II 

110TH CONGRESS 

1ST SESSION S. 1081 

To amend the Internal Revenue Code of 1986 to impose a flat tax only 

on individual taxable earned income and business taxable income, and 

for other purposes. 

IN THE SENATE OF THE UNITED STATES 

APRIL 10, 2007 

Mr. SPECTER 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 impose 

a flat tax only on individual taxable earned income and 

business taxable income, 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; TABLE OF CONTENTS; AMEND4 MENT OF 1986 CODE. 

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

6 ‘‘Flat Tax Act of 2007’’. 

7 (b) TABLE OF CONTENTS.—The table of contents for 

8 this Act is as follows: 

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

mstockstill on PROD1PC66 with BILLS

2 

•S 1081 IS

Sec. 2. Flat tax on individual taxable earned income and business taxable income. 

Sec. 3. Repeal of estate and gift taxes. 

Sec. 4. Additional repeals. 

Sec. 5. Effective dates. 

1 (c) AMENDMENT OF 1986 CODE.—Except as other2 wise expressly provided, whenever in this Act an amend3 ment or repeal is expressed in terms of an amendment 

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

5 shall be considered to be made to a section or other provi6 sion of the Internal Revenue Code of 1986. 

7 SEC. 2. FLAT TAX ON INDIVIDUAL TAXABLE EARNED IN8 COME AND BUSINESS TAXABLE INCOME. 

9 (a) IN GENERAL.—Subchapter A of chapter 1 of sub10 title A is amended to read as follows: 

11 ‘‘Subchapter A—Determination of Tax 

12 Liability 

‘‘PART I. TAX ON INDIVIDUALS

‘‘PART II. TAX ON BUSINESS ACTIVITIES

13 ‘‘PART I—TAX ON INDIVIDUALS 

‘‘Sec. 1. Tax imposed. 

‘‘Sec. 2. Standard deduction. 

‘‘Sec. 3. Deduction for cash charitable contributions. 

‘‘Sec. 4. Deduction for home acquisition indebtedness. 

‘‘Sec. 5. Definitions and special rules. 

‘‘Sec. 6. Dependent defined. 

‘‘Sec. 7. Inflation adjustment. 

14 ‘‘SEC. 1. TAX IMPOSED. 

15 ‘‘(a) IMPOSITION OF TAX.—There is hereby imposed 

16 on every individual a tax equal to 20 percent of the taxable 

17 earned income of such individual. 

mstockstill on PROD1PC66 with BILLS

3 

•S 1081 IS

1 ‘‘(b) TAXABLE EARNED INCOME.—For purposes of 

2 this section, the term ‘taxable earned income’ means the 

3 excess (if any) of— 

4 ‘‘(1) the earned income received or accrued dur5 ing the taxable year, over 

6 ‘‘(2) the sum of— 

7 ‘‘(A) the standard deduction, 

8 ‘‘(B) the deduction for cash charitable con9 tributions, and 

10 ‘‘(C) the deduction for home acquisition in11 debtedness, for such taxable year. 

12 ‘‘(c) EARNED INCOME.—For purposes of this sec13 tion— 

14 ‘‘(1) IN GENERAL.—The term ‘earned income’ 

15 means wages, salaries, or professional fees, and 

16 other amounts received from sources within the 

17 United States as compensation for personal services 

18 actually rendered, but does not include that part of 

19 compensation derived by the taxpayer for personal 

20 services rendered by the taxpayer to a corporation 

21 which represents a distribution of earnings or profits 

22 rather than a reasonable allowance as compensation 

23 for the personal services actually rendered. 

24 ‘‘(2) TAXPAYER ENGAGED IN TRADE OR BUSI25 NESS.—In the case of a taxpayer engaged in a trade 

mstockstill on PROD1PC66 with BILLS

4 

•S 1081 IS

1 or business in which both personal services and cap2 ital are material income-producing factors, under 

3 regulations prescribed by the Secretary, a reasonable 

4 allowance as compensation for the personal services 

5 rendered by the taxpayer, not in excess of 30 per6 cent of the taxpayer’s share of the net profits of 

7 such trade or business, shall be considered as earned 

8 income. 

9 ‘‘SEC. 2. STANDARD DEDUCTION. 

10 ‘‘(a) IN GENERAL.—For purposes of this subtitle, the 

11 term ‘standard deduction’ means the sum of— 

12 ‘‘(1) the basic standard deduction, plus 

13 ‘‘(2) the additional standard deduction. 

14 ‘‘(b) BASIC STANDARD DEDUCTION.—For purposes 

15 of subsection (a), the basic standard deduction is— 

16 ‘‘(1) 200 percent of the dollar amount in effect 

17 under paragraph (3) of the taxable year in the case 

18 of— 

19 ‘‘(A) a joint return, or 

20 ‘‘(B) a surviving spouse (as defined in sec21 tion 5(a)), 

22 ‘‘(2) $18,750 in the case of a head of household 

23 (as defined in section 5(b)), or 

24 ‘‘(3) $12,500 in any other case. 

mstockstill on PROD1PC66 with BILLS

5 

•S 1081 IS

1 ‘‘(c) ADDITIONAL STANDARD DEDUCTION.—For pur2 poses of subsection (a), the additional standard deduction 

3 is $6,250 for each dependent (as defined in section 6)— 

4 ‘‘(1) whose earned income for the calendar year 

5 in which the taxable year of the taxpayer begins is 

6 less than the basic standard deduction specified in 

7 subsection (b)(3), or 

8 ‘‘(2) who is a child of the taxpayer and who— 

9 ‘‘(A) has not attained the age of 19 at the 

10 close of the calendar year in which the taxable 

11 year of the taxpayer begins, or 

12 ‘‘(B) is a student who has not attained the 

13 age of 24 at the close of such calendar year. 

14 ‘‘SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBU15 TIONS. 

16 ‘‘(a) GENERAL RULE.—For purposes of this part, 

17 there shall be allowed as a deduction any charitable con18 tribution (as defined in subsection (b)) not to exceed 

19 $3,125 (50 percent of such amount in the case of a mar20 ried individual filing a separate return), payment of which 

21 is made within the taxable year. 

22 ‘‘(b) CHARITABLE CONTRIBUTION DEFINED.—For 

23 purposes of this section, the term ‘charitable contribution’ 

24 means a contribution or gift of cash or its equivalent to 

25 or for the use of the following: 

mstockstill on PROD1PC66 with BILLS

6 

•S 1081 IS

1 ‘‘(1) A State, a possession of the United States, 

2 or any political subdivision of any of the foregoing, 

3 or the United States or the District of Columbia, 

4 but only if the contribution or gift is made for exclu5 sively public purposes. 

6 ‘‘(2) A corporation, trust, or community chest, 

7 fund, or foundation— 

8 ‘‘(A) created or organized in the United 

9 States or in any possession thereof, or under 

10 the law of the United States, any State, the 

11 District of Columbia, or any possession of the 

12 United States, 

13 ‘‘(B) organized and operated exclusively 

14 for religious, charitable, scientific, literary, or 

15 educational purposes, or to foster national or 

16 international amateur sports competition (but 

17 only if no part of its activities involve the provi18 sion of athletic facilities or equipment), or for 

19 the prevention of cruelty to children or animals, 

20 ‘‘(C) no part of the net earnings of which 

21 inures to the benefit of any private shareholder 

22 or individual, and 

23 ‘‘(D) which is not disqualified for tax ex24 emption under section 501(c)(3) by reason of 

25 attempting to influence legislation, and which 

mstockstill on PROD1PC66 with BILLS

7 

•S 1081 IS

1 does not participate in, or intervene in (includ2 ing the publishing or distributing of state3 ments), any political campaign on behalf of (or 

4 in opposition to) any candidate for public office. 

5 A contribution or gift by a corporation to a trust, 

6 chest, fund, or foundation shall be deductible by rea7 son of this paragraph only if it is to be used within 

8 the United States or any of its possessions exclu9 sively for purposes specified in subparagraph (B). 

10 Rules similar to the rules of section 501(j) shall 

11 apply for purposes of this paragraph. 

12 ‘‘(3) A post or organization of war veterans, or 

13 an auxiliary unit or society of, or trust or foundation 

14 for, any such post or organization— 

15 ‘‘(A) organized in the United States or any 

16 of its possessions, and 

17 ‘‘(B) no part of the net earnings of which 

18 inures to the benefit of any private shareholder 

19 or individual. 

20 ‘‘(4) In the case of a contribution or gift by an 

21 individual, a domestic fraternal society, order, or as22 sociation, operating under the lodge system, but only 

23 if such contribution or gift is to be used exclusively 

24 for religious, charitable, scientific, literary, or edumstockstill on PROD1PC66 with BILLS

8 

•S 1081 IS

1 cational purposes, or for the prevention of cruelty to 

2 children or animals. 

3 ‘‘(5) A cemetery company owned and operated 

4 exclusively for the benefit of its members, or any 

5 corporation chartered solely for burial purposes as a 

6 cemetery corporation and not permitted by its char7 ter to engage in any business not necessarily inci8 dent to that purpose, if such company or corporation 

9 is not operated for profit and no part of the net 

10 earnings of such company or corporation inures to 

11 the benefit of any private shareholder or individual. 

12 For purposes of this section, the term ‘charitable contribu13 tion’ also means an amount treated under subsection (d) 

14 as paid for the use of an organization described in para15 graph (2), (3), or (4). 

16 ‘‘(c) DISALLOWANCE OF DEDUCTION IN CERTAIN

17 CASES AND SPECIAL RULES.— 

18 ‘‘(1) SUBSTANTIATION REQUIREMENT FOR CER19 TAIN CONTRIBUTIONS.— 

20 ‘‘(A) GENERAL RULE.—No deduction shall 

21 be allowed under subsection (a) for any con22 tribution of $250 or more unless the taxpayer 

23 substantiates the contribution by a contempora24 neous written acknowledgment of the contribumstockstill on PROD1PC66 with BILLS

9 

•S 1081 IS

1 tion by the donee organization that meets the 

2 requirements of subparagraph (B). 

3 ‘‘(B) CONTENT OF ACKNOWLEDGMENT.— 

4 An acknowledgment meets the requirements of 

5 this subparagraph if it includes the following 

6 information: 

7 ‘‘(i) The amount of cash contributed. 

8 ‘‘(ii) Whether the donee organization 

9 provided any goods or services in consider10 ation, in whole or in part, for any contribu11 tion described in clause (i). 

12 ‘‘(iii) A description and good faith es13 timate of the value of any goods or services 

14 referred to in clause (ii) or, if such goods 

15 or services consist solely of intangible reli16 gious benefits, a statement to that effect. 

17 For purposes of this subparagraph, the term 

18 ‘intangible religious benefit’ means any intan19 gible religious benefit which is provided by an 

20 organization organized exclusively for religious 

21 purposes and which generally is not sold in a 

22 commercial transaction outside the donative 

23 context. 

24 ‘‘(C) CONTEMPORANEOUS.—For purposes 

25 of subparagraph (A), an acknowledgment shall 

mstockstill on PROD1PC66 with BILLS

10 

•S 1081 IS

1 be considered to be contemporaneous if the tax2 payer obtains the acknowledgment on or before 

3 the earlier of— 

4 ‘‘(i) the date on which the taxpayer 

5 files a return for the taxable year in which 

6 the contribution was made, or 

7 ‘‘(ii) the due date (including exten8 sions) for filing such return. 

9 ‘‘(D) SUBSTANTIATION NOT REQUIRED

10 FOR CONTRIBUTIONS REPORTED BY THE

11 DONEE ORGANIZATION.—Subparagraph (A) 

12 shall not apply to a contribution if the donee 

13 organization files a return, on such form and in 

14 accordance with such regulations as the Sec15 retary may prescribe, which includes the infor16 mation described in subparagraph (B) with re17 spect to the contribution. 

18 ‘‘(E) REGULATIONS.—The Secretary shall 

19 prescribe such regulations as may be necessary 

20 or appropriate to carry out the purposes of this 

21 paragraph, including regulations that may pro22 vide that some or all of the requirements of this 

23 paragraph do not apply in appropriate cases. 

24 ‘‘(2) DENIAL OF DEDUCTION WHERE CON25 TRIBUTION FOR LOBBYING ACTIVITIES.—No deducmstockstill on PROD1PC66 with BILLS

11 

•S 1081 IS

1 tion shall be allowed under this section for a con2 tribution to an organization which conducts activities 

3 to which section 11(d)(2)(C)(i) applies on matters of 

4 direct financial interest to the donor’s trade or busi5 ness, if a principal purpose of the contribution was 

6 to avoid Federal income tax by securing a deduction 

7 for such activities under this section which would be 

8 disallowed by reason of section 11(d)(2)(C) if the 

9 donor had conducted such activities directly. No de10 duction shall be allowed under section 11(d) for any 

11 amount for which a deduction is disallowed under 

12 the preceding sentence. 

13 ‘‘(d) AMOUNTS PAID TO MAINTAIN CERTAIN STU14 DENTS AS MEMBERS OF TAXPAYER’S HOUSEHOLD.— 

15 ‘‘(1) IN GENERAL.—Subject to the limitations 

16 provided by paragraph (2), amounts paid by the tax17 payer to maintain an individual (other than a de18 pendent, as defined in section 6, or a relative of the 

19 taxpayer) as a member of such taxpayer’s household 

20 during the period that such individual is— 

21 ‘‘(A) a member of the taxpayer’s household 

22 under a written agreement between the tax23 payer and an organization described in para24 graph (2), (3), or (4) of subsection (b) to imple25 ment a program of the organization to provide 

mstockstill on PROD1PC66 with BILLS

12 

•S 1081 IS

1 educational opportunities for pupils or students 

2 in private homes, and 

3 ‘‘(B) a full-time pupil or student in the 

4 twelfth or any lower grade at an educational or5 ganization located in the United States which 

6 normally maintains a regular faculty and cur7 riculum and normally has a regularly enrolled 

8 body of pupils or students in attendance at the 

9 place where its educational activities are regu10 larly carried on, shall be treated as amounts 

11 paid for the use of the organization. 

12 ‘‘(2) LIMITATIONS.— 

13 ‘‘(A) AMOUNT.—Paragraph (1) shall apply 

14 to amounts paid within the taxable year only to 

15 the extent that such amounts do not exceed $50 

16 multiplied by the number of full calendar 

17 months during the taxable year which fall with18 in the period described in paragraph (1). For 

19 purposes of the preceding sentence, if 15 or 

20 more days of a calendar month fall within such 

21 period such month shall be considered as a full 

22 calendar month. 

23 ‘‘(B) COMPENSATION OR REIMBURSE24 MENT.—Paragraph (1) shall not apply to any 

25 amount paid by the taxpayer within the taxable 

mstockstill on PROD1PC66 with BILLS

13 

•S 1081 IS

1 year if the taxpayer receives any money or 

2 other property as compensation or reimburse3 ment for maintaining the individual in the tax4 payer’s household during the period described 

5 in paragraph (1). 

6 ‘‘(3) RELATIVE DEFINED.—For purposes of 

7 paragraph (1), the term ‘relative of the taxpayer’ 

8 means an individual who, with respect to the tax9 payer, bears any of the relationships described in 

10 subparagraphs (A) through (G) of section 6(d)(2). 

11 ‘‘(4) NO OTHER AMOUNT ALLOWED AS DEDUC12 TION.—No deduction shall be allowed under sub13 section (a) for any amount paid by a taxpayer to 

14 maintain an individual as a member of the tax15 payer’s household under a program described in 

16 paragraph (1)(A) except as provided in this sub17 section. 

18 ‘‘(e) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL

19 EXPENSES.—No deduction shall be allowed under this sec20 tion for traveling expenses (including amounts expended 

21 for meals and lodging) while away from home, whether 

22 paid directly or by reimbursement, unless there is no sig23 nificant element of personal pleasure, recreation, or vaca24 tion in such travel. 

mstockstill on PROD1PC66 with BILLS

14 

•S 1081 IS

1 ‘‘(f) DISALLOWANCE OF DEDUCTIONS IN CERTAIN

2 CASES.—For disallowance of deductions for contributions 

3 to or for the use of Communist controlled organizations, 

4 see section 11(a) of the Internal Security Act of 1950 (50 

5 U.S.C. 790). 

6 ‘‘(g) TREATMENT OF CERTAIN AMOUNTS PAID TO OR

7 FOR THE BENEFIT OF INSTITUTIONS OF HIGHER EDU8 CATION.— 

9 ‘‘(1) IN GENERAL.—For purposes of this sec10 tion, 80 percent of any amount described in para11 graph (2) shall be treated as a charitable contribu12 tion. 

13 ‘‘(2) AMOUNT DESCRIBED.—For purposes of 

14 paragraph (1), an amount is described in this para15 graph if— 

16 ‘‘(A) the amount is paid by the taxpayer to 

17 or for the benefit of an educational organiza18 tion— 

19 ‘‘(i) which is described in subsection 

20 (d)(1)(B), and 

21 ‘‘(ii) which is an institution of higher 

22 education (as defined in section 3304(f)), 

23 and 

24 ‘‘(B) such amount would be allowable as a 

25 deduction under this section but for the fact 

mstockstill on PROD1PC66 with BILLS

15 

•S 1081 IS

1 that the taxpayer receives (directly or indi2 rectly) as a result of paying such amount the 

3 right to purchase tickets for seating at an ath4 letic event in an athletic stadium of such insti5 tution. 

6 If any portion of a payment is for the purchase of such 

7 tickets, such portion and the remaining portion (if any) 

8 of such payment shall be treated as separate amounts for 

9 purposes of this subsection. 

10 ‘‘(h) OTHER CROSS REFERENCES.— 

11 ‘‘(1) For treatment of certain organizations 

12 providing child care, see section 501(k). 

13 ‘‘(2) For charitable contributions of partners, 

14 see section 702. 

15 ‘‘(3) For treatment of gifts for benefit of or use 

16 in connection with the Naval Academy as gifts to or 

17 for the use of the United States, see section 6973 

18 of title 10, United States Code. 

19 ‘‘(4) For treatment of gifts accepted by the 

20 Secretary of State, the Director of the International 

21 Communication Agency, or the Director of the 

22 United States International Development Coopera23 tion Agency, as gifts to or for the use of the United 

24 States, see section 25 of the State Department Basic 

25 Authorities Act of 1956. 

mstockstill on PROD1PC66 with BILLS

16 

•S 1081 IS

1 ‘‘(5) For treatment of gifts of money accepted 

2 by the Attorney General for credit to the ‘Com3 missary Funds, Federal Prisons’ as gifts to or for 

4 the use of the United States, see section 4043 of 

5 title 18, United States Code. 

6 ‘‘(6) For charitable contributions to or for the 

7 use of Indian tribal governments (or subdivisions of 

8 such governments), see section 7871. 

9 ‘‘SEC. 4. DEDUCTION FOR HOME ACQUISITION INDEBTED10 NESS. 

11 ‘‘(a) GENERAL RULE.—For purposes of this part, 

12 there shall be allowed as a deduction all qualified residence 

13 interest paid or accrued within the taxable year. 

14 ‘‘(b) QUALIFIED RESIDENCE INTEREST DEFINED.— 

15 The term ‘qualified residence interest’ means any interest 

16 which is paid or accrued during the taxable year on acqui17 sition indebtedness with respect to any qualified residence 

18 of the taxpayer. For purposes of the preceding sentence, 

19 the determination of whether any property is a qualified 

20 residence of the taxpayer shall be made as of the time 

21 the interest is accrued. 

22 ‘‘(c) ACQUISITION INDEBTEDNESS.— 

23 ‘‘(1) IN GENERAL.—The term ‘acquisition in24 debtedness’ means any indebtedness which— 

mstockstill on PROD1PC66 with BILLS

17 

•S 1081 IS

1 ‘‘(A) is incurred in acquiring, constructing, 

2 or substantially improving any qualified resi3 dence of the taxpayer, and 

4 ‘‘(B) is secured by such residence. 

5 Such term also includes any indebtedness secured by 

6 such residence resulting from the refinancing of in7 debtedness meeting the requirements of the pre8 ceding sentence (or this sentence); but only to the 

9 extent the amount of the indebtedness resulting 

10 from such refinancing does not exceed the amount of 

11 the refinanced indebtedness. 

12 ‘‘(2) DOLLAR LIMITATION.—The aggregate 

13 amount treated as acquisition indebtedness for any 

14 period shall not exceed $125,000 (50 percent of such 

15 amount in the case of a married individual filing a 

16 separate return). 

17 ‘‘(d) TREATMENT OF INDEBTEDNESS INCURRED ON

18 OR BEFORE OCTOBER 13, 1987.— 

19 ‘‘(1) IN GENERAL.—In the case of any pre-Oc20 tober 13, 1987, indebtedness— 

21 ‘‘(A) such indebtedness shall be treated as 

22 acquisition indebtedness, and 

23 ‘‘(B) the limitation of subsection (c)(2) 

24 shall not apply. 

mstockstill on PROD1PC66 with BILLS

18 

•S 1081 IS

1 ‘‘(2) REDUCTION IN LIMITATION.—The limita2 tion of subsection (c)(2) shall be reduced (but not 

3 below zero) by the aggregate amount of outstanding 

4 pre-October 13, 1987, indebtedness. 

5 ‘‘(3) PRE-OCTOBER 13, 1987, INDEBTEDNESS.— 

6 The term ‘pre-October 13, 1987, indebtedness’ 

7 means— 

8 ‘‘(A) any indebtedness which was incurred 

9 on or before October 13, 1987, and which was 

10 secured by a qualified residence on October 13, 

11 1987, and at all times thereafter before the in12 terest is paid or accrued, or 

13 ‘‘(B) any indebtedness which is secured by 

14 the qualified residence and was incurred after 

15 October 13, 1987, to refinance indebtedness de16 scribed in subparagraph (A) (or refinanced in17 debtedness meeting the requirements of this 

18 subparagraph) to the extent (immediately after 

19 the refinancing) the principal amount of the in20 debtedness resulting from the refinancing does 

21 not exceed the principal amount of the refi22 nanced indebtedness (immediately before the re23 financing). 

mstockstill on PROD1PC66 with BILLS

19 

•S 1081 IS

1 ‘‘(4) LIMITATION ON PERIOD OF REFI2 NANCING.—Subparagraph (B) of paragraph (3) 

3 shall not apply to any indebtedness after— 

4 ‘‘(A) the expiration of the term of the in5 debtedness described in paragraph (3)(A), or 

6 ‘‘(B) if the principal of the indebtedness 

7 described in paragraph (3)(A) is not amortized 

8 over its term, the expiration of the term of the 

9 first refinancing of such indebtedness (or if ear10 lier, the date which is 30 years after the date 

11 of such first refinancing). 

12 ‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.— 

13 For purposes of this section— 

14 ‘‘(1) QUALIFIED RESIDENCE.—For purposes of 

15 this subsection— 

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

17 subparagraph (C), the term ‘qualified residence’ 

18 means the principal residence of the taxpayer. 

19 ‘‘(B) MARRIED INDIVIDUALS FILING SEPA20 RATE RETURNS.—If a married couple does not 

21 file a joint return for the taxable year— 

22 ‘‘(i) such couple shall be treated as 1 

23 taxpayer for purposes of subparagraph 

24 (A), and 

mstockstill on PROD1PC66 with BILLS

20 

•S 1081 IS

1 ‘‘(ii) each individual shall be entitled 

to take into account 1 2 ⁄2 of the principal 

3 residence unless both individuals consent 

4 in writing to 1 individual taking into ac5 count the principal residence. 

6 ‘‘(C) PRE-OCTOBER 13, 1987, INDEBTED7 NESS.—In the case of any pre-October 13, 

8 1987, indebtedness, the term ‘qualified resi9 dence’ has the meaning given that term in sec10 tion 163(h)(4), as in effect on the day before 

11 the date of enactment of this subparagraph. 

12 ‘‘(2) SPECIAL RULE FOR COOPERATIVE HOUS13 ING CORPORATIONS.—Any indebtedness secured by 

14 stock held by the taxpayer as a tenant-stockholder in 

15 a cooperative housing corporation shall be treated as 

16 secured by the house or apartment which the tax17 payer is entitled to occupy as such a tenant-stock18 holder. If stock described in the preceding sentence 

19 may not be used to secure indebtedness, indebted20 ness shall be treated as so secured if the taxpayer 

21 establishes to the satisfaction of the Secretary that 

22 such indebtedness was incurred to acquire such 

23 stock. 

24 ‘‘(3) UNENFORCEABLE SECURITY INTERESTS.— 

25 Indebtedness shall not fail to be treated as secured 

mstockstill on PROD1PC66 with BILLS

21 

•S 1081 IS

1 by any property solely because, under any applicable 

2 State or local homestead or other debtor protection 

3 law in effect on August 16, 1986, the security inter4 est is ineffective or the enforceability of the security 

5 interest is restricted. 

6 ‘‘(4) SPECIAL RULES FOR ESTATES AND

7 TRUSTS.—For purposes of determining whether any 

8 interest paid or accrued by an estate or trust is 

9 qualified residence interest, any residence held by 

10 such estate or trust shall be treated as a qualified 

11 residence of such estate or trust if such estate or 

12 trust establishes that such residence is a qualified 

13 residence of a beneficiary who has a present interest 

14 in such estate or trust or an interest in the resid15 uary of such estate or trust. 

16 ‘‘SEC. 5. DEFINITIONS AND SPECIAL RULES. 

17 ‘‘(a) DEFINITION OF SURVIVING SPOUSE.— 

18 ‘‘(1) IN GENERAL.—For purposes of this part, 

19 the term ‘surviving spouse’ means a taxpayer— 

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

21 the taxpayer’s 2 taxable years immediately pre22 ceding the taxable year, and 

23 ‘‘(B) who maintains as the taxpayer’s 

24 home a household which constitutes for the taxmstockstill on PROD1PC66 with BILLS

22 

•S 1081 IS

1 able year the principal place of abode (as a 

2 member of such household) of a dependent— 

3 ‘‘(i) who (within the meaning of sec4 tion 6, determined without regard to sub5 sections (b)(1), (b)(2), and (d)(1)(B)) is a 

6 son, stepson, daughter, or stepdaughter of 

7 the taxpayer, and 

8 ‘‘(ii) with respect to whom the tax9 payer is entitled to a deduction for the tax10 able year under section 2. 

11 For purposes of this paragraph, an individual shall 

12 be considered as maintaining a household only if 

13 over one-half of the cost of maintaining the house14 hold during the taxable year is furnished by such in15 dividual. 

16 ‘‘(2) LIMITATIONS.—Notwithstanding para17 graph (1), for purposes of this part a taxpayer shall 

18 not be considered to be a surviving spouse— 

19 ‘‘(A) if the taxpayer has remarried at any 

20 time before the close of the taxable year, or 

21 ‘‘(B) unless, for the taxpayer’s taxable 

22 year during which the taxpayer’s spouse died, a 

23 joint return could have been made under the 

24 provisions of section 6013 (without regard to 

25 subsection (a)(3) thereof). 

mstockstill on PROD1PC66 with BILLS

23 

•S 1081 IS

1 ‘‘(3) SPECIAL RULE WHERE DECEASED SPOUSE

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

3 missing status (within the meaning of section 

4 6013(f)(3)) as a result of service in a combat zone 

5 and if such individual remains in such status until 

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

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

8 which such individual dies shall be treated as the 

9 earlier of the date determined under subparagraph 

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

11 ‘‘(A) The date on which the determination 

12 is made under section 556 of title 37 of the 

13 United States Code or under section 5566 of 

14 title 5 of such Code (whichever is applicable) 

15 that such individual died while in such missing 

16 status. 

17 ‘‘(B) Except in the case of the combat 

18 zone designated for purposes of the Vietnam 

19 conflict, the date which is 2 years after the date 

20 designated as the date of termination of com21 batant activities in that zone. 

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

23 ‘‘(1) IN GENERAL.—For purposes of this part, 

24 an individual shall be considered a head of a house25 hold if, and only if, such individual is not married 

mstockstill on PROD1PC66 with BILLS

24 

•S 1081 IS

1 at the close of such individual’s taxable year, is not 

2 a surviving spouse (as defined in subsection (a)), 

3 and either— 

4 ‘‘(A) maintains as such individual’s home a 

5 household which constitutes for more than one6 half of such taxable year the principal place of 

7 abode, as a member of such household, of— 

8 ‘‘(i) a qualifying child of the indi9 vidual (as defined in section 6(c), deter10 mined without regard to section 6(e)), but 

11 not if such child— 

12 ‘‘(I) is married at the close of the 

13 taxpayer’s taxable year, and 

14 ‘‘(II) is not a dependent of such 

15 individual by reason of section 6(b)(2) 

16 or 6(b)(3), or both, or 

17 ‘‘(ii) any other person who is a de18 pendent of the taxpayer, if the taxpayer is 

19 entitled to a deduction for the taxable year 

20 for such person under section 2, or 

21 ‘‘(B) maintains a household which con22 stitutes for such taxable year the principal place 

23 of abode of the father or mother of the tax24 payer, if the taxpayer is entitled to a deduction 

mstockstill on PROD1PC66 with BILLS

25 

•S 1081 IS

1 for the taxable year for such father or mother 

2 under section 2. 

3 For purposes of this paragraph, an individual shall 

4 be considered as maintaining a household only if 

5 over one-half of the cost of maintaining the house6 hold during the taxable year is furnished by such in7 dividual. 

8 ‘‘(2) DETERMINATION OF STATUS.—For pur9 poses of this subsection— 

10 ‘‘(A) an individual who is legally separated 

11 from such individual’s spouse under a decree of 

12 divorce or of separate maintenance shall not be 

13 considered as married, 

14 ‘‘(B) a taxpayer shall be considered as not 

15 married at the close of such taxpayer’s taxable 

16 year if at any time during the taxable year such 

17 taxpayer’s spouse is a nonresident alien, and 

18 ‘‘(C) a taxpayer shall be considered as 

19 married at the close of such taxpayer’s taxable 

20 year if such taxpayer’s spouse (other than a 

21 spouse described in subparagraph (B)) died 

22 during the taxable year. 

23 ‘‘(3) LIMITATIONS.—Notwithstanding para24 graph (1), for purposes of this part, a taxpayer shall 

25 not be considered to be a head of a household— 

mstockstill on PROD1PC66 with BILLS

26 

•S 1081 IS

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

2 the taxpayer is a nonresident alien, or 

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

4 not be a dependent for the taxable year but 

5 for— 

6 ‘‘(i) subparagraph (H) of section 

7 6(d)(2), or 

8 ‘‘(ii) paragraph (3) of section 6(d). 

9 ‘‘(c) CERTAIN MARRIED INDIVIDUALS LIVING

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

11 treated as not married at the close of the taxable year 

12 if such individual is so treated under the provisions of sec13 tion 7703(b). 

14 ‘‘SEC. 6. DEPENDENT DEFINED. 

15 ‘‘(a) IN GENERAL.—For purposes of this subtitle, the 

16 term ‘dependent’ means— 

17 ‘‘(1) a qualifying child, or 

18 ‘‘(2) a qualifying relative. 

19 ‘‘(b) EXCEPTIONS.—For purposes of this section— 

20 ‘‘(1) DEPENDENTS INELIGIBLE.—If an indi21 vidual is a dependent of a taxpayer for any taxable 

22 year of such taxpayer beginning in a calendar year, 

23 such individual shall be treated as having no depend24 ents for any taxable year of such individual begin25 ning in such calendar year. 

mstockstill on PROD1PC66 with BILLS

27 

•S 1081 IS

1 ‘‘(2) MARRIED DEPENDENTS.—An individual 

2 shall not be treated as a dependent of a taxpayer 

3 under subsection (a) if such individual has made a 

4 joint return with the individual’s spouse under sec5 tion 6013 for the taxable year beginning in the cal6 endar year in which the taxable year of the taxpayer 

7 begins. 

8 ‘‘(3) CITIZENS OR NATIONALS OF OTHER COUN9 TRIES.— 

10 ‘‘(A) IN GENERAL.—The term ‘dependent’ 

11 does not include an individual who is not a cit12 izen or national of the United States unless 

13 such individual is a resident of the United 

14 States or a country contiguous to the United 

15 States. 

16 ‘‘(B) EXCEPTION FOR ADOPTED CHILD.— 

17 Subparagraph (A) shall not exclude any child of 

18 a taxpayer (within the meaning of subsection 

19 (f)(1)(B)) from the definition of ‘dependent’ 

20 if— 

21 ‘‘(i) for the taxable year of the tax22 payer, the child has the same principal 

23 place of abode as the taxpayer and is a 

24 member of the taxpayer’s household, and 

mstockstill on PROD1PC66 with BILLS

28 

•S 1081 IS

1 ‘‘(ii) the taxpayer is a citizen or na2 tional of the United States. 

3 ‘‘(c) QUALIFYING CHILD.—For purposes of this sec4 tion— 

5 ‘‘(1) IN GENERAL.—The term ‘qualifying child’ 

6 means, with respect to any taxpayer for any taxable 

7 year, an individual— 

8 ‘‘(A) who bears a relationship to the tax9 payer described in paragraph (2), 

10 ‘‘(B) who has the same principal place of 

11 abode as the taxpayer for more than one-half of 

12 such taxable year, 

13 ‘‘(C) who meets the age requirements of 

14 paragraph (3), and 

15 ‘‘(D) who has not provided over one-half of 

16 such individual’s own support for the calendar 

17 year in which the taxable year of the taxpayer 

18 begins. 

19 ‘‘(2) RELATIONSHIP.—For purposes of para20 graph (1)(A), an individual bears a relationship to 

21 the taxpayer described in this paragraph if such in22 dividual is— 

23 ‘‘(A) a child of the taxpayer or a descend24 ant of such a child, or 

mstockstill on PROD1PC66 with BILLS

29 

•S 1081 IS

1 ‘‘(B) a brother, sister, stepbrother, or step2 sister of the taxpayer or a descendant of any 

3 such relative. 

4 ‘‘(3) AGE REQUIREMENTS.— 

5 ‘‘(A) IN GENERAL.—For purposes of para6 graph (1)(C), an individual meets the require7 ments of this paragraph if such individual— 

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

9 of the close of the calendar year in which 

10 the taxable year of the taxpayer begins, or 

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

12 the age of 24 as of the close of such cal13 endar year. 

14 ‘‘(B) SPECIAL RULE FOR DISABLED.—In 

15 the case of an individual who is permanently 

16 and totally disabled at any time during such 

17 calendar year, the requirements of subpara18 graph (A) shall be treated as met with respect 

19 to such individual. 

20 ‘‘(4) SPECIAL RULE RELATING TO 2 OR MORE

21 CLAIMING QUALIFYING CHILD.— 

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

23 subparagraph (B), if (but for this paragraph) 

24 an individual may be and is claimed as a quali25 fying child by 2 or more taxpayers for a taxable 

mstockstill on PROD1PC66 with BILLS

30 

•S 1081 IS

1 year beginning in the same calendar year, such 

2 individual shall be treated as the qualifying 

3 child of the taxpayer who is— 

4 ‘‘(i) a parent of the individual, or 

5 ‘‘(ii) if clause (i) does not apply, the 

6 taxpayer with the highest adjusted gross 

7 income for such taxable year. 

8 ‘‘(B) MORE THAN 1 PARENT CLAIMING

9 QUALIFYING CHILD.—If the parents claiming 

10 any qualifying child do not file a joint return 

11 together, such child shall be treated as the 

12 qualifying child of— 

13 ‘‘(i) the parent with whom the child 

14 resided for the longest period of time dur15 ing the taxable year, or 

16 ‘‘(ii) if the child resides with both par17 ents for the same amount of time during 

18 such taxable year, the parent with the 

19 highest adjusted gross income. 

20 ‘‘(d) QUALIFYING RELATIVE.—For purposes of this 

21 section— 

22 ‘‘(1) IN GENERAL.—The term ‘qualifying rel23 ative’ means, with respect to any taxpayer for any 

24 taxable year, an individual— 

mstockstill on PROD1PC66 with BILLS

31 

•S 1081 IS

1 ‘‘(A) who bears a relationship to the tax2 payer described in paragraph (2), 

3 ‘‘(B) with respect to whom the taxpayer 

4 provides over one-half of the individual’s sup5 port for the calendar year in which such taxable 

6 year begins, and 

7 ‘‘(C) who is not a qualifying child of such 

8 taxpayer or of any other taxpayer for any tax9 able year beginning in the calendar year in 

10 which such taxable year begins. 

11 ‘‘(2) RELATIONSHIP.—For purposes of para12 graph (1)(A), an individual bears a relationship to 

13 the taxpayer described in this paragraph if the indi14 vidual is any of the following with respect to the tax15 payer: 

16 ‘‘(A) A child or a descendant of a child. 

17 ‘‘(B) A brother, sister, stepbrother, or 

18 stepsister. 

19 ‘‘(C) The father or mother, or an ancestor 

20 of either. 

21 ‘‘(D) A stepfather or stepmother. 

22 ‘‘(E) A son or daughter of a brother or sis23 ter of the taxpayer. 

24 ‘‘(F) A brother or sister of the father or 

25 mother of the taxpayer. 

mstockstill on PROD1PC66 with BILLS

32 

•S 1081 IS

1 ‘‘(G) A son-in-law, daughter-in-law, father2 in-law, mother-in-law, brother-in-law, or sister3 in-law. 

4 ‘‘(H) An individual (other than an indi5 vidual who at any time during the taxable year 

6 was the spouse, determined without regard to 

7 section 7703, of the taxpayer) who, for the tax8 able year of the taxpayer, has the same prin9 cipal place of abode as the taxpayer and is a 

10 member of the taxpayer’s household. 

11 ‘‘(3) SPECIAL RULE RELATING TO MULTIPLE

12 SUPPORT AGREEMENTS.—For purposes of paragraph 

13 (1)(C), over one-half of the support of an individual 

14 for a calendar year shall be treated as received from 

15 the taxpayer if— 

16 ‘‘(A) no one person contributed over one17 half of such support, 

18 ‘‘(B) over one-half of such support was re19 ceived from 2 or more persons each of whom, 

20 but for the fact that any such person alone did 

21 not contribute over one-half of such support, 

22 would have been entitled to claim such indi23 vidual as a dependent for a taxable year begin24 ning in such calendar year, 

mstockstill on PROD1PC66 with BILLS

33 

•S 1081 IS

1 ‘‘(C) the taxpayer contributed over 10 per2 cent of such support, and 

3 ‘‘(D) each person described in subpara4 graph (B) (other than the taxpayer) who con5 tributed over 10 percent of such support files a 

6 written declaration (in such manner and form 

7 as the Secretary may by regulations prescribe) 

8 that such person will not claim such individual 

9 as a dependent for any taxable year beginning 

10 in such calendar year. 

11 ‘‘(4) SPECIAL RULE RELATING TO INCOME OF

12 HANDICAPPED DEPENDENTS.— 

13 ‘‘(A) IN GENERAL.—For purposes of para14 graph (1)(B), the gross income of an individual 

15 who is permanently and totally disabled at any 

16 time during the taxable year shall not include 

17 income attributable to services performed by the 

18 individual at a sheltered workshop if— 

19 ‘‘(i) the availability of medical care at 

20 such workshop is the principal reason for 

21 the individual’s presence there, and 

22 ‘‘(ii) the income arises solely from ac23 tivities at such workshop which are inci24 dent to such medical care. 

mstockstill on PROD1PC66 with BILLS

34 

•S 1081 IS

1 ‘‘(B) SHELTERED WORKSHOP DEFINED.— 

2 For purposes of subparagraph (A), the term 

3 ‘sheltered workshop’ means a school— 

4 ‘‘(i) which provides special instruction 

5 or training designed to alleviate the dis6 ability of the individual, and 

7 ‘‘(ii) which is operated by an organi8 zation described in section 501(c)(3) and 

9 exempt from tax under section 501(a), or 

10 by a State, a possession of the United 

11 States, any political subdivision of any of 

12 the foregoing, the United States, or the 

13 District of Columbia. 

14 ‘‘(5) SPECIAL RULES FOR SUPPORT.—For pur15 poses of this subsection— 

16 ‘‘(A) payments to a spouse which are in17 cludible in the gross income of such spouse 

18 shall not be treated as a payment by the payor 

19 spouse for the support of any dependent, and 

20 ‘‘(B) in the case of the remarriage of a 

21 parent, support of a child received from the 

22 parent’s spouse shall be treated as received 

23 from the parent. 

24 ‘‘(e) SPECIAL RULE FOR DIVORCED PARENTS.— 

mstockstill on PROD1PC66 with BILLS

35 

•S 1081 IS

1 ‘‘(1) IN GENERAL.—Notwithstanding subsection 

2 (c)(1)(B), (c)(4), or (d)(1)(C), if— 

3 ‘‘(A) a child receives over one-half of the 

4 child’s support during the calendar year from 

5 the child’s parents— 

6 ‘‘(i) who are divorced or legally sepa7 rated under a decree of divorce or separate 

8 maintenance, 

9 ‘‘(ii) who are separated under a writ10 ten separation agreement, or 

11 ‘‘(iii) who live apart at all times dur12 ing the last 6 months of the calendar year, 

13 and 

14 ‘‘(B) such child is in the custody of 1 or 

15 both of the child’s parents for more than one16 half of the calendar year, such child shall be 

17 treated as being the qualifying child or quali18 fying relative of the noncustodial parent for a 

19 calendar year if the requirements described in 

20 paragraph (2) or (3) are met. 

21 ‘‘(2) EXCEPTION WHERE CUSTODIAL PARENT

22 RELEASES CLAIM TO EXEMPTION FOR THE YEAR.— 

23 For purposes of paragraph (1), the requirements de24 scribed in this paragraph are met with respect to 

25 any calendar year if— 

mstockstill on PROD1PC66 with BILLS

36 

•S 1081 IS

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

2 declaration (in such manner and form as the 

3 Secretary may by regulations prescribe) that 

4 such custodial parent will not claim such child 

5 as a dependent for any taxable year beginning 

6 in such calendar year, and 

7 ‘‘(B) the noncustodial parent attaches such 

8 written declaration to the noncustodial parent’s 

9 return for the taxable year beginning during 

10 such calendar year. 

11 ‘‘(3) EXCEPTION FOR CERTAIN PRE-1985 IN12 STRUMENTS.— 

13 ‘‘(A) IN GENERAL.—For purposes of para14 graph (1), the requirements described in this 

15 paragraph are met with respect to any calendar 

16 year if— 

17 ‘‘(i) a qualified pre-1985 instrument 

18 between the parents applicable to the tax19 able year beginning in such calendar year 

20 provides that the noncustodial parent shall 

21 be entitled to any deduction allowable 

22 under section 151 for such child, and 

23 ‘‘(ii) the noncustodial parent provides 

24 at least $600 for the support of such child 

25 during such calendar year. 

mstockstill on PROD1PC66 with BILLS

37 

•S 1081 IS

1 For purposes of this subparagraph, amounts ex2 pended for the support of a child or children 

3 shall be treated as received from the noncusto4 dial parent to the extent that such parent pro5 vided amounts for such support. 

6 ‘‘(B) QUALIFIED PRE-1985 INSTRUMENT.— 

7 For purposes of this paragraph, the term 

8 ‘qualified pre-1985 instrument’ means any de9 cree of divorce or separate maintenance or writ10 ten agreement— 

11 ‘‘(i) which is executed before January 

12 1, 1985, 

13 ‘‘(ii) which on such date contains the 

14 provision described in subparagraph (A)(i), 

15 and 

16 ‘‘(iii) which is not modified on or after 

17 such date in a modification which expressly 

18 provides that this paragraph shall not 

19 apply to such decree or agreement. 

20 ‘‘(4) CUSTODIAL PARENT AND NONCUSTODIAL

21 PARENT.—For purposes of this subsection— 

22 ‘‘(A) CUSTODIAL PARENT.—The term ‘cus23 todial parent’ means the parent having custody 

24 for the greater portion of the calendar year. 

mstockstill on PROD1PC66 with BILLS

38 

•S 1081 IS

1 ‘‘(B) NONCUSTODIAL PARENT.—The term 

2 ‘noncustodial parent’ means the parent who is 

3 not the custodial parent. 

4 ‘‘(5) EXCEPTION FOR MULTIPLE-SUPPORT

5 AGREEMENTS.—This subsection shall not apply in 

6 any case where over one-half of the support of the 

7 child is treated as having been received from a tax8 payer under the provision of subsection (d)(3). 

9 ‘‘(6) SPECIAL RULE FOR SUPPORT RECEIVED

10 FROM NEW SPOUSE OF PARENT.—For purposes of 

11 this subsection, in the case of the remarriage of a 

12 parent, support of a child received from the parent’s 

13 spouse shall be treated as received from the parent. 

14 ‘‘(f) OTHER DEFINITIONS AND RULES.—For pur15 poses of this section— 

16 ‘‘(1) CHILD DEFINED.— 

17 ‘‘(A) IN GENERAL.—The term ‘child’ 

18 means an individual who is— 

19 ‘‘(i) a son, daughter, stepson, or step20 daughter of the taxpayer, or 

21 ‘‘(ii) an eligible foster child of the tax22 payer. 

23 ‘‘(B) ADOPTED CHILD.—In determining 

24 whether any of the relationships specified in 

25 subparagraph (A)(i) or paragraph (4) exists, a 

mstockstill on PROD1PC66 with BILLS

39 

•S 1081 IS

1 legally adopted individual of the taxpayer, or an 

2 individual who is lawfully placed with the tax3 payer for legal adoption by the taxpayer, shall 

4 be treated as a child of such individual by 

5 blood. 

6 ‘‘(C) ELIGIBLE FOSTER CHILD.—For pur7 poses of subparagraph (A)(ii), the term ‘eligible 

8 foster child’ means an individual who is placed 

9 with the taxpayer by an authorized placement 

10 agency or by judgment, decree, or other order 

11 of any court of competent jurisdiction. 

12 ‘‘(2) STUDENT DEFINED.—The term ‘student’ 

13 means an individual who during each of 5 calendar 

14 months during the calendar year in which the tax15 able year of the taxpayer begins— 

16 ‘‘(A) is a full-time student at an edu17 cational organization described in section 

18 3(d)(1)(B), or 

19 ‘‘(B) is pursuing a full-time course of insti20 tutional on-farm training under the supervision 

21 of an accredited agent of an educational organi22 zation described in section 3(d)(1)(B) or of a 

23 State or political subdivision of a State. 

24 ‘‘(3) DETERMINATION OF HOUSEHOLD STA25 TUS.—An individual shall not be treated as a memmstockstill on PROD1PC66 with BILLS

40 

•S 1081 IS

1 ber of the taxpayer’s household if at any time during 

2 the taxable year of the taxpayer the relationship be3 tween such individual and the taxpayer is in viola4 tion of local law. 

5 ‘‘(4) BROTHER AND SISTER.—The terms 

6 ‘brother’ and ‘sister’ include a brother or sister by 

7 the half blood. 

8 ‘‘(5) SPECIAL SUPPORT TEST IN CASE OF STU9 DENTS.—For purposes of subsections (c)(1)(D) and 

10 (d)(1)(C), in the case of an individual who is— 

11 ‘‘(A) a child of the taxpayer, and 

12 ‘‘(B) a student, amounts received as schol13 arships for study at an educational organization 

14 described in section 3(d)(1)(B) shall not be 

15 taken into account. 

16 ‘‘(6) TREATMENT OF MISSING CHILDREN.— 

17 ‘‘(A) IN GENERAL.—Solely for the pur18 poses referred to in subparagraph (B), a child 

19 of the taxpayer— 

20 ‘‘(i) who is presumed by law enforce21 ment authorities to have been kidnaped by 

22 someone who is not a member of the fam23 ily of such child or the taxpayer, and 

24 ‘‘(ii) who had, for the taxable year in 

25 which the kidnaping occurred, the same 

mstockstill on PROD1PC66 with BILLS

41 

•S 1081 IS

1 principal place of abode as the taxpayer for 

2 more than one-half of the portion of such 

3 year before the date of the kidnaping, shall 

4 be treated as meeting the requirement of 

5 subsection (c)(1)(B) with respect to a tax6 payer for all taxable years ending during 

7 the period that the child is kidnaped. 

8 ‘‘(B) PURPOSES.—Subparagraph (A) shall 

9 apply solely for purposes of determining— 

10 ‘‘(i) the deduction under section 2(c), 

11 and 

12 ‘‘(ii) whether an individual is a sur13 viving spouse or a head of a household (as 

14 such terms are defined in section 5). 

15 ‘‘(C) COMPARABLE TREATMENT OF CER16 TAIN QUALIFYING RELATIVES.—For purposes 

17 of this section, a child of the taxpayer— 

18 ‘‘(i) who is presumed by law enforce19 ment authorities to have been kidnaped by 

20 someone who is not a member of the fam21 ily of such child or the taxpayer, and 

22 ‘‘(ii) who was (without regard to this 

23 paragraph) a qualifying relative of the tax24 payer for the portion of the taxable year 

25 before the date of the kidnaping, shall be 

mstockstill on PROD1PC66 with BILLS

42 

•S 1081 IS

1 treated as a qualifying relative of the tax2 payer for all taxable years ending during 

3 the period that the child is kidnaped. 

4 ‘‘(D) TERMINATION OF TREATMENT.— 

5 Subparagraphs (A) and (C) shall cease to apply 

6 as of the first taxable year of the taxpayer be7 ginning after the calendar year in which there 

8 is a determination that the child is dead (or, if 

9 earlier, in which the child would have attained 

10 age 18). 

11 ‘‘SEC. 7. INFLATION ADJUSTMENT. 

12 ‘‘(a) IN GENERAL.—In the case of any taxable year 

13 beginning in a calendar year after 2008, each dollar 

14 amount contained in sections 2(b), 2(c), 3(a), and 4(c)(2) 

15 shall be increased by an amount equal to— 

16 ‘‘(1) such dollar amount, multiplied by 

17 ‘‘(2) the cost-of-living adjustment for the cal18 endar year in which the taxable year begins. 

19 ‘‘(b) COST-OF-LIVING ADJUSTMENT.—For purposes 

20 of subsection (a), the cost-of-living adjustment for any cal21 endar year is the percentage (if any) by which— 

22 ‘‘(1) the CPI for the preceding calendar year, 

23 exceeds 

24 ‘‘(2) the CPI for calendar year 2007. 

mstockstill on PROD1PC66 with BILLS

43 

•S 1081 IS

1 ‘‘(c) CPI FOR ANY CALENDAR YEAR.—For purposes 

2 of subsection (b), the CPI for any calendar year is the 

3 average of the Consumer Price Index as of the close of 

4 the 12-month period ending on August 31 of such cal5 endar year. 

6 ‘‘(d) CONSUMER PRICE INDEX.—For purposes of 

7 subsection (c), the term ‘Consumer Price Index’ means the 

8 last Consumer Price Index for all-urban consumers pub9 lished by the Department of Labor. For purposes of the 

10 preceding sentence, the revision of the Consumer Price 

11 Index which is most consistent with the Consumer Price 

12 Index for calendar year 1986 shall be used. 

13 ‘‘(e) ROUNDING.—If any increase determined under 

14 subsection (a) is not a multiple of $50, such amount shall 

15 be rounded to the next lowest multiple of $50. 

16 ‘‘PART II—TAX ON BUSINESS ACTIVITIES 

‘‘Sec. 11. Tax imposed on business activities. 

17 ‘‘SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES. 

18 ‘‘(a) TAX IMPOSED.—There is hereby imposed on 

19 every person engaged in a business activity located in the 

20 United States a tax equal to 20 percent of the business 

21 taxable income of such person. 

22 ‘‘(b) LIABILITY FOR TAX.—The tax imposed by this 

23 section shall be paid by the person engaged in the business 

mstockstill on PROD1PC66 with BILLS

44 

•S 1081 IS

1 activity, whether such person is an individual, partnership, 

2 corporation, or otherwise. 

3 ‘‘(c) BUSINESS TAXABLE INCOME.— 

4 ‘‘(1) IN GENERAL.—For purposes of this sec5 tion, the term ‘business taxable income’ means gross 

6 active income reduced by the deductions specified in 

7 subsection (d). 

8 ‘‘(2) GROSS ACTIVE INCOME.—For purposes of 

9 paragraph (1), the term ‘gross active income’ means 

10 gross income other than investment income. 

11 ‘‘(d) DEDUCTIONS.— 

12 ‘‘(1) IN GENERAL.—The deductions specified in 

13 this subsection are— 

14 ‘‘(A) the cost of business inputs for the 

15 business activity, 

16 ‘‘(B) the compensation (including contribu17 tions to qualified retirement plans but not in18 cluding other fringe benefits) paid for employ19 ees performing services in such activity, and 

20 ‘‘(C) the cost of personal and real property 

21 used in such activity. 

22 ‘‘(2) BUSINESS INPUTS.— 

23 ‘‘(A) IN GENERAL.—For purposes of para24 graph (1)(A), the term ‘cost of business inputs’ 

25 means— 

mstockstill on PROD1PC66 with BILLS

45 

•S 1081 IS

1 ‘‘(i) the actual cost of goods, services, 

2 and materials, whether or not resold dur3 ing the taxable year, and 

4 ‘‘(ii) the actual cost, if reasonable, of 

5 travel and entertainment expenses for busi6 ness purposes. 

7 ‘‘(B) PURCHASES OF GOODS AND SERV8 ICES EXCLUDED.—Such term shall not include 

9 purchases of goods and services provided to em10 ployees or owners. 

11 ‘‘(C) CERTAIN LOBBYING AND POLITICAL

12 EXPENDITURES EXCLUDED.— 

13 ‘‘(i) IN GENERAL.—Such term shall 

14 not include any amount paid or incurred in 

15 connection with— 

16 ‘‘(I) influencing legislation, 

17 ‘‘(II) participation in, or inter18 vention in, any political campaign on 

19 behalf of (or in opposition to) any 

20 candidate for public office, 

21 ‘‘(III) any attempt to influence 

22 the general public, or segments there23 of, with respect to elections, legislative 

24 matters, or referendums, or 

mstockstill on PROD1PC66 with BILLS

46 

•S 1081 IS

1 ‘‘(IV) any direct communication 

2 with a covered executive branch offi3 cial in an attempt to influence the of4 ficial actions or positions of such offi5 cial. 

6 ‘‘(ii) EXCEPTION FOR LOCAL LEGISLA7 TION.—In the case of any legislation of 

8 any local council or similar governing 

9 body— 

10 ‘‘(I) clause (i)(I) shall not apply, 

11 and 

12 ‘‘(II) such term shall include all 

13 ordinary and necessary expenses (in14 cluding, but not limited to, traveling 

15 expenses described in subparagraph 

16 (A)(iii) and the cost of preparing tes17 timony) paid or incurred during the 

18 taxable year in carrying on any trade 

19 or business— 

20 ‘‘(aa) in direct connection 

21 with appearances before, submis22 sion of statements to, or sending 

23 communications to the commit24 tees, or individual members, of 

25 such council or body with respect 

mstockstill on PROD1PC66 with BILLS

47 

•S 1081 IS

1 to legislation or proposed legisla2 tion of direct interest to the tax3 payer, or 

4 ‘‘(bb) in direct connection 

5 with communication of informa6 tion between the taxpayer and an 

7 organization of which the tax8 payer is a member with respect 

9 to any such legislation or pro10 posed legislation which is of di11 rect interest to the taxpayer and 

12 to such organization, and that 

13 portion of the dues so paid or in14 curred with respect to any orga15 nization of which the taxpayer is 

16 a member which is attributable 

17 to the expenses of the activities 

18 carried on by such organization. 

19 ‘‘(iii) APPLICATION TO DUES OF TAX20 EXEMPT ORGANIZATIONS.—Such term 

21 shall include the portion of dues or other 

22 similar amounts paid by the taxpayer to an 

23 organization which is exempt from tax 

24 under this subtitle which the organization 

25 notifies the taxpayer under section 

mstockstill on PROD1PC66 with BILLS

48 

•S 1081 IS

1 6033(e)(1)(A)(ii) is allocable to expendi2 tures to which clause (i) applies. 

3 ‘‘(iv) INFLUENCING LEGISLATION.— 

4 For purposes of this subparagraph— 

5 ‘‘(I) IN GENERAL.—The term ‘in6 fluencing legislation’ means any at7 tempt to influence any legislation 

8 through communication with any 

9 member or employee of a legislative 

10 body, or with any government official 

11 or employee who may participate in 

12 the formulation of legislation. 

13 ‘‘(II) LEGISLATION.—The term 

14 ‘legislation’ has the meaning given 

15 that term in section 4911(e)(2). 

16 ‘‘(v) OTHER SPECIAL RULES.— 

17 ‘‘(I) EXCEPTION FOR CERTAIN

18 TAXPAYERS.—In the case of any tax19 payer engaged in the trade or busi20 ness of conducting activities described 

21 in clause (i), clause (i) shall not apply 

22 to expenditures of the taxpayer in 

23 conducting such activities directly on 

24 behalf of another person (but shall 

25 apply to payments by such other permstockstill on PROD1PC66 with BILLS

49 

•S 1081 IS

1 son to the taxpayer for conducting 

2 such activities). 

3 ‘‘(II) DE MINIMIS EXCEPTION.— 

4 ‘‘(aa) IN GENERAL.—Clause 

5 (i) shall not apply to any in6 house expenditures for any tax7 able year if such expenditures do 

8 not exceed $2,000. In deter9 mining whether a taxpayer ex10 ceeds the $2,000 limit, there 

11 shall not be taken into account 

12 overhead costs otherwise allocable 

13 to activities described in sub14 clauses (I) and (IV) of clause (i). 

15 ‘‘(bb) IN-HOUSE EXPENDI16 TURES.—For purposes of provi17 sion (aa), the term ‘in-house ex18 penditures’ means expenditures 

19 described in subclauses (I) and 

20 (IV) of clause (i) other than pay21 ments by the taxpayer to a per22 son engaged in the trade or busi23 ness of conducting activities de24 scribed in clause (i) for the con25 duct of such activities on behalf 

mstockstill on PROD1PC66 with BILLS

50 

•S 1081 IS

1 of the taxpayer, or dues or other 

2 similar amounts paid or incurred 

3 by the taxpayer which are allo4 cable to activities described in 

5 clause (i). 

6 ‘‘(III) EXPENSES INCURRED IN

7 CONNECTION WITH LOBBYING AND

8 POLITICAL ACTIVITIES.—Any amount 

9 paid or incurred for research for, or 

10 preparation, planning, or coordination 

11 of, any activity described in clause (i) 

12 shall be treated as paid or incurred in 

13 connection with such activity. 

14 ‘‘(vi) COVERED EXECUTIVE BRANCH

15 OFFICIAL.—For purposes of this subpara16 graph, the term ‘covered executive branch 

17 official’ means— 

18 ‘‘(I) the President, 

19 ‘‘(II) the Vice President, 

20 ‘‘(III) any officer or employee of 

21 the White House Office of the Execu22 tive Office of the President, and the 2 

23 most senior level officers of each of 

24 the other agencies in such Executive 

25 Office, and 

mstockstill on PROD1PC66 with BILLS

51 

•S 1081 IS

1 ‘‘(IV) any individual serving in a 

2 position in level I of the Executive 

3 Schedule under section 5312 of title 

4 5, United States Code, any other indi5 vidual designated by the President as 

6 having Cabinet level status, and any 

7 immediate deputy of such an indi8 vidual. 

9 ‘‘(vii) SPECIAL RULE FOR INDIAN

10 TRIBAL GOVERNMENTS.—For purposes of 

11 this subparagraph, an Indian tribal gov12 ernment shall be treated in the same man13 ner as a local council or similar governing 

14 body. 

15 ‘‘(viii) CROSS REFERENCE.— 

‘‘For reporting requirements and alternative taxes related to this subsection, see 

section 6033(e). 

16 ‘‘(e) CARRYOVER OF EXCESS DEDUCTIONS.— 

17 ‘‘(1) IN GENERAL.—If the aggregate deductions 

18 for any taxable year exceed the gross active income 

19 for such taxable year, the amount of the deductions 

20 specified in subsection (d) for the succeeding taxable 

21 year (determined without regard to this subsection) 

22 shall be increased by the sum of— 

23 ‘‘(A) such excess, plus 

mstockstill on PROD1PC66 with BILLS

52 

•S 1081 IS

1 ‘‘(B) the product of such excess and the 3- 

2 month Treasury rate for the last month of such 

3 taxable year. 

4 ‘‘(2) 3-MONTH TREASURY RATE.—For purposes 

5 of paragraph (1), the 3-month Treasury rate is the 

6 rate determined by the Secretary based on the aver7 age market yield (during any 1-month period se8 lected by the Secretary and ending in the calendar 

9 month in which the determination is made) on out10 standing marketable obligations of the United States 

11 with remaining periods to maturity of 3 months or 

12 less.’’ 

13 (b) CONFORMING REPEALS AND REDESIGNATIONS.— 

14 (1) REPEALS.—The following subchapters of 

15 chapter 1 of subtitle A and the items relating to 

16 such subchapters in the table of subchapters for 

17 such chapter 1 are repealed: 

18 (A) Subchapter B (relating to computation 

19 of taxable income). 

20 (B) Subchapter C (relating to corporate 

21 distributions and adjustments). 

22 (C) Subchapter D (relating to deferred 

23 compensation, etc.). 

24 (D) Subchapter G (relating to corporations 

25 used to avoid income tax on shareholders). 

mstockstill on PROD1PC66 with BILLS

53 

•S 1081 IS

1 (E) Subchapter H (relating to banking in2 stitutions). 

3 (F) Subchapter I (relating to natural re4 sources). 

5 (G) Subchapter J (relating to estates, 

6 trusts, beneficiaries, and decedents). 

7 (H) Subchapter L (relating to insurance 

8 companies). 

9 (I) Subchapter M (relating to regulated in10 vestment companies and real estate investment 

11 trusts). 

12 (J) Subchapter N (relating to tax based on 

13 income from sources within or without the 

14 United States). 

15 (K) Subchapter O (relating to gain or loss 

16 on disposition of property). 

17 (L) Subchapter P (relating to capital gains 

18 and losses). 

19 (M) Subchapter Q (relating to readjust20 ment of tax between years and special limita21 tions). 

22 (N) Subchapter S (relating to tax treat23 ment of S corporations and their shareholders). 

24 (O) Subchapter T (relating to cooperatives 

25 and their patrons). 

mstockstill on PROD1PC66 with BILLS

54 

•S 1081 IS

1 (P) Subchapter U (relating to designation 

2 and treatment of empowerment zones, enter3 prise communities, and rural development in4 vestment areas). 

5 (Q) Subchapter V (relating to title 11 

6 cases). 

7 (R) Subchapter W (relating to District of 

8 Columbia Enterprise Zone). 

9 (2) REDESIGNATIONS.—The following sub10 chapters of chapter 1 of subtitle A and the items re11 lating to such subchapters in the table of sub12 chapters for such chapter 1 are redesignated: 

13 (A) Subchapter E (relating to accounting 

14 periods and methods of accounting) as sub15 chapter B. 

16 (B) Subchapter F (relating to exempt or17 ganizations) as subchapter C. 

18 (C) Subchapter K (relating to partners 

19 and partnerships) as subchapter D. 

20 SEC. 3. REPEAL OF ESTATE AND GIFT TAXES. 

21 Subtitle B (relating to estate, gift, and generation22 skipping taxes) and the item relating to such subtitle in 

23 the table of subtitles is repealed. 

mstockstill on PROD1PC66 with BILLS

55 

•S 1081 IS

1 SEC. 4. ADDITIONAL REPEALS. 

2 Subtitles H (relating to financing of presidential elec3 tion campaigns) and J (relating to coal industry health 

4 benefits) and the items relating to such subtitles in the 

5 table of subtitles are repealed. 

6 SEC. 5. EFFECTIVE DATES. 

7 (a) IN GENERAL.—Except as provided in subsection 

8 (b), the amendments made by this Act apply to taxable 

9 years beginning after December 31, 2007. 

10 (b) REPEAL OF ESTATE AND GIFT TAXES.—The re11 peal made by section 3 applies to estates of decedents 

12 dying, and transfers made, after December 31, 2007. 

13 (c) TECHNICAL AND CONFORMING CHANGES.—The 

14 Secretary of the Treasury or the Secretary’s delegate 

15 shall, as soon as practicable but in any event not later 

16 than 90 days after the date of enactment of this Act, sub17 mit to the Committee on Ways and Means of the House 

18 of Representatives and the Committee on Finance of the 

19 Senate a draft of any technical and conforming changes 

20 in the Internal Revenue Code of 1986 which are necessary 

21 to reflect throughout such Code the changes in the sub22 stantive provisions of law made by this Act. 

Æ 

mstockstill on PROD1PC66 with BILLS