II 

109TH CONGRESS 

1ST SESSION S. 812 

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 15, 2005 

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 2005’’. 

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. 
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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.

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. 
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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 
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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) $15,000 in the case of a head of household 

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

24 ‘‘(3) $10,000 in any other case. 
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1 ‘‘(c) ADDITIONAL STANDARD DEDUCTION.—For pur2 poses of subsection (a), the additional standard deduction 

3 is $5,000 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 ‘‘(d) INFLATION ADJUSTMENT.— 

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

16 year beginning in a calendar year after 2006, each 

17 dollar amount contained in subsections (b) and (c) 

18 shall be increased by an amount equal to— 

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

20 ‘‘(B) the cost-of-living adjustment for the 

21 calendar year in which the taxable year begins. 

22 ‘‘(2) COST-OF-LIVING ADJUSTMENT.—For pur23 poses of paragraph (1), the cost-of-living adjustment 

24 for any calendar year is the percentage (if any) by 

25 which— 
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1 ‘‘(A) the CPI for the preceding calendar 

2 year, exceeds 

3 ‘‘(B) the CPI for calendar year 2005. 

4 ‘‘(3) CPI FOR ANY CALENDAR YEAR.—For pur5 poses of paragraph (2), the CPI for any calendar 

6 year is the average of the Consumer Price Index as 

7 of the close of the 12-month period ending on Au8 gust 31 of such calendar year. 

9 ‘‘(4) CONSUMER PRICE INDEX.—For purposes 

10 of paragraph (3), the term ‘Consumer Price Index’ 

11 means the last Consumer Price Index for all-urban 

12 consumers published by the Department of Labor. 

13 For purposes of the preceding sentence, the revision 

14 of the Consumer Price Index which is most con15 sistent with the Consumer Price Index for calendar 

16 year 1986 shall be used. 

17 ‘‘(5) ROUNDING.—If any increase determined 

18 under paragraph (1) is not a multiple of $50, such 

19 amount shall be rounded to the next lowest multiple 

20 of $50. 

21 ‘‘SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBU22 TIONS. 

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

24 there shall be allowed as a deduction any charitable con25 tribution (as defined in subsection (b)) not to exceed 
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1 $2,500 ($1,250, in the case of a married individual filing 

2 a separate return), payment of which is made within the 

3 taxable year. 

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

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

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

7 or for the use of the following: 

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

9 or any political subdivision of any of the foregoing, 

10 or the United States or the District of Columbia, 

11 but only if the contribution or gift is made for exclu12 sively public purposes. 

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

14 fund, or foundation— 

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

16 States or in any possession thereof, or under 

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

18 District of Columbia, or any possession of the 

19 United States, 

20 ‘‘(B) organized and operated exclusively 

21 for religious, charitable, scientific, literary, or 

22 educational purposes, or to foster national or 

23 international amateur sports competition (but 

24 only if no part of its activities involve the provi-
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1 sion of athletic facilities or equipment), or for 

2 the prevention of cruelty to children or animals, 

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

4 inures to the benefit of any private shareholder 

5 or individual, and 

6 ‘‘(D) which is not disqualified for tax ex7 emption under section 501(c)(3) by reason of 

8 attempting to influence legislation, and which 

9 does not participate in, or intervene in (includ10 ing the publishing or distributing of state11 ments), any political campaign on behalf of (or 

12 in opposition to) any candidate for public office. 

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

14 chest, fund, or foundation shall be deductible by rea15 son of this paragraph only if it is to be used within 

16 the United States or any of its possessions exclu17 sively for purposes specified in subparagraph (B). 

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

19 apply for purposes of this paragraph. 

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

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

22 for, any such post or organization— 

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

24 of its possessions, and 
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1 ‘‘(B) no part of the net earnings of which 

2 inures to the benefit of any private shareholder 

3 or individual. 

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

5 individual, a domestic fraternal society, order, or as6 sociation, operating under the lodge system, but only 

7 if such contribution or gift is to be used exclusively 

8 for religious, charitable, scientific, literary, or edu9 cational purposes, or for the prevention of cruelty to 

10 children or animals. 

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

12 exclusively for the benefit of its members, or any 

13 corporation chartered solely for burial purposes as a 

14 cemetery corporation and not permitted by its char15 ter to engage in any business not necessarily inci16 dent to that purpose, if such company or corporation 

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

18 earnings of such company or corporation inures to 

19 the benefit of any private shareholder or individual. 

20 For purposes of this section, the term ‘charitable contribu21 tion’ also means an amount treated under subsection (d) 

22 as paid for the use of an organization described in para23 graph (2), (3), or (4). 

24 ‘‘(c) DISALLOWANCE OF DEDUCTION IN CERTAIN

25 CASES AND SPECIAL RULES.— 
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1 ‘‘(1) SUBSTANTIATION REQUIREMENT FOR CER2 TAIN CONTRIBUTIONS.— 

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

4 be allowed under subsection (a) for any con5 tribution of $250 or more unless the taxpayer 

6 substantiates the contribution by a contempora7 neous written acknowledgment of the contribu8 tion by the donee organization that meets the 

9 requirements of subparagraph (B). 

10 ‘‘(B) CONTENT OF ACKNOWLEDGMENT.—

11 An acknowledgment meets the requirements of 

12 this subparagraph if it includes the following 

13 information: 

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

15 ‘‘(ii) Whether the donee organization 

16 provided any goods or services in consider17 ation, in whole or in part, for any contribu18 tion described in clause (i). 

19 ‘‘(iii) A description and good faith es20 timate of the value of any goods or services 

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

22 or services consist solely of intangible reli23 gious benefits, a statement to that effect. 

24 For purposes of this subparagraph, the term 

25 ‘intangible religious benefit’ means any intan-
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1 gible religious benefit which is provided by an 

2 organization organized exclusively for religious 

3 purposes and which generally is not sold in a 

4 commercial transaction outside the donative 

5 context. 

6 ‘‘(C) CONTEMPORANEOUS.—For purposes 

7 of subparagraph (A), an acknowledgment shall 

8 be considered to be contemporaneous if the tax9 payer obtains the acknowledgment on or before 

10 the earlier of— 

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

12 files a return for the taxable year in which 

13 the contribution was made, or 

14 ‘‘(ii) the due date (including exten15 sions) for filing such return. 

16 ‘‘(D) SUBSTANTIATION NOT REQUIRED

17 FOR CONTRIBUTIONS REPORTED BY THE

18 DONEE ORGANIZATION.—Subparagraph (A) 

19 shall not apply to a contribution if the donee 

20 organization files a return, on such form and in 

21 accordance with such regulations as the Sec22 retary may prescribe, which includes the infor23 mation described in subparagraph (B) with re24 spect to the contribution. 
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1 ‘‘(E) REGULATIONS.—The Secretary shall 

2 prescribe such regulations as may be necessary 

3 or appropriate to carry out the purposes of this 

4 paragraph, including regulations that may pro5 vide that some or all of the requirements of this 

6 paragraph do not apply in appropriate cases. 

7 ‘‘(2) DENIAL OF DEDUCTION WHERE CON8 TRIBUTION FOR LOBBYING ACTIVITIES.—No deduc9 tion shall be allowed under this section for a con10 tribution to an organization which conducts activities 

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

12 direct financial interest to the donor’s trade or busi13 ness, if a principal purpose of the contribution was 

14 to avoid Federal income tax by securing a deduction 

15 for such activities under this section which would be 

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

17 donor had conducted such activities directly. No de18 duction shall be allowed under section 11(d) for any 

19 amount for which a deduction is disallowed under 

20 the preceding sentence. 

21 ‘‘(d) AMOUNTS PAID TO MAINTAIN CERTAIN STU22 DENTS AS MEMBERS OF TAXPAYER’S HOUSEHOLD.— 

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

24 provided by paragraph (2), amounts paid by the tax25 payer to maintain an individual (other than a de-
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1 pendent, as defined in section 6, or a relative of the 

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

3 during the period that such individual is— 

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

5 under a written agreement between the tax6 payer and an organization described in para7 graph (2), (3), or (4) of subsection (b) to imple8 ment a program of the organization to provide 

9 educational opportunities for pupils or students 

10 in private homes, and 

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

12 twelfth or any lower grade at an educational or13 ganization located in the United States which 

14 normally maintains a regular faculty and cur15 riculum and normally has a regularly enrolled 

16 body of pupils or students in attendance at the 

17 place where its educational activities are regu18 larly carried on, shall be treated as amounts 

19 paid for the use of the organization. 

20 ‘‘(2) LIMITATIONS.— 

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

22 to amounts paid within the taxable year only to 

23 the extent that such amounts do not exceed $50 

24 multiplied by the number of full calendar 

25 months during the taxable year which fall with-
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1 in the period described in paragraph (1). For 

2 purposes of the preceding sentence, if 15 or 

3 more days of a calendar month fall within such 

4 period such month shall be considered as a full 

5 calendar month. 

6 ‘‘(B) COMPENSATION OR REIMBURSE7 MENT.—Paragraph (1) shall not apply to any 

8 amount paid by the taxpayer within the taxable 

9 year if the taxpayer receives any money or 

10 other property as compensation or reimburse11 ment for maintaining the individual in the tax12 payer’s household during the period described 

13 in paragraph (1). 

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

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

16 means an individual who, with respect to the tax17 payer, bears any of the relationships described in 

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

19 ‘‘(4) NO OTHER AMOUNT ALLOWED AS DEDUC20 TION.—No deduction shall be allowed under sub21 section (a) for any amount paid by a taxpayer to 

22 maintain an individual as a member of the tax23 payer’s household under a program described in 

24 paragraph (1)(A) except as provided in this sub25 section. 
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1 ‘‘(e) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL

2 EXPENSES.—No deduction shall be allowed under this sec3 tion for traveling expenses (including amounts expended 

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

5 paid directly or by reimbursement, unless there is no sig6 nificant element of personal pleasure, recreation, or vaca7 tion in such travel. 

8 ‘‘(f) DISALLOWANCE OF DEDUCTIONS IN CERTAIN

9 CASES.—For disallowance of deductions for contributions 

10 to or for the use of Communist controlled organizations, 

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

12 U.S.C. 790). 

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

14 FOR THE BENEFIT OF INSTITUTIONS OF HIGHER EDU15 CATION.— 

16 ‘‘(1) IN GENERAL.—For purposes of this sec17 tion, 80 percent of any amount described in para18 graph (2) shall be treated as a charitable contribu19 tion. 

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

21 paragraph (1), an amount is described in this para22 graph if— 

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

24 or for the benefit of an educational organiza25 tion— 
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1 ‘‘(i) which is described in subsection 

2 (d)(1)(B), and 

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

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

5 and 

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

7 deduction under this section but for the fact 

8 that the taxpayer receives (directly or indi9 rectly) as a result of paying such amount the 

10 right to purchase tickets for seating at an ath11 letic event in an athletic stadium of such insti12 tution. 

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

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

15 of such payment shall be treated as separate amounts for 

16 purposes of this subsection. 

17 ‘‘(h) OTHER CROSS REFERENCES.— 

18 ‘‘(1) For treatment of certain organizations 

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

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

21 see section 702. 

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

23 in connection with the Naval Academy as gifts to or 

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

25 of title 10, United States Code. 
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1 ‘‘(4) For treatment of gifts accepted by the 

2 Secretary of State, the Director of the International 

3 Communication Agency, or the Director of the 

4 United States International Development Coopera5 tion Agency, as gifts to or for the use of the United 

6 States, see section 25 of the State Department Basic 

7 Authorities Act of 1956. 

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

9 by the Attorney General for credit to the ‘Com10 missary Funds, Federal Prisons’ as gifts to or for 

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

12 title 18, United States Code. 

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

14 use of Indian tribal governments (or subdivisions of 

15 such governments), see section 7871. 

16 ‘‘SEC. 4. DEDUCTION FOR HOME ACQUISITION INDEBTED17 NESS. 

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

19 there shall be allowed as a deduction all qualified residence 

20 interest paid or accrued within the taxable year. 

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

22 The term ‘qualified residence interest’ means any interest 

23 which is paid or accrued during the taxable year on acqui24 sition indebtedness with respect to any qualified residence 

25 of the taxpayer. For purposes of the preceding sentence, 
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1 the determination of whether any property is a qualified 

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

3 the interest is accrued. 

4 ‘‘(c) ACQUISITION INDEBTEDNESS.— 

5 ‘‘(1) IN GENERAL.—The term ‘acquisition in6 debtedness’ means any indebtedness which— 

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

8 or substantially improving any qualified resi9 dence of the taxpayer, and 

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

11 Such term also includes any indebtedness secured by such 

12 residence resulting from the refinancing of indebtedness 

13 meeting the requirements of the preceding sentence (or 

14 this sentence); but only to the extent the amount of the 

15 indebtedness resulting from such refinancing does not ex16 ceed the amount of the refinanced indebtedness. 

17 ‘‘(2) $100,000 limitation.—The aggregate 

18 amount treated as acquisition indebtedness for any 

19 period shall not exceed $100,000 ($50,000 in the 

20 case of a married individual filing a separate re21 turn). 

22 ‘‘(d) TREATMENT OF INDEBTEDNESS INCURRED ON

23 OR BEFORE OCTOBER 13, 1987.— 

24 ‘‘(1) IN GENERAL.—In the case of any pre-Oc25 tober 13, 1987, indebtedness— 
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1 ‘‘(A) such indebtedness shall be treated as 

2 acquisition indebtedness, and 

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

4 shall not apply. 

5 ‘‘(2) REDUCTION IN $100,000 LIMITATION.—The 

6 limitation of subsection (c)(2) shall be reduced (but 

7 not below zero) by the aggregate amount of out8 standing pre-October 13, 1987, indebtedness. 

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

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

11 means— 

12 ‘‘(A) any indebtedness which was incurred 

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

14 secured by a qualified residence on October 13, 

15 1987, and at all times thereafter before the in16 terest is paid or accrued, or 

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

18 the qualified residence and was incurred after 

19 October 13, 1987, to refinance indebtedness de20 scribed in subparagraph (A) (or refinanced in21 debtedness meeting the requirements of this 

22 subparagraph) to the extent (immediately after 

23 the refinancing) the principal amount of the in24 debtedness resulting from the refinancing does 

25 not exceed the principal amount of the refi-
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1 nanced indebtedness (immediately before the re2 financing). 

3 ‘‘(4) LIMITATION ON PERIOD OF REFI4 NANCING.—Subparagraph (B) of paragraph (3) 

5 shall not apply to any indebtedness after— 

6 ‘‘(A) the expiration of the term of the in7 debtedness described in paragraph (3)(A), or 

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

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

10 over its term, the expiration of the term of the 

11 first refinancing of such indebtedness (or if ear12 lier, the date which is 30 years after the date 

13 of such first refinancing). 

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

15 For purposes of this section— 

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

17 this subsection— 

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

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

20 means the principal residence of the taxpayer. 

21 ‘‘(B) MARRIED INDIVIDUALS FILING SEPA22 RATE RETURNS.—If a married couple does not 

23 file a joint return for the taxable year— 
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1 ‘‘(i) such couple shall be treated as 1 

2 taxpayer for purposes of subparagraph 

3 (A), and 

4 ‘‘(ii) each individual shall be entitled 

to take into account 1 5 ⁄2 of the principal 

6 residence unless both individuals consent 

7 in writing to 1 individual taking into ac8 count the principal residence. 

9 ‘‘(C) PRE-OCTOBER 13, 1987, INDEBTED10 NESS.—In the case of any pre-October 13, 

11 1987, indebtedness, the term ‘qualified resi12 dence’ has the meaning given that term in sec13 tion 163(h)(4), as in effect on the day before 

14 the date of enactment of this subparagraph. 

15 ‘‘(2) SPECIAL RULE FOR COOPERATIVE HOUS16 ING CORPORATIONS.—Any indebtedness secured by 

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

18 a cooperative housing corporation shall be treated as 

19 secured by the house or apartment which the tax20 payer is entitled to occupy as such a tenant-stock21 holder. If stock described in the preceding sentence 

22 may not be used to secure indebtedness, indebted23 ness shall be treated as so secured if the taxpayer 

24 establishes to the satisfaction of the Secretary that 
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1 such indebtedness was incurred to acquire such 

2 stock. 

3 ‘‘(3) UNENFORCEABLE SECURITY INTERESTS.—

4 Indebtedness shall not fail to be treated as secured 

5 by any property solely because, under any applicable 

6 State or local homestead or other debtor protection 

7 law in effect on August 16, 1986, the security inter8 est is ineffective or the enforceability of the security 

9 interest is restricted. 

10 ‘‘(4) SPECIAL RULES FOR ESTATES AND

11 TRUSTS.—For purposes of determining whether any 

12 interest paid or accrued by an estate or trust is 

13 qualified residence interest, any residence held by 

14 such estate or trust shall be treated as a qualified 

15 residence of such estate or trust if such estate or 

16 trust establishes that such residence is a qualified 

17 residence of a beneficiary who has a present interest 

18 in such estate or trust or an interest in the resid19 uary of such estate or trust. 

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

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

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

23 the term ‘surviving spouse’ means a taxpayer— 
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1 ‘‘(A) whose spouse died during either of 

2 the taxpayer’s 2 taxable years immediately pre3 ceding the taxable year, and 

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

5 home a household which constitutes for the tax6 able year the principal place of abode (as a 

7 member of such household) of a dependent— 

8 ‘‘(i) who (within the meaning of sec9 tion 6, determined without regard to sub10 sections (b)(1), (b)(2), and (d)(1)(B)) is a 

11 son, stepson, daughter, or stepdaughter of 

12 the taxpayer, and 

13 ‘‘(ii) with respect to whom the tax14 payer is entitled to a deduction for the tax15 able year under section 2. 

16 For purposes of this paragraph, an individual shall 

17 be considered as maintaining a household only if 

18 over one-half of the cost of maintaining the house19 hold during the taxable year is furnished by such in20 dividual. 

21 ‘‘(2) LIMITATIONS.—Notwithstanding para22 graph (1), for purposes of this part a taxpayer shall 

23 not be considered to be a surviving spouse— 

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

25 time before the close of the taxable year, or 
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1 ‘‘(B) unless, for the taxpayer’s taxable 

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

3 joint return could have been made under the 

4 provisions of section 6013 (without regard to 

5 subsection (a)(3) thereof). 

6 ‘‘(3) SPECIAL RULE WHERE DECEASED SPOUSE

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

8 missing status (within the meaning of section 

9 6013(f)(3)) as a result of service in a combat zone 

10 and if such individual remains in such status until 

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

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

13 which such individual dies shall be treated as the 

14 earlier of the date determined under subparagraph 

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

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

17 is made under section 556 of title 37 of the 

18 United States Code or under section 5566 of 

19 title 5 of such Code (whichever is applicable) 

20 that such individual died while in such missing 

21 status. 

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

23 zone designated for purposes of the Vietnam 

24 conflict, the date which is 2 years after the date 
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1 designated as the date of termination of com2 batant activities in that zone. 

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

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

5 an individual shall be considered a head of a house6 hold if, and only if, such individual is not married 

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

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

9 and either— 

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

11 household which constitutes for more than one12 half of such taxable year the principal place of 

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

14 ‘‘(i) a qualifying child of the indi15 vidual (as defined in section 6(c), deter16 mined without regard to section 6(e)), but 

17 not if such child— 

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

19 taxpayer’s taxable year, and 

20 ‘‘(II) is not a dependent of such 

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

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

23 ‘‘(ii) any other person who is a de24 pendent of the taxpayer, if the taxpayer is 
26

•S 812 IS

1 entitled to a deduction for the taxable year 

2 for such person under section 2, or 

3 ‘‘(B) maintains a household which con4 stitutes for such taxable year the principal place 

5 of abode of the father or mother of the tax6 payer, if the taxpayer is entitled to a deduction 

7 for the taxable year for such father or mother 

8 under section 2. 

9 For purposes of this paragraph, an individual shall 

10 be considered as maintaining a household only if 

11 over one-half of the cost of maintaining the house12 hold during the taxable year is furnished by such in13 dividual. 

14 ‘‘(2) DETERMINATION OF STATUS.—For pur15 poses of this subsection— 

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

17 from such individual’s spouse under a decree of 

18 divorce or of separate maintenance shall not be 

19 considered as married, 

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

21 married at the close of such taxpayer’s taxable 

22 year if at any time during the taxable year such 

23 taxpayer’s spouse is a nonresident alien, and 

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

25 married at the close of such taxpayer’s taxable 
27

•S 812 IS

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

2 spouse described in subparagraph (B)) died 

3 during the taxable year. 

4 ‘‘(3) LIMITATIONS.—Notwithstanding para5 graph (1), for purposes of this part, a taxpayer shall 

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

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

8 the taxpayer is a nonresident alien, or 

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

10 not be a dependent for the taxable year but 

11 for— 

12 ‘‘(i) subparagraph (H) of section 

13 6(d)(2), or 

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

15 ‘‘(c) CERTAIN MARRIED INDIVIDUALS LIVING

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

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

18 if such individual is so treated under the provisions of sec19 tion 7703(b). 

20 ‘‘SEC. 6. DEPENDENT DEFINED. 

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

22 term ‘dependent’ means— 

23 ‘‘(1) a qualifying child, or 

24 ‘‘(2) a qualifying relative. 

25 ‘‘(b) EXCEPTIONS.—For purposes of this section— 
28

•S 812 IS

1 ‘‘(1) DEPENDENTS INELIGIBLE.—If an indi2 vidual is a dependent of a taxpayer for any taxable 

3 year of such taxpayer beginning in a calendar year, 

4 such individual shall be treated as having no depend5 ents for any taxable year of such individual begin6 ning in such calendar year. 

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

8 shall not be treated as a dependent of a taxpayer 

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

10 joint return with the individual’s spouse under sec11 tion 6013 for the taxable year beginning in the cal12 endar year in which the taxable year of the taxpayer 

13 begins. 

14 ‘‘(3) CITIZENS OR NATIONALS OF OTHER COUN15 TRIES.— 

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

17 does not include an individual who is not a cit18 izen or national of the United States unless 

19 such individual is a resident of the United 

20 States or a country contiguous to the United 

21 States. 

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

23 Subparagraph (A) shall not exclude any child of 

24 a taxpayer (within the meaning of subsection 
29

•S 812 IS

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

2 if— 

3 ‘‘(i) for the taxable year of the tax4 payer, the child has the same principal 

5 place of abode as the taxpayer and is a 

6 member of the taxpayer’s household, and 

7 ‘‘(ii) the taxpayer is a citizen or na8 tional of the United States. 

9 ‘‘(c) QUALIFYING CHILD.—For purposes of this sec10 tion— 

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

12 means, with respect to any taxpayer for any taxable 

13 year, an individual— 

14 ‘‘(A) who bears a relationship to the tax15 payer described in paragraph (2), 

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

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

18 such taxable year, 

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

20 paragraph (3), and 

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

22 such individual’s own support for the calendar 

23 year in which the taxable year of the taxpayer 

24 begins. 
30

•S 812 IS

1 ‘‘(2) RELATIONSHIP.—For purposes of para2 graph (1)(A), an individual bears a relationship to 

3 the taxpayer described in this paragraph if such in4 dividual is— 

5 ‘‘(A) a child of the taxpayer or a descend6 ant of such a child, or 

7 ‘‘(B) a brother, sister, stepbrother, or step8 sister of the taxpayer or a descendant of any 

9 such relative. 

10 ‘‘(3) AGE REQUIREMENTS.— 

11 ‘‘(A) IN GENERAL.—For purposes of para12 graph (1)(C), an individual meets the require13 ments of this paragraph if such individual— 

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

15 of the close of the calendar year in which 

16 the taxable year of the taxpayer begins, or 

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

18 the age of 24 as of the close of such cal19 endar year. 

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

21 the case of an individual who is permanently 

22 and totally disabled at any time during such 

23 calendar year, the requirements of subpara24 graph (A) shall be treated as met with respect 

25 to such individual. 
31

•S 812 IS

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

2 CLAIMING QUALIFYING CHILD.— 

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

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

5 an individual may be and is claimed as a quali6 fying child by 2 or more taxpayers for a taxable 

7 year beginning in the same calendar year, such 

8 individual shall be treated as the qualifying 

9 child of the taxpayer who is— 

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

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

12 taxpayer with the highest adjusted gross 

13 income for such taxable year. 

14 ‘‘(B) MORE THAN 1 PARENT CLAIMING

15 QUALIFYING CHILD.—If the parents claiming 

16 any qualifying child do not file a joint return 

17 together, such child shall be treated as the 

18 qualifying child of— 

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

20 resided for the longest period of time dur21 ing the taxable year, or 

22 ‘‘(ii) if the child resides with both par23 ents for the same amount of time during 

24 such taxable year, the parent with the 

25 highest adjusted gross income. 
32

•S 812 IS

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

2 section— 

3 ‘‘(1) IN GENERAL.—The term ‘qualifying rel4 ative’ means, with respect to any taxpayer for any 

5 taxable year, an individual— 

6 ‘‘(A) who bears a relationship to the tax7 payer described in paragraph (2), 

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

9 provides over one-half of the individual’s sup10 port for the calendar year in which such taxable 

11 year begins, and 

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

13 taxpayer or of any other taxpayer for any tax14 able year beginning in the calendar year in 

15 which such taxable year begins. 

16 ‘‘(2) RELATIONSHIP.—For purposes of para17 graph (1)(A), an individual bears a relationship to 

18 the taxpayer described in this paragraph if the indi19 vidual is any of the following with respect to the tax20 payer: 

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

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

23 stepsister. 

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

25 of either. 
33

•S 812 IS

1 ‘‘(D) A stepfather or stepmother. 

2 ‘‘(E) A son or daughter of a brother or sis3 ter of the taxpayer. 

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

5 mother of the taxpayer. 

6 ‘‘(G) A son-in-law, daughter-in-law, father7 in-law, mother-in-law, brother-in-law, or sister8 in-law. 

9 ‘‘(H) An individual (other than an indi10 vidual who at any time during the taxable year 

11 was the spouse, determined without regard to 

12 section 7703, of the taxpayer) who, for the tax13 able year of the taxpayer, has the same prin14 cipal place of abode as the taxpayer and is a 

15 member of the taxpayer’s household. 

16 ‘‘(3) SPECIAL RULE RELATING TO MULTIPLE

17 SUPPORT AGREEMENTS.—For purposes of paragraph 

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

19 for a calendar year shall be treated as received from 

20 the taxpayer if— 

21 ‘‘(A) no one person contributed over one22 half of such support, 

23 ‘‘(B) over one-half of such support was re24 ceived from 2 or more persons each of whom, 

25 but for the fact that any such person alone did 
34

•S 812 IS

1 not contribute over one-half of such support, 

2 would have been entitled to claim such indi3 vidual as a dependent for a taxable year begin4 ning in such calendar year, 

5 ‘‘(C) the taxpayer contributed over 10 per6 cent of such support, and 

7 ‘‘(D) each person described in subpara8 graph (B) (other than the taxpayer) who con9 tributed over 10 percent of such support files a 

10 written declaration (in such manner and form 

11 as the Secretary may by regulations prescribe) 

12 that such person will not claim such individual 

13 as a dependent for any taxable year beginning 

14 in such calendar year. 

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

16 HANDICAPPED DEPENDENTS.— 

17 ‘‘(A) IN GENERAL.—For purposes of para18 graph (1)(B), the gross income of an individual 

19 who is permanently and totally disabled at any 

20 time during the taxable year shall not include 

21 income attributable to services performed by the 

22 individual at a sheltered workshop if— 

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

24 such workshop is the principal reason for 

25 the individual’s presence there, and 
35

•S 812 IS

1 ‘‘(ii) the income arises solely from ac2 tivities at such workshop which are inci3 dent to such medical care. 

4 ‘‘(B) SHELTERED WORKSHOP DEFINED.—

5 For purposes of subparagraph (A), the term 

6 ‘sheltered workshop’ means a school— 

7 ‘‘(i) which provides special instruction 

8 or training designed to alleviate the dis9 ability of the individual, and 

10 ‘‘(ii) which is operated by an organi11 zation described in section 501(c)(3) and 

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

13 by a State, a possession of the United 

14 States, any political subdivision of any of 

15 the foregoing, the United States, or the 

16 District of Columbia. 

17 ‘‘(5) SPECIAL RULES FOR SUPPORT.—For pur18 poses of this subsection— 

19 ‘‘(A) payments to a spouse which are in20 cludible in the gross income of such spouse 

21 shall not be treated as a payment by the payor 

22 spouse for the support of any dependent, and 

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

24 parent, support of a child received from the 
36

•S 812 IS

1 parent’s spouse shall be treated as received 

2 from the parent. 

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

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

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

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

7 child’s support during the calendar year from 

8 the child’s parents— 

9 ‘‘(i) who are divorced or legally sepa10 rated under a decree of divorce or separate 

11 maintenance, 

12 ‘‘(ii) who are separated under a writ13 ten separation agreement, or 

14 ‘‘(iii) who live apart at all times dur15 ing the last 6 months of the calendar year, 

16 and 

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

18 both of the child’s parents for more than one19 half of the calendar year, such child shall be 

20 treated as being the qualifying child or quali21 fying relative of the noncustodial parent for a 

22 calendar year if the requirements described in 

23 paragraph (2) are met. 
37

•S 812 IS

1 ‘‘(2) REQUIREMENTS.—For purposes of para2 graph (1), the requirements described in this para3 graph are met if— 

4 ‘‘(A) a decree of divorce or separate main5 tenance or written separation agreement be6 tween the parents applicable to the taxable year 

7 beginning in such calendar year provides that 

8 the noncustodial parent shall be entitled to any 

9 deduction allowable under section 2 for such 

10 child, and in the case of such a decree or agree11 ment executed before January 1, 1985, the 

12 noncustodial parent provides at least $600 for 

13 the support of such child during such calendar 

14 year, or 

15 ‘‘(B) the custodial parent signs a written 

16 declaration (in such manner and form as the 

17 Secretary may prescribe) that such parent will 

18 not claim such child as a dependent for such 

19 taxable year. 

20 For purposes of subparagraph (A), amounts ex21 pended for the support of a child or children shall 

22 be treated as received from the noncustodial parent 

23 to the extent that such parent provided amounts for 

24 such support. 
38

•S 812 IS

1 ‘‘(3) CUSTODIAL PARENT AND NONCUSTODIAL

2 PARENT.—For purposes of this subsection— 

3 ‘‘(A) CUSTODIAL PARENT.—The term ‘cus4 todial parent’ means the parent with whom a 

5 child shared the same principal place of abode 

6 for the greater portion of the calendar year. 

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

8 ‘noncustodial parent’ means the parent who is 

9 not the custodial parent. 

10 ‘‘(4) EXCEPTION FOR MULTIPLE-SUPPORT

11 AGREEMENTS.—This subsection shall not apply in 

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

13 child is treated as having been received from a tax14 payer under the provision of subsection (d)(3). 

15 ‘‘(f) OTHER DEFINITIONS AND RULES.—For pur16 poses of this section— 

17 ‘‘(1) CHILD DEFINED.— 

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

19 means an individual who is— 

20 ‘‘(i) a son, daughter, stepson, or step21 daughter of the taxpayer, or 

22 ‘‘(ii) an eligible foster child of the tax23 payer. 

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

25 whether any of the relationships specified in 
39

•S 812 IS

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

2 legally adopted individual of the taxpayer, or an 

3 individual who is lawfully placed with the tax4 payer for legal adoption by the taxpayer, shall 

5 be treated as a child of such individual by 

6 blood. 

7 ‘‘(C) ELIGIBLE FOSTER CHILD.—For pur8 poses of subparagraph (A)(ii), the term ‘eligible 

9 foster child’ means an individual who is placed 

10 with the taxpayer by an authorized placement 

11 agency or by judgment, decree, or other order 

12 of any court of competent jurisdiction. 

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

14 means an individual who during each of 5 calendar 

15 months during the calendar year in which the tax16 able year of the taxpayer begins— 

17 ‘‘(A) is a full-time student at an edu18 cational organization described in section 

19 3(d)(1)(B), or 

20 ‘‘(B) is pursuing a full-time course of insti21 tutional on-farm training under the supervision 

22 of an accredited agent of an educational organi23 zation described in section 3(d)(1)(B) or of a 

24 State or political subdivision of a State. 
40

•S 812 IS

1 ‘‘(3) DETERMINATION OF HOUSEHOLD STA2 TUS.—An individual shall not be treated as a mem3 ber of the taxpayer’s household if at any time during 

4 the taxable year of the taxpayer the relationship be5 tween such individual and the taxpayer is in viola6 tion of local law. 

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

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

9 the half blood. 

10 ‘‘(5) SPECIAL SUPPORT TEST IN CASE OF STU11 DENTS.—For purposes of subsections (c)(1)(D) and 

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

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

14 ‘‘(B) a student, amounts received as schol15 arships for study at an educational organization 

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

17 taken into account. 

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

19 ‘‘(A) IN GENERAL.—Solely for the pur20 poses referred to in subparagraph (B), a child 

21 of the taxpayer— 

22 ‘‘(i) who is presumed by law enforce23 ment authorities to have been kidnapped 

24 by someone who is not a member of the 

25 family of such child or the taxpayer, and 
41

•S 812 IS

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

2 which the kidnapping occurred, the same 

3 principal place of abode as the taxpayer for 

4 more than one-half of the portion of such 

5 year before the date of the kidnapping, 

6 shall be treated as meeting the require7 ment of subsection (c)(1)(B) with respect 

8 to a taxpayer for all taxable years ending 

9 during the period that the child is kid10 napped. 

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

12 apply solely for purposes of determining— 

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

14 and 

15 ‘‘(ii) whether an individual is a sur16 viving spouse or a head of a household (as 

17 such terms are defined in section 5). 

18 ‘‘(C) COMPARABLE TREATMENT OF CER19 TAIN QUALIFYING RELATIVES.—For purposes 

20 of this section, a child of the taxpayer— 

21 ‘‘(i) who is presumed by law enforce22 ment authorities to have been kidnapped 

23 by someone who is not a member of the 

24 family of such child or the taxpayer, and 
42

•S 812 IS

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

2 paragraph) a qualifying relative of the tax3 payer for the portion of the taxable year 

4 before the date of the kidnapping, shall be 

5 treated as a qualifying relative of the tax6 payer for all taxable years ending during 

7 the period that the child is kidnapped. 

8 ‘‘(D) TERMINATION OF TREATMENT.—

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

10 as of the first taxable year of the taxpayer be11 ginning after the calendar year in which there 

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

13 earlier, in which the child would have attained 

14 age 18). 

15 ‘‘PART II—TAX ON BUSINESS ACTIVITIES

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

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

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

18 every person engaged in a business activity located in the 

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

20 taxable income of such person. 

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

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

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

24 corporation, or otherwise. 
43

•S 812 IS

1 ‘‘(c) BUSINESS TAXABLE INCOME.— 

2 ‘‘(1) IN GENERAL.—For purposes of this sec3 tion, the term ‘business taxable income’ means gross 

4 active income reduced by the deductions specified in 

5 subsection (d). 

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

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

8 gross income other than investment income. 

9 ‘‘(d) DEDUCTIONS.— 

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

11 this subsection are— 

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

13 business activity, 

14 ‘‘(B) the compensation (including contribu15 tions to qualified retirement plans but not in16 cluding other fringe benefits) paid for employ17 ees performing services in such activity, and 

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

19 used in such activity. 

20 ‘‘(2) BUSINESS INPUTS.— 

21 ‘‘(A) IN GENERAL.—For purposes of para22 graph (1)(A), the term ‘cost of business inputs’ 

23 means— 
44

•S 812 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 
45

•S 812 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 
46

•S 812 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 
47

•S 812 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 per-
48

•S 812 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 
49

•S 812 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 
50

•S 812 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 
51

•S 812 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). 
52

•S 812 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). 
53

•S 812 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. 
54

•S 812 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, 2005. 

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, 2005. 

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