122 
described in subparagraph (A), (C), or (D)) to 
the extent such distributions do not exceed the 
amount allowable as a deduction under section 
31 to the employee for amounts paid during the 
taxable year for medical care (determined with-
out regard to whether the employee itemizes de-
ductions for such taxable year). 
‘‘(C) PAYMENTS
TO
ALTERNATE
PAYEES 
PURSUANT
TO
QUALIFIED
DOMESTIC
RELA-
TIONS ORDERS.—Any distribution to an alter-
nate payee pursuant to a qualified domestic re-
lations order (within the meaning of section 
414(p)(1)). 
‘‘(D) DISTRIBUTIONS TO UNEMPLOYED IN-
DIVIDUALS
FOR
HEALTH
INSURANCE
PRE-
MIUMS.— 
‘‘(i) IN GENERAL.—Distributions from 
an individual retirement plan to an indi-
vidual after separation from employment— 
‘‘(I) if such individual has re-
ceived unemployment compensation 
for 12 consecutive weeks under any 
Federal or State unemployment com-
pensation law by reason of such sepa-
ration, 
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‘‘(II) if such distributions are 
made during any taxable year during 
which such unemployment compensa-
tion is paid or the succeeding taxable 
year, and 
‘‘(III) to the extent such distribu-
tions do not exceed the amount paid 
during the taxable year for insurance 
described in section 213(d)(1)(D) of 
the Internal Revenue Code of 1986 
with respect to the individual and the 
individual’s spouse and dependents. 
‘‘(ii) DISTRIBUTIONS
AFTER
REEM-
PLOYMENT.—Clause (i) shall not apply to 
any distribution made after the individual 
has been employed for at least 60 days 
after the separation from employment to 
which clause (i) applies. 
‘‘(iii) 
SELF-EMPLOYED
INDIVID-
UALS.—To the extent provided in regula-
tions, a self-employed individual shall be 
treated as meeting the requirements of 
clause (i)(I) if, under Federal or State law, 
the individual would have received unem-
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124 
ployment compensation but for the fact the 
individual was self-employed. 
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL 
RETIREMENT PLANS FOR HIGHER EDUCATION 
EXPENSES.—Distributions 
to 
an 
individual 
from an individual retirement plan to the extent 
such distributions do not exceed the qualified 
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable year. 
Distributions shall not be taken into account 
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C), or 
(D) or to the extent paragraph (1) does not 
apply to such distributions by reason of sub-
paragraph (B). 
‘‘(F) 
DISTRIBUTIONS
FROM
CERTAIN 
PLANS
FOR
FIRST
HOME
PURCHASES.—Dis-
tributions to an individual from an individual 
retirement plan which are qualified first-time 
homebuyer distributions (as defined in para-
graph (8)). Distributions shall not be taken into 
account under the preceding sentence if such 
distributions are described in subparagraph (A), 
(C), (D), or (E) or to the extent paragraph (1) 
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125 
does not apply to such distributions by reason 
of subparagraph (B). 
‘‘(3) LIMITATIONS.— 
‘‘(A) CERTAIN EXCEPTIONS NOT TO APPLY 
TO
INDIVIDUAL
RETIREMENT
PLANS.—Sub-
paragraphs (A)(v), and (C) of paragraph (2) 
shall not apply to distributions from an indi-
vidual retirement plan. 
‘‘(B) PERIODIC PAYMENTS UNDER QUALI-
FIED
PLANS
MUST
BEGIN
AFTER
SEPARA-
TION.—Paragraph (2)(A)(iv) shall not apply to 
any amount paid from a trust described in sec-
tion 401(a) which is exempt from tax under 
section 501(a) or from a contract described in 
section 72(e)(5)(D)(ii) of the Internal Revenue 
Code of 1986 unless the series of payments be-
gins after the employee separates from service. 
‘‘(4) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) paragraph (1) does not apply to 
a distribution by reason of paragraph 
(2)(A)(iv), and 
‘‘(ii) the series of payments under 
such paragraph are subsequently modified 
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126 
(other than by reason of death or dis-
ability)— 
‘‘(I) before the close of the 5-year 
period beginning with the date of the 
first payment and after the employee 
attains age 591⁄2, or 
‘‘(II) before the employee attains 
age 591⁄2, the taxpayer’s tax for the 
1st taxable year in which such modi-
fication occurs shall be increased by 
an amount, determined under regula-
tions, equal to the tax which (but for 
paragraph (2)(A)(iv)) would have 
been imposed, plus interest for the de-
ferral period. 
‘‘(B) DEFERRAL
PERIOD.—For purposes 
of this paragraph, the term ‘deferral period’ 
means the period beginning with the taxable 
year in which (without regard to paragraph 
(2)(A)(iv)) the distribution would have been in-
cludible in gross income and ending with the 
taxable year in which the modification described 
in subparagraph (A) occurs. 
‘‘(5) EMPLOYEE.—For purposes of this sub-
section, the term ‘employee’ includes any partici-
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127 
pant, and in the case of an individual retirement 
plan, the individual for whose benefit such plan was 
established. 
‘‘(6) SPECIAL RULES FOR SIMPLE RETIREMENT 
ACCOUNTS.—In the case of any amount received 
from a simple retirement account (within the mean-
ing of section 408(p) during the 2-year period begin-
ning on the date such individual first participated in 
any qualified salary reduction arrangement main-
tained by the individual’s employer under section 
408(p)(2), paragraph (1) shall be applied by sub-
stituting ‘25 percent’ for ‘10 percent’. 
‘‘(7) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
higher education expenses’ means qualified 
higher education expenses (as defined in section 
8(b)(2)) for education furnished to— 
‘‘(i) the taxpayer, 
‘‘(ii) the taxpayer’s spouse, or 
‘‘(iii) any child or grandchild of the 
taxpayer or the taxpayer’s spouse, at an el-
igible educational institution (as defined in 
section 8(b)(2)(B)). 
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129 
Roth IRA is a qualified first-time homeowner dis-
tribution. 
‘‘(s) 10–PERCENT ADDITIONAL TAX FOR TAXABLE 
DISTRIBUTIONS FROM MODIFIED ENDOWMENT CON-
TRACTS.— 
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any 
taxpayer receives any amount under a modified en-
dowment contract (as defined in section 7702A), the 
taxpayer’s tax under this chapter for the taxable 
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the 
portion of such amount which is includible in gross 
income. 
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN 
DISTRIBUTIONS.—Paragraph (1) shall not apply to 
any distribution— 
‘‘(A) made on or after the date on which 
the taxpayer attains age 591⁄2, 
‘‘(B) which is attributable to the tax-
payer’s becoming disabled (within the meaning 
of subsection (m)(7)), or 
‘‘(C) which is part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life 
expectancy) of the taxpayer or the joint lives 
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130 
(or joint life expectancies) of such taxpayer and 
his beneficiary. 
‘‘Subchapter C—Basis, Business Transactions 
and Nonrecognition Transactions 
‘‘Sec. 71. Gain or loss on the sale of an asset. 
‘‘Sec. 72. Basis. 
‘‘Sec. 73. Basis in business entities. 
‘‘Sec. 74. Gratuitous transfers. 
‘‘Sec. 75. Transactions involving business entities. 
‘‘Sec. 76. Rollover on residence sale. 
‘‘Sec. 77. Other nonrecognition transactions. 
‘‘Sec. 78. Wash sales and straddles. 
‘‘SEC. 71. GAIN OR LOSS ON THE SALE OF AN ASSET. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this chapter, the amount of gross income to be recognized 
on the sale, exchange, or other disposition of property 
equals the excess of— 
‘‘(1) the amount realized from the disposition, 
over 
‘‘(2) the taxpayer’s adjusted basis in the prop-
erty. 
‘‘(b) AMOUNT REALIZED.—The amount realized from 
the disposition of property shall be the sum of money re-
ceived plus the fair market value of the property (other 
than money) received. See section 122(c) for the treatment 
of installment sales. 
‘‘(c) NONRECOGNITION TRANSACTION.—Subsection 
(a) shall not apply to nonrecognition transactions de-
scribed in this chapter. 
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131 
‘‘(d) CONTRACTS MARKED TO MARKET.— 
‘‘(1) IN
GENERAL.—Under regulations pre-
scribed by the Secretary, a markable contract held 
by the taxpayer at the end of the year shall be treat-
ed as sold and reacquired for its fair market value 
on the last business day of the taxable year. The 
regulations shall adopt principles and definitions 
similar to those that applied under section 1256 of 
the Internal Revenue Code of 1986. 
‘‘(2) MARKABLE CONTRACT.—For purposes of 
this subsection, ‘markable contract’ means— 
‘‘(A) any regulated futures contract, 
‘‘(B) any foreign currency contract, 
‘‘(C) any nonequity option, 
‘‘(D) any dealer equity option 
as such terms were defined for purposes of section 
1256 of the Internal Revenue Code of 1986. 
‘‘SEC. 72. BASIS. 
‘‘(a) BASIS, SALE, OR EXCHANGE.—Except to the ex-
tent inconsistent with provisions of this chapter, adjusted 
basis and the existence of a sale or exchange shall be de-
termined in accordance with principles applicable under 
the Internal Revenue Code of 1986. 
‘‘(b) DEFINITION OF BASIS.—For purposes of this 
chapter, ‘basis’ means the adjusted basis of property. The 
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132 
adjusted basis of property is generally its cost, as adjusted 
for actions or transactions that increase or decrease the 
basis of property. Except as provided in section 73 (relat-
ing to business entities and basis in business entities), the 
taxpayer’s adjusted basis on January 1, 2007, in an asset 
acquired before that date, shall be its adjusted basis as 
of December 31, 2006, as determined under the Internal 
Revenue Code of 1986. 
‘‘SEC. 73. BASIS IN BUSINESS ENTITIES. 
‘‘(a) RULES FOR ALL BUSINESS ENTITIES.— 
‘‘(1) IN GENERAL.—A taxpayer’s basis in an in-
terest in a business entity shall equal— 
‘‘(A) the cost of acquiring the interest, 
‘‘(B) increased by the amount of cash and 
basis of any property contributed to the entity, 
and 
‘‘(C) decreased by the portion of any liqui-
dating distributions from the entity that are 
treated as returns of capital in accordance with 
rules prescribed by the Secretary. 
‘‘(2) INITIAL BASIS.—Except as otherwise pro-
vided in this section, a taxpayer’s basis on January 
1, 2007, or any interest in a business entity held as 
of December 31, 2006, shall be the basis of such in-
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133 
terest as of December 31, 2006, as determined 
under the Internal Revenue Code of 1986. 
‘‘(3) CROSS REFERENCES.—See section 75 for 
rules relating to the effect of certain business trans-
actions on a taxpayer’s basis. 
‘‘(4) SPECIAL
RULE
FOR
CONTRIBUTION
OF 
PERSONAL USE PROPERTY.—If a taxpayer contrib-
utes personal-use property (as defined in section 
210(b)(3)(B)), the taxpayer’s basis in the property 
shall not be increased by an amount in excess of the 
fair market value of the property contributed. 
‘‘(b) SPECIAL RULES
FOR PARTNERSHIP INTER-
ESTS.— 
‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A 
partner’s basis in a partnership interest as of Janu-
ary 1, 2007, equals— 
‘‘(A) the partner’s basis in the partnership 
as of the end of the taxable year ending on De-
cember 31, 2006 minus 
‘‘(B) the amount of the partner’s share of 
the indebtedness of the partnership taken into 
account in determining such basis. 
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the taxpayer 
has a negative basis in the partnership and such 
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134 
negative basis shall increase the gain on the sale or 
disposition of the partnership interest (except to the 
extent such negative basis has been adjusted by rea-
son of capital contributions). 
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a partner’s basis in a 
partnership interest shall be determined in accord-
ance with the general principles of this chapter ap-
plicable to an individual’s basis in an interest in a 
business entity. A partner’s basis in a partnership 
shall not be adjusted by reason of any— 
‘‘(A) distribution from the partnership (ex-
cept to the extent such distribution is treated as 
distribution of basis in accordance with the gen-
eral principles of this chapter applicable to an 
individual’s basis in an interest in a business 
entity), 
‘‘(B) income, earnings, or loss of the part-
nership, or 
‘‘(C) any change in the partner’s share of 
the partnership’s indebtedness. 
‘‘(4) SPECIAL RULE FOR TRANSITION DISTRIBU-
TIONS.— 
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