—Part VI of subchapter B of chap18 ter 1 is amended by adding at the end the following new

19 section:

20 ‘‘SEC. 199. EXPENSING OF COMPUTER SOFTWARE.

21 ‘‘(a) TREATMENT AS EXPENSES.—

22 ‘‘(1) IN GENERAL.—A taxpayer may elect to

23 treat any computer software expenditure which is

24 paid or incurred by the taxpayer as an expense

25 which is not chargeable to capital account. Any ex-
38

•S 2642 IS

1 penditure which is so treated shall be allowed as a

2 deduction for the taxable year in which it is paid or

3 incurred.

4 ‘‘(2) ELECTION.—An election under paragraph

5 (1) shall be made at such time and in such manner

6 as the Secretary prescribes by regulation.

7 ‘‘(b) COMPUTER SOFTWARE EXPENDITURE.—For

8 purposes of this section, the term ‘computer software ex9 penditure’ means an expenditure—

10 ‘‘(1) for computer software (within the meaning

11 of section 197(e)(3),

12 ‘‘(2) for which depreciation would otherwise be

13 allowable under section 167(f), and

14 ‘‘(3) which is not deductible under any provi15 sion of this title other than section 167(f) or 197.

16 ‘‘(c) LIMITATION.—The deduction allowed under sub17 section (a) for any taxable year shall not exceed $20,000.

18 ‘‘(d) NO OTHER DEPRECIATION OR AMORTIZATION

19 DEDUCTION ALLOWED.—Except as provided in subsection

20 (a), no depreciation or amortization deduction shall be al21 lowable with respect to any computer software.

22 ‘‘(e) INFLATION ADJUSTMENT.—

23 ‘‘(1) IN GENERAL.—In the case of a taxable

24 year beginning after 2001, the $20,000 amount
39

•S 2642 IS

1 under subsection (c) shall be increased by an

2 amount equal to—

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

4 ‘‘(B) the cost-of-living adjustment deter5 mined under section 1(f)(3) for the calendar

6 year in which the taxable year begins, deter7 mined by substituting ‘calendar year 2000’ for

8 ‘calendar year 1992’ in subparagraph (B)

9 thereof.

10 ‘‘(2) ROUNDING.—If any amount as adjusted

11 under paragraph (1) is not a multiple of $100, such

12 amount shall be rounded to the next lowest multiple

13 of $100.’’.

14 (b) CONFORMING AMENDMENT.—The table of sec15 tions for part IV of subchapter B of chapter 1 is amended

16 by adding at the end the following new item:

‘‘Sec. 199. Expensing of computer software.’’.

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

18 this section shall apply to taxable years beginning after

19 December 31, 2000.
40

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1 TITLE VI—MISCELLANEOUS

2 SIMPLIFICATION PROVISIONS

3 Subtitle A—Penalty and Interest

4 Provisions

5 SEC. 601. FAILURE BY INDIVIDUAL TO PAY ESTIMATED TAX

6 PENALTY CONVERTED TO INTEREST CHARGE

7 ON ACCUMULATED UNPAID BALANCE.

8 (a) PENALTY MOVED TO INTEREST CHAPTER OF

9 CODE.—The Internal Revenue Code of 1986 is amended

10 by redesignating section 6654 as section 6641 and by

11 moving section 6641 (as so redesignated) from part I of

12 subchapter A of chapter 68 to the end of subchapter E

13 of chapter 67 (as added by subsection (e)(1) of this sec14 tion).

15 (b) PENALTY CONVERTED TO INTEREST CHARGE.—

16 The heading and subsections (a) and (b) of section 6641

17 (as so redesignated) are amended to read as follows:

18 ‘‘SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY

19 ESTIMATED INCOME TAX.

20 ‘‘(a) IN GENERAL.—Interest shall be paid on any un21 derpayment of estimated tax by an individual for a taxable

22 year for each day of such underpayment. The amount of

23 such interest for any day shall be the product of the un24 derpayment rate established under subsection (b)(2) mul25 tiplied by the amount of the underpayment.
41

•S 2642 IS

1 ‘‘(b) AMOUNT OF UNDERPAYMENT; INTEREST

2 RATE.—For purposes of subsection (a)—

3 ‘‘(1) AMOUNT.—The amount of the under4 payment on any day shall be the excess of—

5 ‘‘(A) the sum of the required installments

6 for the taxable year the due dates for which are

7 on or before such day, over

8 ‘‘(B) the sum of the amounts (if any) of

9 estimated tax payments made on or before such

10 day on such required installments.

11 ‘‘(2) DETERMINATION OF INTEREST RATE.—

12 ‘‘(A) IN GENERAL.—The underpayment

13 rate with respect to any day in an installment

14 underpayment period shall be the under15 payment rate established under section 6621

16 for the first day of the calendar quarter in

17 which such installment underpayment period

18 begins.

19 ‘‘(B) INSTALLMENT UNDERPAYMENT PE20 RIOD.—For purposes of subparagraph (A), the

21 term ‘installment underpayment period’ means

22 the period beginning on the day after the due

23 date for a required installment and ending on

24 the due date for the subsequent required in25 stallment (or in the case of the 4th required
42

•S 2642 IS

1 installment, the 15th day of the 4th month fol2 lowing the close of a taxable year).

3 ‘‘(C) DAILY RATE.—The rate determined

4 under subparagraph (A) shall be applied on a

5 daily basis and shall be based on the assump6 tion of 365 days in a calendar year.

7 ‘‘(3) TERMINATION OF ESTIMATED TAX INTER8 EST.—No day after the end of the installment un9 derpayment period for the 4th required installment

10 specified in paragraph (2)(B) for a taxable year

11 shall be treated as a day of underpayment with re12 spect to such taxable year.’’.

13 (c) INCREASE IN SAFE HARBOR WHERE TAX IS

14 SMALL.—

15 (1) IN GENERAL.—Clause (i) of section

16 6641(d)(1)(B) (as so redesignated) is amended to

17 read as follows:

18 ‘‘(i) the lesser of—

19 ‘‘(I) 90 percent of the tax shown

20 on the return for the taxable year (or,

21 if no return is filed, 90 percent of the

22 tax for such year), or

23 ‘‘(II) the tax shown on the return

24 for the taxable year (or, if no return
43

•S 2642 IS

1 is filed, the tax for such year) reduced

2 (but not below zero) by $2,000, or’’.

3 (2) CONFORMING AMENDMENT.—Subsection (e)

4 of section 6641 (as so redesignated) is amended by

5 striking paragraph (1) and redesignating paragraphs

6 (2) and (3) as paragraphs (1) and (2), respectively.

7 (d) CONFORMING AMENDMENTS.—

8 (1) Paragraphs (1) and (2) of subsection (e)

9 (as redesignated by subsection (c)(2)) and sub10 section (h) of section 6641 (as so designated) are

11 each amended by striking ‘‘addition to tax’’ each

12 place it occurs and inserting ‘‘interest’’.

13 (2) Section 167(g)(5)(D) is amended by strik14 ing ‘‘6654’’ and inserting ‘‘6641’’.

15 (3) Section 460(b)(1) is amended by striking

16 ‘‘6654’’ and inserting ‘‘6641’’.

17 (4) Section 3510(b) is amended—

18 (A) by striking ‘‘section 6654’’ in para19 graph (1) and inserting ‘‘section 6641’’,

20 (B) by amending paragraph (2)(B) to read

21 as follows:

22 ‘‘(B) no interest would be required to be

23 paid (but for this section) under 6641 for such

24 taxable year by reason of the $2,000 amount

25 specified in section 6641(d)(1)(B)(i)(II).’’,
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•S 2642 IS

1 (C) by striking ‘‘section 6654(d)(2)’’ in

2 paragraph (3) and inserting ‘‘section

3 6641(d)(2)’’, and

4 (D) by striking paragraph (4).

5 (5) Section 6201(b)(1) is amended by striking

6 ‘‘6654’’ and inserting ‘‘6641’’.

7 (6) Section 6601(h) is amended by striking

8 ‘‘6654’’ and inserting ‘‘6641’’.

9 (7) Section 6621(b)(2)(B) is amended by strik10 ing ‘‘addition to tax under section 6654’’ and insert11 ing ‘‘interest required to be paid under section

12 6641’’.

13 (8) Section 6622(b) is amended—

14 (A) by striking ‘‘PENALTY FOR’’ in the

15 heading, and

16 (B) by striking ‘‘addition to tax under sec17 tion 6654 or 6655’’ and inserting ‘‘interest re18 quired to be paid under section 6641 or addi19 tion to tax under section 6655’’.

20 (9) Section 6658(a) is amended—

21 (A) by striking ‘‘6654, or 6655’’ and in22 serting ‘‘or 6655, and no interest shall be re23 quired to be paid under section 6641,’’, and

24 (B) by inserting ‘‘or paying interest’’ after

25 ‘‘the tax’’ in paragraph (2)(B)(ii).
45

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1 (10) Section 6665(b) is amended—

2 (A) in the matter preceding paragraph (1)

3 by striking ‘‘, 6654,’’, and

4 (B) in paragraph (2) by striking ‘‘6654

5 or’’.

6 (11) Section 7203 is amended by striking ‘‘sec7 tion 6654 or 6655’’ and inserting ‘‘section 6655 or

8 interest required to be paid under section 6641’’.

9 (e) CLERICAL AMENDMENTS.—

10 (1) Chapter 67 is amended by inserting after

11 subchapter D the following:

12 ‘‘Subchapter E—Interest on Failure by

13 Individual to Pay Estimated Income Tax

‘‘Sec. 6641. Interest on failure by individual to pay estimated income tax.’’.

14 (2) The table of subchapters for chapter 67 is

15 amended by adding at the end the following new

16 items:

‘‘Subchapter D. Notice requirements.

‘‘Subchapter E. Interest on failure by individual to pay estimated

income tax.’’.

17 (3) The table of sections for part I of sub18 chapter A of chapter 68 is amended by striking the

19 item relating to section 6654.

20 (f) EFFECTIVE DATE.—The amendments made by

21 this section shall apply to installment payments for taxable

22 years beginning after December 31, 2000.
46

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1 SEC. 602. EXCLUSION FROM GROSS INCOME FOR INTEREST

2 ON OVERPAYMENTS OF INCOME TAX BY INDI3 VIDUALS.

4 (a) IN GENERAL.—Part III of subchapter B of chap5 ter 1 (relating to items specifically excluded from gross

6 income) is amended by redesignating section 139 as sec7 tion 139A and by inserting after section 138 the following

8 new section:

9 ‘‘SEC. 139. EXCLUSION FROM GROSS INCOME FOR INTER10 EST ON OVERPAYMENTS OF INCOME TAX BY

11 INDIVIDUALS.

12 ‘‘(a) IN GENERAL.—In the case of an individual,

13 gross income shall not include interest paid under section

14 6611 on any overpayment of tax imposed by this subtitle.

15 ‘‘(b) EXCEPTION.—Subsection (a) shall not apply in

16 the case of a failure to claim items resulting in the over17 payment on the original return if the Secretary determines

18 that the principal purpose of such failure is to take advan19 tage of subsection (a).

20 ‘‘(c) SPECIAL RULE FOR DETERMINING MODIFIED

21 ADJUSTED GROSS INCOME.—For purposes of this title,

22 interest not included in gross income under subsection (a)

23 shall not be treated as interest which is exempt from tax

24 for purposes of sections 32(i)(2)(B) and 6012(d) or any

25 computation in which interest exempt from tax under this

26 title is added to adjusted gross income.’’.
47

•S 2642 IS

1 (b) CLERICAL AMENDMENT.—The table of sections

2 for part III of subchapter B of chapter 1 is amended by

3 striking the item relating to section 139 and inserting the

4 following new items:

‘‘Sec. 139. Exclusion from gross income for interest on overpayments of income tax by individuals.

‘‘Sec. 139A. Cross references to other Acts.’’.

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

6 this section shall apply to interest received in calendar

7 years beginning after the date of the enactment of this

8 Act.

9 SEC. 603. REDUCTIONS OF PENALTY FOR FAILURE TO PAY

10 TAX.

11 (a) REDUCTIONS OF PENALTY FOR FAILURE TO PAY

12 TAX.—

13 (1) REDUCTION OF PENALTY BY 50 PER14 CENT.—

15 (A) IN GENERAL.—Paragraphs (2) and (3)

16 of section 6651(a) are each amended by strik17 ing ‘‘0.5’’ each place it appears and inserting

18 ‘‘0.25’’.

19 (B) CONFORMING AMENDMENT.—Para20 graph (1) of section 6651(d) is amended by

21 striking ‘‘by substituting ‘1 percent’ for ‘0.5

22 percent’ ’’ and inserting ‘‘by substituting ‘0.5

23 percent’ for ‘0.25 percent’ ’’.
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•S 2642 IS

1 (2) REDUCTION OF PENALTY TO ZERO DURING

2 PERIOD OF INSTALLMENT AGREEMENT.—Subsection

3 (h) of section 6651 is amended by striking ‘‘by sub4 stituting ‘0.25’ for ‘0.5’ ’’ and inserting ‘‘by sub5 stituting ‘zero’ for ‘0.25’ ’’.

6 (3) EFFECTIVE DATE.—The amendments made

7 by this subsection shall apply for purposes of deter8 mining additions to tax for months beginning after

9 December 31, 2000.

10 (b) PROHIBITION OF FEE FOR INSTALLMENT

11 AGREEMENTS USING AUTOMATED WITHDRAWALS.—

12 (1) IN GENERAL.—Section 6159 (relating to

13 agreements for payment of tax liability in install14 ments) is amended by redesignating subsection (e)

15 as subsection (f) and by inserting after subsection

16 (d) the following new subsection:

17 ‘‘(e) PROHIBITION OF FEE FOR INSTALLMENT

18 AGREEMENTS USING AUTOMATED WITHDRAWALS.—The

19 Secretary may not charge a taxpayer a fee for entering

20 into an agreement with the Secretary under this section

21 only for so long as payments under such agreement are

22 made by means of electronic transfer or by similar auto23 mated means.’’.

24 (2) EFFECTIVE DATE.—The amendments made

25 by this subsection shall apply to installment agree-
49

•S 2642 IS

1 ments entered into more than 30 days after the date

2 of the enactment of this Act.

3 SEC. 604. ABATEMENT OF INTEREST.

4 (a) ABATEMENT OF INTEREST IF GROSS INJUSTICE

5 WOULD OTHERWISE RESULT.—Section 6404 is amended

6 by redesignating subsection (i) as subsection (j) and by

7 inserting after subsection (h) the following new subsection:

8 ‘‘(i) ABATEMENT OF INTEREST IF GROSS INJUSTICE

9 WOULD OTHERWISE RESULT.—The Secretary may abate

10 the assessment of all or any part of interest on any

11 amount of tax imposed by this title for any period if the

12 Secretary determines that—

13 ‘‘(1) a gross injustice would otherwise result if

14 interest were to be charged, and

15 ‘‘(2) no significant aspect of the events giving

16 rise to the accrual of the interest can be attributed

17 to the taxpayer involved.’’.

18 (b) ABATEMENT OF INTEREST FOR PERIODS AT19 TRIBUTABLE TO ANY UNREASONABLE IRS ERROR OR

20 DELAY.—Subparagraphs (A) and (B) of section

21 6404(e)(1) are each amended by striking ‘‘in performing

22 a ministerial or managerial act’’.

23 (c) ABATEMENT OF INTEREST WITH RESPECT TO

24 ERRONEOUS REFUND CHECK WITHOUT REGARD TO SIZE

25 OF REFUND.—Paragraph (2) of section 6404(e) is amend-
50

•S 2642 IS

1 ed by striking ‘‘unless—’’ and all that follows and insert2 ing ‘‘unless the taxpayer (or a related party) has in any

3 way caused such erroneous refund.’’

4 (d) ABATEMENT OF INTEREST TO EXTENT INTER5 EST IS ATTRIBUTABLE TO TAXPAYER RELIANCE ON

6 WRITTEN STATEMENTS OF THE IRS.—Subsection (f) of

7 section 6404 is amended—

8 (1) in the subsection heading, by striking

9 ‘‘PENALTY OR ADDITION’’ and inserting ‘‘INTEREST,

10 PENALTY, OR ADDITION’’, and

11 (2) in paragraph (1) and in subparagraph (B)

12 of paragraph (2), by striking ‘‘penalty or addition’’

13 and inserting ‘‘interest, penalty, or addition’’.

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

15 this section shall apply with respect to interest accruing

16 on or after the date of the enactment of this Act.

17 SEC. 605. ANNUAL REPORT ON ABATEMENT OF PENALTIES.

18 Not later than 6 months after the close of each Fed19 eral fiscal year after fiscal year 1999, the Treasury In20 spector General for Tax Administration shall submit a re21 port to Congress on abatements of penalties under the In22 ternal Revenue Code of 1986 during such year, including

23 information on the reasons and criteria for such abate24 ments.
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•S 2642 IS

1 Subtitle B—Procedural Provisions

2 SEC. 611. AUTHORITY TO CORRECT ERRORS BY THE IRS

3 WITH RESPECT TO TAXPAYER.

4 (a) IN GENERAL.—The Secretary of the Treasury

5 shall promulgate regulations to allow the Secretary or the

6 Secretary’s delegate to provide appropriate relief to any

7 individual taxpayer if the Secretary or delegate determines

8 that—

9 (1) any action taken by an officer or employee

10 of the Internal Revenue Service (acting in an official

11 capacity) in connection with an assessment or collec12 tion of tax liability of a taxpayer was in error at the

13 time of such action,

14 (2) no significant aspect of such error can be

15 attributed to the taxpayer involved,

16 (3) with the consent of the taxpayer, such relief

17 would be in the best interests of the taxpayer and

18 the United States, and

19 (4) such action results in substantially less fa20 vorable treatment of the taxpayer with respect to the

21 assessment or collection.

22 (b) APPROPRIATE RELIEF.—For purposes of sub23 section (a), the term ‘‘appropriate relief’’ means any relief

24 intended to return the taxpayer to the same position in
52

•S 2642 IS

1 which such taxpayer was prior to the action taken under

2 subsection (a)(1).

3 (c) RELIEF OTHERWISE AVAILABLE.—Subsection (a)

4 shall not apply to any action for which relief is otherwise

5 provided under internal revenue laws.

6 (d) REGULATIONS.—The Secretary of the Treasury

7 shall promulgate such regulations as necessary to carry

8 out the purposes of this section.

9 (e) EFFECTIVE DATE.—This section shall apply with

10 respect to actions taken after the date of the enactment

11 of this Act.

12 SEC. 612. MODIFICATION OF FILING DATE.

13 (a) IN GENERAL.—Section 7502(a)(2) (relating to

14 mailing requirements) is amended by—

15 (1) striking subparagraph (A) and inserting the

16 following new subparagraph:

17 ‘‘(A) in the case of a payment, the post18 mark date falls within the prescribed period or

19 on or before the prescribed date for making the

20 payment (including any extension granted for

21 making such payment), and’’, and

22 (2) striking ‘‘or other document, or’’ in sub23 paragraph (B) and inserting ‘‘or other document

24 was, or’’.
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•S 2642 IS

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

2 subsection (a) shall apply to deposits required to be made

3 after December 31, 2000.

4 SEC. 613. WAIVER OF ADDITION TO TAX FOR EARLY WITH5 DRAWAL FROM IRA.

6 (a) IN GENERAL.—Section 72(t) (relating to 10-per7 cent additional tax on early distributions from qualified

8 retirement plans) is amended by adding at the end the

9 following new paragraph:

10 ‘‘(9) HARDSHIP EXCEPTION.—The Secretary

11 may waive part or all of the tax imposed under para12 graph (1) to any distribution if the Secretary deter13 mines that—

14 ‘‘(A) adequate notice is not received by the

15 taxpayer as required under section 402(f)(1)

16 with respect to an eligible rollover distribution,

17 ‘‘(B) the taxpayer has no reason to know

18 the information required to be contained in

19 such notice, and

20 ‘‘(C) the application of such tax would re21 sult in undue hardship due to the financial con22 dition of the taxpayer.’’.

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

24 subsection (a) shall apply to distributions made in taxable

25 years beginning after December 31, 2000.
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•S 2642 IS

1 SEC. 614. FIXED RATE OF INTEREST FOR INSTALLMENT

2 AGREEMENT.

3 (a) IN GENERAL.—Section 6621(b)(2) (relating to

4 period during which rate applies) is amended by adding

5 at the end the following new subparagraph:

6 ‘‘(C) SPECIAL RULE FOR INSTALLMENT

7 AGREEMENTS.—In the case of an installment

8 agreement under section 6159, the Federal

9 short-term rate which applies with respect to

10 any day of the installment agreement period

11 shall be the rate determined under paragraph

12 (1) for the first day of the calendar quarter in

13 which such installment agreement is entered

14 into.’’.

15 (b) ADJUSTMENT FOR CHANGING RATES.—Section

16 6159(b) (relating to extent to which agreements remain

17 in effect) is amended by adding at the end the following

18 new paragraph:

19 ‘‘(6) CHANGE IN INTEREST RATE.—Notwith20 standing section 6621(b)(2)(C), the Secretary may

21 alter or modify such agreement with respect to the

22 rate of interest in effect for such agreement if the

23 Secretary determines that such rate is higher than

24 the rate determined under section 6621(b) for the

25 current calendar quarter.’’.
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•S 2642 IS

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

2 this section shall apply to installment agreements entered

3 into after December 31, 2000.

4 SEC. 615. EXCEPTION TO TAX ON EARLY WITHDRAWAL

5 FROM IRA.

6 (a) IN GENERAL.—Subparagraph (A) of section

7 72(t)(2) (relating to subsection not to apply to certain dis8 tributions) is amended by striking ‘‘, or’’ at the end of

9 clause (vi), by striking the period at the end of clause (vii)

10 and inserting ‘‘, or’’, and by adding at the end the fol11 lowing new clause:

12 ‘‘(viii) used to satisfy part or all of

13 any liability for tax imposed under this

14 subtitle of the person receiving such dis15 tribution.’’.

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

17 subsection (a) shall apply to distributions made in taxable

18 years beginning after December 31, 2000.

19 Subtitle C—Small Investors Tax

20 Simplification Act

21 SEC. 621. ELECTION TO USE SIMPLIFIED METHOD FOR

22 QUALIFIED INVESTMENT CLUBS.

23 (a) IN GENERAL.—Part I of subchapter K of chapter

24 1 (relating to determination of tax liability of partners and
56

•S 2642 IS

1 partnerships) is amended by inserting after section 704

2 the following new section:

3 ‘‘SEC. 704A. ELECTION TO USE SIMPLIFIED METHOD FOR

4 QUALIFIED INVESTMENT CLUBS.

5 ‘‘(a) IN GENERAL.—Notwithstanding any other pro6 vision of this subchapter, a partner’s distributive share of

7 all items of income, gain, loss, deduction, or credit of a

8 qualified investment club shall be determined under the

9 simplified method.

10 ‘‘(b) SIMPLIFIED METHOD.—For purposes of this

11 section—

12 ‘‘(1) IN GENERAL.—The term ‘simplified meth13 od’ means a method pursuant to which a partnership

14 allocates each of the items of income, gain, loss, de15 duction, and credit for its taxable year to its part16 ners based on their proportionate interests on the

17 last day of such taxable year in partnership profits.

18 ‘‘(2) EXCEPTION FOR DISTRIBUTIONS DURING

19 YEAR.—The partnership may take into account the

20 partners’ varying interests in partnership profits re21 sulting from distributions during the taxable year in

22 determining the partners’ interests in partnership

23 profits for purposes of paragraph (1).

24 ‘‘(c) DEFINITIONS.—For purposes of this section—
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•S 2642 IS

1 ‘‘(1) QUALIFIED INVESTMENT CLUB.—The

2 term ‘qualified investment club’ means, with respect

3 to any taxable year, any partnership—

4 ‘‘(A) which is not required to be registered

5 under the Investment Company Act of 1940,

6 ‘‘(B) for which no person who is registered

7 as an investment adviser under the Investment

8 Advisers Act of 1940 substantially participates

9 in the management or investment decisions

10 thereof,

11 ‘‘(C) all of the partners of which are quali12 fied partners for the calendar year in which the

13 taxable year of the partnership ends,

14 ‘‘(D) at least 90 percent of the gross in15 come of which is derived from items described

16 in section 851(b)(2),

17 ‘‘(E) at least 90 percent of the value of the

18 total assets of which, at the end of each quarter

19 of such year, consists of cash, cash items (in20 cluding receivables), and securities,

21 ‘‘(F) the taxable year of which is the cal22 endar year, and

23 ‘‘(G) for which an election under sub24 section (e) is in effect.

25 ‘‘(2) QUALIFIED PARTNER.—
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•S 2642 IS

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

2 partner’ means—

3 ‘‘(i) any individual other than a non4 resident alien,

5 ‘‘(ii) any individual retirement plan,

6 and

7 ‘‘(iii) any education individual retire8 ment account (as defined in section 530).

9 ‘‘(B) LIMITATION ON CONTRIBUTIONS BY

10 INDIVIDUALS.—An individual shall not be a

11 qualified partner for any calendar year if the

12 aggregate contributions by such individual to

13 qualified investment clubs (determined without

14 regard to paragraph (1)(C)) during such cal15 endar year exceeds $3,000 or exceeds $3,000

16 during any of the 5 preceding calendar years.

17 ‘‘(C) LIMITATION ON CONTRIBUTIONS BY

18 TRUSTS.—

19 ‘‘(i) IN GENERAL.—A plan or account

20 referred to in subparagraph (A) (hereafter

21 in this subparagraph referred to as a

22 ‘trust’) shall not be a qualified partner for

23 any calendar year if the aggregate con24 tributions to qualified investment clubs

25 (determined without regard to paragraph
59

•S 2642 IS

1 (1)(C)) during such calendar year by such

2 trust exceeds the excess of—

3 ‘‘(I) the product of $3,000 and

4 the number of years before such cal5 endar year that such trust held any

6 asset, over

7 ‘‘(II) the aggregate contributions

8 made to qualified investment clubs (as

9 so determined) by such trust during

10 all prior calendar years.

11 ‘‘(ii) AGGREGATION OF RELATED

12 TRUSTS.—For purposes of this

13 subparagraph—

14 ‘‘(I) all trusts having the same

15 beneficiary shall be treated as 1 trust,

16 and

17 ‘‘(II) only the trust having the

18 longest period described in clause

19 (i)(I) shall be taken into account

20 thereunder.

21 ‘‘(iii) FRACTIONS OF A YEAR.—For

22 purposes of clause (i)(I), a fraction of a

23 year shall be counted as a whole year.

24 ‘‘(D) NO ATTRIBUTION BETWEEN INDIVID25 UALS AND TRUSTS.—Notwithstanding any other
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1 provision of this title, there shall be no attribu2 tion of contributions between a trust and an in3 dividual.

4 ‘‘(3) SECURITIES.—

5 ‘‘(A) DEFINITION.—The term ‘security’

6 has the meaning given to such term by section

7 475(c)(2) (determined without regard to sub8 paragraph (F) thereof).

9 ‘‘(B) CERTAIN RULES TO APPLY.—For

10 purposes of paragraph (1)(E), rules similar to

11 the rules of paragraphs (4) and (5) of section

12 851(c), shall apply.

13 ‘‘(d) INFLATION ADJUSTMENT.—In the case of cal14 endar years after 2000, the $3,000 amounts contained in

15 subsection (c)(2) shall each be increased for any calendar

16 year after 2001 by an amount equal to—

17 ‘‘(1) $3,000, multiplied by

18 ‘‘(2) the cost-of-living adjustment under section

19 1(f)(3) for such calendar year, determined by sub20 stituting ‘calendar year 2000’ for ‘calendar year

21 1992’ in subparagraph (B) thereof.

22 Any increase under this subsection which is not a multiple

23 of $50 shall be rounded to the nearest multiple of $50.

24 ‘‘(e) ELECTION.—An election under this subsection

25 shall be made on the return for the taxable year for which
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1 it is made and shall apply to such taxable year and all

2 subsequent taxable years for which the partnership is a

3 qualified investment club, unless the election is revoked

4 with the consent of the Secretary.

5 ‘‘(f) TERMINATION OF QUALIFIED INVESTMENT

6 CLUB STATUS.—An election under subsection (e) shall

7 terminate as of the 1st day of any taxable year during

8 which the partnership ceases to be a qualified investment

9 club and, solely for purposes of section 704(c), each part10 ner shall be treated as contributing on such first day such

11 partner’s pro rata share of the partnership’s assets and

12 liabilities on such first day to a new partnership.

13 ‘‘(g) INADVERTENT INVALID ELECTIONS OR TERMI14 NATIONS.—The Secretary shall provide a relief mechanism

15 for treating a partnership as a qualified investment club

16 in circumstances where—

17 ‘‘(1) an election under subsection (e) was not

18 effective for the taxable year for which made by rea19 son of an inadvertent failure to satisfy any require20 ment of subsection (c), or

21 ‘‘(2) there is an inadvertent termination under

22 subsection (f) of such an election.

23 ‘‘(h) ELECTION AFTER TERMINATION.—If an elec24 tion under subsection (e) by a partnership is terminated

25 or revoked, such partnership shall not be eligible to make
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1 an election under subsection (e) for any taxable year be2 fore its 5th taxable year which begins after the 1st taxable

3 year for which such termination or revocation is effective,

4 unless the Secretary consents to such election.

5 ‘‘(i) REGULATIONS.—The Secretary shall prescribe

6 such regulations as may be necessary to carry out the pur7 poses of this section, including regulations regarding the

8 status of an individual or trust as a qualified partner.’’.

9 (b) CLERICAL AMENDMENT.—The table of sections

10 for part I of subchapter K of chapter 1 is amended by

11 inserting after the item relating to section 704 the fol12 lowing new item:

‘‘Sec. 704A. Election to use simplified method for qualified investment clubs.’’

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

14 this section shall apply to taxable years ending after the

15 date of the enactment of this Act.

16 Subtitle D—Other Provisions

17 SEC. 631. ABOVE-THE-LINE DEDUCTION FOR UNREIM18 BURSED BUSINESS EXPENSES.

19 (a) IN GENERAL.—Section 62(a)(2) (relating to cer20 tain trade and business deductions of employees) is

21 amended to read as follows:

22 ‘‘(2) TRADE AND BUSINESS DEDUCTIONS OF

23 EMPLOYEES.—The deductions allowed by part VI

24 (section 161 and following) which consist of ex-
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1 penses paid or incurred by the taxpayer, whether or

2 not such expenses are reimbursed, in connection

3 with the performance by the taxpayer of services as

4 an employee.’’.

5 (b) CONFORMING AMENDMENTS.—

6 (1) Section 62 is amended—

7 (A) by striking ‘‘(a) GENERAL RULE.—

8 For purposes’’ and inserting the following:

9 ‘‘For purposes’’, and

10 (B) by striking subsections (b) and (c).

11 (2) Section 67 is amended by striking sub12 section (f).

13 (3) Section 162(o)(1) is amended by striking

14 ‘‘such services’’ the first place it occurs and all that

15 follows and inserting ‘‘such services, the amount al16 lowable as a deduction under this chapter for the

17 use of a vehicle in performing such services shall be

18 equal to the amount of such qualified reimburse19 ments.’’.

20 (4) Section 3402(m)(1) is amended by striking

21 ‘‘62(a)’’ and inserting ‘‘62’’.

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

23 this section shall apply to taxable years beginning after

24 December 31, 2000.
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1 SEC. 632. EXPENSING OF CERTAIN PERSONAL PROPERTY

2 USED IN CONNECTION WITH RESIDENTIAL

3 RENTAL PROPERTY.

4 (a) IN GENERAL.—Section 179(d)(1) (defining sec5 tion 179 property) is amended by inserting ‘‘(without re6 gard to paragraph (2) thereof)’’ after ‘‘50(b)’’.

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

8 subsection (a) shall apply to property placed in service in

9 taxable years beginning after December 31, 2000.

10 SEC. 633. INCLUSION OF CERTAIN OLDER FOSTER CHIL11 DREN IN DEFINITION OF DEPENDENT.

12 (a) IN GENERAL.—Section 151(c)(1)(B)(ii) (relating

13 to additional exemption for dependents) is amended by in14 serting ‘‘or a foster child’’ after ‘‘student’’.

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

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

17 December 31, 2000.

18 SEC. 634. EXCLUSION FOR FOSTER CARE PAYMENTS TO

19 APPLY TO PAYMENTS BY QUALIFIED PLACE20 MENT AGENCIES.

21 (a) IN GENERAL.—The matter preceding subpara22 graph (B) of section 131(b)(1) (defining qualified foster

23 care payment) is amended to read as follows:

24 ‘‘(1) IN GENERAL.—The term ‘qualified foster

25 care payment’ means any payment made pursuant to
65

•S 2642 IS

1 a foster care program of a State or political subdivi2 sion thereof—

3 ‘‘(A) which is paid by—

4 ‘‘(i) the State or political subdivision

5 thereof, or

6 ‘‘(ii) a qualified foster care placement

7 agency, and’’.

8 (b) QUALIFIED FOSTER INDIVIDUALS TO INCLUDE

9 INDIVIDUALS PLACED BY QUALIFIED PLACEMENT AGEN10 CIES.—Subparagraph (B) of section 131(b)(2) (defining

11 qualified foster individual) is amended to read as follows:

12 ‘‘(B) a qualified foster care placement

13 agency.’’.

14 (c) QUALIFIED FOSTER CARE PLACEMENT AGENCY

15 DEFINED.—Subsection (b) of section 131 is amended by

16 redesignating paragraph (3) as paragraph (4) and by in17 serting after paragraph (2) the following new paragraph:

18 ‘‘(3) QUALIFIED FOSTER CARE PLACEMENT

19 AGENCY.—The term ‘qualified foster care placement

20 agency’ means any placement agency which is li21 censed or certified by—

22 ‘‘(A) a State or political subdivision there23 of, or

24 ‘‘(B) an entity designated by a State or

25 political subdivision thereof,
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•S 2642 IS

1 for the foster care program of such State or political

2 subdivision to make foster care payments to pro3 viders of foster care.’’.

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

5 this section shall apply to taxable years beginning after

6 December 31, 2000.

7 SEC. 635. SIMPLIFICATION AND INCREASE IN STANDARD

8 DEDUCTION FOR DEPENDENTS.

9 (a) IN GENERAL.—Section 63(c)(5) (relating to limi10 tation on basic standard deduction in the case of certain

11 dependents) is amended by striking ‘‘exceed the greater’’

12 and all that follows through the period and inserting the

13 following: ‘‘exceed the lesser of—

14 ‘‘(A) the basic standard deduction under

15 paragraph (2) applicable to such individual for

16 such individual’s taxable year (determined with17 out regard to this paragraph), or

18 ‘‘(B) the sum of $1,000 and such individ19 ual’s earned income.’’.

20 (b) ADJUSTMENTS FOR INFLATION.—Section

21 63(c)(4)(B) (relating to adjustments for inflation) is

22 amended—

23 (1) by striking ‘‘or 5(A)’’ in clause (i), and

24 (2) by amending clause (ii) to read as follows:
67

•S 2642 IS

1 ‘‘(ii) ‘calendar year 1999’ in the case

2 of the dollar amount contained in para3 graph (5)(B).’’.

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

5 this section shall apply to taxable years beginning after

6 December 31, 2000.

7 SEC. 636. 2-PERCENT FLOOR ON MISCELLANEOUS

8 ITEMIZED DEDUCTIONS NOT TO APPLY TO

9 QUALIFIED PROFESSIONAL DEVELOPMENT

10 EXPENSES OF ELEMENTARY AND SEC11 ONDARY SCHOOL TEACHERS.

12 (a) IN GENERAL.—Section 67(b) (defining miscella13 neous itemized deductions) is amended by striking ‘‘and’’

14 at the end of paragraph (11), by striking the period at

15 the end of paragraph (12) and inserting ‘‘, and’’, and by

16 adding at the end the following new paragraph:

17 ‘‘(13) any deduction allowable for the qualified

18 professional development expenses paid or incurred

19 by an eligible teacher.’’.

20 (b) DEFINITIONS.—Section 67 (relating to 2-percent

21 floor on miscellaneous itemized deductions) is amended by

22 adding at the end the following new subsection:

23 ‘‘(g) QUALIFIED PROFESSIONAL DEVELOPMENT EX24 PENSES OF ELIGIBLE TEACHERS.—For purposes of sub25 section (b)(13)—
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1 ‘‘(1) QUALIFIED PROFESSIONAL DEVELOPMENT

2 EXPENSES.—

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

4 professional development expenses’ means

5 expenses—

6 ‘‘(i) for tuition, fees, books, supplies,

7 equipment, and transportation required for

8 the enrollment or attendance of an indi9 vidual in a qualified course of instruction,

10 and

11 ‘‘(ii) with respect to which a deduction

12 is allowable under section 162 (determined

13 without regard to this section).

14 ‘‘(B) QUALIFIED COURSE OF INSTRUC15 TION.—The term ‘qualified course of instruc16 tion’ means a course of instruction which—

17 ‘‘(i) is—

18 ‘‘(I) directly related to the cur19 riculum and academic subjects in

20 which an eligible teacher provides in21 struction, or

22 ‘‘(II) designed to enhance the

23 ability of an eligible teacher to under24 stand and use State standards for the
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•S 2642 IS

1 academic subjects in which such

2 teacher provides instruction,

3 ‘‘(ii) may—

4 ‘‘(I) provide instruction in how to

5 teach children with different learning

6 styles, particularly children with dis7 abilities and children with special

8 learning needs (including children who

9 are gifted and talented), or

10 ‘‘(II) provide instruction in how

11 best to discipline children in the class12 room and identify early and appro13 priate interventions to help children

14 described in subclause (I) to learn,

15 ‘‘(iii) is tied to challenging State or

16 local content standards and student per17 formance standards,

18 ‘‘(iv) is tied to strategies and pro19 grams that demonstrate effectiveness in in20 creasing student academic achievement

21 and student performance, or substantially

22 increasing the knowledge and teaching

23 skills of an eligible teacher,

24 ‘‘(v) is of sufficient intensity and du25 ration to have a positive and lasting im-
70

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1 pact on the performance of an eligible

2 teacher in the classroom (which shall not

3 include 1-day or short-term workshops and

4 conferences), except that this clause shall

5 not apply to an activity if such activity is

6 1 component described in a long-term com7 prehensive professional development plan

8 established by an eligible teacher and the

9 teacher’s supervisor based upon an assess10 ment of the needs of the teacher, the stu11 dents of the teacher, and the local edu12 cational agency involved, and

13 ‘‘(vi) is part of a program of profes14 sional development which is approved and

15 certified by the appropriate local edu16 cational agency as furthering the goals of

17 the preceding clauses.

18 ‘‘(C) LOCAL EDUCATIONAL AGENCY.—The

19 term ‘local educational agency’ has the meaning

20 given such term by section 14101 of the Ele21 mentary and Secondary Education Act of 1965,

22 as in effect on the date of the enactment of this

23 subsection.

24 ‘‘(2) ELIGIBLE TEACHER.—
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1 ‘‘(A) IN GENERAL.—The term ‘eligible

2 teacher’ means an individual who is a kinder3 garten through grade 12 classroom teacher in

4 an elementary or secondary school.

5 ‘‘(B) ELEMENTARY OR SECONDARY

6 SCHOOL.—The terms ‘elementary school’ and

7 ‘secondary school’ have the meanings given

8 such terms by section 14101 of the Elementary

9 and Secondary Education Act of 1965 (20

10 U.S.C. 8801), as so in effect.’’.

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

12 this section shall apply to taxable years beginning after

13 December 31, 2000.

Æ