376
Such regulations shall be consistent with the provi-
sions under sections 511 through 513 of the Internal 
Revenue Code of 1986, except to the extent such 
provisions are inconsistent with other principles of 
the business tax. The regulations shall include exclu-
sions from the definition of ‘trade or business’ simi-
lar to those contained in section 513 of the Internal 
Revenue Code for—
‘‘(A) certain bingo games, 
‘‘(B) certain hospital services, and 
‘‘(C) certain public entertainment activity 
at fairs and expositions by an organization 
which regularly conducts, as one of its substan-
tial exempt purposes, an agricultural or edu-
cational fair or exhibition. 
‘‘(3) TRADE
SHOWS.—The conduct of trade 
shows and conventions shall not be excluded from 
the definition of trade or business. 
‘‘Subchapter I—Cooperatives
‘‘Sec. 260. Patronage dividends of cooperatives.
‘‘SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES. 
‘‘(a) PATRONAGE DIVIDENDS PAID BY SUPPLY CO-
OPERATIVES.—A qualified patronage dividend paid by a 
supply cooperative to a patron shall be treated as if it is 
a refund of a portion of the amounts paid by the patron
377
for goods, services, or use of capital. In general, if the 
supply cooperative included the amount received from the 
patron in taxable receipts, the dividend shall reduce tax-
able receipts in the year incurred. If the recipient of the 
dividend is a business entity which deducted the cost of 
business purchases to which the dividend related, the re-
cipient will reduce its cost of business purchases by the 
amount of the dividend in the year the dividend is paid 
or incurred. 
‘‘(b) PATRONAGE DIVIDENDS PAID BY MARKETING 
COOPERATIVES.—A qualified patronage dividend paid to 
a patron by a marketing cooperative shall be treated as 
an upward price adjustment in the amount received by the 
patron for its goods marketed by the cooperative. In gen-
eral, the cooperative will increase its cost of business pur-
chases by the amount of the qualified patronage dividend 
and the recipient will increase its taxable receipts by the 
amount of the qualified patronage dividend. 
‘‘(c) DIVIDEND TREATMENT.—Only the portion of a 
patronage dividend that is not a qualified patronage divi-
dend shall be treated as a dividend under this chapter and 
chapter 2. 
‘‘(d) DEFINITIONS.—
‘‘(1) QUALIFIED
PATRONAGE
DIVIDEND.—A 
‘qualified patronage dividend’ is that part of a pa-
378
tronage dividend that is attributable to the patron’s 
allocable share of patronage earnings of a marketing 
cooperative or a supply cooperative. 
‘‘(2) SUPPLY COOPERATIVE.—A ‘supply cooper-
ative’ is a cooperative that sells goods or service to 
patrons and provided patronage dividends with re-
spect to the quantity of purchases of the patrons. 
‘‘(3) MARKETING COOPERATIVE.—A ‘marketing 
cooperative’ is a cooperative that sells goods pro-
duced by its members and provides patronage divi-
dends to the members based on the quantities of 
goods sold or provided for sale. 
‘‘(e) SPECIAL RULES.—
‘‘(1) NOTICES OF ALLOCATION AND PER-UNIT 
RETAIN
CERTIFICATES.—Except as provided in 
paragraph (2), a notice of allocation, per-unit retain 
certificate, or other similar document shall not be 
treated as a patronage dividend until it is redeemed 
in cash or property. 
‘‘(2) OPPORTUNITY
TO
RECEIVE
CASH.—If a 
patron is given an opportunity to receive a patron-
age dividend in cash, but instead chooses to accept 
a per-unit retain certificate or a qualified notice of 
allocation, the patron will be treated as receiving
379
cash and simultaneously contributing to the capital 
of the cooperative. 
‘‘(3) APPLICATION LIMITED TO QUALIFIED CO-
OPERATIVES.—Under rules to be prescribed by the 
Secretary, this section shall apply only to coopera-
tives to which one of the following provisions of the 
Internal Revenue Code of 1986 would have applied: 
‘‘(A) Section 501(c)(12) (relating to coop-
erative telephone companies and similar organi-
zations). 
‘‘(B) Section 501(c)(14) (relating to cer-
tain cooperative banks). 
‘‘(C) Section 521 (relating to farm co-
operatives). 
‘‘(D) Section 1381 (relating to coopera-
tives generally). 
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe regulations for the application of this section. 
The regulations shall generally be consistent with 
subchapter T of chapter 1 of the Internal Revenue 
Code of 1986 except to the extent that such rules 
are inconsistent with provisions of this chapter.
‘‘Subchapter J—Sourcing Rules
‘‘Sec. 265. Exports of property or services. 
‘‘Sec. 266. Imports of property or services. 
‘‘Sec. 267. Import or export of services. 
‘‘Sec. 268. International transportation services.
380
‘‘Sec. 269. International communications. 
‘‘Sec. 270. Insurance.
‘‘SEC. 265. EXPORTS OF PROPERTY OR SERVICES. 
‘‘(a) GENERAL RULE.—Taxable receipts do not in-
clude amounts received by the exporter thereof for prop-
erty or services exported from the United States for use 
or consumption outside the United States. 
‘‘(b) EXPORT THROUGH NONBUSINESS ENTITY.—
For purposes of subsection (a), if property or services are 
sold to a governmental entity or a tax-exempt organization 
for export and are exported other than in an activity of 
such entity which is subject to the business tax, then the 
seller of such property or services is deemed to be the ex-
porter thereof. 
‘‘(c) EXPORT OF SERVICES.—See section 267 for 
rules for determining whether services are exported or im-
ported. 
‘‘SEC. 266. IMPORTS OF PROPERTY OR SERVICES. 
‘‘(a) IN GENERAL.—The import of property or serv-
ices for consumption in the United States shall constitute 
a business purchase if such property or service is to be 
used in a business activity in the United States. Property 
being held for sale or retail by a business entity that is 
in the business of selling goods shall be considered held 
for ‘use in a business activity’. 
‘‘(b) AMOUNT OF BUSINESS PURCHASE.—
381
‘‘(1) IN GENERAL.—The cost of business pur-
chases with respect to the import of property or 
services for use or consumption in the United States 
is the customs value, price or other amount used for 
purposes of determining the import tax under sec-
tion 286 or section 287. 
‘‘(2) IMPORT TAX.—The cost of business pur-
chases does not include any import tax paid. No de-
duction shall be allowed with respect to property or 
service imported by a business entity unless the im-
port tax is paid with respect to such import. 
‘‘SEC. 267. IMPORT OR EXPORT OF SERVICES. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this subchapter or in rules prescribed under subchapter 
G (relating to financial intermediation business), services 
shall not be treated as imported or exported from the loca-
tion in which they are performed. 
‘‘(b) IMPORT OF SERVICES.—A business entity shall 
be treated as importing a service if—
‘‘(1) the entire benefit of the service will be re-
alized in the United States, and 
‘‘(2) the benefit will be realized in connection 
with the United States business activities of the 
business entity.
382
‘‘(c) EXPORT
OF SERVICES.—A business will be 
treated as exporting a service if—
‘‘(1) the entire benefit of the service will be re-
alized outside of the United States, and 
‘‘(2) the benefit will be realized solely in con-
nection with the activities of the purchaser occurring 
outside the United States. 
‘‘(d) SERVICES ACQUIRED FROM SERVICE PROVIDER 
THAT PROVIDES SERVICES IN AND OUTSIDE THE UNITED 
STATES.—
‘‘(1) IN
GENERAL.—If a business entity ac-
quires services from a service provider that provides 
services both in and outside the United States and 
the service provider shows on the invoice where the 
services are provided—
‘‘(A) the business entity shall treat the 
services as provided where stated on the invoice, 
and 
‘‘(B) the service provider shall treat as tax-
able receipts any services listed as provided in 
the United States. 
‘‘(2) NO INVOICE.—If a business entity acquires 
services from a service provider that provides serv-
ices both in and outside the United States and the
383
service provider does not show on an invoice where 
such services are provided—
‘‘(A) the business entity shall treat the 
services as if provided in the location to which 
payment is sent, and 
‘‘(B) the service provider shall treat as tax-
able receipts any payments received in the 
United States. 
‘‘(e) SPECIAL RULES PREVAIL.—See sections 268 
and 269 for special rule relating to transportation and 
communication services. 
‘‘SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES. 
‘‘(a) TRANSPORTATION OF PROPERTY.—
‘‘(1) TAXABLE RECEIPTS.—
‘‘(A) EXPORTS.—Taxable receipts do not 
include receipts from the transportation of 
property exported from the United States. 
‘‘(B) IMPORTS.—Taxable receipts include 
receipts from transportation of property im-
ported into the United States only if such costs 
are not taken into account in determining the 
import tax. 
‘‘(C) PRESUMPTIONS.—The Secretary shall 
prescribe regulations describing situations in 
which a transporter of property must presume
384
that no import tax has been paid on the cost 
of its services. 
‘‘(2) BUSINESS PURCHASES.—
‘‘(A) EXPORTS.—Business purchases do 
not include amounts paid or incurred for the 
cost of transportation of property exported from 
the United States. 
‘‘(B) IMPORTS.—Amounts paid or incurred 
for transportation of goods imported into the 
United States, shall constitute a cost of busi-
ness purchase only to the extent that they are 
taken into account in determining the customs 
value for purposes of section 286(a) (relating 
to the import tax). 
‘‘(b) TRANSPORTATION OF PASSENGERS.—
‘‘(1) TAXABLE RECEIPTS.—Taxable receipts—
‘‘(A) include receipts from the transpor-
tation of passengers from the United States to 
a destination outside the United States, but 
‘‘(B) do not include receipts from the 
transportation of passengers from outside the 
United States to a destination in the United 
States. 
‘‘(2) BUSINESS
PURCHASES.—Business pur-
chases—
385
‘‘(A) include amounts paid or incurred in 
a business activity for the transportation of 
passengers from the United States to a destina-
tion outside the United States, but 
‘‘(B) do not include amounts paid or in-
curred for transportation of passengers from 
outside the United States to a destination in 
the United States. 
‘‘(3) SIMPLIFYING RULES.—The Secretary may 
provide rules that simplify this subsection, including 
rules under which—
‘‘(A) half of receipts attributable to trans-
portation to or from the United States are 
treated as taxable receipts, 
‘‘(B) half of the cost for business trips to 
and from the United States are treated as busi-
ness purchases, and 
‘‘(C) all transportation expenses of a busi-
ness entity that has no regular business outside 
the United States are treated as business pur-
chases. 
‘‘SEC. 269. INTERNATIONAL COMMUNICATIONS. 
‘‘(a) IN GENERAL.—For purposes of section 266, 
communications services shall be treated as provided at
386
the point of origin of the communications and shall not 
be treated as imported or exported. 
‘‘(b) COMMUNICATIONS SERVICES.—Communications 
services include—
‘‘(1) telephone communications services, 
‘‘(2) courier services (except in the case of 
transportation of property that is imported or ex-
ported), 
‘‘(3) satellite transmission services, 
‘‘(4) telegraph services, 
‘‘(5) facsimile transmission services, and 
‘‘(6) other similar services. 
‘‘SEC. 270. INSURANCE. 
‘‘(a) IN GENERAL.—Insurance services will be treat-
ed as provided at the location of the insurance company 
providing the services. Except as the Secretary may pre-
scribe by regulations, insurance companies will be treated 
as providing services at the location to which insurance 
payments are made. 
‘‘(b) INSURED RISKS IN THE UNITED STATES.—If 
insurance services are provided outside the United States 
and the insured risk is located in the United States—
‘‘(1) the insurance service shall be treated as 
imported,
387
‘‘(2) the insurance premiums shall be subject to 
the import tax, and 
‘‘(3) payments of insurance benefits shall not be 
treated as imported. 
‘‘(c) 
INSURED
RISK
OUTSIDE
THE
UNITED 
STATES.—If insurance services are provided inside the 
United States and the insured risk is located outside the 
United States—
‘‘(1) insurance services shall be treated as ex-
ported, 
‘‘(2) payments of insurance benefits shall be 
treated as payments for services outside the United 
States, and shall not be deducted as business pur-
chases. 
‘‘(d) INSURANCE
SERVICES.—Insurance services 
means the provision of insurance and services related to 
insurance other than insurance that is treated as a savings 
asset. 
‘‘SEC. 271. BANKING SERVICES. 
‘‘The Secretary shall prescribe regulations on the lo-
cation of banking services and the extent to which such 
services are to be treated as imported or exported. 
‘‘Subchapter K—Business Conducted in a 
Possession
‘‘Sec. 276. Treatment of possessions.
388
‘‘SEC. 276. TREATMENT OF POSSESSIONS. 
‘‘(a) IN GENERAL.—For purposes of the business tax 
imposed by this chapter, the U.S. possessions shall not 
be treated as part of the United States. 
‘‘(b) EFFECT ON PAYROLL TAX CREDIT.—A busi-
ness entity may not claim a payroll tax credit with respect 
to any payroll taxes paid with respect to income of resi-
dents of the U.S. possessions. 
‘‘(c) POSSESSION.—For purposes of this subchapter, 
‘U.S. possession’ or ‘possession’ means a possession of the 
United States and includes the Commonwealth of Puerto 
Rico and the Virgin Islands. 
‘‘Subchapter L—Payroll Tax Credit
‘‘Sec. 281. Amount of credit. 
‘‘Sec. 282. Current-year payroll tax credit. 
‘‘Sec. 283. Credit carryover.
‘‘SEC. 281. AMOUNT OF CREDIT. 
‘‘(a) AMOUNT OF CREDIT.—The payroll tax credit for 
a business entity for a taxable year is the lesser of—
‘‘(1) the sum of—
‘‘(A) the current-year payroll tax credit, 
and 
‘‘(B) the credit carryovers to the taxable 
year, or
‘‘(2) the business entity’s business tax for the 
taxable year (determined without regard to the pay-
roll tax credit).
389
‘‘(b) CONSOLIDATED RETURNS.—In the case of busi-
ness entities filing consolidated returns, the amount of the 
credit shall be determined using the combined payroll tax 
credits and credit carryovers of the business entities and 
the combined business tax of the business entities. 
‘‘SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT. 
‘‘(a) IN GENERAL.—The ‘current-year payroll tax 
credit’ is an amount equal to the sum of—
‘‘(1) the employer’s share of the FICA tax im-
posed on wages of its employees during the taxable 
year, 
‘‘(2) the employer’s share of the tier 1 railroad 
retirement tax for its employees during the taxable 
year, 
‘‘(3) one-half of the allocable portion of the 
SECA tax imposed on individuals (other than inde-
pendent contractors and other business entities) who 
provide services to the business entity. 
‘‘(b) DEFINITIONS.—
‘‘(1) EMPLOYER’S SHARE OF THE FICA TAX.—
‘Employer’s share of the FICA tax’ means the old-
age, survivors, disability and hospital insurance 
taxes imposed by section 3111.
390
‘‘(2) EMPLOYER’S SHARE OF THE TIER 1 RAIL-
ROAD RETIREMENT TAX.—‘Employer’s share of the 
tier 1 railroad retirement tax’ means—
‘‘(A) the tier 1 railroad retirement tax im-
posed by section 3221(a), and 
‘‘(B) the portion of the tax imposed by sec-
tion 3211(a)(1) on employee representatives at-
tributable to the tax imposed by section 3111. 
‘‘(3) ONE-HALF OF THE ALLOCABLE PORTION 
OF THE SECA TAX.—
‘‘(A) SECA TAX.—‘SECA tax’ means the 
self-employment tax imposed by section 1401. 
‘‘(B) PARTNERSHIPS.—Until such time as 
the SECA tax and the Federal Insurance Con-
tributions Acts are amended to treat partners 
of partnerships as employees, if a partner des-
ignates a partnership as a principal source of 
employment income for the taxable year, one-
half of the partnership’s allocable portion of the 
SECA tax of such partner equals the FICA tax 
that the employer would have been required to 
pay under section 3111 with respect to such 
partner if the partner’s self-employment income 
as reported by the partnership were wages sub-
ject to the FICA tax. A partner and partner-
391
ship can agree to treat no portion of a partner’s 
SECA tax as allocable to the partnership. 
‘‘(C) PROPRIETORSHIP.—In the case of an 
individual who is a proprietor or sole owner and 
provider of service to a business entity, the indi-
vidual shall allocate the portion of one-half of 
his SECA tax not allocated pursuant to sub-
paragraph (B) to his business entities in ac-
cordance with rules prescribed by the Secretary. 
‘‘(c) SPECIAL RULE.—Under rules prescribed by the 
Secretary, an individual subject to the self-employment tax 
shall pay half of the self-employment tax on an amount 
of self employment income not less than the amount of 
the individual’s self-employment income taken into ac-
count by partnerships under subparagraph (B) of sub-
section (b)(3). 
‘‘SEC. 283. CREDIT CARRYOVER. 
‘‘(a) CARRYOVER.—A current-year credit that is not 
applied in the taxable year in which earned shall constitute 
a credit carryover until applied but for no more than 15 
taxable years. 
‘‘(b) ORDER OF USE.—For purposes of determining 
which credits are applied under section 281, if the total 
credit allowable in a taxable year is less than the sum of 
the current-year payroll credit and the carryover credits,
392
the current-year payroll credit shall be considered applied 
first and then credit carryovers shall be considered applied 
in the order earned. 
‘‘Subchapter M—Import Tax
‘‘Sec. 286. Imposition of tax on property. 
‘‘Sec. 287. Imposition of tax on import of services. 
‘‘Sec. 288. General rules for the import tax.
‘‘SEC. 286. IMPOSITION OF TAX ON PROPERTY. 
‘‘(a) GENERAL RULE.—There is hereby imposed a 
tax equal to 11 percent of the customs value of all prop-
erty entered into the United States for consumption, use 
or warehousing. 
‘‘(b) LIABILITY FOR TAX.—The tax imposed on the 
import of property by subsection (a) shall be paid by the 
person entering the property into the United States for 
consumption, use or warehousing. Such tax shall be due 
and payable at the time of import. 
‘‘(c) IMPORTS
OF PREVIOUSLY EXPORTED PROP-
ERTY.—In the case of any article that is classified under 
a heading or subheading of subchapter I or II of chapter 
98 of the Tariff Schedules of the United States, the tax 
under this section shall be imposed only on that portion 
of the customs value of such article that is dutiable under 
such heading or subheading. 
‘‘(d) IMPORTS FOR PERSONAL CONSUMPTION.—The 
import tax imposed by this section shall not apply to any 
article entered into the United States duty free under sub-
393
chapters I through VII of chapter 98 of the Tariff Sched-
ules of the United States. 
‘‘SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES. 
‘‘(a) GENERAL RULE.—There is hereby imposed a 
tax equal to 11 percent of the cost of all services treated 
as imported into the United States during the taxable year 
of the service recipient. 
‘‘(b) LIABILITY FOR THE TAX.—The tax on the im-
port of services imposed by subsection (a) shall be paid 
by the person who receives the imported services. The tax 
shall be payable as if it were an addition to the business 
tax imposed by section 201. 
‘‘(c) IMPORTED SERVICES.—For purposes of this sec-
tion, services shall be treated as imported if they are treat-
ed as imported under section 267 (general rules on import 
of services) or section 270 (related to insurance). 
‘‘(d) SPECIAL RULE FOR INSURANCE.—The seller of 
insurance that is treated as imported under section 270 
shall be liable for the collection of the tax imposed by sub-
section (a) on the insurance and for paying such tax to 
the Secretary. The first sentence of subsection (b) (relat-
ing to the person liable for the tax) shall apply to insur-
ance only to the extent that the seller of the insurance 
services does not collect such tax.
394
‘‘SEC. 288. GENERAL RULES FOR THE IMPORT TAX. 
‘‘(a) IMPORT TAX.—‘Import tax’ means the tax im-
posed by section 286 on the import of property and the 
tax imposed by section 287 on the import of services. 
‘‘(b) NO PAYROLL TAX CREDIT.—The payroll tax 
credit shall not be allowed against the import tax. 
‘‘Subchapter N—Transition Rules
‘‘Sec. 290. Amortization of transition basis. 
‘‘Sec. 291. Sales of transition basis property. 
‘‘Sec. 292. Safe harbor leases. 
‘‘Sec. 293. Carryovers. 
‘‘Sec. 294. Section 481 adjustments.
‘‘SEC. 290. AMORTIZATION OF TRANSITION BASIS. 
‘‘(a) TRANSITION BASIS DEDUCTION.—The ‘transi-
tion basis deduction’ for a taxable year is the sum of the 
amortization allowance determined under this section for 
the taxable year. 
‘‘(b) AMORTIZATION RULES.—The amortization al-
lowance for each category of amortizable basis shall be de-
termined by amortizing the amortizable basis of such cat-
egory ratably over the amortization period for the category 
beginning January 1, 2004. 
‘‘(c) AMORTIZATION PERIOD.—The amortization pe-
riods shall be determined in accordance with the following 
table:
‘‘In the case of: 
‘‘The amortization period is: 
Category I basis ....................................................
15 years
Category II basis ...................................................
30 years
Category III basis .................................................
40 years
Unrecovered inventory costs ..................................
5 years
395
‘‘(d) CATEGORIES.—
‘‘(1) CATEGORY I BASIS.—‘Category I basis’ is 
the sum of the unrecovered bases as of January 1, 
2004, of all depreciable property placed in service 
prior to January 1, 2004, and the unamortized por-
tion of amortizable costs incurred before January 1, 
2004, if—
‘‘(A) cost recovery or amortization began 
before January 1, 2004, and 
‘‘(B) the remaining recovery period or am-
ortization period as of January 1, 2004, is less 
than 15 years. 
‘‘(2) CATEGORY II BASIS.—‘Category II basis’ 
is the sum of the unrecovered bases as of January 
1, 2004, of all depreciable property placed in service 
prior to January 1, 2004, and the unamortized por-
tion of amortizable costs incurred before January 1, 
2004, if—
‘‘(A) cost recovery or amortization began 
before January 1, 2004, and 
‘‘(B) the remaining recovery period or am-
ortization period as of January 1, 2004, is 15 
years or more.
396
‘‘(3) CATEGORY III BASIS.—‘Category III basis’ 
is the sum of the adjusted basis of each asset satis-
fying the following requirements: 
‘‘(A) The asset was placed in service prior 
to January 1, 2004, 
‘‘(B) The asset was used in a business ac-
tivity in 2004,
‘‘(C) The cost of the asset was capitalized 
and not depreciable or otherwise recoverable 
under the Internal Revenue Code of 1986, and 
‘‘(D) The cost of the asset would have con-
stituted deductible expenses under the business 
tax if such cost had been incurred after 2003. 
‘‘(4) UNRECOVERED INVENTORY COSTS.—‘Un-
recovered inventory costs’ means the cost of goods 
sold (as determined under the Internal Revenue 
Code of 1986) if a business entity sold all of its in-
ventory (including inventory being produced) on the 
effective date of the business tax. 
‘‘(e) RULES OF APPLICATION.—
‘‘(1) REMAINING RECOVERY PERIOD.—
‘‘(A) TIME OF MEASURE.—The remaining 
recovery period shall be determined as of De-
cember 31, 2003, and shall include each taxable 
year ending after such date in which a deduc-
397
tion would have been allowed under the Internal 
Revenue Code of 1986. 
‘‘(B) ACCOUNTING METHOD.—The remain-
ing recovery period shall be determined using 
the cost recovery method and rules applicable 
for determining taxable income under the Inter-
nal Revenue Code of 1986. 
‘‘(2) DEPLETABLE ASSETS.—Under rules pre-
scribed by the Secretary, this section shall apply to 
the remaining cost basis of depletable property and 
to other property for which a cost recovery method 
other than one based on time is used. 
‘‘SEC. 291. SALES OF TRANSITION BASIS PROPERTY. 
‘‘(a) IN GENERAL.—Except as provided in subsection 
(b), for purposes of determining the tax consequences of 
a sale, retirement, casualty or conversion to personal use 
of an asset whose basis or cost is taken into account under 
section 90, the amount to be amortized shall be treated 
as fully deducted upon the adoption of the business tax. 
‘‘(b) SUBSTANTIAL SALES.—
‘‘(1) IN GENERAL.—In the case of a substantial 
sale of assets to which the amortization rules of sec-
tion 90 apply, the purchaser and seller may jointly 
elect to have the purchaser assume the amortization
398
deductions attributable to such assets, in which 
case—
‘‘(A) the seller’s taxable receipts from such 
sale shall be reduced by the amount of 
unamortized basis or cost assumed by the pur-
chaser, 
‘‘(B) the purchaser may treat as a cost of 
a business purchase only the portion of the pur-
chase price in excess of the amount of 
unamortized basis or cost assumed, 
‘‘(C) the unamortized basis or cost as-
sumed shall continue to be amortized in the 
manner amortized by the seller. 
‘‘(2) SUBSTANTIAL SALE.—A sale of assets by 
a business entity to another business entity is a sub-
stantial sale if—
‘‘(A) more than 20 percent (in fair market 
value or in original cost) of the assets of the 
seller are sold, 
‘‘(B) the total consideration for the sale 
exceeds $1 million or 20 percent of the taxable 
receipts of the seller for the taxable year pre-
ceding the year of the sale, or
399
‘‘(C) the sale satisfies other criteria estab-
lished by the Secretary to prevent distortions in 
gross profits resulting from asset sales. 
‘‘SEC. 292. SAFE HARBOR LEASES. 
‘‘(a) IN GENERAL.—In the case of a safe harbor 
lease, rental payments deemed to occur under the lease 
and interest payments deemed to be made under the leases 
shall constitute costs of business purchases, and rental in-
come and interest income deemed to be earned under the 
lease shall constitute taxable receipts. The transition basis 
deduction rules shall apply to the lessor’s adjusted basis 
in assets subject to a safe harbor lease. 
‘‘(b) SAFE HARBOR LEASE.—‘Safe harbor lease’ 
means a sale and leaseback transaction entered into pur-
suant to section 168(f)(8) of the Internal Revenue Code, 
as added by the Economic Recovery Tax Act of 1981, 
when such provision was in effect but only if such trans-
action would not be treated as a sale and leaseback for 
tax purposes but for that provision. 
‘‘SEC. 293. CARRYOVERS. 
‘‘(a) NO LOSS CARRYOVERS.—No deduction shall be 
allowed under the business tax for net operating loss 
carryovers, capital loss carryovers, or any other loss 
carryovers from the income tax under the Internal Rev-
enue Code of 1986.
400
‘‘(b) NO CREDIT CARRYOVERS.—No credits shall be 
allowed under the business tax for business credit 
carryovers, minimum tax credit carryovers, or any other 
credit carryovers from the income tax under the Internal 
Revenue Code of 1986. 
‘‘SEC. 294. SECTION 481 ADJUSTMENTS. 
‘‘(a) POSITIVE NET SECTION 481 ADJUSTMENT 
AMOUNT.—If, as of January 1, 2004, a business entity 
has a positive net section 481 adjustment amount, the 
amount shall be applied to reduce the transition basis in 
accounts (for purposes of section 290) in the following 
order: 
‘‘(1) First, to reduce the category I basis (but 
not below zero), 
‘‘(2) Second, to reduce the category II basis 
(but not below zero), 
‘‘(3) Third, to reduce the unrecovered inventory 
costs. 
‘‘(b) NEGATIVE NET SECTION 481 ADJUSTMENT 
AMOUNT.—If, as of January 1, 2004, a business entity 
has a negative net section 481 adjustment amount, the 
amount shall be applied to increase category I basis for 
purposes of section 290.
401
‘‘(c) SECTION 481 ADJUSTMENT.—A business enti-
ty’s net section 481 adjustment is determined by sub-
tracting—
‘‘(1) the sum of all additional deductions to 
which a business entity would be entitled by reason 
of section 481 of the Internal Revenue Code of 1986 
for periods beginning on or after the effective date 
of the business tax with respect to changes in ac-
counting methods made before such effective date, 
from 
‘‘(2) the sum of all additional income which a 
business entity would recognize by reason of section 
481 of the Internal Revenue Code of 1986 for peri-
ods beginning on or after the effective date of the 
business tax with respect to changes in accounting 
methods made before such effective date, 
in each case assuming that the income tax under the In-
ternal Revenue Code of 1986 remained in effect. 
‘‘Subchapter O—Rules for Administration, 
Consolidated Returns
‘‘Sec. 301. Returns, due dates, etc. 
‘‘Sec. 302. Consolidated returns.
‘‘SEC. 301. RETURNS, DUE DATES, ETC. 
‘‘(a) IN GENERAL.—Until subtitle F is amended to 
reflect the adoption of this chapter, the rules of subtitle
402
F relating to C corporations shall apply to business enti-
ties with respect to—
‘‘(1) returns and records; 
‘‘(2) time and place for paying tax; 
‘‘(3) assessment of taxes; 
‘‘(4) collections and liens; 
‘‘(5) abatements, credits, and refunds; 
‘‘(6) interest on underpayments and overpay-
ments; 
‘‘(7) additions to tax and penalties; 
‘‘(8) closing agreements and compromises; 
‘‘(9) crimes; 
‘‘(10) judicial proceedings; 
‘‘(11) discovery of liability and enforcement; 
and 
‘‘(12) estimated taxes. 
‘‘(b) INDIVIDUALS ENGAGING IN BUSINESS ACTIVI-
TIES.—Under rules prescribed by the Secretary, individ-
uals engaging in business activities on their own or with 
their spouses shall be permitted to file their business tax 
returns with their individual tax returns and shall be sub-
ject to estimated tax rules for individual income tax re-
turns.
403
‘‘SEC. 302. CONSOLIDATED RETURNS. 
‘‘(a) IN GENERAL.—Business entities may file con-
solidated returns of business tax if they would have been 
permitted to file consolidated returns under section 1501 
of the Internal Revenue Code and such section were ap-
plied by treating each business entity as a corporation and 
its owners or partners as shareholders. 
‘‘(b) FINANCIAL
INSTITUTIONS.—Financial inter-
mediation businesses may be included in consolidated re-
turns, but each financial intermediation business must 
compute its gross profits separately. 
‘‘(c) INTERCOMPANY TRANSACTIONS.—In computing 
the gross profits of a consolidated group, intercompany 
transactions can be taken into account, or at the election 
of the filer, be disregarded (except in the case of trans-
actions with financial intermediation businesses). 
‘‘Subchapter P—Definitions and Rules of 
Application
‘‘Sec. 310. Definitions. 
‘‘Sec. 311. Rules of application.
‘‘SEC. 310. DEFINITIONS. 
‘‘(a) IN GENERAL.—When used in this chapter, 
where not otherwise distinctly expressed or manifestly in-
compatible with the intent thereof—
404
‘‘(1) USA INCOME
TAX.—‘USA Income Tax’ 
and ‘Simplified USA Tax’ for individuals mean the 
tax imposed by chapter 1. 
‘‘(2) INTERNAL REVENUE CODE OF 1986.—‘In-
ternal Revenue Code of 1986’ means the Internal 
Revenue Code of 1986 as in effect immediately be-
fore the enactment of the Simplified USA Tax. 
‘‘(3) UNITED STATES.—‘United States’ means 
the States and the District of Columbia. 
‘‘(b) TERMS DEFINED IN CHAPTER 2.—If a term 
that is used but not defined in this chapter or in section 
7701 is defined in chapter 1, the definition in chapter 1 
shall apply except if manifestly incompatible with the in-
tent of the provision in which the term is used. 
‘‘SEC. 311. RULES OF APPLICATION. 
‘‘(a) DEFINITIONS.—Any definition included in this 
chapter shall apply for all purposes of this chapter un-
less—
‘‘(1) such definition is limited to the purposes 
of a particular chapter, section, or subsection, or
‘‘(2) the definition clearly would not be applica-
ble in a particular context. 
‘‘(b) INTERPRETATIONS CONSISTENT WITH INTER-
NAL REVENUE CODE OF 1986.—Terms not defined in this 
chapter or elsewhere in this title, but defined in the Inter-
405
nal Revenue Code of 1986, shall be interpreted in a man-
ner consistent with the Internal Revenue Code of 1986, 
except to the extent such interpretation would be incon-
sistent with the principles and purposes of this chapter.’’
(b) The amendments made by this section shall be 
effective on January 1, 2004, except to the extent other-
wise specifically provided in the text of such amendments. 
SEC. 302. REPEAL OF CHAPTER 6. 
Chapter 6 of the Code (relating to consolidated re-
turns) is repealed as of January 1, 2004. 
TITLE IV—DEFERRED 
COMPENSATION PLANS 
SEC. 401. PROVISIONS SAVED. 
(a) IN GENERAL.—Except as otherwise provided in 
this title, the sections contained in subchapter D of chap-
ter 1 of the Code (relating to deferred compensation, etc.) 
are hereby saved as chapter 3. 
(b) LIMITATIONS
ON CHAPTER 3.—The following 
new section is inserted before section 401 of the Code (as 
saved by subsection (a)): 
‘‘SEC. 400. EFFECT OF CHAPTER 3. 
‘‘(a) IN GENERAL.—The provisions of chapter 3 (sec-
tions 401 through 420) are included in this subtitle for 
purposes of cross-reference and for purposes of deter-
mining whether plans are exempt from the business tax