In the Red Act of 2016

To make college more affordable, reduce student debt, and provide greater access to higher education for all students of the United States. 1. Short title; table of contents (a) Short title This Act may be cited as the In the Red Act of 2016 (b) Table of contents The table of contents for this Act is as follows: Sec. 1. Short title; table of contents. Title I—America's college promise Sec. 101. State and Indian tribe grants for community college. Sec. 102. Pathways to student success. Title II—Student loan refinancing Sec. 201. Refinancing programs. Title III—Federal Pell Grant protection Sec. 301. Federal Pell Grant protection. Sec. 302. Point of order against cutting Federal Pell Grants. Sec. 303. Affirming that Federal Pell Grants are a foundational investment in affordable higher education. Title IV—Accountability Sec. 401. Supporting efforts to ensure that institutions of higher education are accountable for ensuring the high value of degrees and credentials. Title V—Offsets Sec. 501. Amendment of 1986 Code. Sec. 502. Fair share tax on high-income taxpayers. Sec. 503. Expansion of denial of deduction for certain excessive employee remuneration. Sec. 504. Partnership interests transferred in connection with performance of services. Sec. 505. Special rules for partners providing investment management services to partnerships. Sec. 506. Consistent treatment of stock options by corporations. Sec. 507. Application of executive pay deduction limit. Sec. 508. Modifications to rules relating to inverted corporations. Sec. 509. Modifications of foreign tax credit rules applicable to major integrated oil companies which are dual capacity taxpayers. Sec. 510. Limitation on section 199 deduction attributable to oil, natural gas, or primary products thereof. Sec. 511. Limitation on deduction for intangible drilling and development costs; amortization of disallowed amounts. Sec. 512. Limitation on percentage depletion allowance for oil and gas wells. Sec. 513. Limitation on deduction for tertiary injectants. Sec. 514. Modification of definition of major integrated oil company. Sec. 515. Repeal of outer Continental Shelf deep water and deep gas royalty relief. Sec. 516. Coordination of American Opportunity Credit and Lifetime Learning Credit with Pell Grants not used for qualified tuition and related expenses. Sec. 517. Expansion of Pell Grant exclusion from gross income. I America's college promise 101. State and Indian tribe grants for community college (a) In general From amounts appropriated under subsection (g)(1) for any fiscal year, the Secretary shall award grants to eligible States and Indian tribes to pay the Federal share of expenditures needed to carry out the activities and services described in subsection (e). (b) Federal share; non-Federal share (1) Federal share (A) Formula Subject to subparagraph (B), the Federal share of a grant under this section shall be based on a formula, determined by the Secretary, that— (i) accounts for the State or Indian tribe’s share of eligible students; and (ii) provides, for each eligible student in the State or Indian tribe, a per-student amount that is— (I) not less than 300 percent of the per-student amount of the State or Indian tribe share, determined under paragraph (2), subject to subclause (II); and (II) not greater than 75 percent of— (aa) for the 2016–2017 award year, the average resident community college tuition and fees per student in all States for the most recent year for which data are available; and (bb) for each subsequent award year, the average resident community college tuition and fees per student in all States calculated under this subclause for the preceding year, increased by the lesser of— (AA) the percentage by which the average resident community college tuition and fees per student in all States for the most recent year for which data are available increased as compared to such average for the preceding year; or (BB) 3 percent. (B) Exception for certain indian tribes In any case in which not less than 75 percent of the students at the community colleges operated or controlled by an Indian tribe are low-income students, the amount of the Federal share for such Indian tribe shall be not less than 95 percent of the total amount needed to waive tuition and fees for all eligible students enrolled in such community colleges. (2) State or tribal share (A) Formula (i) In general The State or tribal share of a grant under this section for each fiscal year shall be the amount needed to pay 25 percent of the average community college resident tuition and fees per student in all States in the 2016–2017 award year for all eligible students in the State or Indian tribe, respectively, for such fiscal year, except as provided in clause (ii). (ii) Exception for certain indian tribes In a case in which not less than 5 percent of the students at the community colleges operated or controlled by an Indian tribe are low-income students, the amount of such Indian tribe’s tribal share shall not exceed 5 percent of the total amount needed to waive tuition and fees for all eligible students enrolled in such community colleges. (B) Need-based aid A State or Indian tribe may include any need-based financial aid provided through State or tribal funds to eligible students as part of the State or tribal share. (C) No in-kind contributions A State or Indian tribe shall not include in-kind contributions for purposes of the State or tribal share described in subparagraph (A). (c) Eligibility To be eligible for a grant under this section, a State or Indian tribe shall agree to waive community college resident tuition and fees for all eligible students for each year of the grant. (d) Applications (1) Submission For each fiscal year for which a State or Indian tribe desires a grant under this section, an application shall be submitted to the Secretary at such time, in such manner, and containing such information as the Secretary may require. Such application shall be submitted by— (A) in the case of a State, the Governor, the State agency with jurisdiction over higher education, or another agency designated by the Governor to administer the program under this section; or (B) in the case of an Indian tribe, the governing body of such tribe. (2) Contents Each State or Indian tribe application shall include, at a minimum— (A) an estimate of the number of eligible students in the State or Indian tribe and the cost of waiving community college resident tuition and fees for all eligible students for each fiscal year covered by the grant, with annual increases of an amount that shall not exceed 3 percent of the prior year’s average resident community college tuition and fees; (B) an assurance that all community colleges in the State or under the jurisdiction of the Indian tribe, respectively, will waive resident tuition and fees for eligible students in programs that are— (i) academic programs with credits that can fully transfer via articulation agreement toward a baccalaureate degree or post­baccalaureate degree at any public institution of higher education in the State; or (ii) occupational skills training programs that lead to a recognized postsecondary credential that is in an in-demand industry sector or occupation in the State; (C) a description of the promising and evidence-based institutional reforms and innovative practices to improve student outcomes, including completion or transfer rates, that have been or will be adopted by the participating community colleges, such as— (i) providing comprehensive academic and student support services, including mentoring and advising, especially for first-generation and minority students; (ii) providing accelerated learning opportunities, such as dual or concurrent enrollment programs; (iii) advancing competency-based education; (iv) strengthening remedial education, especially for low-income students, first generation students, adult students, and students from other underrepresented groups in postsecondary education; (v) implementing course redesigns of high-enrollment courses to improve student outcomes and reduce cost; or (vi) utilizing career pathways or degree pathways; (D) a description of how the State or Indian tribe will promote alignment between its public secondary school and postsecondary education systems, including between 2-year and 4-year public institutions of higher education and with minority-serving institutions described in section 371 of the Higher Education Act of 1965 ( 20 U.S.C. 1067q (E) a description of how the State or Indian tribe will ensure that programs leading to a recognized postsecondary credential meet the quality criteria established by the State under section 123(a) of the Workforce Innovation and Opportunity Act ( 29 U.S.C. 3153(a) (F) an assurance that all participating community colleges in the State or under the authority of the Indian tribe have entered into program participation agreements under section 487 of the Higher Education Act of 1965 ( 20 U.S.C. 1094 (G) an assurance that, for each year of the grant, the State or Indian tribe will notify each eligible student of the student's remaining eligibility for assistance under this section; and (H) a description of how the State or Indian tribe will promote the improved performance of public institutions of higher education through funding reform, including through the use of a performance-based model that allocates a portion of the State or Indian tribe's public higher education expenditures based on the performance of those institutions on State-specified metrics, including successful student outcomes. (e) Allowable uses of funds (1) In general A State or Indian tribe shall use a grant under this section only to provide funds to participating community colleges to waive resident tuition and fees for eligible students who are enrolled in— (A) academic programs with credits that can fully transfer via articulation agreement toward a baccalaureate degree or post­bac­ca­lau­re­ate degree at any public institution of higher education in the State; or (B) occupational skills training programs that lead to a recognized postsecondary credential that is in an in-demand industry sector or occupation in the State. (2) Additional uses If a State or Indian tribe demonstrates to the Secretary that it has grant funds remaining after meeting the demand for activities described in paragraph (1), the State or Indian tribe may use those funds to carry out one or more of the following: (A) Expanding the waiver of resident tuition and fees at community college to students who are returning students or otherwise not enrolling in postsecondary education for the first time, and who meet the student eligibility requirements of clauses (ii) through (v) of subsection (f)(4)(A). (B) Expanding the scope and capacity of high-quality academic and occupational skills training programs at community colleges. (C) Improving postsecondary education readiness in the State or Indian tribe, through outreach and early intervention. (D) Expanding access to dual or concurrent enrollment programs. (E) Improving affordability at 4-year public institutions of higher education. (3) Use of funds for administrative purposes A State or Indian tribe that receives a grant under this section may not use any funds provided under this section for administrative purposes relating to such grant. (4) Maintenance of effort A State or Indian tribe receiving a grant under this section is entitled to receive its full allotment of funds under this section for a fiscal year only if, for each year of the grant, the State or Indian tribe provides financial support for public higher education at a level equal to or exceeding the average amount provided per full-time equivalent student for public institutions of higher education for the 3 consecutive preceding State or Indian tribe fiscal years. In making the calculation under this paragraph, the State or Indian tribe shall exclude capital expenses and research and development costs and include need-based financial aid for students who attend public institutions of higher education. (5) Annual report A State or Indian tribe receiving a grant under this section shall submit an annual report to the Secretary— (A) describing the uses of grant funds under this section, the progress made in fulfilling the requirements of the grant, and the rates of graduation, transfer, and attainment of a recognized postsecondary credential for the students at participating community colleges; and (B) including any other information as the Secretary may require. (6) Reporting by Secretary The Secretary annually shall— (A) compile and analyze the information described in paragraph (5); and (B) prepare and submit a report to the Committee on Health, Education, Labor, and Pensions of the Senate and the Committee on Education and the Workforce of the House of Representatives containing the analysis described in subparagraph (A) and an identification of State and Indian tribe best practices for achieving the purpose of this section. (7) Technical assistance The Secretary shall provide technical assistance to eligible States and Indian tribes concerning best practices regarding the promising and evidence-based institutional reforms and innovative practices to improve student outcomes as described in subsection (d)(2)(C) and shall disseminate such best practices among the States and Indian tribes. (8) Continuation of funding (A) In general A State or Indian tribe receiving a grant under this section for a fiscal year may continue to receive funding under this section for future fiscal years conditioned on the availability of budget authority and on meeting the requirements of the grant, as determined by the Secretary. (B) Discontinuation The Secretary may discontinue funding of the Federal share of a grant under this section if the State or Indian tribe has violated the terms of the grant or is not making adequate progress in implementing the reforms described in the application submitted under subsection (d). (f) Definitions In this section: (1) Career pathway The term career pathway 29 U.S.C. 3102 (2) Community college The term community college 20 U.S.C. 1059c (3) Dual or concurrent enrollment program The term dual or concurrent enrollment program (4) Eligible student (A) Definition The term eligible student (i) (I) enrolls in a community college for the first time, regardless of age, after the date of enactment of this Act; or (II) is enrolled in a community college, for the first time, as of the date of enactment of this Act; (ii) attends the community college on not less than a half-time basis; (iii) is maintaining satisfactory progress, as defined in section 484(c) of the Higher Education Act of 1965 ( 20 U.S.C. 1091(c) (iv) qualifies for resident tuition, as determined by the State or Indian tribe; and (v) is enrolled in an eligible program described in subsection (d)(2)(B). (B) Special rule An otherwise eligible student shall lose eligibility 3 calendar years after first receiving benefits under this section. (5) In-demand industry sector or occupation The term in-demand industry sector or occupation 29 U.S.C. 3102 (6) Indian tribe The term Indian tribe 25 U.S.C. 479a (7) Institution of higher education The term institution of higher education 20 U.S.C. 1001 (8) Recognized postsecondary credential The term recognized postsecondary credential 29 U.S.C. 3102 (9) Secretary The term Secretary (10) State The term State 20 U.S.C. 1003 (g) Appropriations (1) Authorization and appropriations For the purpose of making grants under this section, there are authorized to be appropriated, and there are appropriated— (A) $1,365,000,000 for fiscal year 2016; (B) $3,020,000,000 for fiscal year 2017; (C) $3,854,000,000 for fiscal year 2018; (D) $5,395,000,000 for fiscal year 2019; (E) $7,061,000,000 for fiscal year 2020; (F) $8,085,000,000 for fiscal year 2021; (G) $10,182,000,000 for fiscal year 2022; (H) $13,019,000,000 for fiscal year 2023; (I) $13,583,000,000 for fiscal year 2024; and (J) $14,171,000,000 for fiscal year 2025 and each succeeding fiscal year. (2) Availability Funds appropriated under paragraph (1) shall remain available to the Secretary until expended. (3) Insufficient funds If the amount appropriated under paragraph (1) for a fiscal year is not sufficient to award each participating State and Indian tribe a grant under this section that is equal to the minimum amount of the Federal share described in subsection (b)(1), the Secretary may ratably reduce the amount of each such grant or take other actions necessary to ensure an equitable distribution of such amount. 102. Pathways to student success (a) Pathways to student success for historically black colleges and universities (1) In general From amounts appropriated under subsection (d)(1) for any fiscal year, the Secretary shall award grants to participating 4-year historically black colleges or universities that meet the requirements of paragraph (2) to— (A) encourage students to enroll as first-time students and successfully complete a bachelor’s degree at participating institutions; (B) provide incentives to community college students to transfer to participating institutions through strong transfer pathways to complete a bachelor’s degree program; and (C) support participating institutions to better serve new and existing students by engaging in reforms and innovations designed to improve completion rates and other student outcomes. (2) Eligibility To be eligible to receive a grant under the program under this subsection, an institution shall be a historically black college or university that— (A) has a student body of which not less than 35 percent are low-income students; (B) commits to maintaining or adopting and implementing promising and evidence-based institutional reforms and innovative practices to improve the completion rates and other student outcomes, such as— (i) providing comprehensive academic and student support services, including mentoring and advising; (ii) providing accelerated learning opportunities and degree pathways, such as dual enrollment and pathways to graduate and professional degree programs; (iii) advancing distance and competency-based education; (iv) partnering with employers, industry, not-for-profit associations, and other groups to provide opportunities to advance learning outside the classroom, including work-based learning opportunities such as internships or apprenticeships or programs designed to improve intercultural development and personal growth, such as foreign exchange and study abroad programs; (v) reforming remedial education, especially for low-income students, first generation college students, adult students, and other underrepresented students; or (vi) implementing course redesigns of high-enrollment courses to improve student outcomes and reduce cost; (C) sets performance goals for improving student outcomes for the duration of the grant; and (D) if receiving a grant for transfer students, has articulation agreements with community colleges at the national, State, or local level to ensure that community college credits can fully transfer to the participating institution. (3) Grant amount (A) Initial amount For the first year that an eligible institution participates in the grant program under this subsection and subject to subparagraph (C), such eligible institution shall receive a grant in an amount based on the product of— (i) the actual cost of tuition and fees at the eligible institution in such year (referred to in this subsection as the per-student rebate (ii) the number of eligible students enrolled in the eligible institution for the preceding year. (B) Subsequent increases For each succeeding year after the first year of the grant program under this subsection, each participating eligible institution shall receive a grant in the amount determined under subparagraph (A) for such year, except that in no case shall the amount of the per-student rebate for an eligible institution increase by more than 3 percent as compared to the amount of such rebate for the preceding year. (C) Limitations (i) Maximum per-student rebate No eligible institution participating in the grant program under this subsection shall receive a per-student rebate amount for any year that is greater than the national average of annual tuition and fees at public 4-year institutions of higher education for such year, as determined by the Secretary. (ii) First year tuition and fees During the first year of participation in the grant program under this subsection, no eligible institution may increase tuition and fees at a rate greater than any annual increase at the eligible institution in the previous 5 years. (4) Application An eligible institution that desires a grant under this subsection shall submit an application to the Secretary at such time, in such manner, and containing such information as the Secretary may require. (5) Use of funds Funds awarded under this subsection to a participating eligible institution shall be— (A) applied in their entirety to student accounts; and (B) used to waive or significantly reduce tuition and fees for eligible students in an amount of not more than up to the annual per-student rebate amount for each student, for not more than the first 60 credits an eligible student enrolls in the participating eligible institution. (b) Pathways to student success for Hispanic-Serving institutions, Asian American and Native American Pacific Islander-Serving institutions, Tribal Colleges and Universities, Alaska Native-Serving institutions, Native Hawaiian-Serving institutions, Predominantly Black Institutions, and Native American-Serving nontribal institutions (1) In general From amounts appropriated under subsection (d)(1) for any fiscal year, the Secretary shall award grants to participating 4-year minority-serving institutions to— (A) encourage students to enroll as first-time students and successfully complete a bachelor’s degree at participating institutions; (B) provide incentives to community college students to transfer to participating institutions through strong transfer pathways to complete a bachelor’s degree program; and (C) support participating institutions to better serve new and existing students by engaging in reforms and innovations designed to improve completion rates and other student outcomes. (2) Institutional eligibility To be eligible to participate and receive a grant under this subsection, an institution shall be a minority-serving institution that— (A) has a student body of which not less than 35 percent are low-income students; (B) commits to maintaining or adopting and implementing promising and evidence-based institutional reforms and innovative practices to improve the completion rates and other student outcomes, such as— (i) providing comprehensive academic and student support services, including mentoring and advising; (ii) providing accelerated learning opportunities and degree pathways, such as dual enrollment and pathways to graduate and professional degree programs; (iii) advancing distance and competency-based education; (iv) partnering with employers, industry, not-for-profit associations, and other groups to provide opportunities to advance learning outside the classroom, including work-based learning opportunities such as internships or apprenticeships or programs designed to improve intercultural development and personal growth, such as foreign exchange and study abroad programs; (v) reforming remedial education, especially for low-income students, first generation college students, adult students, and other underrepresented students; and (vi) implementing course redesigns of high-enrollment courses to improve student outcomes and reduce cost; (C) sets performance goals for improving student outcomes for the duration of the grant; and (D) if receiving a grant for transfer students, has articulation agreements with community colleges at the national, State, or local levels to ensure that community college credits can fully transfer to the participating institution. (3) Grant amount (A) Initial amount For the first year that an eligible institution participates in the grant program under this subsection and subject to subparagraph (C), such participating eligible institution shall receive a grant in an amount based on the product of— (i) the actual cost of tuition and fees at the eligible institution in such year (referred to in this subsection as the per-student rebate (ii) the number of eligible students enrolled in the eligible institution for the preceding year. (B) Subsequent increases For each succeeding year after the first year of the grant program under this subsection, each participating eligible institution shall receive a grant in the amount determined under subparagraph (A) for such year, except that in no case shall the amount of the per-student rebate increase by more than 3 percent as compared to the amount of such rebate for the preceding year. (C) Limitations (i) Maximum per-student rebate No eligible institution participating in the grant program under this subsection shall receive a per-student rebate amount for a grant year greater than the national average of public 4-year institutional tuition and fees, as determined by the Secretary. (ii) First year tuition and fees During the first year of participation in the grant program under this subsection, no eligible institution may increase tuition and fees at a rate greater than any annual increase made by the institution in the previous 5 years. (4) Application An eligible institution shall submit an application to the Secretary at such time, in such a manner, and containing such information as determined by the Secretary. (5) Use of funds Funds awarded under this subsection to a participating eligible institution shall be— (A) applied in their entirety to student accounts; and (B) used to waive or significantly reduce tuition and fees for eligible students in an amount of not more than up to the annual per-student rebate amount for each student, for not more than the first 60 credits an eligible student enrolls in the participating eligible institution. (c) Definitions In this section: (1) Eligible student (A) Definition The term eligible student (i) (I) enrolls in a historically black college or university, or minority-serving institution, for the first time; or (II) transfers from a community college into a historically black college or university, or minority-serving institution, for the first time; (ii) attends the historically black college or university, or minority serving institution, on at least a half-time basis; (iii) maintains satisfactory academic progress; and (iv) is a low-income student. (B) Special rules (i) First 3 years An otherwise eligible student shall lose eligibility 3 calendar years after first receiving benefits under this section. (ii) Special rule for certain students Notwithstanding subparagraph (A)(i), an otherwise eligible student whose parent or guardian was denied a PLUS loan after November 2011 and before March 29, 2015, and who subsequently withdrew from a historically black college or university, or minority-serving institution, and has not yet completed a program of study at such historically black college or university or minority-serving institution, shall be eligible to participate under subsection (a) or (b) in order to complete such program of study, subject to all other requirements of subsection (a) or (b) (as the case may be). (2) Historically black college or university The term historically black college or university 20 U.S.C. 1061(2) (3) Low-income student The term low-income student 20 U.S.C. 1070a (4) Minority-serving institution The term minority-serving institution (A) described in paragraphs (2) through (7) of section 371(a) of the Higher Education Act of 1965 ( 20 U.S.C. 1067q(a) (B) designated as a minority-serving institution by the Secretary. (d) Appropriations (1) Authorization and appropriations for HBCU and MSI grants For the purpose of carrying out subsections (a) and (b), there are authorized to be appropriated, and there are appropriated— (A) $55,000,000 for fiscal year 2016; (B) $180,000,000 for fiscal year 2017; (C) $1,072,000,000 for fiscal year 2018; (D) $1,115,000,000 for fiscal year 2019; (E) $1,160,000,000 for fiscal year 2020; (F) $1,206,000,000 for fiscal year 2021; (G) $1,225,000,000 for fiscal year 2022; (H) $1,306,000,000 for fiscal year 2023; (I) $1,359,000,000 for fiscal year 2024; and (J) $1,414,000,000 for fiscal year 2025 and each succeeding fiscal year. (2) Availability Funds appropriated under paragraph (1) are to remain available to the Secretary until expended. (3) Insufficient funds If the amount appropriated under paragraph (1) for a fiscal year is not sufficient to award, to each participating institution in the grant programs under subsections (a) and (b), a grant under this section equal to 100 percent of the grant amount determined under subsection (a)(3) or (b)(3) (as the case may be), the Secretary may ratably reduce the amount of each such grant or take other actions necessary to ensure an equitable distribution of such amount. II Student loan refinancing 201. Refinancing programs (a) Program authority Section 451(a) of the Higher Education Act of 1965 ( 20 U.S.C. 1087a(a) (1) by striking and (2) (2) (2) by inserting ; and (3) to make loans under section 460A and section 460B section 459A (b) Refinancing program Part D of title IV of the Higher Education Act of 1965 ( 20 U.S.C. 1087a et seq. 460A. Refinancing FFEL and Federal Direct Loans (a) In general Beginning not later than 180 days after the date of enactment of the In the Red Act of 2016 (b) Refinancing Direct Loans (1) Federal Direct Loans Upon application of a qualified borrower, the Secretary shall repay a Federal Direct Stafford Loan, a Federal Direct Unsubsidized Stafford Loan, a Federal Direct PLUS Loan, or a Federal Direct Consolidation Loan of the qualified borrower, for which the first disbursement was made, or the application for the consolidation loan was received, before July 1, 2016, with the proceeds of a refinanced Federal Direct Stafford Loan, a Federal Direct Unsubsidized Stafford Loan, a Federal Direct PLUS Loan, or a Federal Direct Consolidation Loan, respectively, issued to the borrower in an amount equal to the sum of the unpaid principal, accrued unpaid interest, and late charges of the original loan. (2) Refinancing FFEL program loans as refinanced Federal Direct Loans Upon application of a qualified borrower for any loan that was made, insured, or guaranteed under part B and for which the first disbursement was made, or the application for the consolidation loan was received, before July 1, 2010, the Secretary shall make a loan under this part, in an amount equal to the sum of the unpaid principal, accrued unpaid interest, and late charges of the original loan to the borrower in accordance with the following: (A) The Secretary shall pay the proceeds of such loan to the eligible lender of the loan made, insured, or guaranteed under part B, in order to discharge the borrower from any remaining obligation to the lender with respect to the original loan. (B) A loan made under this section that was originally— (i) a loan originally made, insured, or guaranteed under section 428 shall be a Federal Direct Stafford Loan; (ii) a loan originally made, insured, or guaranteed under section 428B shall be a Federal Direct PLUS Loan; (iii) a loan originally made, insured, or guaranteed under section 428H shall be a Federal Direct Unsubsidized Stafford Loan; and (iv) a loan originally made, insured, or guaranteed under section 428C shall be a Federal Direct Consolidation Loan. (C) The interest rate for each loan made by the Secretary under this paragraph shall be the rate provided under subsection (c). (c) Interest rates (1) In general The interest rate for the refinanced Federal Direct Stafford Loans, Federal Direct Unsubsidized Stafford Loans, Federal Direct PLUS Loans, and Federal Direct Consolidation Loans, shall be a rate equal to— (A) in any case where the original loan was a loan under section 428 or 428H, a Federal Direct Stafford loan, or a Federal Direct Unsubsidized Stafford Loan, that was issued to an undergraduate student, a rate equal to the rate for Federal Direct Stafford Loans and Federal Direct Unsubsidized Stafford Loans issued to undergraduate students for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014; (B) in any case where the original loan was a loan under section 428 or 428H, a Federal Direct Stafford Loan, or a Federal Direct Unsubsidized Stafford Loan, that was issued to a graduate or professional student, a rate equal to the rate for Federal Direct Unsubsidized Stafford Loans issued to graduate or professional students for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014; (C) in any case where the original loan was a loan under section 428B or a Federal Direct PLUS Loan, a rate equal to the rate for Federal Direct PLUS Loans for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014; and (D) in any case where the original loan was a loan under section 428C or a Federal Direct Consolidation Loan, a rate calculated in accordance with paragraph (2). (2) Interest Rates for Consolidation Loans (A) Method of calculation In order to determine the interest rate for any refinanced Federal Direct Consolidation Loan under paragraph (1)(D), the Secretary shall— (i) determine each of the component loans that were originally consolidated in the loan under section 428C or the Federal Direct Consolidation Loan, and calculate the proportion of the unpaid principal balance of the loan under section 428C or the Federal Direct Consolidation Loan that each component loan represents; (ii) use the proportions determined in accordance with clause (i) and the interest rate applicable for each component loan, as determined under subparagraph (B), to calculate the weighted average of the interest rates on the loans consolidated into the loan under section 428C or the Federal Direct Consolidation Loan; and (iii) apply the weighted average calculated under clause (ii) as the interest rate for the refinanced Federal Direct Consolidation Loan. (B) Interest rates for component loans The interest rates for the component loans of a loan made under section 428C or a Federal Direct Consolidation Loan shall be the following: (i) The interest rate for any loan under section 428 or 428H, Federal Direct Stafford Loan, or Federal Direct Unsubsidized Stafford Loan issued to an undergraduate student shall be a rate equal to the lesser of— (I) the rate for Federal Direct Stafford Loans and Federal Direct Unsubsidized Stafford Loans issued to undergraduate students for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014; or (II) the original interest rate of the component loan. (ii) The interest rate for any loan under section 428 or 428H, Federal Direct Stafford Loan, or Federal Direct Unsubsidized Stafford Loan issued to a graduate or professional student shall be a rate equal to the lesser of— (I) the rate for Federal Direct Unsubsidized Stafford Loans issued to graduate or professional students for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014; or (II) the original interest rate of the component loan. (iii) The interest rate for any loan under section 428B or Federal Direct PLUS Loan shall be a rate equal to the lesser of— (I) the rate for Federal Direct PLUS Loans for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014; or (II) the original interest rate of the component loan. (iv) The interest rate for any component loan that is a loan under section 428C or a Federal Direct Consolidation Loan shall be the weighted average of the interest rates that would apply under this subparagraph for each loan comprising the component consolidation loan. (v) The interest rate for any eligible loan that is a component of a loan made under section 428C or a Federal Direct Consolidation Loan and is not described in clauses (i) through (iv) shall be the interest rate on the original component loan. (3) Fixed Rate The applicable rate of interest determined under paragraph (1) for a refinanced loan under this section shall be fixed for the period of the loan. (d) Terms and conditions of loans (1) In general A loan that is refinanced under this section shall have the same terms and conditions as the original loan, except as otherwise provided in this section. (2) No automatic extension of repayment period Refinancing a loan under this section shall not result in the extension of the duration of the repayment period of the loan, and the borrower shall retain the same repayment term that was in effect on the original loan. Nothing in this paragraph shall be construed to prevent a borrower from electing a different repayment plan at any time in accordance with section 455(d)(3). (e) Definition of qualified borrower (1) In General For purposes of this section, the term qualified borrower (A) of a loan under this part or part B for which the first disbursement was made, or the application for a consolidation loan was received, before July 1, 2016; and (B) who meets the eligibility requirements based on income or debt-to-income ratio established by the Secretary. (2) Income requirements Not later than 180 days after the date of enactment of the In the Red Act of 2016 (f) Notification to borrowers The Secretary, in coordination with the Director of the Bureau of Consumer Financial Protection, shall undertake a campaign to alert borrowers of loans that are eligible for refinancing under this section that the borrowers are eligible to apply for such refinancing. The campaign shall include the following activities: (1) Developing consumer information materials about the availability of Federal student loan refinancing. (2) Requiring servicers of loans under this part or part B to provide such consumer information to borrowers in a manner determined appropriate by the Secretary, in consultation with the Director of the Bureau of Consumer Financial Protection. 460B. Federal Direct Refinanced Private Loan program (a) Definitions In this section: (1) Eligible private education loan The term eligible private education loan 15 U.S.C. 1650(a) (A) was disbursed to the borrower before July 1, 2016; and (B) was for the borrower’s own postsecondary educational expenses for an eligible program at an institution of higher education participating in the loan program under this part, as of the date that the loan was disbursed. (2) Federal Direct Refinanced Private Loan The term Federal Direct Refinanced Private Loan (3) Private educational lender The term private educational lender 15 U.S.C. 1650(a) (4) Qualified borrower The term qualified borrower (A) has an eligible private education loan; (B) has been current on payments on the eligible private education loan for the 6 months prior to the date of the qualified borrower's application for refinancing under this section, and is in good standing on the loan at the time of such application; (C) is not in default on the eligible private education loan or on any loan made, insured, or guaranteed under this part or part B or E; and (D) meets the eligibility requirements described in subsection (b)(2). (b) Program authorized (1) In general The Secretary, in consultation with the Secretary of the Treasury, shall carry out a program under which the Secretary, upon application by a qualified borrower who has an eligible private education loan, shall issue such borrower a loan under this part in accordance with the following: (A) The loan issued under this program shall be in an amount equal to the sum of the unpaid principal, accrued unpaid interest, and late charges of the private education loan. (B) The Secretary shall pay the proceeds of the loan issued under this program to the private educational lender of the private education loan, in order to discharge the qualified borrower from any remaining obligation to the lender with respect to the original loan. (C) The Secretary shall require that the qualified borrower undergo loan counseling that provides all of the information and counseling required under clauses (i) through (viii) of section 485(b)(1)(A) before the loan is refinanced in accordance with this section, and before the proceeds of such loan are paid to the private educational lender. (D) The Secretary shall issue the loan as a Federal Direct Refinanced Private Loan, which shall have the same terms, conditions, and benefits as a Federal Direct Unsubsidized Stafford Loan, except as otherwise provided in this section. (2) Borrower eligibility Not later than 180 days after the date of enactment of the In the Red Act of 2016 (A) based on income or debt-to-income ratio that take into consideration providing access to refinancing under this section for borrowers with the greatest financial need; (B) to ensure eligibility only for borrowers in good standing; (C) to minimize inequities between Federal Direct Refinanced Private Loans and other Federal student loans; (D) to preclude windfall profits for private educational lenders; and (E) to ensure full access to the program authorized in this subsection for borrowers with private loans who otherwise meet the criteria established in accordance with subparagraphs (A) and (B). (c) Interest rate (1) In general The interest rate for a Federal Direct Refinanced Private Loan is— (A) in the case of a Federal Direct Refinanced Private Loan for a private education loan originally issued for undergraduate postsecondary educational expenses, a rate equal to the rate for Federal Direct Stafford Loans and Federal Direct Unsubsidized Stafford Loans issued to undergraduate students for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014; and (B) in the case of a Federal Direct Refinanced Private Loan for a private education loan originally issued for graduate or professional degree postsecondary educational expenses, a rate equal to the rate for Federal Direct Unsubsidized Stafford Loans issued to graduate or professional students for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014. (2) Combined undergraduate and graduate study loans If a Federal Direct Refinanced Private Loan is for a private education loan originally issued for both undergraduate and graduate or professional postsecondary educational expenses, the interest rate shall be a rate equal to the rate for Federal Direct PLUS Loans for the 12-month period beginning on July 1, 2013, and ending on June 30, 2014. (3) Fixed Rate The applicable rate of interest determined under this subsection for a Federal Direct Refinanced Private Loan shall be fixed for the period of the loan. (d) No inclusion in aggregate limits The amount of a Federal Direct Refinanced Private Loan, or a Federal Direct Consolidated Loan to the extent such loan was used to repay a Federal Direct Refinanced Private Loan, shall not be included in calculating a borrower's annual or aggregate loan limits under section 428 or 428H. (e) No eligibility for service-Related repayment Notwithstanding sections 428K(a)(2)(A), 428L(b)(2), 455(m)(3)(A), and 460(b), a Federal Direct Refinanced Private Loan, or any Federal Direct Consolidation Loan to the extent such loan was used to repay a Federal Direct Refinanced Private Loan, shall not be eligible for any loan repayment or loan forgiveness program under section 428K, 428L, or 460 or for the repayment plan for public service employees under section 455(m). (f) Private educational lender reporting requirement (1) Reporting required Not later than 180 days after the date of enactment of the In the Red Act of 2016 (2) Contents of reporting The data that private educational lenders shall report in accordance with paragraph (1) shall include each of the following about private education loans (as defined in section 140(a) of the Truth in Lending Act ( 15 U.S.C. 1650(a) (A) The total amount of private education loan debt the lender holds. (B) The total number of private education loan borrowers the lender serves. (C) The average interest rate on the outstanding private education loan debt held by the lender. (D) The proportion of private education loan borrowers who are in default on a loan held by the lender. (E) The proportion of the outstanding private education loan volume held by the lender that is in default. (F) The proportions of outstanding private education loan borrowers who are 30, 60, and 90 days delinquent. (G) The proportions of outstanding private education loan volume that is 30, 60, and 90 days delinquent. (g) Notification to borrowers The Secretary, in coordination with the Secretary of the Treasury and the Director of the Bureau of Consumer Financial Protection, shall undertake a campaign to alert borrowers about the availability of private student loan refinancing under this section. . (c) Amendments to public service repayment plan provisions Section 455(m) of the Higher Education Act of 1965 ( 20 U.S.C. 1087e(m) (1) by redesignating paragraphs (3) and (4) as paragraphs (4) and (5), respectively; (2) by inserting after paragraph (2) the following: (3) Special rules for section 460A loans (A) Refinanced Federal Direct loans Notwithstanding paragraph (1), in determining the number of monthly payments that meet the requirements of such paragraph for an eligible Federal Direct Loan refinanced under section 460A that was originally a loan under this part, the Secretary shall include all monthly payments made on the original loan that meet the requirements of such paragraph. (B) Refinanced FFEL loans In the case of an eligible Federal Direct Loan refinanced under section 460A that was originally a loan under part B, only monthly payments made after the date on which the loan was refinanced may be included for purposes of paragraph (1). ; and (3) in paragraph (4)(A) (as redesignated by paragraph (1)), by inserting (including any Federal Direct Stafford Loan, Federal Direct PLUS Loan, Federal Direct Unsubsidized Stafford Loan, or Federal Direct Consolidation Loan refinanced under section 460A) (d) Income-Based repayment Section 493C of the Higher Education Act of 1965 ( 20 U.S.C. 1098e (f) Special rule for refinanced loans (1) Refinanced Federal Direct and FFEL loans In calculating the period of time during which a borrower of a loan that is refinanced under section 460A has made monthly payments for purposes of subsection (b)(7), the Secretary shall deem the period to include all monthly payments made for the original loan, and all monthly payments made for the refinanced loan, that otherwise meet the requirements of this section. (2) Federal Direct Refinanced Private Loans In calculating the period of time during which a borrower of a Federal Direct Refinanced Private Loan under section 460B has made monthly payments for purposes of subsection (b)(7), the Secretary shall include only payments— (A) that are made after the date of the issuance of the Federal Direct Refinanced Private Loan; and (B) that otherwise meet the requirements of this section. . III Federal Pell Grant protection 301. Federal Pell Grant protection Section 401(b)(7) of the Higher Education Act of 1965 ( 20 U.S.C. 1070a(b)(7) (1) in subparagraph (A)(iii), by striking clauses (ii) and (iii) of subparagraph (B) subparagraph (B)(ii) (2) in subparagraph (C)— (A) in clause (ii)— (i) in the clause heading, by striking Award years 2014–2015 through 2017–2018 Award year 2014–2015 and subsequent award years (ii) in the matter preceding subclause (I), by striking each of the award years 2014–2015 through 2017–2018 award year 2014–2015 and each subsequent award year (iii) in subclause (I), by striking clause (iv)(II) clause (iii)(II) (B) by striking clause (iii); and (C) by redesignating clause (iv) as clause (iii). 302. Point of order against cutting Federal Pell Grants (a) Point of Order It shall not be in order in the Senate to consider any bill, joint resolution, motion, amendment, amendment between the Houses, or conference report that would decrease the appropriations provided for Federal Pell Grants under section 401(b)(7) of the Higher Education Act of 1965 ( 20 U.S.C. 1070a(b)(7) (b) Waiver and appeal Subsection (a) may be waived or suspended in the Senate only by an affirmative vote of three-fifths of the Members, duly chosen and sworn. An affirmative vote of three-fifths of the Members of the Senate, duly chosen and sworn, shall be required to sustain an appeal of the ruling of the Chair on a point of order raised under subsection (a). 303. Affirming that Federal Pell Grants are a foundational investment in affordable higher education (a) Findings Congress finds the following: (1) Research shows that with higher educational attainment, individuals are more likely to be employed, earn higher wages, secure health and retirement benefits, make healthier life choices, and be more engaged citizens of their communities. (2) Higher education, whether at a 2- or 4-year institution, can help people of the United States from lower income backgrounds climb into the middle class. (3) In 2015, more than 20,000,000 students enrolled in colleges and universities in the United States—an increase of 4,900,000 since 2000. (4) Despite the benefits of further education beyond high school, many students from low-income backgrounds do not attend college. According to the United States Census Bureau, approximately 80 percent of high school graduates from the wealthiest families pursue higher education, while only a little more than half from the lowest income quartile attend college. (5) Federal Pell Grants provide need-based aid to students who want to further their education and are the single largest source of grant aid for helping students afford college. (6) In award year 2013–2014, an estimated 73 percent of all Pell Grant recipients had a total family income equal to or less than $30,000. (7) In 2015, more than 8,200,000 students, or approximately 41 percent of all undergraduates, used Federal Pell Grants to finance their education. (b) Sense of the Senate It is the sense of the Senate that Congress should— (1) affirm that Federal Pell Grants are a foundational investment in affordable higher education for students and families; and (2) commit to ensuring that Federal Pell Grants remain a stable source of financial support for students and families. IV Accountability 401. Supporting efforts to ensure that institutions of higher education are accountable for ensuring the high value of degrees and credentials (a) Findings Congress finds the following: (1) The employment rate for people of the United States between the ages of 21 to 25 has declined by 12 percent from 2000 through 2012. (2) The cost of attending a 4-year public institution of higher education has increased by 32 percent from 2002 through 2012. (3) More than 1 in 4 student loan borrowers are now in default or delinquent on a student loan. (4) There are limited means through which to ensure that institutions of higher education are held accountable for the value of the degrees and credentials obtained by students, or the outcomes of those students. (5) Student borrowers who obtain a high-value degree or credential are much more likely to be able to find a good paying job and repay their student loan debt. (b) Sense of the Senate It is the sense of the Senate that Congress should support efforts to ensure that institutions of higher education have strong incentives to ensure that students graduate with degrees and credentials that have a high value, and that will enable graduates to secure good-paying employment in their field of study and enjoy long-term success, by— (1) enhancing accountability for institutions of higher education for the quality and cost of degree programs, including student debt burden; (2) holding institutions of higher education and their leaders financially accountable when the institutions or leaders engage in fraud or misconduct that violates Federal and State laws; (3) creating incentives and tools that will allow State governments and institutions of higher education to curb tuition inflation and maintain investment in higher education; (4) creating incentives for institutions of higher education to direct more resources to their academic programs and to provide pathways to ensure that all students can complete their degrees and credentials in a timely manner; and (5) guaranteeing that the servicing of student loans made, insured, or guaranteed under part B or D of title IV of the Higher Education Act of 1965 ( 20 U.S.C. 1071 et seq. V Offsets 501. Amendment of 1986 Code Except as otherwise expressly provided, whenever in this title an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986. 502. Fair share tax on high-income taxpayers (a) In general Subchapter A of chapter 1 VII Fair share tax on high-income taxpayers Sec. 59A. Fair share tax. 59A. Fair share tax (a) General rule (1) Phase-in of tax In the case of any high-income taxpayer, there is hereby imposed for a taxable year (in addition to any other tax imposed by this subtitle) a tax equal to the product of— (A) the amount determined under paragraph (2), and (B) a fraction (not to exceed 1)— (i) the numerator of which is the excess of— (I) the taxpayer's adjusted gross income, over (II) the dollar amount in effect under subsection (c)(1), and (ii) the denominator of which is the dollar amount in effect under subsection (c)(1). (2) Amount of tax The amount of tax determined under this paragraph is an amount equal to the excess (if any) of— (A) the tentative fair share tax for the taxable year, over (B) the excess of— (i) the sum of— (I) the regular tax liability (as defined in section 26(b)) for the taxable year, determined without regard to any tax liability determined under this section, (II) the tax imposed by section 55 for the taxable year, plus (III) the payroll tax for the taxable year, over (ii) the credits allowable under part IV of subchapter A (other than sections 27(a), 31, and 34). (b) Tentative fair share tax For purposes of this section— (1) In general The tentative fair share tax for the taxable year is 30 percent of the excess of— (A) the adjusted gross income of the taxpayer, over (B) the modified charitable contribution deduction for the taxable year. (2) Modified charitable contribution deduction For purposes of paragraph (1)— (A) In general The modified charitable contribution deduction for any taxable year is an amount equal to the amount which bears the same ratio to the deduction allowable under section 170 (section 642(c) in the case of a trust or estate) for such taxable year as— (i) the amount of itemized deductions allowable under the regular tax (as defined in section 55) for such taxable year, determined after the application of section 68, bears to (ii) such amount, determined before the application of section 68. (B) Taxpayer must itemize In the case of any individual who does not elect to itemize deductions for the taxable year, the modified charitable contribution deduction shall be zero. (c) High-Income taxpayer For purposes of this section— (1) In general The term high-income taxpayer (2) Inflation adjustment (A) In general In the case of a taxable year beginning after 2016, the $1,000,000 amount under paragraph (1) shall be increased by an amount equal to— (i) such dollar amount, multiplied by (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting calendar year 2015 calendar year 1992 (B) Rounding If any amount as adjusted under subparagraph (A) is not a multiple of $10,000, such amount shall be rounded to the next lowest multiple of $10,000. (d) Payroll tax For purposes of this section, the payroll tax for any taxable year is an amount equal to the excess of— (1) the taxes imposed on the taxpayer under sections 1401, 1411, 3101, 3201, and 3211(a) (to the extent such tax is attributable to the rate of tax in effect under section 3101) with respect to such taxable year or wages or compensation received during such taxable year, over (2) the deduction allowable under section 164(f) for such taxable year. (e) Special rule for estates and trusts For purposes of this section, in the case of an estate or trust, adjusted gross income shall be computed in the manner described in section 67(e). (f) Not treated as tax imposed by this chapter for certain purposes The tax imposed under this section shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter (other than the credit allowed under section 27(a)) or for purposes of section 55. . (b) Clerical amendment The table of parts for subchapter A of chapter 1 Part VII. Fair share tax on high-Income taxpayers . (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2015. 503. Expansion of denial of deduction for certain excessive employee remuneration (a) Application to all current and former employees (1) In general Section 162(m) (A) by striking covered employee covered individual (B) by striking such employee such individual (2) Covered individual Paragraph (3) of section 162(m) (3) Covered individual For purposes of this subsection, the term covered individual . (3) Conforming amendments (A) Section 48D(b)(3)(A) (as in effect for taxable years beginning before January 1, 2016) section 162(m)(3) (B) Section 409A(b)(3)(D)(ii) (as in effect for taxable years beginning before January 1, 2016) section 162(m)(3) (b) Expansion of applicable employee remuneration (1) Elimination of exception for commission-based pay (A) In general Paragraph (4) of section 162(m), as amended by subsection (a), is amended by striking subparagraph (B) and by redesignating subparagraphs (C) through (G) as subparagraphs (B) through (F), respectively. (B) Conforming amendments (i) Section 162(m)(5) (I) by striking subparagraphs (B), (C), and (D) thereof subparagraphs (B) and (C) thereof (II) by striking subparagraphs (F) and (G) subparagraphs (E) and (F) (ii) Section 162(m)(6) (I) by striking subparagraphs (B), (C), and (D) thereof subparagraphs (B) and (C) thereof (II) by striking subparagraphs (F) and (G) subparagraphs (E) and (F) (2) Inclusion of performance-based compensation (A) In general Paragraph (4) of section 162(m), as amended by subsection (a) and paragraph (1) of this subsection, is amended by striking subparagraph (B) and redesignating subparagraphs (C) through (F) as subparagraphs (B) through (E), respectively. (B) Conforming amendments (i) Section 162(m)(5), as amended by paragraph (1), is amended— (I) by striking subparagraphs (B) and (C) thereof subparagraph (B) thereof (II) by striking subparagraphs (E) and (F) subparagraphs (D) and (E) (ii) Section 162(m)(6), as amended by paragraph (1), is amended— (I) by striking subparagraphs (B) and (C) thereof subparagraph (B) thereof (II) by striking subparagraphs (E) and (F) subparagraphs (D) and (E) (c) Expansion of applicable employer Paragraph (2) of section 162(m) (2) Publicly held corporation For purposes of this subsection, the term publicly held corporation 15 U.S.C. 78c (A) the securities of which are registered under section 12 of such Act ( 15 U.S.C. 78l (B) that is required to file reports under section 15(d) of such Act ( 15 U.S.C. 780(d) . (d) Regulatory authority (1) In general Section 162(m) (7) Regulations The Secretary may prescribe such guidance, rules, or regulations, including with respect to reporting, as are necessary to carry out the purposes of this subsection. . (2) Conforming amendment Paragraph (6) of section 162(m) (e) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2015. 504. Partnership interests transferred in connection with performance of services (a) Modification to election To include partnership interest in gross income in year of transfer Subsection (c) of section 83 (4) Partnership interests Except as provided by the Secretary— (A) In general In the case of any transfer of an interest in a partnership in connection with the provision of services to (or for the benefit of) such partnership— (i) the fair market value of such interest shall be treated for purposes of this section as being equal to the amount of the distribution which the partner would receive if the partnership sold (at the time of the transfer) all of its assets at fair market value and distributed the proceeds of such sale (reduced by the liabilities of the partnership) to its partners in liquidation of the partnership, and (ii) the person receiving such interest shall be treated as having made the election under subsection (b)(1) unless such person makes an election under this paragraph to have such subsection not apply. (B) Election The election under subparagraph (A)(ii) shall be made under rules similar to the rules of subsection (b)(2). . (b) Effective date The amendments made by this section shall apply to interests in partnerships transferred after the date of the enactment of this Act. 505. Special rules for partners providing investment management services to partnerships (a) In general Part I of subchapter K of chapter 1 710. Special rules for partners providing investment management services to partnerships (a) Treatment of distributive share of partnership items For purposes of this title, in the case of an investment services partnership interest— (1) In general Notwithstanding section 702(b)— (A) an amount equal to the net capital gain with respect to such interest for any partnership taxable year shall be treated as ordinary income, and (B) subject to the limitation of paragraph (2), an amount equal to the net capital loss with respect to such interest for any partnership taxable year shall be treated as an ordinary loss. (2) Recharacterization of losses limited to recharacterized gains The amount treated as ordinary loss under paragraph (1)(B) for any taxable year shall not exceed the excess (if any) of— (A) the aggregate amount treated as ordinary income under paragraph (1)(A) with respect to the investment services partnership interest for all preceding partnership taxable years to which this section applies, over (B) the aggregate amount treated as ordinary loss under paragraph (1)(B) with respect to such interest for all preceding partnership taxable years to which this section applies. (3) Allocation to items of gain and loss (A) Net capital gain The amount treated as ordinary income under paragraph (1)(A) shall be allocated ratably among the items of long-term capital gain taken into account in determining such net capital gain. (B) Net capital loss The amount treated as ordinary loss under paragraph (1)(B) shall be allocated ratably among the items of long-term capital loss and short-term capital loss taken into account in determining such net capital loss. (4) Terms relating to capital gains and losses For purposes of this section— (A) In general Net capital gain, long-term capital gain, and long-term capital loss, with respect to any investment services partnership interest for any taxable year, shall be determined under section 1222, except that such section shall be applied— (i) without regard to the recharacterization of any item as ordinary income or ordinary loss under this section, (ii) by only taking into account items of gain and loss taken into account by the holder of such interest under section 702 (other than subsection (a)(9) thereof) with respect to such interest for such taxable year, and (iii) by treating property which is taken into account in determining gains and losses to which section 1231 applies as capital assets held for more than 1 year. (B) Net capital loss The term net capital loss (5) Special rule for dividends Any dividend allocated with respect to any investment services partnership interest shall not be treated as qualified dividend income for purposes of section 1(h). (6) Special rule for qualified small business stock Section 1202 shall not apply to any gain from the sale or exchange of qualified small business stock (as defined in section 1202(c)) allocated with respect to any investment services partnership interest. (b) Dispositions of partnership interests (1) Gain (A) In general Any gain on the disposition of an investment services partnership interest shall be— (i) treated as ordinary income, and (ii) recognized notwithstanding any other provision of this subtitle. (B) Gift and transfers at death In the case of a disposition of an investment services partnership interest by gift or by reason of death of the taxpayer— (i) subparagraph (A) shall not apply, (ii) such interest shall be treated as an investment services partnership interest in the hands of the person acquiring such interest, and (iii) any amount that would have been treated as ordinary income under this subsection had the decedent sold such interest immediately before death shall be treated as an item of income in respect of a decedent under section 691. (2) Loss Any loss on the disposition of an investment services partnership interest shall be treated as an ordinary loss to the extent of the excess (if any) of— (A) the aggregate amount treated as ordinary income under subsection (a) with respect to such interest for all partnership taxable years to which this section applies, over (B) the aggregate amount treated as ordinary loss under subsection (a) with respect to such interest for all partnership taxable years to which this section applies. (3) Election with respect to certain exchanges Paragraph (1)(A)(ii) shall not apply to the contribution of an investment services partnership interest to a partnership in exchange for an interest in such partnership if— (A) the taxpayer makes an irrevocable election to treat the partnership interest received in the exchange as an investment services partnership interest, and (B) the taxpayer agrees to comply with such reporting and recordkeeping requirements as the Secretary may prescribe. (4) Distributions of partnership property (A) In general In the case of any distribution of property by a partnership with respect to any investment services partnership interest held by a partner, the partner receiving such property shall recognize gain equal to the excess (if any) of— (i) the fair market value of such property at the time of such distribution, over (ii) the adjusted basis of such property in the hands of such partner (determined without regard to subparagraph (C)). (B) Treatment of gain as ordinary income Any gain recognized by such partner under subparagraph (A) shall be treated as ordinary income to the same extent and in the same manner as the increase in such partner’s distributive share of the taxable income of the partnership would be treated under subsection (a) if, immediately prior to the distribution, the partnership had sold the distributed property at fair market value and all of the gain from such disposition were allocated to such partner. For purposes of applying subsection (a)(2), any gain treated as ordinary income under this subparagraph shall be treated as an amount treated as ordinary income under subsection (a)(1)(A). (C) Adjustment of basis In the case of a distribution to which subparagraph (A) applies, the basis of the distributed property in the hands of the distributee partner shall be the fair market value of such property. (D) Special rules with respect to mergers, divisions, and technical terminations In the case of a taxpayer which satisfies requirements similar to the requirements of subparagraphs (A) and (B) of paragraph (3), this paragraph and paragraph (1)(A)(ii) shall not apply to the distribution of a partnership interest if such distribution is in connection with a contribution (or deemed contribution) of any property of the partnership to which section 721 applies pursuant to a transaction described in paragraph (1)(B) or (2) of section 708(b). (c) Investment services partnership interest For purposes of this section— (1) In general The term investment services partnership interest (A) shall not be treated as an investment services partnership interest for any period before the first date on which it is so held in connection with such a trade or business, (B) shall not cease to be an investment services partnership interest merely because such person holds such interest other than in connection with such a trade or business, and (C) shall be treated as an investment services partnership interest if acquired from a related person in whose hands such interest was an investment services partnership interest. (2) Businesses to which this section applies A trade or business is described in this paragraph if such trade or business primarily involves the performance of any of the following services with respect to assets held (directly or indirectly) by one or more investment partnerships referred to in paragraph (1): (A) Advising as to the advisability of investing in, purchasing, or selling any specified asset. (B) Managing, acquiring, or disposing of any specified asset. (C) Arranging financing with respect to acquiring specified assets. (D) Any activity in support of any service described in subparagraphs (A) through (C). (3) Investment partnership (A) In general The term investment partnership (i) substantially all of the assets of the partnership are specified assets (determined without regard to any section 197 intangible within the meaning of section 197(d)), and (ii) less than 75 percent of the capital of the partnership is attributable to qualified capital interests which constitute property held in connection with a trade or business of the owner of such interest. (B) Look-through of certain wholly owned entities for purposes of determining assets of the partnership (i) In general For purposes of determining the assets of a partnership under subparagraph (A)(i)— (I) any interest in a specified entity shall not be treated as an asset of such partnership, and (II) such partnership shall be treated as holding its proportionate share of each of the assets of such specified entity. (ii) Specified entity For purposes of clause (i), the term specified entity (I) a partnership all of the capital and profits interests of which are held directly or indirectly by the upper-tier partnership, or (II) a foreign corporation which does not engage in a trade or business in the United States and all of the stock of which is held directly or indirectly by the upper-tier partnership. (C) Special rules for determining if property held in connection with trade or business (i) In general Except as otherwise provided by the Secretary, solely for purposes of determining whether any interest in a partnership constitutes property held in connection with a trade or business under subparagraph (A)(ii)— (I) a trade or business of any person closely related to the owner of such interest shall be treated as a trade or business of such owner, (II) such interest shall be treated as held by a person in connection with a trade or business during any taxable year if such interest was so held by such person during any 3 taxable years preceding such taxable year, and (III) paragraph (5)(B) shall not apply. (ii) Closely related persons For purposes of clause (i)(I), a person shall be treated as closely related to another person if, taking into account the rules of section 267(c), the relationship between such persons is described in— (I) paragraph (1) or (9) of section 267(b), or (II) section 267(b)(4), but solely in the case of a trust with respect to which each current beneficiary is the grantor or a person whose relationship to the grantor is described in paragraph (1) or (9) of section 267(b). (D) Anti-abuse rules The Secretary may issue regulations or other guidance which prevent the avoidance of the purposes of subparagraph (A), including regulations or other guidance which treat convertible and contingent debt (and other debt having the attributes of equity) as a capital interest in the partnership. (E) Controlled groups of entities (i) In general In the case of a controlled group of entities, if an interest in the partnership received in exchange for a contribution to the capital of the partnership by any member of such controlled group would (in the hands of such member) constitute property held in connection with a trade or business, then any interest in such partnership held by any member of such group shall be treated for purposes of subparagraph (A) as constituting (in the hands of such member) property held in connection with a trade or business. (ii) Controlled group of entities For purposes of clause (i), the term controlled group of entities (F) Special rule for corporations For purposes of this paragraph, in the case of a corporation, the determination of whether property is held in connection with a trade or business shall be determined as if the taxpayer were an individual. (4) Specified asset The term specified asset (5) Related persons (A) In general A person shall be treated as related to another person if the relationship between such persons is described in section 267(b) or 707(b). (B) Attribution of partner services Any service described in paragraph (2) which is provided by a partner of a partnership shall be treated as also provided by such partnership. (d) Exception for certain capital interests (1) In general In the case of any portion of an investment services partnership interest which is a qualified capital interest, all items of gain and loss (and any dividends) which are allocated to such qualified capital interest shall not be taken into account under subsection (a) if— (A) allocations of items are made by the partnership to such qualified capital interest in the same manner as such allocations are made to other qualified capital interests held by partners who do not provide any services described in subsection (c)(2) and who are not related to the partner holding the qualified capital interest, and (B) the allocations made to such other interests are significant compared to the allocations made to such qualified capital interest. (2) Authority to provide exceptions to allocation requirements To the extent provided by the Secretary in regulations or other guidance— (A) Allocations to portion of qualified capital interest Paragraph (1) may be applied separately with respect to a portion of a qualified capital interest. (B) No or insignificant allocations to nonservice providers In any case in which the requirements of paragraph (1)(B) are not satisfied, items of gain and loss (and any dividends) shall not be taken into account under subsection (a) to the extent that such items are properly allocable under such regulations or other guidance to qualified capital interests. (C) Allocations to service providers’ qualified capital interests which are less than other allocations Allocations shall not be treated as failing to meet the requirement of paragraph (1)(A) merely because the allocations to the qualified capital interest represent a lower return than the allocations made to the other qualified capital interests referred to in such paragraph. (3) Special rule for changes in services and capital contributions In the case of an interest in a partnership which was not an investment services partnership interest and which, by reason of a change in the services with respect to assets held (directly or indirectly) by the partnership or by reason of a change in the capital contributions to such partnership, becomes an investment services partnership interest, the qualified capital interest of the holder of such partnership interest immediately after such change shall not, for purposes of this subsection, be less than the fair market value of such interest (determined immediately before such change). (4) Special rule for tiered partnerships Except as otherwise provided by the Secretary, in the case of tiered partnerships, all items which are allocated in a manner which meets the requirements of paragraph (1) to qualified capital interests in a lower-tier partnership shall retain such character to the extent allocated on the basis of qualified capital interests in any upper-tier partnership. (5) Exception for no-self-charged carry and management fee provisions Except as otherwise provided by the Secretary, an interest shall not fail to be treated as satisfying the requirement of paragraph (1)(A) merely because the allocations made by the partnership to such interest do not reflect the cost of services described in subsection (c)(2) which are provided (directly or indirectly) to the partnership by the holder of such interest (or a related person). (6) Special rule for dispositions In the case of any investment services partnership interest any portion of which is a qualified capital interest, subsection (b) shall not apply to so much of any gain or loss as bears the same proportion to the entire amount of such gain or loss as— (A) the distributive share of gain or loss that would have been allocated to the qualified capital interest (consistent with the requirements of paragraph (1)) if the partnership had sold all of its assets at fair market value immediately before the disposition, bears to (B) the distributive share of gain or loss that would have been so allocated to the investment services partnership interest of which such qualified capital interest is a part. (7) Qualified capital interest For purposes of this section— (A) In general The term qualified capital interest (i) the fair market value of any money or other property contributed to the partnership in exchange for such interest (determined without regard to section 752(a)), (ii) any amounts which have been included in gross income under section 83 with respect to the transfer of such interest, and (iii) the excess (if any) of— (I) any items of income and gain taken into account under section 702 with respect to such interest, over (II) any items of deduction and loss so taken into account. (B) Adjustment to qualified capital interest (i) Distributions and losses The qualified capital interest shall be reduced by distributions from the partnership with respect to such interest and by the excess (if any) of the amount described in subparagraph (A)(iii)(II) over the amount described in subparagraph (A)(iii)(I). (ii) Special rule for contributions of property In the case of any contribution of property described in subparagraph (A)(i) with respect to which the fair market value of such property is not equal to the adjusted basis of such property immediately before such contribution, proper adjustments shall be made to the qualified capital interest to take into account such difference consistent with such regulations or other guidance as the Secretary may provide. (C) Technical terminations, etc., disregarded No increase or decrease in the qualified capital interest of any partner shall result from a termination, merger, consolidation, or division described in section 708, or any similar transaction. (8) Treatment of certain loans (A) Proceeds of partnership loans not treated as qualified capital interest of service providing partners For purposes of this subsection, an investment services partnership interest shall not be treated as a qualified capital interest to the extent that such interest is acquired in connection with the proceeds of any loan or other advance made or guaranteed, directly or indirectly, by any other partner or the partnership (or any person related to any such other partner or the partnership). The preceding sentence shall not apply to the extent the loan or other advance is repaid before the date of the enactment of this section unless such repayment is made with the proceeds of a loan or other advance described in the preceding sentence. (B) Reduction in allocations to qualified capital interests for loans from nonservice-providing partners to the partnership For purposes of this subsection, any loan or other advance to the partnership made or guaranteed, directly or indirectly, by a partner not providing services described in subsection (c)(2) to the partnership (or any person related to such partner) shall be taken into account in determining the qualified capital interests of the partners in the partnership. (9) Special rule for qualified family partnerships (A) In general In the case of any specified family partnership interest, paragraph (1)(A) shall be applied without regard to the phrase and who are not related to the partner holding the qualified capital interest (B) Specified family partnership interest For purposes of this paragraph, the term specified family partnership interest (i) such interest is an interest in a qualified family partnership, (ii) such interest is held by a natural person or by a trust with respect to which each beneficiary is a grantor or a person whose relationship to the grantor is described in section 267(b)(1), and (iii) all other interests in such qualified family partnership with respect to which significant allocations are made (within the meaning of paragraph (1)(B) and in comparison to the allocations made to the interest described in clause (ii)) are held by persons who— (I) are related to the natural person or trust referred to in clause (ii), or (II) provide services described in subsection (c)(2). (C) Qualified family partnership For purposes of this paragraph, the term qualified family partnership (i) all of the capital and profits interests of such partnership are held by— (I) specified family members, (II) any person closely related (within the meaning of subsection (c)(3)(C)(ii)) to a specified family member, or (III) any other person (not described in subclause (I) or (II)) if such interest is an investment services partnership interest with respect to such person, and (ii) such partnership does not hold itself out to the public as an investment advisor. (D) Specified family members For purposes of subparagraph (C), individuals shall be treated as specified family members if such individuals would be treated as one person under the rules of section 1361(c)(1) if the applicable date (within the meaning of subparagraph (B)(iii) thereof) were the latest of— (i) the date of the establishment of the partnership, (ii) the earliest date that the common ancestor holds a capital or profits interest in the partnership, or (iii) the date of the enactment of this section. (e) Other income and gain in connection with investment management services (1) In general If— (A) a person performs (directly or indirectly) investment management services for any investment entity, (B) such person holds (directly or indirectly) a disqualified interest with respect to such entity, and (C) the value of such interest (or payments thereunder) is substantially related to the amount of income or gain (whether or not realized) from the assets with respect to which the investment management services are performed, any income or gain with respect to such interest shall be treated as ordinary income. Rules similar to the rules of subsections (a)(5) and (d) shall apply for purposes of this subsection. (2) Definitions For purposes of this subsection— (A) Disqualified interest (i) In general The term disqualified interest (I) any interest in such entity other than indebtedness, (II) convertible or contingent debt of such entity, (III) any option or other right to acquire property described in subclause (I) or (II), and (IV) any derivative instrument entered into (directly or indirectly) with such entity or any investor in such entity. (ii) Exceptions Such term shall not include— (I) a partnership interest, (II) except as provided by the Secretary, any interest in a taxable corporation, and (III) except as provided by the Secretary, stock in an S corporation. (B) Taxable corporation The term taxable corporation (i) a domestic C corporation, or (ii) a foreign corporation substantially all of the income of which is— (I) effectively connected with the conduct of a trade or business in the United States, or (II) subject to a comprehensive foreign income tax (as defined in section 457A(d)(2)). (C) Investment management services The term investment management services (D) Investment entity The term investment entity (f) Exception for domestic C corporations Except as otherwise provided by the Secretary, in the case of a domestic C corporation— (1) subsections (a) and (b) shall not apply to any item allocated to such corporation with respect to any investment services partnership interest (or to any gain or loss with respect to the disposition of such an interest), and (2) subsection (e) shall not apply. (g) Regulations The Secretary shall prescribe such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance to— (1) require such reporting and recordkeeping by any person in such manner and at such time as the Secretary may prescribe for purposes of enabling the partnership to meet the requirements of section 6031 with respect to any item described in section 702(a)(9), (2) provide modifications to the application of this section (including treating related persons as not related to one another) to the extent such modification is consistent with the purposes of this section, (3) prevent the avoidance of the purposes of this section (including through the use of qualified family partnerships), and (4) coordinate this section with the other provisions of this title. (h) Cross reference For 40-percent penalty on certain underpayments due to the avoidance of this section, see section 6662. . (b) Application of section 751 to indirect dispositions of investment services partnership interests (1) In general Subsection (a) of section 751 or or (3) investment services partnership interests held by the partnership, . (2) Certain distributions treated as sales or exchanges Subparagraph (A) of section 751(b)(1) or or (iii) investment services partnership interests held by the partnership, . (3) Application of special rules in the case of tiered partnerships Subsection (f) of section 751 (A) by striking or or (3) an investment services partnership interest held by the partnership, , and (B) by striking partner. partner (other than a partnership in which it holds an investment services partnership interest). (4) Investment services partnership interests; qualified capital interests Section 751 (g) Investment services partnership interests For purposes of this section— (1) In general The term investment services partnership interest (2) Adjustments for qualified capital interests The amount to which subsection (a) applies by reason of paragraph (3) thereof shall not include so much of such amount as is attributable to any portion of the investment services partnership interest which is a qualified capital interest (determined under rules similar to the rules of section 710(d)). (3) Exception for publicly traded partnerships Except as otherwise provided by the Secretary, in the case of an exchange of an interest in a publicly traded partnership (as defined in section 7704) to which subsection (a) applies— (A) this section shall be applied without regard to subsections (a)(3), (b)(1)(A)(iii), and (f)(3), and (B) such partnership shall be treated as owning its proportionate share of the property of any other partnership in which it is a partner. (4) Recognition of gains Any gain with respect to which subsection (a) applies by reason of paragraph (3) thereof shall be recognized notwithstanding any other provision of this title. (5) Coordination with inventory items An investment services partnership interest held by the partnership shall not be treated as an inventory item of the partnership. (6) Prevention of double counting Under regulations or other guidance prescribed by the Secretary, subsection (a)(3) shall not apply with respect to any amount to which section 710 applies. (7) Valuation methods The Secretary shall prescribe regulations or other guidance which provide the acceptable methods for valuing investment services partnership interests for purposes of this section. . (c) Treatment for purposes of section 7704 Subsection (d) of section 7704 (6) Income from certain carried interests not qualified (A) In general Specified carried interest income shall not be treated as qualifying income. (B) Specified carried interest income For purposes of this paragraph— (i) In general The term specified carried interest income (I) any item of income or gain allocated to an investment services partnership interest (as defined in section 710(c)) held by the partnership, (II) any gain on the disposition of an investment services partnership interest (as so defined) or a partnership interest to which (in the hands of the partnership) section 751 applies, and (III) any income or gain taken into account by the partnership under subsection (b)(4) or (e) of section 710. (ii) Exception for qualified capital interests A rule similar to the rule of section 710(d) shall apply for purposes of clause (i). (C) Coordination with other provisions Subparagraph (A) shall not apply to any item described in paragraph (1)(E) (or so much of paragraph (1)(F) as relates to paragraph (1)(E)). (D) Special rules for certain partnerships (i) Certain partnerships owned by real estate investment trusts Subparagraph (A) shall not apply in the case of a partnership which meets each of the following requirements: (I) Such partnership is treated as publicly traded under this section solely by reason of interests in such partnership being convertible into interests in a real estate investment trust which is publicly traded. (II) Fifty percent or more of the capital and profits interests of such partnership are owned, directly or indirectly, at all times during the taxable year by such real estate investment trust (determined with the application of section 267(c)). (III) Such partnership meets the requirements of paragraphs (2), (3), and (4) of section 856(c). (ii) Certain partnerships owning other publicly traded partnerships Subparagraph (A) shall not apply in the case of a partnership which meets each of the following requirements: (I) Substantially all of the assets of such partnership consist of interests in one or more publicly traded partnerships (determined without regard to subsection (b)(2)). (II) Substantially all of the income of such partnership is ordinary income or section 1231 gain (as defined in section 1231(a)(3)). (E) Transitional rule Subparagraph (A) shall not apply to any taxable year of the partnership beginning before the date which is 10 years after the date of the enactment of this paragraph. . (d) Imposition of penalty on underpayments (1) In general Subsection (b) of section 6662 (8) The application of section 710(e) or the regulations or other guidance prescribed under section 710(g) to prevent the avoidance of the purposes of section 710. . (2) Amount of penalty (A) In general Section 6662 (k) Increase in penalty in case of property transferred for investment management services In the case of any portion of an underpayment to which this section applies by reason of subsection (b)(8), subsection (a) shall be applied with respect to such portion by substituting 40 percent 20 percent . (B) Conforming amendment Subparagraph (B) of section 6662A(e)(2) or (i) , (i), or (k) (3) Special rules for application of reasonable cause exception Subsection (c) of section 6664 (A) by redesignating paragraphs (3) and (4) as paragraphs (4) and (5), respectively; (B) by striking paragraph (3) paragraph (4) (C) by inserting after paragraph (2) the following new paragraph: (3) Special rule for underpayments attributable to investment management services (A) In general Paragraph (1) shall not apply to any portion of an underpayment to which section 6662 applies by reason of subsection (b)(8) unless— (i) the relevant facts affecting the tax treatment of the item are adequately disclosed, (ii) there is or was substantial authority for such treatment, and (iii) the taxpayer reasonably believed that such treatment was more likely than not the proper treatment. (B) Rules relating to reasonable belief Rules similar to the rules of subsection (d)(3) shall apply for purposes of subparagraph (A)(iii). . (e) Income and loss from investment services partnership interests taken into account in determining net earnings from self-Employment (1) Internal Revenue Code (A) In general Section 1402(a) and ; and (18) notwithstanding the preceding provisions of this subsection, in the case of any individual engaged in the trade or business of providing services described in section 710(c)(2) with respect to any entity, investment services partnership income or loss (as defined in subsection (m)) of such individual with respect to such entity shall be taken into account in determining the net earnings from self-employment of such individual. . (B) Investment services partnership income or loss Section 1402 (m) Investment services partnership income or loss For purposes of subsection (a)— (1) In general The term investment services partnership income or loss (A) the amounts treated as ordinary income or ordinary loss under subsections (b) and (e) of section 710 with respect to such interest, (B) all items of income, gain, loss, and deduction allocated to such interest, and (C) the amounts treated as realized from the sale or exchange of property other than a capital asset under section 751 with respect to such interest. (2) Exception for qualified capital interests A rule similar to the rule of section 710(d) shall apply for purposes of applying paragraph (1)(B). . (2) Social Security Act Section 211(a) of the Social Security Act is amended by striking and ; and (17) Notwithstanding the preceding provisions of this subsection, in the case of any individual engaged in the trade or business of providing services described in section 710(c)(2) . (f) Separate accounting by partner Section 702(a) and , and (9) any amount treated as ordinary income or loss under subsection (a), (b), or (e) of section 710. . (g) Conforming amendments (1) Subsection (d) of section 731 section 710(b)(4) (relating to distributions of partnership property), to the extent otherwise provided by (2) Section 741 or section 710 (relating to special rules for partners providing investment management services to partnerships) (3) The table of sections for part I of subchapter K of chapter 1 Sec. 710. Special rules for partners providing investment management services to partnerships. . (h) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act. (2) Partnership taxable years which include effective date In applying section 710(a) (3) Dispositions of partnership interests (A) In general Section 710(b) of such Code (as added by this section) shall apply to dispositions and distributions after the date of the enactment of this Act. (B) Indirect dispositions The amendments made by subsection (b) shall apply to transactions after the date of the enactment of this Act. (4) Other income and gain in connection with investment management services Section 710(e) of such Code (as added by this section) shall take effect on the date of the enactment of this Act. 506. Consistent treatment of stock options by corporations (a) Consistent treatment for wage deduction (1) In general Section 83(h) (A) by striking In the case of (1) In general In the case of , and (B) by adding at the end the following new paragraph: (2) Stock options In the case of property transferred to a person in connection with a stock option, any deduction related to such stock option shall be allowed only under section 162(q) and paragraph (1) shall not apply. . (2) Treatment of compensation paid with stock options Section 162 (q) Treatment of compensation paid with stock options (1) In general In the case of compensation for personal services that is paid with stock options, the deduction under subsection (a)(1) shall not exceed the amount the taxpayer has treated as compensation cost with respect to such stock options for the purpose of ascertaining income, profit, or loss in a report or statement to shareholders, partners, or other proprietors (or to beneficiaries), and shall be taken into account in the same period that such compensation cost is recognized for such purpose. (2) Special rules for controlled groups The Secretary may prescribe rules for the application of paragraph (1) in cases where the stock option is granted by— (A) a parent or subsidiary corporation (within the meaning of section 424) of the taxpayer, or (B) another corporation. . (b) Consistent treatment for research tax credit Section 41(b)(2)(D) (iv) Special rule for stock options The amount which may be treated as wages for any taxable year in connection with the issuance of a stock option shall not exceed the amount allowed for such taxable year as a compensation deduction under section 162(q) with respect to such stock option. . (c) Application of amendments The amendments made by this section shall apply to stock options exercised after the date of the enactment of this Act, except that— (1) such amendments shall not apply to stock options that were granted before such date and that vested in taxable periods beginning on or before June 15, 2005, (2) for stock options that were granted before such date of enactment and vested during taxable periods beginning after June 15, 2005, and ending before such date of enactment, a deduction under section 162(q) (3) for public entities reporting as small business issuers and for nonpublic entities required to file public reports of financial condition, paragraphs (1) and (2) shall be applied by substituting December 15, 2005 June 15, 2005 (4) no deduction shall be allowed under section 83(h) or section 162(q) of such Code with respect to any stock option the vesting date of which is changed to accelerate the time at which the option may be exercised in order to avoid the applicability of such amendments. 507. Application of executive pay deduction limit (a) In general Subparagraph (B) of section 162(m)(4), as redesignated by paragraphs (1)(A) and (2)(A) of section 503(b) of this Act, is amended to read as follows: (B) Stock option compensation The term applicable employee remuneration . (b) Effective date The amendment made by this section shall apply to stock options exercised or granted after the date of the enactment of this Act. 508. Modifications to rules relating to inverted corporations (a) In general Subsection (b) of section 7874 (b) Inverted corporations treated as domestic corporations (1) In general Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if— (A) such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting 80 percent 60 percent (B) such corporation is an inverted domestic corporation. (2) Inverted domestic corporation For purposes of this subsection, a foreign corporation shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)— (A) the entity completes after February 10, 2016, the direct or indirect acquisition of— (i) substantially all of the properties held directly or indirectly by a domestic corporation, or (ii) substantially all of the assets of, or substantially all of the properties constituting a trade or business of, a domestic partnership, and (B) after the acquisition, more than 50 percent of the stock (by vote or value) of the entity is held— (i) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation, or (ii) in the case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership. (3) Exception for corporations with substantial business activities in foreign country of organization A foreign corporation described in paragraph (2) shall not be treated as an inverted domestic corporation if after the acquisition the expanded affiliated group which includes the entity has substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group. For purposes of subsection (a)(2)(B)(iii) and the preceding sentence, the term substantial business activities . (b) Conforming amendments (1) Clause (i) of section 7874(a)(2)(B) of such Code is amended by striking after March 4, 2003, after March 4, 2003, and before February 11, 2016, (2) Subsection (c) of section 7874 of such Code is amended— (A) in paragraph (2)— (i) by striking subsection (a)(2)(B)(ii) subsections (a)(2)(B)(ii) and (b)(2)(B) (ii) by inserting or (b)(2)(A) (a)(2)(B)(i) (B) in paragraph (3), by inserting or (b)(2)(B), as the case may be, (a)(2)(B)(ii) (C) in paragraph (5), by striking subsection (a)(2)(B)(ii) subsections (a)(2)(B)(ii) and (b)(2)(B) (D) in paragraph (6), by inserting or inverted domestic corporation, as the case may be, surrogate foreign corporation (c) Effective date The amendments made by this section shall apply to taxable years ending after February 10, 2016. 509. Modifications of foreign tax credit rules applicable to major integrated oil companies which are dual capacity taxpayers (a) In general Section 901 (n) Special rules relating to major integrated oil companies which are dual capacity taxpayers (1) General rule Notwithstanding any other provision of this chapter, any amount paid or accrued by a dual capacity taxpayer which is a major integrated oil company (within the meaning of section 167(h)(5)) to a foreign country or possession of the United States for any period shall not be considered a tax— (A) if, for such period, the foreign country or possession does not impose a generally applicable income tax, or (B) to the extent such amount exceeds the amount (determined in accordance with regulations) which— (i) is paid by such dual capacity taxpayer pursuant to the generally applicable income tax imposed by the country or possession, or (ii) would be paid if the generally applicable income tax imposed by the country or possession were applicable to such dual capacity taxpayer. Nothing in this paragraph shall be construed to imply the proper treatment of any such amount not in excess of the amount determined under subparagraph (B). (2) Dual capacity taxpayer For purposes of this subsection, the term dual capacity taxpayer (A) is subject to a levy of such country or possession, and (B) receives (or will receive) directly or indirectly a specific economic benefit (as determined in accordance with regulations) from such country or possession. (3) Generally applicable income tax For purposes of this subsection— (A) In general The term generally applicable income tax (B) Exceptions Such term shall not include a tax unless it has substantial application, by its terms and in practice, to— (i) persons who are not dual capacity taxpayers, and (ii) persons who are citizens or residents of the foreign country or possession. . (b) Effective Date (1) In general The amendments made by this section shall apply to taxes paid or accrued in taxable years beginning after the date of the enactment of this Act. (2) Contrary treaty obligations upheld The amendments made by this section shall not apply to the extent contrary to any treaty obligation of the United States. 510. Limitation on section 199 deduction attributable to oil, natural gas, or primary products thereof (a) Denial of deduction Paragraph (4) of section 199(c) (E) Special rule for certain oil and gas income In the case of any taxpayer who is a major integrated oil company (within the meaning of section 167(h)(5)) for the taxable year, the term domestic production gross receipts . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2015. 511. Limitation on deduction for intangible drilling and development costs; amortization of disallowed amounts (a) In general Section 263(c) (c) Intangible drilling and development costs in the case of oil and gas wells and geothermal wells (1) In general Notwithstanding subsection (a), and except as provided in subsection (i), regulations shall be prescribed by the Secretary under this subtitle corresponding to the regulations which granted the option to deduct as expenses intangible drilling and development costs in the case of oil and gas wells and which were recognized and approved by the Congress in House Concurrent Resolution 50, Seventy-ninth Congress. Such regulations shall also grant the option to deduct as expenses intangible drilling and development costs in the case of wells drilled for any geothermal deposit (as defined in section 613(e)(2)) to the same extent and in the same manner as such expenses are deductible in the case of oil and gas wells. This subsection shall not apply with respect to any costs to which any deduction is allowed under section 59(e) or 291. (2) Exclusion (A) In general This subsection shall not apply to amounts paid or incurred by a taxpayer in any taxable year in which such taxpayer is a major integrated oil company (within the meaning of section 167(h)(5)). (B) Amortization of amounts not allowable as deductions under subparagraph (A) The amount not allowable as a deduction for any taxable year by reason of subparagraph (A) shall be allowable as a deduction ratably over the 60-month period beginning with the month in which the costs are paid or incurred. For purposes of section 1254, any deduction under this subparagraph shall be treated as a deduction under this subsection. . (b) Effective date The amendment made by this section shall apply to amounts paid or incurred in taxable years beginning after December 31, 2015. 512. Limitation on percentage depletion allowance for oil and gas wells (a) In general Section 613A (f) Application with respect to major integrated oil companies In the case of any taxable year in which the taxpayer is a major integrated oil company (within the meaning of section 167(h)(5)), the allowance for percentage depletion shall be zero. . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2015. 513. Limitation on deduction for tertiary injectants (a) In general Section 193 (d) Application with respect to major integrated oil companies (1) In general This section shall not apply to amounts paid or incurred by a taxpayer in any taxable year in which such taxpayer is a major integrated oil company (within the meaning of section 167(h)(5)). (2) Amortization of amounts not allowable as deductions under paragraph (1) The amount not allowable as a deduction for any taxable year by reason of paragraph (1) shall be allowable as a deduction ratably over the 60-month period beginning with the month in which the costs are paid or incurred. . (b) Effective date The amendment made by this section shall apply to amounts paid or incurred in taxable years beginning after December 31, 2015. 514. Modification of definition of major integrated oil company (a) In general Paragraph (5) of section 167(h) (C) Certain successors in interest For purposes of this paragraph, the term major integrated oil company . (b) Conforming amendments (1) In general Subparagraph (B) of section 167(h)(5) except as provided in subparagraph (C), For purposes of this paragraph, (2) Taxable years tested Clause (iii) of section 167(h)(5)(B) of such Code is amended— (A) by striking does not apply by reason of paragraph (4) of section 613A(d) did not apply by reason of paragraph (4) of section 613A(d) for any taxable year after 2004 (B) by striking does not apply did not apply for the taxable year (c) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2015. 515. Repeal of outer Continental Shelf deep water and deep gas royalty relief (a) In general Sections 344 and 345 of the Energy Policy Act of 2005 ( 42 U.S.C. 15904 (b) Administration The Secretary of the Interior shall not be required to provide for royalty relief in the lease sale terms beginning with the first lease sale held on or after the date of enactment of this Act for which a final notice of sale has not been published. 516. Coordination of American Opportunity Credit and Lifetime Learning Credit with Pell Grants not used for qualified tuition and related expenses (a) In general Section 25A(g)(2) (2) Adjustment for certain scholarships, etc (A) In general The amount of qualified tuition and related expenses otherwise taken into account under subsection (a) with respect to an individual for an academic period shall be reduced (before the application of subsections (b), (c), and (d)) by the sum of any amounts paid for the benefit of such individual which are allocable to such period as— (i) a qualified scholarship which is excludable from gross income under section 117, (ii) an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or under chapter 1606 (iii) a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for such individual's educational expenses, or attributable to such individual's enrollment at an eligible educational institution, which is excludable from gross income under any law of the United States. (B) Coordination with pell grants not used for qualified tuition and related expenses For purposes of subparagraph (A), the amount of any Federal Pell Grant under section 401 of the Higher Education Act of 1965 ( 20 U.S.C. 1070a . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2015. 517. Expansion of Pell Grant exclusion from gross income (a) In general Paragraph (1) of section 117(b) (1) by striking the period at the end and inserting , or (2) by striking received by an individual as a scholarship received by an individual— (A) as a scholarship , and (3) by adding at the end the following new subparagraph: (B) as a Federal Pell Grant under section 401 of the Higher Education Act of 1965 ( 20 U.S.C. 1070a . (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2015.

Summary: In the Red Act of 2016 This bill authorizes and appropriates specified funds to the Department of Education (ED) for FY2016-FY2025 and each succeeding year for grants: (1) to waive tuition and fees for eligible students at community colleges, and (2) to waive or reduce tuition and fees for low-income students at four-year historically black colleges and universities and other minority-serving institutions. It amends title IV (Student Assistance) of the Higher Education Act of 1965 to direct ED to establish a program to refinance outstanding federal student loans for borrowers of Direct Loan program loans disbursed before July 1, 2016, and Federal Family Education Loan (FFEL) program loans. (FFELs were not disbursed after June 30, 2010.) The bill modifies, for academic year 2018-2019 and succeeding years, the calculation of the mandatory add-on amount used to determine the total maximum Federal Pell Grant award. It also amends various provisions of the Internal Revenue Code to, among other things: (1) expand the expenses eligible for the American Opportunity Tax Credit to include the amount of a Federal Pell Grant used to pay for living expenses; and (2) include, as a qualified scholarship excludible from gross income, any amount received as a Federal Pell Grant. Finally, the bill amends the Energy Policy Act of 2005 to repeal royalty relief for: (1) deep gas wells in shallow waters of the Gulf of Mexico, and (2) deep water oil and gas leases in the central and western Gulf of Mexico.