section or other provision of the Internal Revenue Code
of 1986.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; etc.
TITLE I—ALTERNATIVE MINIMUM TAX
Sec. 101. Repeal of alternative minimum tax.
TITLE II—FAMILY-RELATED PROVISIONS
SUBTITLE A—QUALIFYING CHILD AND FAMILY STATUS
Sec. 201. Uniform definition of child, etc.
Sec. 202. Modifications of definition of head of household.
Sec. 203. Modifications of dependent care credit.
Sec. 204. Modifications of child tax credit.
Sec. 205. Modifications of earned income credit.
Sec. 206. Modifications of deduction for personal exemption for dependents.
Sec. 207. Modification of determination of marital status.
Sec. 208. Technical and conforming amendments.
Sec. 209. Effective date.
SUBTITLE B—OTHER FAMILY-RELATED PROVISIONS
Sec. 211. Acceleration of repeal of phaseout of personal exemptions.
Sec. 212. Acceleration of repeal of phaseout of overall limitation on itemized de-
ductions.
Sec. 213. Repeal of certain phaseout provisions.
Sec. 214. Simplification of capital gains tax.
Sec. 215. Exemption of certain interest and dividend income from tax.
Sec. 216. Simplification of deduction for points on home mortgage.
Sec. 217. Increase in exclusion for group-term life insurance purchased for em-
ployees.
TITLE III—EDUCATION-RELATED PROVISIONS
Sec. 301. Uniform definition of qualifying higher education expenses.
Sec. 302. Combining Hope and Lifetime Learning credits.
Sec. 303. Clarification of interaction of various education tax incentive provi-
sions.
TITLE IV—BUSINESS PROVISIONS
Sec. 401. Cash method of accounting.
Sec. 402. Repeal of collapsible corporations.
Sec. 403. Simplification of active business test for certain corporate reorganiza-
tions.
Sec. 404. Study on simplification of attribution rules.
Sec. 405. Clarification of treatment of contributions of intangibles to corpora-
tions and partnerships.
Sec. 406. Modernization of references to general and limited partners.
Sec. 407. Repeal of ability to elect large partnership reporting rules.
Sec. 408. Repeal of personal holding company tax.
Sec. 409. Timing rules for guaranteed payments.
Sec. 410. Secretarial authority to prescribe class life for property.
Sec. 411. Repeal of occupational taxes relating to distilled spirits, wine, and
beer.
Sec. 412. Consolidation of life insurance companies with other companies per-
mitted.
TITLE V—ESTIMATED TAX
Sec. 501. Failure to pay estimated tax penalty by individuals converted to in-
terest charge on accumulated unpaid balance.
Sec. 502. Conforming and clerical amendments.
TITLE VI—REPEAL OF DEADWOOD PROVISIONS
Sec. 601. Repeal of deadwood provisions.
TITLE I—ALTERNATIVE
MINIMUM TAX
SEC. 101. REPEAL OF ALTERNATIVE MINIMUM TAX.
(a) IN GENERAL.—Part VI of subchapter A of chap-
ter 1 (relating to alternative minimum tax) is hereby re-
pealed.
(b) EXPEDITED USE OF CREDIT FOR PRIOR YEAR
MINIMUM
TAX
LIABILITY
OF
CORPORATIONS.—Sub-
section (c) of section 53 of such Code is amended to read
as follows:
‘‘(c) LIMITATIONS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the credit allowable under subsection (a)
for any taxable year shall not exceed the excess (if
any) of—
‘‘(A) the regular tax liability of the tax-
payer for such taxable year reduced by the sum
of the credits allowable under subparts A, B, D,
E, and F of this part.
‘‘(2) CORPORATIONS.—In the case of a corpora-
tion, the credit allowable under subsection (a) for
any taxable year shall not exceed the lesser of—
‘‘(A) 20 percent of the minimum tax credit
(determined as of January 1, 2003), and
‘‘(B) 90 percent of the regular tax liability
of the taxpayer for such taxable year reduced
by the sum of the credits allowable under sub-
parts B, D, E, and F of this part.
This paragraph shall not apply to taxable years be-
ginning after the December 31, 2007.’’.
(c) CONFORMING AMENDMENTS.—
(1) Subparagraph (B) of section 1(g)(7) (relat-
ing to election to claim certain unearned income of
child on parent’s return) is amended—
(A) by inserting ‘‘and’’ at the end of clause
(i),
(B) by striking ‘‘and’’ at the end of clause
(ii) and inserting a period, and
(C) by striking clause (iii).
(2) Subsection (d) of section 2 (relating to
taxes imposed on nonresident aliens) is amended by
striking ‘‘sections 1 and 55’’ and inserting ‘‘section
1’’.
(3) Subsection (a) of section 5 (relating to cross
references relating to tax on individuals) is amended
by striking paragraph (4).
(4) Subsection (d) of section 11 (relating to
taxes imposed on foreign corporations) is amended
by striking ‘‘the taxes imposed by subsection (a) and
section 55’’ and inserting ‘‘the tax imposed by sub-
section (a)’’.
(5) Section 12 (relating to cross references re-
lating to tax on corporations) is amended by striking
paragraph (7).
(6) Subparagraph (A) of section 23(b) (relating
to limitation based on amount of tax) is amended to
read as follows:
‘‘(A) the regular tax liability (as defined in
section 26(b)), over’’.
(7) Subparagraph (A) of section 24(b)(3) (re-
lating to limitation based on amount of tax) is
amended to read as follows:
‘‘(A) the regular tax liability (as defined in
section 26(b)), over’’.
(8) Paragraph (1) of section 25B(g) (relating
to limitation based on amount of tax) is amended to
read as follows:
‘‘(1) the regular tax liability (as defined in sec-
tion 26(b)), over’’.
(9) Section 26 (relating to limitation based on
tax liability; definition of tax liability) is amended—
(A) by amending subsection (a) to read as
follows:
‘‘(a) LIMITATION BASED ON AMOUNT OF TAX.—The
aggregate amount of credits allowed by this subpart for
the taxable year shall not exceed the taxpayer’s regular
tax liability for the taxable year.’’,
(B) in subsection (b)(2), by striking sub-
paragraph (A) and by redesignating subpara-
graphs (B) through (N) as subparagraphs (A)
through (M), respectively, and
(C) by striking subsection (c).
(10) Paragraph (6) of section 29(b) (relating to
credit for producing fuel from a nonconventional
source) is amended striking ‘‘the excess’’ and all
that follows and inserting ‘‘the regular tax for the
taxable year reduced by the sum of the credits allow-
able under subpart A and section 27.’’
(11) Paragraph (3) of section 30(b) (relating to
credit for qualified electric vehicles) is amended by
striking ‘‘the excess’’ and all that follows and insert-
ing ‘‘the regular tax for the taxable year reduced by
the sum of the credits allowable under subpart A
and sections 27 and 29.’’
(12) Subsection (c) of section 38 (relating to
general business credit) is amended—
(A) by striking paragraphs (1) and (2) and
inserting the following new paragraph:
‘‘(1) IN GENERAL.—The credit allowed under
subsection (a) for any taxable year shall not exceed
25 percent of so much of the taxpayer’s net regular
tax liability as exceeds $25,000. For purposes of the
preceding sentence, the term ‘net regular tax liabil-
ity’ means the regular tax liability reduced by the
sum of the credits allowable under subparts A and
B of this part.’’, and
(B) by redesignating paragraph (3) as
paragraph (2).
(13) Paragraph (4) of section 45A(d) (relating
to Indian employment credit) is amended by striking
‘‘for purposes’’ and all that follows and inserting
‘‘for purposes of determining the amount of any
credit allowable under this chapter.’’
(14) Subparagraph (B) of section 45D(g)(4)
(relating to new markets tax credit) is amended by
striking ‘‘or for purposes of section 55’’.
(15) Subparagraph (B) of section 45F(d)(4)
(relating to no credits against tax) is amended by
striking ‘‘or for purposes of section 55’’.
(16) Subsection (d) of section 53 (relating to
credit for prior year minimum tax liability) is
amended by adding at the end the following:
‘‘For purposes of this subsection, references to sections
55, 56, and 59 shall be treated as references to such sec-
tions as in effect on the day before the date of the enact-
ment of the Tax Simplification Act of 2002.’’.
(17) Subsection (b) of section 59A (relating to
environmental tax) is amended by adding at the end
the following:
‘‘For purposes of this subsection, references to sections
55 and 56 shall be treated as references to such sections
as in effect on the day before the date of the enactment
of the Tax Simplification Act of 2002.’’.
(18)(A) Paragraph (2) of section 148(b) (relat-
ing to higher yield investments) is amended by add-
ing at the end the following new flush sentence:
‘‘Such term shall not include any tax-exempt bond.’’
(B) Paragraph (3) of section 148(b) is hereby
repealed.
(19) Subparagraph (B) of section 149(g)(3)
(relating to hedge bonds) is amended—
(A) in the heading, by striking ‘‘BONDS
NOT SUBJECT TO MINIMUM TAX.—’’ and insert-
ing ‘‘BONDS.—’’, and
(B) by striking all that follows ‘‘invested in
bonds’’ and inserting ‘‘the interest on which is
not includible in gross income under section
103.’’
(20) Subsection (j) of section 168 (relating to
accelerated cost recovery system) is amended by
striking paragraph (3).
(21) Paragraph (2) of section 168(k) (relating
to deduction allowed in computing minimum tax) is
amended by striking subparagraph (F).
(22) Section 173 (relating to circulation ex-
penditures) is amended by striking ‘‘(a) GENERAL
RULE.—’’ and by striking subsection (b).
(23) Subsection (f) of section 174 (relating to
research and experimental expenditures) is amended
to read as follows:
‘‘(f) CROSS REFERENCE.—
‘‘For adjustments to basis of property for amounts
allowed as deductions as deferred expenses under
subsection (b), see section 1016(a)(14).’’
(24) Subsection (c) of section 263 (relating to
capital expenditures) is amended by striking ‘‘59(e)
or’’.
(25) Subsection (c) of section 263A (relating to
capitalization and inclusion in inventory costs of cer-
tain expenses) is amended by striking paragraph (6).
(26) Section 382(l) (relating to limitation on
net operating loss carryforwards and certain built-in
losses following ownership change) is amended by
striking paragraph (7) and by redesignating para-
graph (8) as paragraph (7).
(27) Section 443 (relating to returns for a pe-
riod of less than 12 months adjustment in com-
puting minimum tax and tax preferences) is amend-
ed by striking subsection (d) and by redesignating
subsection (e) as subsection (d).
(28) Section 616 (relating to development ex-
penditures) is amended by striking subsection (e).
(29) Section 617 (relating to deduction and re-
capture of certain mining exploration expenditures)
is amended by striking subsection (i).
(30) Subsection (c) of section 641 (relating to
imposition of tax) is amended—
(A) in paragraph (2) by striking subpara-
graph (B) and redesignating subparagraphs (C)
and (D) as subparagraphs (B) and (C), respec-
tively, and
(B) in paragraph (3), by striking ‘‘para-
graph 
(2)(C)’’ 
and 
inserting 
‘‘paragraph
(2)(B)’’.
(31) Subsections (b) and (c) of section 666 (re-
lating to accumulation distribution allocated to pre-
ceding years) are each amended by striking ‘‘(other
than the tax imposed by section 55)’’.
(32)(A) Subsection (a) of section 772 (relating
to simplified flow-through) is amended by striking
paragraph (5) and redesignating paragraphs (6),
(7), (8), (9), (10), and (11) as paragraphs (5), (6),
(7), (8), (9), and (10), respectively.
(B) Subsection (c) of section 772 is amended—
(i) in paragraph (2), by striking ‘‘para-
graphs (3)(A) and (5)(A)’’ and inserting ‘‘para-
graph (3)(A)’’,
(ii) by striking paragraph (5), and
(iii) by redesignating paragraph (6) as
paragraph (5), and in that paragraph by strik-
ing ‘‘paragraph (6) of subsection (a)’’ and in-
serting ‘‘paragraph (5) of subsection (a)’’.
(C) Subsection (d) of section 772 is amended—
(i) by striking paragraph (3) and redesig-
nating paragraphs (4), (5), and (6) as para-
graphs (3), (4), and (5), respectively, and
(ii) in subparagraph (A) of paragraph (3),
as so redesignated, by striking ‘‘subsection
(a)(11)’’ and inserting ‘‘subsection (a)(10)’’.
(33) Paragraph (2) of section 815(c) (relating
to distributions to shareholders from pre-1984 pol-
icyholders surplus account) is amended by striking
the last sentence.
(34) Section 847 (relating to special estimated
tax payments) is amended—
(A) in paragraph (9), by striking the last
sentence;
(B) in paragraph (10), by inserting ‘‘and’’
at the end of subparagraph (A) and by striking
subparagraph (B) and redesignating subpara-
graph (C) as subparagraph (B).
(35) Section 848 (relating to capitalization of
certain policy acquisition expenses) is amended by
striking subsection (i) and by redesignating sub-
section (j) as subsection (i).
(36) Subsection (a) of section 860E (relating to
treatment of income in excess of daily accruals on
residual interests) is amended by striking paragraph
(4).
(37) Section 860J (relating to non-FASIT
losses not to offset certain FASIT inclusions) is
amended by striking subsection (c) and redesig-
nating subsection (d) as subsection (c).
(38) Paragraph (1) of section 871(b) (relating
to tax on nonresident alien individuals) is amended
by striking ‘‘or 55’’.
(39) Subsection (b) of section 877 (relating to
expatriation to avoid tax) is amended by striking ‘‘or
55’’.
(40) Paragraph (1) of section 882(a) (relating
to tax on income of foreign corporations connected
with United States business) is amended by striking
‘‘55,’’.
(41) Subsection (a) of section 897 (relating to
disposition of investment in United States real prop-
erty) is amended to read as follows:
‘‘(a) TREATMENT
AS EFFECTIVELY CONNECTED
WITH UNITED STATES TRADE OR BUSINESS.—For pur-
poses of this title, gain or loss of a nonresident alien indi-
vidual or a foreign corporation from the disposition of a
United States real property interest shall be taken into
account—
‘‘(1) in the case of a nonresident alien indi-
vidual, under section 871(b)(1), or
‘‘(2) in the case of a foreign corporation, under
section 882(a)(1),
as if the taxpayer were engaged in a trade or business
within the United States during the taxable year and as
if such gain or loss were effectively connected with such
trade or business.’’
(42) Subsection (k) of section 904 (relating to
limitation on credit) is amended to read as follows:
‘‘(k) CROSS REFERENCE.—
‘‘For increase of limitation under subsection (a)
for taxes paid with respect to amounts received
which were included in the gross income of the tax-
payer for a prior taxable year as a United States
shareholder with respect to a controlled foreign cor-
poration, see section 960(b).’’
(43) Paragraph (1) of section 962(a) (relating
to election by individuals to be subject to tax at cor-
porate rates) is amended—
(A) by striking ‘‘sections 1 and 55’’ and
inserting ‘‘section 1’’, and
(B) by striking ‘‘sections 11 and 55’’ and
inserting ‘‘section 11’’.
(44) Paragraph (20) of section 1016(a) (relat-
ing to adjustments to basis) is amended by inserting
‘‘, as in effect on the day before the date of the en-
actment of the Tax Simplification Act of 2002’’
after ‘‘preferences)’’.
(45) Paragraph (4) of section 1260(b) (relating
to gains from constructive ownership transactions) is
amended by striking ‘‘for purposes’’ and all that fol-
lows and inserting ‘‘for purposes of determining the
amount of any credit allowable under this chapter.’’
(46) Paragraph (1) of section 1397E(c) (relat-
ing to credit to holders of qualified zone academy
bonds) is amended by striking ‘‘plus the tax imposed
by section 55’’.
(47) Subsection (f) of section 1400I (relating to
commercial revitalization deduction) is amended by
striking paragraph (4).
(48) Section 1400L is amended—
(A) in subsection (b)(2) (defining qualified
New York Liberty Zone property) by striking
subparagraph (E), and
(B) in subsection (d)(5) (relating to special
rules for tax-exempt bond financing) by striking
subparagraph (E).
(49) Subsection (a) of section 1561 (relating to
limitations on certain multiple tax benefits in the
case of certain controlled corporations) is amended
by striking the last sentence.
(50) Subparagraph (B) of section 6015(d)(2)
(relating to relief from joint and several liability on
joint return) is amended by striking ‘‘or 55’’.
(51) Subparagraph (A) of section 6425(c)(1)
(defining income tax liability) is amended—
(A) by inserting ‘‘plus’’ at the end of
clause (i), and
(B) by striking clause (ii) and redesig-
nating clause (iii) as clause (ii).
(52) Section 6654(d)(2) (relating to failure by
individual 
to 
pay 
estimated 
income 
tax) 
is
amended—
(A) in clause (i) of subparagraph (B), by
striking ‘‘, alternative minimum taxable in-
come,’’, and
(B) in clause (i) of subparagraph (C), by
striking ‘‘, alternative minimum taxable in-
come,’’.
(53) Subparagraph (A) of section 6655(g)(1)
(relating to failure by corporation to pay estimated
income tax) is amended—
(A) by striking clause (ii), and
(B) by redesignating clauses (iii) and (iv)
as clauses (ii) and (iii), respectively.
(54) Subparagraph (C) of section 6662(e)(3)
(relating to imposition of accuracy-related penalty)
is amended by inserting ‘‘, as in effect on the day
before the date of the enactment of the Tax Sim-
plification Act of 2002’’ after ‘‘55(c)’’.
(d) CLERICAL AMENDMENT.—The table of parts for
subchapter A of chapter 1 is amended by striking the item
relating to part VI.
(e) EFFECTIVE DATE.—The amendments made by
this section shall take effect in taxable years beginning
after December 31, 2002.
TITLE II—FAMILY-RELATED
PROVISIONS
Subtitle A—Qualifying Child and
Family Status
SEC. 201. UNIFORM DEFINITION OF CHILD, ETC.
Section 152 (defining dependent) is amended to read
as follows:
‘‘SEC. 152. DEPENDENT DEFINED.
‘‘(a) IN GENERAL.—For purposes of this subtitle, the
term ‘dependent’ means—
‘‘(1) a qualifying child, or
‘‘(2) a qualifying relative.
‘‘(b) EXCEPTIONS.—For purposes of this section—
‘‘(1) DEPENDENTS
INELIGIBLE.—If an indi-
vidual is a dependent of a taxpayer for any taxable
year of such taxpayer beginning in a calendar year,
such individual shall be treated as having no depend-
ents for any taxable year of such individual begin-
ning in such calendar year.
‘‘(2) MARRIED
DEPENDENTS.—An individual
shall not be treated as a dependent of a taxpayer
under subsection (a) if such individual has made a
joint return with the individual’s spouse under sec-
tion 6013 for the taxable year beginning in the cal-
endar year in which the taxable year of the taxpayer
begins.
‘‘(3) CITIZENS OR NATIONALS OF OTHER COUN-
TRIES.—
‘‘(A) IN GENERAL.—The term ‘dependent’
does not include an individual who is not a cit-
izen or national of the United States unless
such individual is a resident of the United
States or a country contiguous to the United
States.
‘‘(B) EXCEPTION FOR ADOPTED CHILD.—
Subparagraph (A) shall not exclude any legally
adopted child of a taxpayer from the definition
of ‘dependent’ if—
‘‘(i) for the taxable year of the tax-
payer, the child’s principal place of abode
is the home of the taxpayer, and
‘‘(ii) the taxpayer is a citizen or na-
tional of the United States.
‘‘(c) QUALIFYING CHILD.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘qualifying child’
means, with respect to any taxpayer for any taxable
year, an individual—
‘‘(A) who bears a relationship to the tax-
payer described in paragraph (2),
‘‘(B) who has the same principal place of
abode as the taxpayer for more than one-half of
such taxable year, and
‘‘(C) who meets the age requirements of
paragraph (3).
‘‘(2) RELATIONSHIP TEST.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1)(A), an individual bears a relationship
to the taxpayer described in this paragraph if
such individual is—
‘‘(i) a son, daughter, stepson, or step-
daughter of the taxpayer or a descendant
of any such relative,
‘‘(ii) a brother, sister, stepbrother, or
stepsister of the taxpayer or a descendant
of any such relative, whom the taxpayer
cares for as the taxpayer’s own child, or
‘‘(iii) an eligible foster child of the
taxpayer.
‘‘(B) ADOPTED CHILD.—For purposes of
subparagraph (A), a child who is legally adopt-
ed, or who is placed with the taxpayer by an
authorized placement agency for adoption by
the taxpayer, shall be treated as a child by
blood.
‘‘(C) ELIGIBLE FOSTER CHILD.—For pur-
poses of subparagraph (A), the term ‘eligible
foster child’ means an individual—
‘‘(i) who is placed with the taxpayer
by an authorized placement agency or by
judgment, decree, or other order of any
court of competent jurisdiction, and
‘‘(ii) whom the taxpayer cares for as
the taxpayer’s own child.
‘‘(3) AGE
REQUIREMENTS.—For purposes of
paragraph (1)(C), an individual meets the require-
ments of this paragraph if such individual—
‘‘(A) has not attained the age of 19 as of
the close of the calendar year in which the tax-
able year of the taxpayer begins, or
‘‘(B) is a student who has not attained the
age of 24 as of the close of such calendar year.
‘‘(4) SPECIAL RULE RELATING TO 2 OR MORE
CLAIMING QUALIFYING CHILD.—
‘‘(A) IN GENERAL.—Except as provided in
subsection (e), if an individual may be claimed,
and is claimed, as a qualifying child by 2 or
more taxpayers (but for this paragraph) for a
taxable year beginning in the same calendar
year, such individual shall be treated as the
qualifying child of the taxpayer who is—
‘‘(i) a parent of the individual, or
‘‘(ii) if clause (i) does not apply, the
taxpayer with the highest adjusted gross
income for such taxable year.
‘‘(B) MORE
THAN
PARENT
CLAIMING
QUALIFYING
CHILD.—If the parents claiming
the credit with respect to any qualifying child
do not file a joint return together, such child
shall be treated as the qualifying child of—
‘‘(i) the parent with whom the child
resided for the longest period of time dur-
ing the taxable year, or
‘‘(ii) if the child resides with both par-
ents for the same amount of time during
such taxable year, the parent with the
highest adjusted gross income.
‘‘(d) QUALIFYING RELATIVE.—For purposes of this
section—
‘‘(1) IN GENERAL.—The term ‘qualifying rel-
ative’ means, with respect to any taxpayer for any
taxable year, an individual—
‘‘(A) who bears a relationship to the tax-
payer described in paragraph (2),
‘‘(B) whose gross income for the calendar
year in which such taxable year begins is less
than the exemption amount (as defined in sec-
tion 151(d)),
‘‘(C) with respect to whom the taxpayer
provides over half of the individual’s support for
the calendar year in which such taxable year
begins, and
‘‘(D) who is not a qualifying child of such
taxpayer or any other taxpayer for any taxable
year beginning in the calendar year in which
such taxable year begins.
‘‘(2) RELATIONSHIP.—For purposes of para-
graph (1)(A), an individual bears a relationship to
the taxpayer described in this paragraph if the indi-
vidual is any of the following with respect to the tax-
payer:
‘‘(A) A child or a descendant of a child.
‘‘(B) A brother, sister, stepbrother, or
stepsister.
‘‘(C) The father or mother, or an ancestor
of either.
‘‘(D) A stepfather or stepmother.
‘‘(E) A son or daughter of a brother or sis-
ter of the taxpayer.
‘‘(F) A brother or sister of the father or
mother of the taxpayer.
‘‘(G) A son-in-law, daughter-in-law, father-
in-law, mother-in-law, brother-in-law, or sister-
in-law.
‘‘(H) An individual (other than an indi-
vidual who at any time during the taxable year
was the spouse, determined without regard to
section 7703, of the taxpayer) who, for the tax-
able year of the taxpayer, has as such individ-
ual’s principal place of abode the home of the
taxpayer and is a member of the taxpayer’s
family.
‘‘(3) SPECIAL RULE RELATING TO MULTIPLE
SUPPORT AGREEMENTS.—For purposes of paragraph
(1)(C), over half of the support of an individual for
a calendar year shall be treated as received from the
taxpayer if—
‘‘(A) no one person contributed over half
of such support,
‘‘(B) over half of such support was re-
ceived from 2 or more persons each of whom,
but for the fact that any such person alone did
not contribute over half of such support, would
have been entitled to claim such individual as a
dependent for a taxable year beginning in such
calendar year,
‘‘(C) the taxpayer contributed over 10 per-
cent of such support, and
‘‘(D) each person described in subpara-
graph (B) (other than the taxpayer) who con-
tributed over 10 percent of such support files a
written declaration (in such manner and form
as the Secretary may by regulations prescribe)
that such person will not claim such individual
as a dependent for any taxable year beginning
in such calendar year.
‘‘(4) SPECIAL RULE RELATING TO INCOME OF
HANDICAPPED DEPENDENTS.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (1)(B), the gross income of an individual
who is permanently and totally disabled (as de-
fined in section 22(e)(3)) at any time during
the taxable year shall not include income attrib-
utable to services performed by the individual
at a sheltered workshop if—
‘‘(i) the availability of medical care at
such workshop is the principal reason for
the individual’s presence there, and
‘‘(ii) the income arises solely from ac-
tivities at such workshop which are inci-
dent to such medical care.
‘‘(B) SHELTERED WORKSHOP DEFINED.—
For purposes of subparagraph (A), the term
‘sheltered workshop’ means a school—
‘‘(i) which provides special instruction
or training designed to alleviate the dis-
ability of the individual, and
‘‘(ii) which is operated by an organi-
zation described in section 501(c)(3) and
exempt from tax under section 501(a), or
by a State, a possession of the United
States, any political subdivision of any of
the foregoing, the United States, or the
District of Columbia.
‘‘(5) SPECIAL RULE RELATING TO TREATMENT
OF GOVERNMENT BENEFITS IN DETERMINING SUP-
PORT.—For purposes of paragraph (1)(C), any
means-tested benefits obtained under programs de-
scribed in section 6103(l)(7) or substantially similar
government programs shall not be taken into ac-
count for purposes of determining whether over half
of the support of an individual for a calendar year
was provided by the taxpayer.
‘‘(e) SPECIAL RULE FOR CERTAIN PRE-2003 IN-
STRUMENTS.—
‘‘(1) IN GENERAL.—Notwithstanding subsection
(c)(4) or (d)(1)(C), a child who has parents who—
‘‘(A) are divorced or legally separated
under a decree of divorce or separate mainte-
nance,
‘‘(B) are separated under a written separa-
tion agreement, or
‘‘(C) live apart at all times during the last
6 months of the calendar year, shall be treated
as being the qualifying child or qualifying rel-
ative of the noncustodial parent for a calendar
year if the requirements described in paragraph
(2) are met.
‘‘(2) REQUIREMENTS.—For purposes of para-
graph (1), the requirements described in this para-
graph are met if—
‘‘(A) a qualified pre-2003 instrument be-
tween the parents applicable to the taxable year
beginning in such calendar year provides that—
‘‘(i) the noncustodial parent shall be
entitled to any deduction allowable under
section 151 for such child, or
‘‘(ii) the custodial parent will sign a
written declaration that such parent will
not claim such child as a dependent for
such taxable year, and
‘‘(B) in the case of an agreement executed
before January 1, 1985, the noncustodial par-
ent provides at least $600 for the support of
such child during such calendar year.
‘‘(3) QUALIFIED PRE-2003 INSTRUMENT.—For
purposes of this subsection, the term ‘qualified pre-
2003 instrument’ means any decree of divorce or
separate maintenance or written agreement—
‘‘(A) which is executed before January 1,
2003,
‘‘(B) which on such date contains either of
the provisions described in paragraph (2)(A),
and
‘‘(C) which is not modified on or after such
date in a modification which expressly provides
that this subsection shall not apply to such de-
cree or agreement.
‘‘(4) CUSTODIAL PARENT AND NONCUSTODIAL
PARENT.—For purposes of this subsection—
‘‘(A) CUSTODIAL PARENT.—The term ‘cus-
todial parent’ means the parent with whom a
child shared the same principal place of abode
for the greater portion of the calendar year.
‘‘(B) NONCUSTODIAL PARENT.—The term
‘noncustodial parent’ means the parent who is
not the custodial parent.
‘‘(5) SPECIAL RULES FOR SUPPORT.—For pur-
poses of this subsection—
‘‘(A) payments to a spouse which are in-
cludible in the gross income of such spouse
under section 71 or 682 shall not be treated as
a payment by the payor spouse for the support
of any dependent,
‘‘(B) amounts expended for the support of
a child or children shall be treated as received
from the noncustodial parent to the extent that
such parent provided amounts for such support,
and
‘‘(C) in the case of the remarriage of a
parent, support of a child received from the
parent’s spouse shall be treated as received
from the parent.
‘‘(f) OTHER DEFINITIONS AND RULES.—For pur-
poses of this section—
‘‘(1) CHILD DEFINED.—The term ‘child’ means
an individual who (within the meaning of this sec-
tion) is a son, daughter, stepson, or stepdaughter of
the taxpayer.
‘‘(2) STUDENT DEFINED.—The term ‘student’
means an individual who during each of 5 calendar
months during the calendar year in which the tax-
able year of the taxpayer begins—
‘‘(A) is a full-time student at an edu-
cational 
organization 
described 
in 
section
170(b)(1)(A)(ii), or
‘‘(B) is pursuing a full-time course of insti-
tutional on-farm training under the supervision
of an accredited agent of an educational organi-
zation described in section 170(b)(1)(A)(ii) or
of a State or political subdivision of a State.
‘‘(3) PLACE
OF
ABODE.—An individual shall
not be treated as having the same principal place of
abode of the taxpayer if at any time during the tax-
able year of the taxpayer the relationship between
the individual and the taxpayer is in violation of
local law.
‘‘(5) TREATMENT OF MISSING CHILDREN.—
‘‘(A) IN
GENERAL.—Solely for the pur-
poses referred to in subparagraph (B), a child
of the taxpayer—
‘‘(i) who is presumed by law enforce-
ment authorities to have been kidnapped
by someone who is not a member of the
family of such child or the taxpayer, and
‘‘(ii) who had, for the taxable year in
which the kidnapping occurred, the same
principal place of abode as the taxpayer for
more than one-half of the portion of such
year before the date of the kidnapping,
shall be treated as meeting the requirement of
subsection (c)(1)(B) with respect to a taxpayer
for all taxable years ending during the period
that the individual is kidnapped.
‘‘(B) PURPOSES.—Subparagraph (A) shall
apply solely for purposes of determining—
‘‘(i) the deduction under section
151(c),
‘‘(ii) the credit under section 24 (re-
lating to child tax credit),
‘‘(iii) whether an individual is a sur-
viving spouse or a head of a household (as
such terms are defined in section 2), and
‘‘(iv) the earned income credit under
section 32.
‘‘(C) COMPARABLE TREATMENT OF CER-
TAIN
QUALIFYING
RELATIVES.—For purposes
of this section, a child of the taxpayer—
‘‘(i) who is presumed by law enforce-
ment authorities to have been kidnapped
by someone who is not a member of the
family of such child or the taxpayer, and
‘‘(ii) who was (without regard to this
paragraph) a qualifying relative of the tax-
payer for the portion of the taxable year
before the date of the kidnapping,
shall be treated as a qualifying relative of the
taxpayer for all taxable years ending during the
period that the child is kidnapped.
‘‘(D) TERMINATION
OF
TREATMENT.—
Subparagraphs (A) and (C) shall cease to apply
as of the first taxable year of the taxpayer be-
ginning after the calendar year in which there
is a determination that the child is dead (or, if
earlier, in which the child would have attained
age 18).
‘‘(6) CROSS REFERENCES.—
‘‘For provision treating child as dependent of both
parents for purposes of certain provisions, see sec-
tions 105(b), 132(h)(2)(B), and 213(d)(5).’’
SEC. 202. MODIFICATIONS OF DEFINITION OF HEAD OF
HOUSEHOLD.
(a) HEAD OF HOUSEHOLD.—Section 2(b)(1)(A)(i) is
amended to read as follows:
‘‘(i) a qualifying child of the indi-
vidual (as defined in section 152(c)), but
not if such child is married at the close of
the taxpayer’s taxable year and such child
has made a joint return with the child’s
spouse under section 6013 for the taxable
year beginning in the calendar year in
which the taxable year of the taxpayer be-
gins, or’’.
(b) SPECIAL RULE RELATING TO TREATMENT OF
GOVERNMENT BENEFITS
IN DETERMINING COST
OF
MAINTAINING HOUSEHOLD.—Paragraph (1) of section
2(b) is amended by adding after the flush sentence at the
end the following: ‘‘For purposes of the preceding sen-
tence, any means-tested benefits obtained under programs
described in section 6103(l)(7) or substantially similar
government programs shall not be taken into account for
purposes of determining whether over half of the cost of
maintaining the household is furnished by the individual.’’.
(c) CONFORMING AMENDMENT.—Clauses (i) and (ii)
of section 2(b)(3)(B) are amended to read as follows:
‘‘(i) subparagraph (H) of section
152(d)(2), or
‘‘(ii) 
paragraph 
(3) 
of 
section
152(d).’’.
SEC. 203. MODIFICATIONS OF DEPENDENT CARE CREDIT.
(a) IN GENERAL.—Section 21(a)(1) is amended by
striking ‘‘(as defined in subsection (b)(1))’’ and inserting
‘‘(as defined in subparagraph (B) or (C) of subsection
(b)(1)) or who has one or more qualifying individuals (as
defined in subsection (b)(1)(A))’’.
(b) QUALIFYING INDIVIDUAL.—Section 21(b)(1)(A)
is amended to read as follows:
‘‘(A) a qualifying child of the taxpayer (as
defined in section 152(c)) who has not attained
age 13,’’.
(c) SPECIAL RULE RELATING TO TREATMENT OF
GOVERNMENT BENEFITS
IN DETERMINING COST
OF
MAINTAINING HOUSEHOLD.—Section 21(c)(1) is amend-
ed by adding at the end the following: ‘‘Any means-tested
benefits obtained under programs described in section
6103(l)(7) or substantially similar government programs
shall not be taken into account for purposes of deter-
mining whether over half of the cost of maintaining the
household is furnished by the individual.’’.
SEC. 204. MODIFICATIONS OF CHILD TAX CREDIT.
(a) IN GENERAL.—Section 24(c)(1) is amended to
read as follows:
‘‘(1) IN GENERAL.—The term ‘qualifying child’
means a qualifying child of the taxpayer (as defined
in section 152(c)) who has not attained age 17.’’.
(b) CONFORMING AMENDMENT.—Section 24(c)(2) is
amended by striking ‘‘first sentence of section 152(b)(3)’’
and inserting ‘‘subparagraph (A) of section 152(b)(3)’’.
SEC. 205. MODIFICATIONS OF EARNED INCOME CREDIT.
(a) QUALIFYING CHILD.—
(1) IN
GENERAL.—Paragraph (3) of section
32(c) is amended to read as follows:
‘‘(3) QUALIFYING CHILD.—
‘‘(A) IN GENERAL.—The term ‘qualifying
child’ means a qualifying child of the taxpayer
(as defined in section 152(c)).
‘‘(B) MARRIED
INDIVIDUAL.—The term
‘qualifying child’ shall not include an individual
who is married as of the close of the taxpayer’s
taxable year unless the taxpayer is entitled to
a deduction under section 151 for such taxable
year with respect to such individual (or would
be so entitled but for subsection (d)(3) or (e) of
section 152).
‘‘(C) PLACE OF ABODE.—For purposes of
subparagraph (A), the requirements of section
152(c)(1)(B) shall be met only if the principal
place of abode is in the United States.
‘‘(D) IDENTIFICATION REQUIREMENTS.—
‘‘(i) IN GENERAL.—A qualifying child
shall not be taken into account under sub-
section (b) unless the taxpayer includes the
name, age, and TIN of the qualifying child
on the return of tax for the taxable year.
‘‘(ii) OTHER
METHODS.—The Sec-
retary may prescribe other methods for
providing the information described in
clause (i).’’.
(2) CONFORMING AMENDMENTS.—
(A) Section 32(c)(1) is amended by strik-
ing subparagraph (C) and by redesignating sub-
paragraphs (D), (E), (F), and (G) as subpara-
graphs (C), (D), (E), and (F), respectively.
(B) Section 32(c)(4) is amended by strik-
ing ‘‘(3)(E)’’ and inserting ‘‘(3)(C)’’.
(C) Section 32(m) is amended by striking
‘‘subsections (c)(1)(F)’’ and inserting ‘‘sub-
sections (c)(1)(E)’’.
(b) MODIFICATION
OF JOINT RETURN REQUIRE-
MENT.—Subsection (d) of section 32 is amended to read
as follows:
‘‘(d) MARRIED INDIVIDUALS.—
‘‘(1) IN GENERAL.—If the taxpayer is married
at the close of the taxable year, the credit shall be
allowed under subsection (a) only if the taxpayer
and his spouse file a joint return for the taxable
year.
‘‘(2) MARITAL STATUS.—For purposes of para-
graph (1), an individual legally separated from his
spouse under a decree of divorce or of separate
maintenance shall not be considered as married.
‘‘(3) CERTAIN
MARRIED
INDIVIDUALS
LIVING
APART.—For purposes of paragraph (1), if—
‘‘(A) an individual—
‘‘(i) is married and files a separate re-
turn, and
‘‘(ii) has a qualifying child who is a
son, daughter, stepson, or stepdaughter of
such individual, and
‘‘(B) during the last 6 months of such tax-
able year, such individual and such individual’s
spouse do not have the same principal place of
abode,
such individual shall not be considered as married.’’.
SEC. 206. MODIFICATIONS OF DEDUCTION FOR PERSONAL
EXEMPTION FOR DEPENDENTS.
Section 151(c) (relating to additional exemption for
dependents) is amended to read as follows:
‘‘(c) ADDITIONAL EXEMPTION FOR DEPENDENTS.—
An exemption of the exemption amount for each individual
who is a dependent (as defined in section 152) of the tax-
payer for the taxable year.’’
SEC. 207. MODIFICATION OF DETERMINATION OF MARITAL
STATUS.
Section 7703 (relating to determination of marital
status) is amended by adding at the end the following new
subsection:
‘‘(c) SPECIAL RULE RELATING TO TREATMENT OF
GOVERNMENT BENEFITS
IN DETERMINING COST
OF
MAINTAINING HOUSEHOLD.—For purposes of subsection
(b)(2), any means-tested benefits obtained under pro-
grams described in section 6103(l)(7) or substantially
similar government programs shall not be taken into ac-
count for purposes of determining whether over half of the
cost of maintaining the household is furnished by the indi-
vidual.’’.
SEC. 208. TECHNICAL AND CONFORMING AMENDMENTS.
(1) Section 21(e)(5)(A) is amended by striking
‘‘paragraph (2) or (4) of’’.
(2) Section 21(e)(6)(B) is amended by striking
‘‘section 
151(c)(3)’’ 
and 
inserting 
‘‘section
152(f)(1)’’.
(3) Section 25B(c)(2)(B) is amended by strik-
ing ‘‘151(c)(4)’’ and inserting ‘‘152(f)(2)’’.
(4)(A) Subparagraphs (A) and (B) of section
51(i)(1) are each amended by striking ‘‘paragraphs
(1) through (8) of section 152(a)’’ both places it ap-
pears and inserting ‘‘subparagraphs (A) through (G)
of section 152(d)(2)’’.
(B) Section 51(i)(1)(C) is amended by striking
‘‘152(a)(9)’’ and inserting ‘‘152(d)(2)(H)’’.
(5) Section 72(t)(7)(A)(iii) is amended by strik-
ing ‘‘151(c)(3)’’ and inserting ‘‘152(f)(1)’’.
(6) Section 129(c)(2) is amended by striking
‘‘151(c)(3)’’ and inserting ‘‘152(f)(1)’’.
(7) The first sentence of section 132(h)(2)(B)
is amended by striking ‘‘151(c)(3)’’ and inserting
‘‘152(f)(1)’’.
(8) Section 153 is amended by striking para-
graph (1) and by redesignating paragraphs (2), (3),
and (4) as paragraphs (1), (2), and (3), respectively.
(9) Section 170(g)(3) is amended by striking
‘‘paragraphs (1) through (8) of section 152(a)’’ and
inserting ‘‘subparagraphs (A) through (G) of section
152(d)(2)’’.
(10) The second sentence of section 213(d)(11)
is amended by striking ‘‘paragraphs (1) through (8)
of section 152(a)’’ and inserting ‘‘subparagraphs (A)
through (G) of section 152(d)(2)’’.
(11) Section 529(e)(2)(B) is amended by strik-
ing ‘‘paragraphs (1) through (8) of section 152(a)’’
and inserting ‘‘subparagraphs (A) through (G) of
section 152(d)(2)’’.
(12) Section 2032A(c)(7)(D) is amended by
striking ‘‘section 151(c)(4)’’ and inserting ‘‘section
152(f)(2)’’.
(13) Section 7701(a)(17) is amended by strik-
ing ‘‘152(b)(4), 682,’’ and inserting ‘‘682’’.
(14) Section 7702B(f)(2)(C)(iii) is amended by
striking ‘‘paragraphs (1) through (8) of section
152(a)’’ and inserting ‘‘subparagraphs (A) through
(G) of section 152(d)(2)’’.
(15) Section 7703(b)(1) is amended—
(A) by striking ‘‘151(c)(3)’’ and inserting
‘‘152(f)(1)’’, and
(B) by striking ‘‘paragraph (2) or (4) of’’.
SEC. 209. EFFECTIVE DATE.
The amendments made by this subtitle shall apply to
taxable years beginning after December 31, 2002.
Subtitle B—Other Family-Related
Provisions
SEC. 211. ACCELERATION OF REPEAL OF PHASEOUT OF
PERSONAL EXEMPTIONS.
(a) IN GENERAL.—Subsection (d) of section 151 (re-
lating to phaseout of exemption amount) is amended by
striking paragraph (3) and redesignating paragraph (4)
as paragraph (3).
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 151(d), as amend-
ed by subsection (a), is amended to read as follows:
‘‘(3) INFLATION ADJUSTMENT.—In the case of
any taxable year beginning in a calendar year after
1989, the dollar amount contained in paragraph (1)
shall be increased by an amount equal to—
‘‘(A) such dollar amount, multiplied by
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar
year in which the taxable year begins, by sub-
stituting ‘calendar year 1988’ for ‘calendar year
1992’ in subparagraph (B) thereof.’’.
(2) Section 1(f)(6) is amended—
(A) in subparagraph (A) by striking
‘‘151(d)(4)’’ and inserting ‘‘151(d)(3)’’, and
(B) in subparagraph (B), both as in effect
on the date of the enactment of this Act and as
amended by the Economic Growth and Tax Re-
lief Reconciliation Act of 2001, by striking
‘‘151(d)(4)(A)’’ and inserting ‘‘151(d)(3)’’.
(c) EFFECTIVE DATE.—The amendments made by
subsection (a) shall apply to taxable years beginning after
December 31, 2002.
SEC. 212. ACCELERATION OF REPEAL OF PHASEOUT OF
OVERALL LIMITATION ON ITEMIZED DEDUC-
TIONS.
(a) IN GENERAL.—Section 68 (relating to overall
limitation on itemized deductions) is hereby repealed and
the table of sections for part I of subchapter B of chapter
1 is amended by striking the item relating to section 68.
(b) CONFORMING AMENDMENTS.—
(1) Section 1(f)(6)(A) is amended by striking ‘‘,
section 68(b)(2)’’.
(2) Section 773(a)(3)(B) is amended by strik-
ing clause (i) and redesignating clauses (ii), (iii),
and (iv) as clauses (i), (ii), and (iii), respectively.
(c) EFFECTIVE DATE.—The amendments by this sec-
tion shall apply to taxable years beginning after December
31, 2002.
SEC. 213. REPEAL OF CERTAIN PHASEOUT PROVISIONS.
(a) CHILD TAX CREDIT.—Subsection (b) of section
24 (relating to limitations) is amended—
(1) by striking paragraphs (1) and (2),
(2) by striking ‘‘‘‘(3) LIMITATION BASED ON
AMOUNT OF TAX.—’’ and moving the text 2 ems to
the left, and
(3) by redesignating subparagraphs (A) and
(B) as paragraphs (1) and (2), respectively.
(b) HOUSEHOLD AND DEPENDENT CARE SERVICES
NECESSARY
FOR GAINFUL EMPLOYMENT.—Subsection
(a) of section 21 (relating to allowance of credit) is
amended—
(1) in paragraph (1) by striking ‘‘applicable
percentage’’ and inserting ‘‘35 percent’’,
(2) by striking paragraph (2), and
(3) by striking ‘‘(1) IN GENERAL.—’’ and mov-
ing the text 2 ems to the left.
(c) RETIREMENT SAVINGS.—
(1) IN GENERAL.—Section 219 (relating to re-
tirement savings) is amended by striking subsection
(g).
(2) CONFORMING AMENDMENTS.—
(A) 
Sections 
132(m)(3) 
and
408(p)(2)(D)(ii) are each amended by inserting
‘‘(as in effect on the day before the enactment
of this parenthetical)’’ after ‘‘section 219(g)(5)’’
each place it appears.
(B) Section 408(d)(5)(B) is amended by
striking the last sentence.
(C) Section 408(o)(2)(B)(i) is amended by
striking ‘‘(determined without regard to section
219(g))’’ both places it appears.
(D) Section 408A(c)(2)(A) is amended by
striking ‘‘or (g)’’.
(E) Section 408A(c) is amended by strik-
ing paragraph (3) and redesignating para-
graphs (4), (5), (6), and (7) as paragraphs (3),
(4), (5), and (6), respectively.
(F) Section 4973(b)(2) is amended by
striking the last sentence.
(d) HOPE AND LIFETIME LEARNING CREDITS.—Sec-
tion 25A (relating to hope and lifetime learning credits)
is amended by striking subsection (d).
(e) INTEREST
ON
EDUCATION
LOANS.—Section
221(b) (relating to maximum deduction) is amended—
(1) by striking paragraph (2),
(2) by striking ‘‘(1) IN GENERAL.—Except as
provided in paragraph (2), the’’ and inserting
‘‘The’’, and
(3) moving the text 2 ems to the left.
(f) INCOME FROM UNITED STATES SAVINGS BONDS
USED
TO
PAY
HIGHER
EDUCATION
TUITION
AND
FEES.—Subsection (c) of section 135 is amended to read
as follows:
‘‘(b) LIMITATION.—
‘‘(1) IN GENERAL.—If—
‘‘(A) the aggregate proceeds of qualified
United States savings bonds redeemed by the
taxpayer during the taxable year exceed
‘‘(B) the qualified higher education ex-
penses paid by the taxpayer during such taxable
year,
the amount excludable from gross income under sub-
section (a) shall not exceed the applicable fraction of
the amount excludable from gross income under sub-
section (a) without regard to this subsection.
‘‘(2) APPLICABLE FRACTION.—For purposes of
paragraph (1), the term ‘applicable fraction’ means
the fraction the numerator of which is the amount
described in paragraph (1)(B) and the denominator
of which is the amount described in paragraph
(1)(A).’’.
(g) ADOPTION CREDIT.—Subsection (b) of section 23
(relating to limitations) is amended by striking paragraph
(2) and redesignating paragraphs (3) and (4) as para-
graphs (2) and (3).
(h) ADOPTION ASSISTANCE PROGRAMS.—
(1) IN
GENERAL.—Subsection (b) of section
137 is amended—
(A) by striking paragraphs (2) and (3),
(B) in paragraph (1)—
(i) by striking ‘‘(1) DOLLAR LIMITA-
TIONS.—’’, and
(ii) moving the text 2 ems to the left.
(2) CONFORMING AMENDMENT.—Section 23(h)
is amended by striking ‘‘section 137(b)(1)’’ and in-
serting ‘‘section 137(b)’’.
(i) QUALIFIED TUITION AND RELATED EXPENSES.—
Subsection (b) of section 222 is amended to read as fol-
lows:
‘‘(b) DOLLAR LIMITATIONS.—
‘‘(1) IN GENERAL.—The amount allowed as a
deduction under subsection (a) with respect to the
taxpayer for any taxable year shall not exceed the
applicable dollar limit.
‘‘(2) APPLICABLE
DOLLAR
LIMIT.—For pur-
poses of paragraph (1), the applicable dollar limit
shall be determined in accordance with the following
table:
‘‘Taxable years beginning in
calendar year:
The applicable dollar limit is:
2003 ...............................................
$3,000.
2004 and 2005 ..............................
$4,000.’’.
(j) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 214. SIMPLIFICATION OF CAPITAL GAINS TAX.
(a) IN GENERAL.—Part I of subchapter P of chapter
1 (relating to treatment of capital gains) is amended by
adding at the end the following new section:
‘‘SEC. 1203. CAPITAL GAINS DEDUCTION.
‘‘If for any taxable year a taxpayer other than a cor-
poration has a net capital gain, 50 percent of such gain
shall be a deduction from gross income.’’.
(b) DEDUCTION ALLOWABLE WHETHER
OR NOT
TAXPAYER ITEMIZES OTHER DEDUCTIONS.—
(1) Subsection (b) of section 63 is amended by
striking ‘‘and’’ at the end of paragraph (1), by strik-
ing the period at the end of paragraph (2) and in-
serting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph:
‘‘(3) the deduction allowed by section 1203.’’.
(2) Subsection (d) of section 63 is amended by
striking ‘‘and’’ at the end of paragraph (1), by strik-
ing the period at the end of paragraph (2) and in-
serting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph:
‘‘(3) the deduction allowed by section 1203.’’.
(c) TECHNICAL AND CONFORMING AMENDMENTS.—
(1) Section 1 is amended by striking subsection
(h).
(2) Subparagraph (E) of section 163(d)(4) is
amended to read as follows:
‘‘(E) COORDINATION WITH CAPITAL GAINS
DEDUCTION.—The net capital gain taken into
account under section 1203 for any taxable
year shall be reduced (but not below zero) by
the amount which the taxpayer takes into ac-
count as investment income under subpara-
graph (B)(iii) for such year.’’.
(3) Paragraph (1) of section 170(e) is amended
by striking ‘‘the amount of gain’’ in the material fol-
lowing subparagraph (B)(ii) and inserting ‘‘50 per-
cent (100 percent in the case of a corporation) of
the amount of gain’’.
(4) Subparagraph (B) of section 172(d)(2) is
amended to read as follows:
‘‘(B) the exclusion under section 1202 and
the deduction under section 1203 shall not be
allowed.’’.
(5) The last sentence of section 453A(c)(3) is
amended by striking all that follows ‘‘long-term cap-
ital gain,’’ and inserting ‘‘the maximum rate on net
capital gain under section 1201 or the deduction
under section 1203 (whichever is appropriate) shall
be taken into account.’’.
(6)(A) Section 641(c)(2)(A) is amended by
striking ‘‘Except as provided in section 1(h), the’’
and inserting ‘‘The’’.
(B) Section 641(c)(2)(C) is amended by insert-
ing after clause (iii) the following new clause:
‘‘(iv) The deduction under section
1203.’’.
(7) Paragraph (4) of section 642(c) is amended
to read as follows:
‘‘(4) ADJUSTMENTS.—To the extent that the
amount otherwise allowable as a deduction under
this subsection consists of gain from the sale or ex-
change of capital assets held for more than 1 year,
proper adjustment shall be made for any exclusion
allowable under section 1202 and any deduction al-
lowable under section 1203 to the estate or trust. In
the case of a trust, the deduction allowed by this
subsection shall be subject to section 681 (relating
to unrelated business income).’’.
(8) Section 642 is amended by adding at the
end the following new subsection:
‘‘(j) CAPITAL GAINS DEDUCTION.—The deduction
under section 1203 to an estate or trust shall be computed
by excluding the portion (if any) of the gains for the tax-
able year which is includible by the income beneficiaries
under sections 652 and 662 (relating to inclusions of
amounts in gross income of beneficiaries of trusts) as gain
derived from the sale or exchange of capital assets.’’.
(9) The last sentence of section 643(a)(3) is
amended to read as follows: ‘‘The exclusion under
section 1202 and the deduction under section 1203
shall not be taken into account.’’.
(10) Subparagraph (C) of section 643(a)(6) is
amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and
by inserting before the period ‘‘, and (ii) the deduc-
tion under section 1203 (relating to capital gains de-
duction) shall not be taken into account’’.
(11) Paragraph (4) of section 691(c) is amend-
ed by striking ‘‘1(h),’’ and by inserting ‘‘1203,’’
after ‘‘1202,’’.
(12) The second sentence of paragraph (2) of
section 871(a) is amended by striking ‘‘section
1202’’ and inserting ‘‘sections 1202 and 1203’’.
(13)(A) Paragraph (2) of section 904(b) is
amended by striking subparagraphs (A) and (C)’’,
by redesignating subparagraph (B) as subparagraph
(A), and by inserting after subparagraph (A) (as so
redesignated) the following new subparagraph:
‘‘(B) OTHER TAXPAYERS.—In the case of
a taxpayer other than a corporation, taxable in-
come from sources outside the United States
shall include gain from the sale or exchange of
capital assets only to the extent of foreign
source capital gain net income.’’.
(B) Subparagraph (A) of section 904(b)(2), as
so redesignated, is amended—
(i) by striking all that precedes clause (i)
and inserting the following:
‘‘(A) CORPORATIONS.—In the case of a
corporation—’’, and
(ii) by striking in clause (i) ‘‘in lieu of ap-
plying subparagraph (A),’’.
(C) Paragraph (3) of section 904(b) is amended
by striking subparagraphs (D) and (E) and inserting
the following new subparagraph:
‘‘(D) RATE DIFFERENTIAL PORTION.—The
rate differential portion of foreign source net
capital gain, net capital gain, or the excess of
net capital gain from sources within the United
States over net capital gain, as the case may
be, is the same proportion of such amount as
the excess of the highest rate of tax specified in
section 11(b) over the alternative rate of tax
under section 1201(a) bears to the highest rate
of tax specified in section 11(b).’’.
(14) Paragraph (1) of section 1402(i) is amend-
ed by inserting ‘‘, and the deduction provided by sec-
tion 1203 shall not apply’’ before the period at the
end thereof.
(15) Paragraph (1) of section 1445(e) is
amended by striking ‘‘20 percent’’ and inserting
‘‘one-half of the maximum rate of tax in effect under
section 1’’.
(16)(A) 
The 
second 
sentence 
of 
section
7518(g)(6)(A) is amended—
(i) by striking ‘‘during a taxable year to
which section 1(h) or 1201(a) applies’’, and
(ii) by striking ‘‘20 percent’’ and inserting
‘‘one-half of the maximum rate of tax in effect
under section 1’’.
(B) The second sentence of section
607(h)(6)(A) of the Merchant Marine Act,
1936, is amended—
(i) by striking ‘‘during a taxable year
to which section 1(h) or 1201(a) of such
Code applies’’, and
(ii) by striking ‘‘20 percent’’ and in-
serting ‘‘one-half of the maximum rate of
tax in effect under section 1 of such
Code’’.
(d) CLERICAL AMENDMENT.—The table of sections
for part I of subchapter P of chapter 1 is amended by
adding at the end the following new item:
‘‘Sec. 1203. Capital gains deduction.’’.
(e) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to taxable years beginning
after December 31, 2002.
(2) WITHHOLDING.—The amendments made by
subsection (d)(15) shall apply only to amounts paid
after December 31, 2002.
(3) REPEAL OF ELECTION.—Section 311 of the
Taxpayer Relief Act of 1997 is amended by striking
subsection (e).
(4) COORDINATION
WITH
PRIOR
TRANSITION
RULE.—Any amount treated as long-term capital
gain by reason of paragraph (3) of section 1122(h)
of the Tax Reform Act of 1986 shall not be taken
into account for purposes of applying section 1203
of the Internal Revenue Code of 1986 (as added by
this section).
SEC. 215. EXEMPTION OF CERTAIN INTEREST AND DIVI-
DEND INCOME FROM TAX.
(a) IN GENERAL.—Part III of subchapter B of chap-
ter 1 (relating to amounts specifically excluded from gross
income) is amended by inserting after section 115 the fol-
lowing new section:
‘‘SEC. 116. PARTIAL EXCLUSION OF DIVIDENDS AND INTER-
EST RECEIVED BY INDIVIDUALS.
‘‘(a) EXCLUSION FROM GROSS INCOME.—Gross in-
come does not include dividends and interest otherwise in-
cludible in gross income which are received during the tax-
able year by an individual.
‘‘(b) LIMITATIONS.—
‘‘(1) 
MAXIMUM
AMOUNT.—The 
aggregate
amount excluded under subsection (a) for any tax-
able year shall not exceed $250 ($500 in the case of
a joint return).
‘‘(2) CERTAIN
DIVIDENDS
EXCLUDED.—Sub-
section (a) shall not apply to any dividend from a
corporation which for the taxable year of the cor-
poration in which the distribution is made is a cor-
poration exempt from tax under section 521 (relat-
ing to farmers’ cooperative associations).
‘‘(c) 
SPECIAL
RULES.—For 
purposes 
of 
this
section—
‘‘(1) EXCLUSION NOT TO APPLY TO CAPITAL
GAIN
DIVIDENDS
FROM
REGULATED
INVESTMENT
COMPANIES
AND
REAL
ESTATE
INVESTMENT
TRUSTS.—
‘‘For treatment of capital gain dividends, see sec-
tions 854(a) and 857(c).
‘‘(2) CERTAIN
NONRESIDENT
ALIENS
INELI-
GIBLE
FOR
EXCLUSION.—In the case of a non-
resident alien individual, subsection (a) shall apply
only in determining the taxes imposed for the tax-
able year pursuant to sections 871(b)(1) and 877(b).
‘‘(3) DIVIDENDS FROM EMPLOYEE STOCK OWN-
ERSHIP PLANS.—Subsection (a) shall not apply to
any dividend described in section 404(k).’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (C) of section 32(c)(5) is
amended by striking ‘‘or’’ at the end of clause (i),
by striking the period at the end of clause (ii) and
inserting ‘‘; or’’, and by inserting after clause (ii)
the following new clause:
‘‘(iii) interest and dividends received
during the taxable year which are excluded
from gross income under section 116.’’.
(2) Subparagraph (A) of section 32(i)(2) is
amended by inserting ‘‘(determined without regard
to section 116)’’ before the comma.
(3) Subparagraph (B) of section 86(b)(2) is
amended to read as follows:
‘‘(B) increased by the sum of—
‘‘(i) the amount of interest received or
accrued by the taxpayer during the taxable
year which is exempt from tax, and
‘‘(ii) the amount of interest and divi-
dends received during the taxable year
which are excluded from gross income
under section 116.’’.
(4) Subsection (d) of section 135 is amended by
redesignating paragraph (4) as paragraph (5) and
by inserting after paragraph (3) the following new
paragraph:
‘‘(4) COORDINATION WITH SECTION 116.—This
section shall be applied before section 116.’’.
(5) Paragraph (2) of section 265(a) is amended
by inserting before the period ‘‘, or to purchase or
carry obligations or shares, or to make deposits, to
the extent the interest thereon is excludable from
gross income under section 116’’.
(6) Subsection (c) of section 584 is amended by
adding at the end the following new flush sentence:
‘‘The proportionate share of each participant in the
amount of dividends or interest received by the common
trust fund and to which section 116 applies shall be con-
sidered for purposes of such section as having been re-
ceived by such participant.’’.
(7) Subsection (a) of section 643 is amended by
redesignating paragraph (7) as paragraph (8) and
by inserting after paragraph (6) the following new
paragraph:
‘‘(7) DIVIDENDS OR INTEREST.—There shall be
included the amount of any dividends or interest ex-
cluded from gross income pursuant to section 116.’’.
(8) Section 854(a) is amended by inserting
‘‘section 116 (relating to partial exclusion of divi-
dends and interest received by individuals) and’’
after ‘‘For purposes of’’.
(9) Section 857(c) is amended to read as fol-
lows:
‘‘(c) RESTRICTIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) TREATMENT FOR SECTION 116.—For pur-
poses of section 116 (relating to partial exclusion of
dividends and interest received by individuals), a
capital gain dividend (as defined in subsection
(b)(3)(C)) received from a real estate investment
trust which meets the requirements of this part shall
not be considered as a dividend.
‘‘(2) TREATMENT FOR SECTION 243.—For pur-
poses of section 243 (relating to deductions for divi-
dends received by corporations), a dividend received
from a real estate investment trust which meets the
requirements of this part shall not be considered as
a dividend.’’.
(10) The table of sections for part III of sub-
chapter B of chapter 1 is amended by inserting after
the item relating to section 115 the following new
item:
‘‘Sec. 116. Partial exclusion of dividends and interest received by
individuals.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 216. SIMPLIFICATION OF DEDUCTION FOR POINTS ON
HOME MORTGAGE.
(a) IN GENERAL.—Paragraph (2) of section 461(g)
(relating to prepaid interest) is amended by adding at the
end the following new sentence: ‘‘This subsection also shall
not apply to points paid in respect of indebtedness secured
by such residence resulting from the refinancing of indebt-
edness meeting the requirements of the preceding sentence
(or this sentence), but only to the extent the amount of
the indebtedness resulting from such refinancing does not
exceed the amount of the refinanced indebtedness.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 217. INCREASE IN EXCLUSION FOR GROUP-TERM LIFE
INSURANCE PURCHASED FOR EMPLOYEES.
(a) IN GENERAL.—Paragraph (1) of section 79(a) is
amended 
by 
striking 
‘‘$50,000’’ 
and 
inserting
‘‘$100,000’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to years beginning after Decem-
ber 31, 2002.
TITLE III—EDUCATION-RELATED
PROVISIONS
SEC. 301. UNIFORM DEFINITION OF QUALIFYING HIGHER
EDUCATION EXPENSES.
(a) IN GENERAL.—Paragraph (3) of section 529(e)
(relating to other definitions and special rules) is amended
to read as follows:
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means—
‘‘(i) tuition, fees, books, supplies, and
equipment required for the enrollment or
attendance of a designated beneficiary at
an eligible educational institution; and
‘‘(ii) expenses for special needs serv-
ices in the case of a special needs bene-
ficiary which are incurred in connection
with such enrollment or attendance.
‘‘(B) ROOM
AND
BOARD
INCLUDED
FOR
STUDENTS WHO ARE AT LEAST HALF-TIME.—
‘‘(i) IN GENERAL.—In the case of an
individual who is an eligible student (as de-
fined in section 25A(b)(3)) for any aca-
demic period, such term shall also include
reasonable costs for such period (as deter-
mined under the qualified tuition program)
incurred by the designated beneficiary for
room and board while attending such insti-
tution. For purposes of subsection (b)(7),
a designated beneficiary shall be treated as
meeting the requirements of this clause.
‘‘(ii) LIMITATION.—The amount treat-
ed as qualified higher education expenses
by reason of clause (i) shall not exceed—
‘‘(I) the allowance (applicable to
the student) for room and board in-
cluded in the cost of attendance (as
defined in section 472 of the Higher
Education Act of 1965 (20 U.S.C.
1087ll), as in effect on the date of the
enactment of the Economic Growth
and Tax Relief Reconciliation Act of
2001) as determined by the eligible
educational institution for such pe-
riod, or
‘‘(II) if greater, the actual invoice
amount the student residing in hous-
ing owned or operated by the eligible
educational institution is charged by
such institution for room and board
costs for such period.
‘‘(C) EXCEPTIONS.—
‘‘(i) EXCEPTION FOR EDUCATION IN-
VOLVING
SPORTS, ETC.—Such term does
not include expenses with respect to any
course or other education involving sports,
games, or hobbies, unless such course or
other education is part of the individual’s
degree program.
‘‘(ii) EXCEPTION FOR NONACADEMIC
FEES.—Such term does not include stu-
dent activity fees, athletic fees, insurance
expenses, or other expenses unrelated to an
individual’s academic course of instruc-
tion.’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 25A and 6050S are each amended
by striking ‘‘qualified tuition and related expenses’’
each place it appears and inserting ‘‘qualified higher
education expenses’’.
(2) Section 25A(f)(1) is amended to read as fol-
lows:
‘‘(1) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ means the qualified higher education ex-
penses (as defined by section 529(e)(3) without re-
gard to subparagraph (B) thereof) required for the
enrollment or attendance of—
‘‘(A) the taxpayer,
‘‘(B) the taxpayer’s spouse, or
‘‘(C) any dependent of the taxpayer with
respect to whom the taxpayer is allowed a de-
duction under section 151,
at an eligible educational institution for courses of
instruction of such individual at such institution.’’.
(3) Section 135(c)(2) is amended—
(A) by striking ‘‘tuition and fees’’ and in-
serting ‘‘the qualified higher education expenses
(as defined by section 529(e)(3) without regard
to subparagraph (B) thereof)’’, and
(B) by striking subparagraph (B) and re-
designating subparagraph (C) as subparagraph
(B).
(4) Section 221(d)(2) is amended by striking
‘‘the cost of attendance (as defined in section 472 of
the Higher Education Act of 1965, 20 U.S.C.
1087ll, as in effect on the day before the date of the
enactment of this Act)’’ and inserting ‘‘the qualified
higher education expenses (as defined by section
529(e)(3) without regard to subparagraph (B) there-
of) incurred for attendance’’.
(5)(A) Section 222 is amended by striking
‘‘qualified tuition and related expenses’’ each place
it appears and inserting ‘‘qualified higher education
expenses’’.
(B) Section 222(d)(1) is amended to read as
follows:
‘‘(1) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ has the meaning given such term by section
529(e)(3) (without regard to subparagraph (B)
thereof). Such expenses shall be reduced in the same
manner as under section 25A(g)(2).’’.
(C) Section 222(d) is amended by redesignating
paragraph (6) as paragraph (7) and by inserting
after paragraph (5) the following new paragraph:
‘‘(6) ROOM AND BOARD INCLUDED FOR STU-
DENTS WHO ARE FULL-TIME.—No amount shall be
taken into account under this section for an expense
described in section 529(e)(3)(B) (relating to room
and board included for students who are at least
half-time) unless such individual is an eligible stu-
dent (as defined in section 25A(b)(3)), determined
by substituting ‘the normal full-time work load’ in
lieu of ‘1⁄2 the normal full-time work load’ in sub-
paragraph (B) thereof.’’.
(D) The heading for section 222 is amended by
striking ‘‘TUITITION AND RELATED’’ and
inserting ‘‘HIGHER EDUCATION’’.
(E) The table of sections for part VII of sub-
chapter B of chapter 1 is amended by amending the
item relating to section 222 to read as follows:
‘‘Sec. 222. Qualified higher education expenses.’’.
(6)(A) Section 6724(d) is amended—
(i) in paragraph (1)(B)(x) by striking
‘‘qualified tuition and related expenses’’ and in-
serting ‘‘qualified higher education expenses’’,
and
(ii) in paragraph (2)(Z) by striking ‘‘quali-
fied tuition and related expenses’’ and inserting
‘‘qualified higher education expenses’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to amounts paid in taxable years
beginning after December 31, 2002, for education fur-
nished in periods beginning after such date.
SEC. 302. COMBINING HOPE AND LIFETIME LEARNING
CREDITS.
(a) IN GENERAL.—So much of section 25A (relating
to Hope and Lifetime Learning Credits) as precedes sub-
section (d) is amended to read as follows:
‘‘SEC. 25A. EDUCATION CREDIT.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax
imposed by this chapter for the taxable year the amount
equal to 20 percent of so much of the qualified expenses
paid by the taxpayer during the taxable year (for edu-
cation furnished during any academic period beginning in
such taxable year) as does not exceed $10,000.
‘‘(b) QUALIFIED EXPENSES.—For purposes of sub-
section (a), the term ‘qualified expenses’ means the sum
of—
‘‘(1) qualified higher education expenses, and
‘‘(2) the expenses described in subsection (d)(1)
with respect to any course of instruction at an eligi-
ble educational institution to acquire or improve job
skills of the individual.’’.
(b) CONFORMING AMENDMENTS TO CREDIT.—
(1) Section 25A, as amended by subsection (a)
and sections 207(d) and 301, is further amended—
(A) by striking subsection (h), and
(B) by redesignating subsections (e), (f),
(g), and (i) as subsections (c), (d), (e), and (f),
respectively.
(2) Subsection (e)(2), as so redesignated, is
amended by striking ‘‘(before the application of sub-
sections (b), (c), and (d))’’.
(c) OTHER CONFORMING AND CLERICAL AMEND-
MENTS.—
(1) The following provisions are each amended
by striking ‘‘section 25A(g)(2)’’ and inserting ‘‘sec-
tion 25A(e)(2)’’:
(A) Section 72(t)(7)(B).
(B) 221(d)(2)(B).
(C) 222(d)(1) (as amended by section
301(b)(6) of this Act).
(D) 529(c)(3)(B)(v)(I).
(E) 530(b)(2)(A).
(F) 530(d)(2)(C)(i)(I).
(G) 530(d)(4)(B)(iii).
(2) Section 221(d) is amended—
(A) in paragraph (2) by striking ‘‘section
25A(f)(2)’’ and inserting ‘‘section 25A(d)(2)’’,
and
(B) by amending paragraph (3) to read as
follows:
‘‘(3) ELIGIBLE STUDENT.—The term ‘eligible
student’ means, with respect to any academic period,
a student who—
‘‘(A) meets the requirements of section
484(a)(1) of the Higher Education Act of 1965
(20 U.S.C. 1091(a)(1)), as in effect on the date
of the enactment of this section, and
‘‘(B) is carrying at least 1⁄2 the normal
full-time work load for the course of study the
student is pursuing.’’.
(3) Section 529(e)(3)(B)(i) is amended by strik-
ing ‘‘section 25A(b)(3)’’ and inserting ‘‘section
221(d)(3)’’.
(4) The heading of section 529(c)(3)(B)(v) is
amended to read as follows: ‘‘COORDINATION WITH
EDUCATION CREDIT.—’’.
(5) The heading of section 530(d)(2)(C) is
amended to read as follows: ‘‘COORDINATION WITH
EDUCATION CREDIT AND QUALIFIED TUITION PRO-
GRAMS.—’’.
(6) Section 6050S(e) is amended by striking
‘‘subsection 
(g)(2)’’ 
and 
inserting 
‘‘subsection
(e)(2)’’.
(7) Section 6213(g)(2)(J) is amended by strik-
ing ‘‘section 25A(g)(1)’’ and inserting ‘‘section
25A(e)(1)’’.
(8) The item relating to section 25A in the
table of sections for subpart A of part IV of sub-
chapter A of chapter 1 is amended to read as fol-
lows:
‘‘Sec. 25A. Education Credit.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
SEC. 303. CLARIFICATION OF INTERACTION OF VARIOUS
EDUCATION TAX INCENTIVE PROVISIONS.
(a) REPEAL OF EXCISE TAX ON EXCESS CONTRIBU-
TIONS
TO
EDUCATION
SAVINGS
ACCOUNTS.—Section
4973 is amended—
(1) in subsection (a) by inserting ‘‘or’’ at the
end of paragraph (2), by striking ‘‘or’’ at the end of
paragraph (3), and by striking paragraph (4), and
(2) by striking subsection (e) and redesignating
subsection (f) as subsection (e).
(b) COORDINATION OF EDUCATION INCENTIVES.—
Section 222(c)(2) is amended to read as follows:
‘‘(2) COORDINATION WITH EDUCATION EXCLU-
SIONS.—The total amount of qualified higher edu-
cation expenses shall be reduced by the amount of
such expenses taken into account in determining any
amount excluded under section 135, 529(c)(1), or
530(d)(2). For purposes of the preceding sentence,
the amount taken into account in determining the
amount excluded under section 529(c)(1) shall not
include that portion of the distribution which rep-
resents a return of any contributions to the plan.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
TITLE IV—BUSINESS
PROVISIONS
SEC. 401. CASH METHOD OF ACCOUNTING.
(a) PERSONAL SERVICE CORPORATIONS.—
(1) IN
GENERAL.—Subsection (b) of section
448 (relating to exception to general rule on limita-
tion on use of cash method of accounting) is
amended—
(A) by striking paragraph (2), and
(B) by redesignating paragraph (3) as
paragraph (2).
(2) CONFORMING AMENDMENTS.—
(A) Section 448(d) is amended by striking
paragraph (2) and redesignating paragraphs
(3) through (8) as paragraphs (2) through (7),
respectively.
(B) Section 11(b)(2) is amended by insert-
ing ‘‘(as in effect on the day before the date of
the enactment of this parenthetical)’’ after
‘‘section 448(d)(2)’’.
(b) INCREASE IN GROSS RECEIPTS TEST AMOUNT;
TESTING PERIOD LIMITED TO 3 YEARS.—
(1) IN
GENERAL.—Paragraph (2) of section
448(b) (relating to entities with gross receipts of not
more than $5,000,000), as redesignated by sub-
section (a), is amended—
(A) by striking ‘‘$5,000,000’’ in the head-
ing and inserting ‘‘$10,000,000’’,
(B) by striking ‘‘$5,000,000’’ in the text,
and
(C) by striking ‘‘, for all prior taxable
years beginning after December 31, 1985,’’.
(2) GROSS
RECEIPTS
TEST
DEFINED.—Sub-
section (c) of section 448 (relating to $5,000,000
gross receipts test) is amended—
(A) by striking ‘‘$5,000,000’’ in the head-
ing and the first place it appears in paragraph
(1), and
(B) by striking ‘‘$5,000,000’’ the second
place it appears in paragraph (1) and inserting
‘‘$10,000,000’’.
(c) EFFECTIVE DATES.—
(1) PERSONAL SERVICE CORPORATIONS.—The
amendments made by subsection (a) shall apply to
taxable years beginning after December 31, 2002.
(2) GROSS RECEIPTS TEST.—The amendments
made by subsection (b) shall apply to determinations
of whether the requirement of section 448(b)(2) of
the Internal Revenue Code of 1986 (as amended by
this section) is met for any taxable year beginning
after December 31, 2002.
SEC. 402. REPEAL OF COLLAPSIBLE CORPORATIONS.
(a) IN GENERAL.—Subpart C of part II of sub-
chapter C of chapter 1 (relating to collapsible corpora-
tions) is hereby repealed.
(b) CLERICAL AMENDMENT.—The table of subparts
for part II of subchapter C of chapter 1 is amended by
striking the item relating to subpart C.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to sales, exchanges, and distribu-
tions made after the date of the enactment of this Act.
SEC. 403. SIMPLIFICATION OF ACTIVE BUSINESS TEST FOR
CERTAIN CORPORATE REORGANIZATIONS.
(a) IN GENERAL.—Section 355(b) (defining active
conduct of a trade or business) is amended by adding at
the end the following new paragraph:
‘‘(3) SPECIAL
RULES
RELATING
TO
ACTIVE
BUSINESS REQUIREMENT.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining whether a corporation meets the re-
quirement of paragraph (2)(A), all members of
such corporation’s separate affiliated group
shall be treated as one corporation. For pur-
poses of the preceding sentence, a corporation’s
separate affiliated group is the affiliated group
which would be determined under section
1504(a) if such corporation were the common
parent and section 1504(b) did not apply.
‘‘(B) CONTROL.—For purposes of para-
graph (2)(D), all distributee corporations which
are members of the same affiliated group (as
defined in section 1504(a) without regard to
section 1504(b)) shall be treated as one dis-
tributee corporation.’’.
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (A) of section 355(b)(2) is
amended to read as follows:
‘‘(A) it is engaged in the active conduct of
a trade or business,’’.
(2) Section 355(b)(2) is amended by striking
the last sentence.
(c) EFFECTIVE DATE.—
(1) IN GENERAL.—The amendments made by
this section shall apply to distributions after the
date of the enactment of this Act.
(2) 
TRANSITION
RULE.—The 
amendments
made by this section shall not apply to any distribu-
tion pursuant to a transaction which is—
(A) made pursuant to an agreement which
was binding on such date and at all times
thereafter,
(B) described in a ruling request submitted
to the Internal Revenue Service on or before
such date, or
(C) described on or before such date in a
public announcement or in a filing with the Se-
curities and Exchange Commission.
(3) 
ELECTION
TO
HAVE
AMENDMENTS
APPLY.—Paragraph (2) shall not apply if the dis-
tributing corporation elects not to have such para-
graph apply to distributions of such corporation.
Any such election, once made, shall be irrevocable.
SEC. 404. STUDY ON SIMPLIFICATION OF ATTRIBUTION
RULES.
The Secretary of the Treasury shall conduct a study
of the different provisions in the Internal Revenue Code
of 1986 relating to the attribution rules with respect to
the ownership of stock. Such study shall address the ad-
vantages and disadvantages of adopting uniform attribu-
tion rules and the extent to which such uniform rules
would better serve taxpayers, practitioners, and the Inter-
nal Revenue Service. Not later than 180 days after the
date of the enactment of this Act, the Secretary shall sub-
mit such study, together with any recommendation the
Secretary considers appropriate, to the Committee on
Ways and Means of the House of Representatives and the
Committee on Finance of the Senate.
SEC. 405. ALLOCATION OF BASIS ON TRANSFERS OF INTAN-
GIBLES 
IN 
CERTAIN 
NONRECOGNITION
TRANSACTIONS.
(a) TRANSFERS
TO CORPORATIONS.—Section 351
(relating to transfer to corporation controlled by trans-
feror) is amended by redesignating subsection (h) as sub-
section (i) and by inserting after subsection (g) the fol-
lowing new subsection:
‘‘(h) TREATMENT OF TRANSFERS OF INTANGIBLE
PROPERTY.—
‘‘(1) TRANSFERS OF LESS THAN ALL SUBSTAN-
TIAL RIGHTS.
‘‘(A) IN GENERAL.—A transfer of an inter-
est in intangible property (as defined in section
936(h)(3)(B)) shall be treated under this sec-
tion as a transfer of property even if the trans-
fer is of less than all of the substantial rights
of the transferor in the property.
‘‘(B) ALLOCATION OF BASIS.—In the case
of a transfer of less than all of the substantial
rights of the transferor in the intangible prop-
erty, the transferor’s basis immediately before
the transfer shall be allocated among the rights
retained by the transferor and the rights trans-
ferred on the basis of their respective fair mar-
ket values.
‘‘(2) NONRECOGNITION NOT TO APPLY TO IN-
TANGIBLE
PROPERTY
DEVELOPED
FOR
TRANS-
FEREE.—This section shall not apply to a transfer
of intangible property developed by the transferor or
any related person if such development was pursuant
to an arrangement with the transferee.’’.
(b) TRANSFERS TO PARTNERSHIPS.—Subsection (d)
of section 721 is amended to read as follows:
‘‘(d) TRANSFERS OF INTANGIBLE PROPERTY.—
‘‘(1) IN GENERAL.—Rules similar to the rules
of section 351(h) shall apply for purposes of this
section.
‘‘(2) 
TRANSFERS
TO
FOREIGN
PARTNER-
SHIPS.—For regulatory authority to treat intangi-
bles transferred to a partnership as sold, see section
367(d)(3).’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to transfers on or after the date
of the enactment of this Act.
SEC. 406. STUDY ON MODERNIZATION OF REFERENCES TO
GENERAL AND LIMITED PARTNERS.
(a) IN GENERAL.—The Secretary of the Treasury
shall conduct a study on modernizing the use of the terms
‘‘general partners’’ and ‘‘limited partners’’ in the Internal
Revenue Code of 1986 in light of the increased use of lim-
ited liability companies and other business entities classi-
fied as partnerships for Federal tax purposes. Such study
shall address whether the distinction between general and
limited partners should be determined based on liability
for debts of the partnership or on the right to participate
in management of the partnership.
(b) SUBMISSION
OF STUDY
TO CONGRESS.—Not
later than one year after the date of the enactment of this
Act, the Secretary shall submit the study conducted under
subsection (a), together with any recommendation the Sec-
retary considers appropriate, to the Committee on Ways
and Means of the House of Representatives and the Com-
mittee on Finance of the Senate.
SEC. 407. REPEAL OF ABILITY TO ELECT LARGE PARTNER-
SHIP REPORTING RULES.
(a) IN GENERAL.—Paragraph (2) of section 775(a)
(relating to election) is amended by adding at the end the
following: ‘‘No election under this subsection shall be
made after December 31, 2003.’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to partnership taxable years begin-
ning after December 31, 2002.
SEC. 408. REPEAL OF PERSONAL HOLDING COMPANY TAX.
(a) IN GENERAL.—Part II of subchapter G of chap-
ter 1 (relating to personal holding companies) is hereby
repealed.
(b) CONFORMING AMENDMENTS.—
(1) Section 12(2) is amended to read as follows:
‘‘(2) For accumulated earnings tax, see part I
of subchapter G (sec. 531 and following).’’.
(2) Section 26(b)(2) is amended by striking
subparagraph (G) and by redesignating the suc-
ceeding subparagraphs accordingly.
(3) Section 30A(c) is amended by striking para-
graph (3) and by redesignating paragraph (4) as
paragraph (3).
(4) Section 41(e)(7)(E) is amended by adding
‘‘and’’ at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(5) Section 56(b)(2) is amended by striking
subparagraph (C) and by redesignating subpara-
graph (D) as subparagraph (C).
(6) Section 170(e)(4)(D) is amended by adding
‘‘and’’ at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(7) Section 111(d) is amended to read as fol-
lows:
‘‘(d) SPECIAL RULES FOR ACCUMULATED EARNINGS
TAX.—In applying subsection (a) for the purpose of deter-
mining the accumulated earnings tax under section 531—
‘‘(1) any excluded amount under subsection (a)
allowed for purposes of this subtitle (other than sec-
tion 531) shall be allowed whether or not such
amount resulted in a reduction of the tax under sec-
tion 531 for the prior taxable year, and
‘‘(2) where any excluded amount under sub-
section (a) was not allowed as a deduction for the
prior taxable year for purposes of this subtitle other
than section 531 but was allowable for the same tax-
able year under section 531, then such excluded
amount shall be allowable if it did not result in a re-
duction of the tax under section 531.’’.
(8)(A) Section 316(b) is amended by striking
paragraph (2) and by redesignating paragraph (3)
as paragraph (2).
(B) Section 331(b) is amended by striking
‘‘(other than a distribution referred to in paragraph
(2)(B) of section 316(b))’’.
(9) Section 341(d) is amended—
(A) by striking ‘‘section 544(a)’’ and in-
serting ‘‘section 465(f)’’, and
(B) by inserting before the period at the
end of the next to the last sentence ‘‘and such
paragraph (2) shall be applied by inserting ‘by
or for his partner’ after ‘his family’ ’’.
(10) Section 381(c) is amended by striking
paragraphs (14) and (17).
(11) Section 443(e) is amended by striking
paragraph (2) and by redesignating paragraphs (3),
(4), and (5) as paragraphs (2), (3), and (4), respec-
tively.
(12) Section 447(g)(4)(A) is amended by strik-
ing ‘‘other than—’’ and all that follows and insert-
ing ‘‘other than an S corporation.’’
(13)(A) Section 465(a)(1)(B) is amended to
read as follows:
‘‘(B) a C corporation which is closely
held,’’.
(B) Section 465(a)(3) is amended to read as
follows:
‘‘(3) CLOSELY
HELD
DETERMINATION.—For
purposes of paragraph (1), a corporation is closely
held if, at any time during the last half of the tax-
able year, more than 50 percent in value of its out-
standing stock is owned, directly or indirectly, by or
for not more than 5 individuals. For purposes of this
paragraph, an organization described in section
401(a), 501(c)(17), or 509(a) or a portion of a trust
permanently set aside or to be used exclusively for
the purposes described in section 642(c) shall be
considered an individual.’’
(C) Section 465 is amended by adding at the
end the following new subsection:
‘‘(f) CONSTRUCTIVE OWNERSHIP RULES.—For pur-
poses of subsection (a)(3)—
‘‘(1) STOCK
NOT
OWNED
BY
INDIVIDUAL.—
Stock owned, directly or indirectly, by or for a cor-
poration, partnership, estate, or trust shall be con-
sidered as being owned proportionately by its share-
holders, partners, or beneficiaries.
‘‘(2) FAMILY OWNERSHIP.—An individual shall
be considered as owning the stock owned, directly or
indirectly, by or for his family. For purposes of this
paragraph, the family of an individual includes only
his brothers and sisters (whether by the whole or
half blood), spouse, ancestors, and lineal descend-
ants.
‘‘(3) OPTIONS.—If any person has an option to
acquire stock, such stock shall be considered as
owned by such person. For purposes of this para-
graph, an option to acquire such an option, and each
one of a series of such options, shall be considered
as an option to acquire such stock.
‘‘(4) APPLICATION
OF
FAMILY
AND
OPTION
RULES.—Paragraphs (2) and (3) shall be applied if,
but only if, the effect is to make the corporation
closely held under subsection (a)(3).
‘‘(5) CONSTRUCTIVE
OWNERSHIP
AS
ACTUAL
OWNERSHIP.—Stock constructively owned by a per-
son by reason of the application of paragraph (1) or
(3), shall, for purposes of applying paragraph (1) or
(2), be treated as actually owned by such person;
but stock constructively owned by an individual by
reason of the application of paragraph (2) shall not
be treated as owned by him for purposes of again
applying such paragraph in order to make another
the constructive owner of such stock.
‘‘(6) OPTION
RULE
IN
LIEU
OF
FAMILY
RULE.—If stock may be considered as owned by an
individual under either paragraph (2) or (3) it shall
be considered as owned by him under paragraph (3).
‘‘(7) CONVERTIBLE SECURITIES.—Outstanding
securities convertible into stock (whether or not con-
vertible during the taxable year) shall be considered
as outstanding stock if the effect of the inclusion of
all such securities is to make the corporation closely
held under subsection (a)(3). The requirement under
the preceding sentence that all convertible securities
must be included if any are to be included shall be
subject to the exception that, where some of the out-
standing securities are convertible only after a later
date than in the case of others, the class having the
earlier conversion date may be included although the
others are not included, but no convertible securities
shall be included unless all outstanding securities
having a prior conversion date are also included.’’
(D) Section 465(c)(7)(B) is amended by strik-
ing clause (i) and by redesignating clauses (ii) and
(iii) as clauses (i) and (ii), respectively.
(E) Section 465(c)(7)(G) is amended to read as
follows:
‘‘(G) LOSS OF 1 MEMBER OF AFFILIATED
GROUP MAY NOT OFFSET INCOME OF PERSONAL
SERVICE CORPORATION.—Nothing in this para-
graph shall permit any loss of a member of an
affiliated group to be used as an offset against
the income of any other member of such group
which is a personal service corporation (as de-
fined in section 269A(b) but determined by sub-
stituting ‘5 percent’ for ‘10 percent’ in section
269A(b)(2)).’’
(14) Sections 508(d), 4947, and 4948(c)(4) are
each amended by striking ‘‘545(b)(2),’’ each place it
appears.
(15) Section 532(b) is amended by striking
paragraph (1) and by redesignating paragraphs (2),
(3), and (4) as paragraphs (1), (2), and (3), respec-
tively.
(16) Sections 535(b)(1) and 556(b)(1) are each
amended by striking ‘‘section 541’’ and inserting
‘‘section 541 (as in effect before its repeal)’’.
(17)(A) Section 553(a)(1) is amended by strik-
ing ‘‘section 543(d)’’ and inserting ‘‘subsection (c)’’.
(B) Section 553 is amended by adding at the
end the following new subsection:
‘‘(c) ACTIVE BUSINESS COMPUTER SOFTWARE ROY-
ALTIES.—
‘‘(1) IN GENERAL.—For purposes of subsection
(a), the term ‘active business computer software roy-
alties’ means any royalties—
‘‘(A) received by any corporation during
the taxable year in connection with the licensing
of computer software, and
‘‘(B) with respect to which the require-
ments of paragraphs (2), (3), (4), and (5) are
met.
‘‘(2) ROYALTIES MUST BE RECEIVED BY COR-
PORATION ACTIVELY ENGAGED IN COMPUTER SOFT-
WARE BUSINESS.—The requirements of this para-
graph are met if the royalties described in paragraph
(1)—
‘‘(A) are received by a corporation engaged
in the active conduct of the trade or business
of developing, manufacturing, or producing
computer software, and
‘‘(B) are attributable to computer software
which—
‘‘(i) is developed, manufactured, or
produced by such corporation (or its prede-
cessor) in connection with the trade or
business described in subparagraph (A), or
‘‘(ii) is directly related to such trade
or business.
‘‘(3) ROYALTIES MUST CONSTITUTE AT LEAST
50 PERCENT OF INCOME.—The requirements of this
paragraph are met if the royalties described in para-
graph (1) constitute at least 50 percent of the ordi-
nary gross income of the corporation for the taxable
year.
‘‘(4) DEDUCTIONS UNDER SECTIONS 162 AND
174 RELATING TO ROYALTIES MUST EQUAL OR EX-
CEED 25 PERCENT OF ORDINARY GROSS INCOME.—
‘‘(A) IN GENERAL.—The requirements of
this paragraph are met if—
‘‘(i) the sum of the deductions allow-
able to the corporation under sections 162,
174, and 195 for the taxable year which
are properly allocable to the trade or busi-
ness described in paragraph (2) equals or
exceeds 25 percent of the ordinary gross
income of such corporation for such tax-
able year, or
‘‘(ii) the average of such deductions
for the 5-taxable year period ending with
such taxable year equals or exceeds 25 per-
cent of the average ordinary gross income
of such corporation for such period.
If a corporation has not been in existence dur-
ing the 5-taxable year period described in clause
(ii), then the period of existence of such cor-
poration shall be substituted for such 5-taxable
year period.
‘‘(B) DEDUCTIONS
ALLOWABLE
UNDER
SECTION 162.—For purposes of subparagraph
(A), a deduction shall not be treated as allow-
able under section 162 if it is specifically allow-
able under another section.
‘‘(C) LIMITATION ON ALLOWABLE DEDUC-
TIONS.—For purposes of subparagraph (A), no
deduction shall be taken into account with re-
spect to compensation for personal services ren-
dered by the 5 individual shareholders holding
the largest percentage (by value) of the out-
standing stock of the corporation. For purposes
of the preceding sentence individuals holding
less than 5 percent (by value) of the stock of
such corporation shall not be taken into ac-
count.’’
(18) Section 561(a) is amended by striking
paragraph (3), by inserting ‘‘and’’ at the end of
paragraph (1), and by striking ’’, and’’ at the end
of paragraph (2) and inserting a period.
(19) Section 562(b) is amended to read as fol-
lows:
‘‘(b) DISTRIBUTIONS IN LIQUIDATION.—Except in
the case of a foreign personal holding company described
in section 552—
‘‘(1) in the case of amounts distributed in liq-
uidation, the part of such distribution which is prop-
erly chargeable to earnings and profits accumulated
after February 28, 1913, shall be treated as a divi-
dend for purposes of computing the dividends paid
deduction, and
‘‘(2) in the case of a complete liquidation occur-
ring within 24 months after the adoption of a plan
of liquidation, any distribution within such period
pursuant to such plan shall, to the extent of the
earnings and profits (computed without regard to
capital losses) of the corporation for the taxable year
in which such distribution is made, be treated as a
dividend for purposes of computing the dividends
paid deduction.
For purposes of paragraph (1), a liquidation includes a
redemption of stock to which section 302 applies. Except
to the extent provided in regulations, the preceding sen-
tence shall not apply in the case of any mere holding or
investment company which is not a regulated investment
company.’’
(20) Section 563 is amended by striking sub-
section (b).
(21) Section 564 is hereby repealed.
(22) Section 631(c) is amended by striking ‘‘or
section 545(b)(5)’’.
(23) Section 852(b)(1) is amended by striking
‘‘which is a personal holding company (as defined in
section 542) or’’.
(24)(A) Section 856(h)(1) is amended to read
as follows:
‘‘(1) IN GENERAL.—For purposes of subsection
(a)(6), a corporation, trust, or association is closely
held if the stock ownership requirement of section
465(a)(3) is met.’’
(B) Section 856(h)(3)(A)(i) is amended by
striking ‘‘section 542(a)(2)’’ and inserting ‘‘section
465(a)(3)’’.
(C) Paragraph (3) of section 856(h) is amended
by striking subparagraph (B) and by redesignating
subparagraphs (C) and (D) as subparagraphs (B)
and (C), respectively.
(D) Subparagraph (C) of section 856(h)(3), as
redesignating by the preceding subparagraph, is
amended by striking ‘‘subparagraph (C)’’ and insert-
ing ‘‘subparagraph (B)’’.
(25) The last sentence of section 882(c)(2) is
amended to read as follows:
‘‘The preceding sentence shall not be construed to
deny the credit provided by section 33 for tax with-
held at source or the credit provided by section 34
for certain uses of gasoline.’’.
(26) Section 936(a)(3) is amended by striking
subparagraph (C), by inserting ‘‘or’’ at the end of
subparagraph (B), and by redesignating subpara-
graph (D) as subparagraph (C).
(27) Section 992(d) is amended by striking
paragraph (2) and by redesignating succeeding para-
graphs accordingly.
(28) Section 992(e) is amended by striking
‘‘and section 541 (relating to personal holding com-
pany tax)’’.
(29) Section 1202(e)(8) is amended by striking
‘‘section 
543(d)(1)’’ 
and 
inserting 
‘‘section
553(c)(1)’’.
(30) Section 1362(d)(3)(C)(iii) is amended by
adding at the end the following new sentence: ‘‘Ref-
erences to section 542 in the preceding sentence
shall be treated as references to such section as in
effect on the day before its repeal.’’
(31) Section 1504(c)(2)(B) is amended by add-
ing ‘‘and’’ at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(32) Section 2057(e)(2)(C) is amended by add-
ing at the end the following new sentence: ‘‘Ref-
erences to sections 542 and 543 in the preceding
sentence shall be treated as references to such sec-
tions as in effect on the day before their repeal.’’
(33) Sections 6422 is amended by striking
paragraph (3) and by redesignating paragraphs (4)
through (12) and paragraphs (3) through (11), re-
spectively.
(34) Section 6501 is amended by striking sub-
section (f).
(35) Section 6503(k) is amended by striking
paragraph (1) and by redesignating paragraphs (2)
through (5) as paragraphs (1) through (4), respec-
tively.
(36) Section 6515 is amended by striking para-
graph (1) and by redesignating paragraphs (2)
through (6) as paragraphs (1) through (5), respec-
tively.
(37) Subsections (d)(1)(B) and (e)(2) of section
6662 are each amended by striking ‘‘or a personal
holding company (as defined in section 542)’’.
(38) Section 6683 is hereby repealed.
(c) CLERICAL AMENDMENTS.—
(1) The table of parts for subchapter G of
chapter 1 is amended by striking the item relating
to part II.
(2) The table of sections for part IV of such
subchapter G is amended by striking the item relat-
ing to section 564.
(3) The table of sections for part I of sub-
chapter B of chapter 68 is amended by striking the
item relating to section 6683.
(d) EFFECTIVE DATE.—The amendments made by
this Act shall apply to taxable years beginning after De-
cember 31, 2001.
SEC. 409. TIMING RULES FOR GUARANTEED PAYMENTS.
(a) IN GENERAL.—Subsection (e) of section 267 (re-
lating to special rules for pass-thru entities) is amended
by striking paragraph (4) and redesignating paragraphs
(5) and (6) as paragraphs (4) and (5), respectively.
(b) EFFECTIVE DATE.—The amendments made by
subsection (a) shall apply to amounts paid or incurred in
taxable years beginning after December 31, 2002.
SEC. 410. SECRETARIAL AUTHORITY TO PRESCRIBE CLASS
LIFE FOR PROPERTY.
(a) IN GENERAL.—Paragraph (1) of section 168(i)
(defining class life) is amended to read as follows:
‘‘(1) CLASS LIFE.—
‘‘(A) IN GENERAL.—Except as provided in
this section, the term ‘class life’ means the class
life (if any) which would be applicable with re-
spect to any property as of January 1, 1986,
under subsection (m) of section 167 (deter-
mined without regard to paragraph (4) and as
if the taxpayer had made an election under
such subsection). The Secretary, through an of-
fice established in the Treasury, shall monitor
and analyze actual experience with respect to
all depreciable assets. The reference in this
paragraph to subsection (m) of section 167
shall be treated as a reference to such sub-
section as in effect on the day before the date
of the enactment of the Revenue Reconciliation
Act of 1990.
‘‘(B) SECRETARIAL AUTHORITY.—The Sec-
retary, except in the case of residential rental
property or nonresidential real property—
‘‘(i) may prescribe a new class life for
any property,
‘‘(ii) in the case of assigned property,
may modify any assigned item, or
‘‘(iii) may prescribe a class life for
any property which does not have a class
life within the meaning of subparagraph
(A).
Any class life or assigned item prescribed or
modified under the preceding sentence shall
reasonably reflect the anticipated useful life,
and the anticipated decline in value over time,
of the property to the industry or other group.
‘‘(C) EFFECT
OF
MODIFICATION.—Any
class life or assigned item with respect to any
property prescribed or modified under subpara-
graph (B) shall be used in classifying such
property under subsection (e) and in applying
subsection (g).
‘‘(D) ASSIGNED PROPERTY AND ITEM.—
For purposes of this subparagraph—
‘‘(i) ASSIGNED PROPERTY.—The term
‘assigned property’ means property for
which a class life, classification, or recov-
ery period is assigned under subsection
(e)(3) or subparagraph (B), (C), or (D) of
subsection (g)(3).
‘‘(ii) ASSIGNED
ITEMS.—The term
‘assigned item’ means the class life, classi-
fication, or recovery period assigned under
subsection (e)(3) or subparagraph (B),
(C), or (D) of subsection (g)(3).
‘‘(iii) SPECIAL RULE FOR RAILROAD
GRADING OR TUNNEL BORES.—In the case
of any property which is a railroad grading
or tunnel bore—
‘‘(I) such property shall be treat-
ed as an assigned property,
‘‘(II) the recovery period applica-
ble to such property shall be treated
as an assigned item, and
‘‘(III) clause (ii) of subparagraph
(D) shall not apply.
‘‘(E) SPECIAL RULE FOR EFFECTIVE DATE
AND
APPLICATION
OF
CLASS
LIFE
AND
AS-
SIGNED ITEMS.—A class life or assigned item
prescribed or modified under subparagraph
(B)—
‘‘(i) shall take effect on the date pre-
scribed by the Secretary, except that such
date shall not be before the date which is
6 months after the date on which the Sec-
retary submits such class life or assigned
item to the Congress.
‘‘(ii) shall apply only for periods, as
determined by the Secretary, after such
date, except that the Secretary may allow
taxpayers to elect to apply a class life
which is shortened under this paragraph to
periods before such date. ’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to property placed in service
after the date of the enactment of this Act.
SEC. 411. REPEAL OF OCCUPATIONAL TAXES RELATING TO
DISTILLED SPIRITS, WINE, AND BEER.
(a) REPEAL OF OCCUPATIONAL TAXES.—
(1) IN GENERAL.—The following provisions of
part II of subchapter A of chapter 51 (relating to
occupational taxes) are hereby repealed:
(A) Subpart A (relating to proprietors of
distilled spirits plants, bonded wine cellars,
etc.).
(B) Subpart B (relating to brewer).
(C) Subpart D (relating to wholesale deal-
ers) (other than sections 5114 and 5116).
(D) Subpart E (relating to retail dealers)
(other than section 5124).
(E) Subpart G (relating to general provi-
sions) (other than sections 5142, 5143, 5145,
and 5146).
(2) NONBEVERAGE
DOMESTIC
DRAWBACK.—
Section 5131 is amended by striking ‘‘, on payment
of a special tax per annum,’’.
(3) INDUSTRIAL USE OF DISTILLED SPIRITS.—
Section 5276 is hereby repealed.
(b) CONFORMING AMENDMENTS.—
(1)(A) The heading for part II of subchapter A
of chapter 51 and the table of subparts for such
part are amended to read as follows:
‘‘PART II—MISCELLANEOUS PROVISIONS
‘‘Subpart A. Manufacturers of stills.
‘‘Subpart B. Nonbeverage domestic drawback claimants.
‘‘Subpart C. Recordkeeping by dealers.
‘‘Subpart D. Other provisions.’’
(B) The table of parts for such subchapter A
is amended by striking the item relating to part II
and inserting the following new item:
‘‘Part II. Miscellaneous provisions.’’
(2) Subpart C of part II of such subchapter
(relating to manufacturers of stills) is redesignated
as subpart A.
(3)(A) Subpart F of such part II (relating to
nonbeverage domestic drawback claimants) is redes-
ignated as subpart B and sections 5131 through
5134 are redesignated as sections 5111 through
5114, respectively.
(B) The table of sections for such subpart B,
as so redesignated, is amended—
(i) by redesignating the items relating to
sections 5131 through 5134 as relating to sec-
tions 5111 through 5114, respectively, and
(ii) by striking ‘‘and rate of tax’’ in the
item relating to section 5111, as so redesig-
nated.
(C) Section 5111, as redesignated by subpara-
graph (A), is amended—
(i) by striking ‘‘AND RATE OF TAX’’ in
the section heading,
(ii) by striking the subsection heading for
subsection (a), and
(iii) by striking subsection (b).
(4) Part II of subchapter A of chapter 51 is
amended by adding after subpart B, as redesignated
by paragraph (3), the following new subpart:
‘‘Subpart C—Recordkeeping by Dealers
‘‘Sec. 5121. Recordkeeping by wholesale dealers.
‘‘Sec. 5122. Recordkeeping by retail dealers.
‘‘Sec. 5123. Preservation and inspection of records, and entry of
premises for inspection.’’
(5)(A) Section 5114 (relating to records) is
moved to subpart C of such part II and inserted
after the table of sections for such subpart.
(B) Section 5114 is amended—
(i) by striking the section heading and in-
serting the following new heading:
‘‘SEC. 5121. RECORDKEEPING BY WHOLESALE DEALERS.’’,
and
(ii) by redesignating subsection (c) as sub-
section (d) and by inserting after subsection (b)
the following new subsection:
‘‘(c) WHOLESALE DEALERS.—For purposes of this
part—
‘‘(1) WHOLESALE DEALER IN LIQUORS.—The
term ‘wholesale dealer in liquors’ means any dealer
(other than a wholesale dealer in beer) who sells, or
offers for sale, distilled spirits, wines, or beer, to an-
other dealer.
‘‘(2) WHOLESALE DEALER IN BEER.—The term
‘wholesale dealer in beer’ means any dealer who
sells, or offers for sale, beer, but not distilled spirits
or wines, to another dealer.
‘‘(3) DEALER.—The term ‘dealer’ means any
person who sells, or offers for sale, any distilled spir-
its, wines, or beer.
‘‘(4) PRESUMPTION IN CASE OF SALE OF 20
WINE GALLONS OR MORE.—The sale, or offer for
sale, of distilled spirits, wines, or beer, in quantities
of 20 wine gallons or more to the same person at
100
the same time, shall be presumptive evidence that
the person making such sale, or offer for sale, is en-
gaged in or carrying on the business of a wholesale
dealer in liquors or a wholesale dealer in beer, as the
case may be. Such presumption may be overcome by
evidence satisfactorily showing that such sale, or
offer for sale, was made to a person other than a
dealer.’’
(C) Paragraph (3) of section 5121(d), as so re-
designated, is amended by striking ‘‘section 5146’’
and inserting ‘‘section 5123’’.
(6)(A) Section 5124 (relating to records) is
moved to subpart C of part II of subchapter A of
chapter 51 and inserted after section 5121.
(B) Section 5124 is amended—
(i) by striking the section heading and in-
serting the following new heading:
‘‘SEC. 5122. RECORDKEEPING BY RETAIL DEALERS.’’,
(ii) by striking ‘‘section 5146’’ in sub-
section (c) and inserting ‘‘section 5123’’, and
(iii) by redesignating subsection (c) as sub-
section (d) and inserting after subsection (b)
the following new subsection:
‘‘(c) RETAIL
DEALERS.—For purposes of this
section—
101
‘‘(1) RETAIL DEALER IN LIQUORS.—The term
‘retail dealer in liquors’ means any dealer (other
than a retail dealer in beer) who sells, or offers for
sale, distilled spirits, wines, or beer, to any person
other than a dealer.
‘‘(2) RETAIL DEALER IN BEER.—The term ‘re-
tail dealer in beer’ means any dealer who sells, or of-
fers for sale, beer, but not distilled spirits or wines,
to any person other than a dealer.
‘‘(3) DEALER.—The term ‘dealer’ has the
meaning given such term by section 5121(c)(3).’’
(7) Section 5146 of the Internal Revenue Code
of 1986 is moved to subpart C of part II of sub-
chapter A of chapter 51 of such Code, inserted after
section 5122, and redesignated as section 5123.
(8) Part II of subchapter A of chapter 51 is
amended by inserting after subpart C the following
new subpart:
‘‘Subpart D—Other Provisions
‘‘Sec. 5131. Packaging distilled spirits for industrial uses.
‘‘Sec. 5132. Prohibited purchases by dealers.’’
(9) Section 5116 of such Code is moved to sub-
part D of part II of subchapter A of chapter 51 of
such Code, inserted after the table of sections, redes-
ignated as section 5131, and amended by inserting
102
‘‘(as defined in section 5121(c))’’ after ‘‘dealer’’ in
subsection (a).
(10) Subpart D of part II of subchapter A of
chapter 51 is amended by adding at the end thereof
the following new section:
‘‘SEC. 5132. PROHIBITED PURCHASES BY DEALERS.
‘‘(a) IN GENERAL.—Except as provided in regula-
tions prescribed by the Secretary, it shall be unlawful for
a dealer to purchase distilled spirits from any person other
than a wholesale dealer in liquors who is required to keep
the records prescribed by section 5121.
‘‘(b) PENALTY AND FORFEITURE.—
‘‘For penalty and forfeiture provisions applicable
to violations of subsection (a), see sections 5687 and
7302.’’
(11) Subsection (b) of section 5002 is
amended—
(A) by striking ‘‘section 5112(a)’’ and in-
serting ‘‘section 5121(c)(3)’’,
(B) by striking ‘‘section 5112’’ and insert-
ing ‘‘section 5121(c)’’,
(C) by striking ‘‘section 5122’’ and insert-
ing ‘‘section 5122(c)’’.
(12) Subparagraph (A) of section 5010(c)(2) is
amended by striking ‘‘section 5134’’ and inserting
‘‘section 5114’’.
103
(13) Subsection (d) of section 5052 is amended
to read as follows:
‘‘(d) BREWER.—For purposes of this chapter, the
term ‘brewer’ means any person who brews beer or pro-
duces beer for sale. Such term shall not include any person
who produces only beer exempt from tax under section
5053(e).’’
(14) The text of section 5182 is amended to
read as follows:
‘‘For provisions requiring recordkeeping by
wholesale liquor dealers, see section 5112, and by re-
tail liquor dealers, see section 5122.’’
(15) Subsection (b) of section 5402 is amended
by striking ‘‘section 5092’’ and inserting ‘‘section
5052(d)’’.
(16) Section 5671 is amended by striking ‘‘or
5091’’.
(17)(A) Part V of subchapter J of chapter 51
is hereby repealed.
(B) The table of parts for such subchapter J is
amended by striking the item relating to part V.
(18)(A) Sections 5142, 5143, and 5145 of such
Code are moved to subchapter D of chapter 52 of
such Code, inserted after section 5731, redesignated
as sections 5732, 5733, and 5734, respectively, and
104
amended by striking ‘‘this part’’ each place it ap-
pears and inserting ‘‘this subchapter’’.
(B) Section 5732, as redesignated by subpara-
graph (A), is amended by striking ‘‘(except the tax
imposed by section 5131)’’ each place it appears.
(C) Subsection (c) of section 5733, as redesig-
nated by subparagraph (A), is amended by striking
paragraph (2) and by redesignating paragraph (3)
as paragraph (2).
(D) The table of sections for subchapter D of
chapter 52 is amended by adding at the end thereof
the following:
‘‘Sec. 5732. Payment of tax.
‘‘Sec. 5733. Provisions relating to liability for occupational taxes.
‘‘Sec. 5734. Application of State laws.’’
(E) Section 5731 is amended by striking sub-
section (c) and by redesignating subsection (d) as
subsection (c).
(19) Subsection (c) of section 6071 is amended
by striking ‘‘section 5142’’ and inserting ‘‘section
5732’’.
(20) Paragraph (1) of section 7652(g) is
amended—
(A) by striking ‘‘subpart F’’ and inserting
‘‘subpart B’’, and
(B) by striking ‘‘section 5131(a)’’ and in-
serting ‘‘section 5111(a)’’.
105
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on July 1 of the year following
the year in which this Act is enacted, but shall not apply
to taxes imposed for periods before such date.
SEC. 412. CONSOLIDATION OF LIFE INSURANCE COMPA-
NIES WITH OTHER COMPANIES PERMITTED.
(a) IN GENERAL.—Section 1504(b) (defining includ-
ible corporation) is amended by striking paragraph (2)
and by redesignating paragraphs (3) through (8) as para-
graphs (2) through (7), respectively.
(b) CONFORMING AMENDMENTS.—
(1) Section 1503 is amended by striking sub-
section (c) (relating to special rule for application of
certain losses against income of insurance companies
taxed under section 801) and by redesignating sub-
sections (d), (e), and (f) as subsections (b), (c), and
(d), respectively.
(2) Section 1504 is amended by striking sub-
section (c) and by redesignating subsections (d), (e),
and (f) as subsections (c), (d), and (e), respectively.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 2002.
(d) ELECTION FOR PRE-2004 YEARS OF GROUPS
WITH INSURANCE COMPANIES.—For taxable years begin-
106
ning after December 31, 2002, and before January 1,
2004, the common parent of an affiliated group (deter-
mined without regard to section 1504(b)(2) of such Code
as in effect on the day before the date of the enactment
of this Act) which includes 1 or more domestic insurance
companies subject to tax under section 801 of such Code
may elect to treat all such insurance companies as cor-
porations which are not includible corporations within the
meaning of subsection (b) of section 1504 of such Code,
if, as of the date of the enactment of this section—
(1) such affiliated group included 1 or more in-
surance companies subject to tax under section 801
of such Code, and
(2) no additional election was in effect under
section 1504(c)(2) of such Code (as in effect on the
day before the date of the enactment of this Act).
(e) NO CARRYBACK BEFORE JANUARY 1, 2002.—To
the extent that a consolidated net operating loss is allowed
or increased by reason of the amendments made by this
section, such loss may not be carried back to a taxable
year beginning before January 1, 2001.
(f) NONTERMINATION
OF
GROUP.—No affiliated
group shall terminate solely as a result of the amendments
made by this section.
107
(g) SUBSIDIARY STOCK BASIS ADJUSTMENTS.—A
parent corporation’s basis in the stock of a subsidiary cor-
poration shall be adjusted to reflect the preconsolidation
income, gain, deduction and loss incurred during a period
when such corporations were members of an affiliated
group (determined without regard to section 1504(b)(2)
of such Code as in effect on the day before the date of
enactment of this Act) but were not included in a consoli-
dated return of such group by operation of section
1504(c)(2)(A) of such Code (as in effect on the day before
the date of the enactment of this Act).
(h) WAIVER OF 5-YEAR WAITING PERIOD.—Under
regulations prescribed by the Secretary of the Treasury
or his delegate, an automatic waiver from the 5-year wait-
ing period for reconsolidation provided in section
1504(a)(3) of such Code shall be granted to any corpora-
tion which was previously an includible corporation but
was subsequently deemed a nonincludible corporation as
a result of becoming a subsidiary of a corporation which
was not an includible corporation solely by operation of
section 1504(c)(2) of such Code (as in effect on the day
before the date of enactment of this Act).
108
TITLE V—ESTIMATED TAX
SEC. 501. FAILURE TO PAY ESTIMATED TAX PENALTY BY IN-
DIVIDUALS 
CONVERTED 
TO 
INTEREST
CHARGE ON ACCUMULATED UNPAID BAL-
ANCE.
(a) PENALTY MOVED TO INTEREST CHAPTER OF
CODE.—The Internal Revenue Code of 1986 is amended
by redesignating section 6654 as section 6641 and by
moving section 6641 (as so redesignated) from part I of
subchapter A of chapter 68 to the end of subchapter E
of chapter 67 (as added by subsection (e)(1) of this sec-
tion).
(b) PENALTY CONVERTED TO INTEREST CHARGE.—
The heading and subsections (a) and (b) of section 6641
(as so redesignated) are amended to read as follows:
‘‘SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY
ESTIMATED INCOME TAX.
‘‘(a) IN GENERAL.—Interest shall be paid on any un-
derpayment of estimated tax by an individual for a taxable
year for each day of such underpayment. The amount of
such interest for any day shall be the product of the un-
derpayment rate established under subsection (b)(2) mul-
tiplied by the amount of the underpayment.
‘‘(b) AMOUNT
OF
UNDERPAYMENT; INTEREST
RATE.—For purposes of subsection (a)—
109
‘‘(1) AMOUNT.—The amount of the under-
payment on any day shall be the excess of—
‘‘(A) the sum of the required installments
for the taxable year the due dates for which are
on or before such day, over
‘‘(B) the sum of the amounts (if any) of
estimated tax payments made on or before such
day on such required installments.
‘‘(2) DETERMINATION OF INTEREST RATE.—
‘‘(A) IN
GENERAL.—The underpayment
rate with respect to any day in an installment
underpayment period shall be the under-
payment rate established under section 6621
for the first day of the calendar quarter in
which such installment underpayment period
begins.
‘‘(B) INSTALLMENT
UNDERPAYMENT
PE-
RIOD.—For purposes of subparagraph (A), the
term ‘installment underpayment period’ means
the period beginning on the day after the due
date for a required installment and ending on
the due date for the subsequent required in-
stallment (or in the case of the 4th required in-
stallment, the 15th day of the 4th month fol-
lowing the close of a taxable year).
110
‘‘(C) DAILY RATE.—The rate determined
under subparagraph (A) shall be applied on a
daily basis and shall be based on the assump-
tion of 365 days in a calendar year.
‘‘(3) TERMINATION OF ESTIMATED TAX INTER-
EST.—No day after the end of the installment un-
derpayment period for the 4th required installment
specified in paragraph (2)(B) for a taxable year
shall be treated as a day of underpayment with re-
spect to such taxable year.’’.
(c) INCREASE
IN SAFE HARBOR WHERE TAX
IS
SMALL.—
(1) 
IN
GENERAL.—Clause 
(i) 
of 
section
6641(d)(1)(B) (as so redesignated) is amended to
read as follows:
‘‘(i) the lesser of—
‘‘(I) 90 percent of the tax shown
on the return for the taxable year (or,
if no return is filed, 90 percent of the
tax for such year), or
‘‘(II) the tax shown on the return
for the taxable year (or, if no return
is filed, the tax for such year) reduced
(but not below zero) by $2,000, or’’.
111
(2) REPEAL OF ALTERNATE SAFE HARBOR.—
Subparagraph (C) of section 6641(d)(1) (as so re-
designated) is hereby repealed.
(3) CONFORMING AMENDMENT.—
(A) Subsection (e) of section 6641 (as so
redesignated) is amended by striking paragraph
(1) and redesignating paragraphs (2) and (3)
as paragraphs (1) and (2), respectively.
(B) 
Subparagraph 
(C) 
of 
section
6641(i)(1) (as so redesignated) is amended by
striking ‘‘and without regard to subparagraph
(C) of subsection (d)(1)’’.
SEC. 502. CONFORMING AND CLERICAL AMENDMENTS.
(a) CONFORMING AMENDMENTS RELATING TO SEC-
TION 6641.—
(1) Paragraphs (1) and (2) of subsection (e)
(as redesignated by subsection (c)(2)) and sub-
section (h) of section 6641 (as so designated) are
each amended by striking ‘‘addition to tax’’ each
place it occurs and inserting ‘‘interest’’.
(2) Section 167(g)(5)(D) is amended by strik-
ing ‘‘6654’’ and inserting ‘‘6641’’.
(3) Section 460(b)(1) is amended by striking
‘‘6654’’ and inserting ‘‘6641’’.
(4) Section 3510(b) is amended—
112
(A) by striking ‘‘section 6654’’ in para-
graph (1) and inserting ‘‘section 6641’’;
(B) by amending paragraph (2)(B) to read
as follows:
‘‘(B) no interest would be required to be
paid (but for this section) under 6641 for such
taxable year by reason of the $2,000 amount
specified in section 6641(d)(1)(B)(i)(II).’’;
(C) by striking ‘‘section 6654(d)(2)’’ in
paragraph 
(3) 
and 
inserting 
‘‘section
6641(d)(2)’’; and
(D) by striking paragraph (4).
(5) Section 6201(b)(1) is amended—
(A) by striking ‘‘estimated income tax’’
and inserting ‘‘interest’’, and
(B) by striking ‘‘6654’’ and inserting
‘‘6641’’.
(6) Section 6601(h) is amended by striking
‘‘6654’’ and inserting ‘‘6641’’.
(7) Section 6621(b)(2)(B) is amended by strik-
ing ‘‘addition to tax under section 6654’’ and insert-
ing ‘‘interest required to be paid under section
6641’’.
(8) Section 6622(b) is amended—
113
(A) by striking ‘‘PENALTY
FOR’’ in the
heading; and
(B) by striking ‘‘addition to tax under sec-
tion 6654 or 6655’’ and inserting ‘‘interest re-
quired to be paid under section 6641 or addi-
tion to tax under section 6655’’.
(9) Section 6658(a) is amended—
(A) by striking ‘‘6654, or 6655’’ and in-
serting ‘‘or 6655, and no interest shall be re-
quired to be paid under section 6641,’’; and
(B) by inserting ‘‘or paying interest’’ after
‘‘the tax’’ in paragraph (2)(B)(ii).
(10) Section 6665(b) is amended—
(A) in the matter preceding paragraph (1)
by striking ‘‘, 6654,’’; and
(B) in paragraph (2) by striking ‘‘6654
or’’.
(11) Section 7203 is amended by striking ‘‘sec-
tion 6654 or 6655’’ and inserting ‘‘section 6655 or
interest required to be paid under section 6641’’.
(b) CLERICAL AMENDMENTS.—
(1) Chapter 67 is amended by inserting after
subchapter D the following:
114
‘‘Subchapter E—Interest on Failure to Pay
Estimated Income Tax
‘‘Sec. 6641. Interest on failure by individual to pay estimated in-
come tax.’’.
(2) The table of subchapters for chapter 67 is
amended by adding at the end the following new
items:
‘‘Subchapter D. Notice requirements.
‘‘Subchapter E. Interest on failure to pay estimated income tax.’’.
(3) The table of sections for part I of sub-
chapter A of chapter 68 is amended by striking the
item relating to section 6654.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to installment payments for taxable
years beginning after December 31, 2002.
TITLE VI—REPEAL OF
DEADWOOD PROVISIONS
SEC. 601. REPEAL OF DEADWOOD PROVISIONS.
(a) IN GENERAL.—
(1) ADJUSTMENTS IN TAX TABLES SO THAT IN-
FLATION WILL NOT RESULT IN TAX INCREASES.—
Paragraph (7) of section 1(f) is amended to read as
follows:
‘‘(7) SPECIAL RULE FOR CERTAIN BRACKETS.—
In prescribing tables under paragraph (1) which
apply to taxable years beginning in a calendar year
after 1994, the cost-of-living adjustment used in
115
making adjustments to the dollar amounts at which
the 36 percent bracket begins or at which the 39.6
rate bracket begins shall be determined under para-
graph (3) by substituting ‘1993’ for ‘1992’.’’.
(2) CREDIT FOR PRODUCING FUEL FROM NON-
CONVENTIONAL SOURCE.—Section 29 is amended by
striking subsection (e) and redesignating subsection
(f) as subsection (e).
(3) EARNED INCOME CREDIT.—Paragraph (1)
of section 32(b) is amended—
(A) by striking subparagraphs (B) and
(C), and
(B) in subparagraph (A) by striking ‘‘(A)
IN GENERAL.—In the case of taxable years be-
ginning after 1995’’ and moving the table 2
ems to the left.
(4) GENERAL BUSINESS CREDITS.—Subsection
(d) of section 38 is amended by striking paragraph
(3).
(5) CARRYBACK AND CARRYFORWARD OF UN-
USED
CREDITS.—Subsection (d) of section 39 is
amended by striking paragraphs (1) through (8) and
be redesignating paragraphs (9) and (10) as para-
graphs (1) and (2), respectively.
116
(6) ANNUITIES; CERTAIN
PROCEEDS
OF
EN-
DOWMENT AND LIFE INSURANCE CONTRACTS.—Sec-
tion 72 is amended—
(A) in subsection (c)(4) by striking ‘‘; ex-
cept that if such date was before January 1,
1954, then the annuity starting date is January
1, 1954’’, and
(B) in subsection (g)(3) by striking ‘‘Janu-
ary 1, 1954, or’’ and ‘‘, whichever is later’’.
(7) ACCIDENT AND HEALTH PLANS.—Section
105(f) is amended by striking ‘‘or (d)’’.
(8) FLEXIBLE
SPENDING
ARRANGEMENTS.—
Section 106(c)(1) is amended by striking ‘‘Effective
on and after January 1, 1997, gross’’ and inserting
‘‘Gross’’.
(9) CERTAIN COMBAT ZONE COMPENSATION OF
MEMBERS OF THE ARMED FORCES.—Subsection (c)
of section 112 is amended—
(A) by striking ‘‘(after June 24, 1950)’’ in
paragraph (2), and
(B) striking ‘‘such zone;’’ and all that fol-
lows in paragraph (3) and inserting ‘‘such
zone.’’.
(10) 
PRINCIPAL
RESIDENCE.—Section
121(b)(3) is amended—
117
(A) by striking subparagraph (B); and
(B) in subparagraph (A) by striking ‘‘(A)
IN GENERAL.—’’ and moving the text 2 ems to
the left.
(11) CERTAIN REDUCED UNIFORMED SERVICES
RETIREMENT
PAY.—Section 122(b)(1) is amended
by striking ‘‘after December 31, 1965,’’.
(12) 
GREAT
PLAINS
CONSERVATION
PRO-
GRAM.—Section 126(a) is amended by striking para-
graph (6) and redesignating paragraphs (7), (8),
(9), and (10) as paragraphs (6), (7), (8), and (9),
respectively.
(13) TREBLE DAMAGE PAYMENTS UNDER THE
ANTITRUST
LAW.—Section 162(g) is amended by
striking the last sentence.
(14) STATE LEGISLATORS’ TRAVEL EXPENSES
AWAY
FROM
HOME.—Paragraph (4) of section
162(h) is amended by striking ‘‘For taxable years
beginning after December 31, 1980, this’’ and in-
serting ‘‘This’’.
(15) INTEREST.—Section 163 is amended by
striking paragraph (6) of subsection (d) and para-
graph (5) (relating to phase-in of limitation) of sub-
section (h).
118
(16) CHARITABLE, ETC., CONTRIBUTIONS AND
GIFTS.—Section 170 is amended by striking sub-
section (k).
(17) AMORTIZABLE BOND PREMIUM.—Subpara-
graph (B) of section 171(b)(1) is amended to read
as follows:
‘‘(B)(i) in the case of a bond described in
subsection (a)(2), with reference to the amount
payable on maturity or earlier call date, and
‘‘(ii) in the case of a bond described in
subsection (a)(1), with reference to the amount
payable on maturity (or if it results in a smaller
amortizable bond premium attributable to the
period of earlier call date, with reference to the
amount payable on earlier call date), and’’.
(18) NET OPERATING LOSS CARRYBACKS AND
CARRYOVERS.—
(A) Section 172 is amended—
(i) by striking subparagraph (D) of
subsection (b)(1) and redesignating sub-
paragraphs (E), (F), and (G) as subpara-
graphs (D), (E), and (F), respectively,
(ii) by striking subsection (g), and
(iii) by striking subparagraph (F) of
subsection (h)(2).
119
(B) Section 172(h)(4) is amended by strik-
ing ‘‘subsection (b)(1)(E)’’ each place it ap-
pears and inserting ‘‘subsection (b)(1)(D)’’.
(C) Section 172(j)(3) is amended by strik-
ing ‘‘subsection (b)(1)(G)’’ each place it ap-
pears and inserting ‘‘subsection (b)(1)(F)’’.
(D) Section 172, as amended by subpara-
graphs (A) through (C) of this paragraph, is
further amended—
(i) by redesignating subsections (h),
(i), and (j) as subsections (g), (h), and (i),
respectively,
(ii) by striking ‘‘subsection (h)’’ each
place it appears and inserting ‘‘subsection
(g)’’,
(iii) by striking ‘‘subsection (i)’’ each
place it appears and inserting ‘‘subsection
(h)’’,
(E) 
Sections 
904(f)(2)(B)(i) 
and
907(c)(4)(B)(iii)(I) are each amended by strik-
ing ‘‘section 172(h)’’ and inserting ‘‘section
172(g)’’.
(19) RESEARCH AND EXPERIMENTAL EXPENDI-
TURES.—Subparagraph (A) of section 174(a)(2) is
amended to read as follows:
120
‘‘(A) WITHOUT
CONSENT.—A taxpayer
may, without the consent of the Secretary,
adopt the method provided in this subsection
for his first taxable year for which expenditures
described in paragraph (1) are paid or in-
curred.’’.
(20) AMORTIZATION
OF
CERTAIN
RESEARCH
AND
EXPERIMENTAL
EXPENDITURES.—Paragraph
(2) of section 174(b)(2) is amended by striking ‘‘be-
ginning after December 31, 1953’’.
(21) SOIL AND WATER CONSERVATION EXPEND-
ITURES.—Paragraph (1) of section 175(d) is amend-
ed to read as follows:
‘‘(1) WITHOUT
CONSENT.—A taxpayer may,
without the consent of the Secretary, adopt the
method provided in this section for his first taxable
year for which expenditures described in subsection
(a) are paid or incurred.’’.
(22) ACTIVITIES NOT ENGAGED IN FOR PROF-
IT.—Section 183(e)(1) is amended by striking the
last sentence.
(23) DIVIDENDS RECEIVED ON CERTAIN PRE-
FERRED STOCK; AND DIVIDENDS PAID ON CERTAIN
PREFERRED STOCK OF PUBLIC UTILITIES.—
121
(A) Sections 244 and 247 are hereby re-
pealed and the table of sections for part VIII
of subchapter B of chapter 1 is amended by
striking the items relating to sections 244 and
247.
(B) Paragraph (5) of section 172(d) is
amended to read as follows:
‘‘(5) COMPUTATION OF DEDUCTION FOR DIVI-
DENDS RECEIVED.—The deductions allowed by sec-
tion 243 (relating to dividends received by corpora-
tions) and 245 (relating to dividends received from
certain foreign corporations) shall be computed with-
out regard to section 246(b) (relating to limitation
on aggregate amount of deductions).’’.
(C) Paragraph (1) of section 243(c) is
amended to read as follows:
‘‘(1) IN GENERAL.—In the case of any dividend
received from a 20-percent owned corporation, sub-
section (a)(1) shall be applied by substituting ‘80
percent’ for ‘70 percent’.’’.
(D) Section 243(d) is amended by striking
paragraph (4).
(E) Section 246 is amended—
(i) by striking ‘‘, 244,’’ in subsection
(a)(1),
122
(ii) in subsection (b)(1)—
(I) 
by 
striking 
‘‘sections
243(a)(1), and 244(a),’’ the first
place it appears and inserting ‘‘section
243(a)(1),’’,
(II) by striking ‘‘244(a),’’ the
second place it appears therein, and
(III) by striking ‘‘subsection (a)
or (b) of section 245, and 247,’’ and
inserting ‘‘and subsection (a) or (b) of
section 245,’’,
(iii) by striking ‘‘244,’’ subsection
(c)(1).
(F) Section 246A is amended by striking
‘‘, 244,’’ both places it appears in subsections
(a) and (e).
(G) Sections 263(g)(2)(B)(iii), 277(a),
301(e)(2), 469(e)(4), 512(a)(3)(A), subpara-
graphs (A), (C), and (D) of section 805(a)(4),
805(b)(5), 
812(e)(2)(A), 
815(c)(2)(A)(iii),
832(b)(5), 833(b)(3)(E), 1059(b)(2)(B), and
1244(c)(2)(C) are each amended by striking ‘‘,
244,’’ each place it appears.
(H) Section 805(a)(4)(B) is amended by
striking ‘‘, 244(a),’’ each place it appears.
123
(I) Section 810(c)(2)(B) is amended by
striking ‘‘244 (relating to dividends on certain
preferred stock of public utilities),’’.
(24) 
ORGANIZATION
EXPENSES.—Section
248(c) is amended by striking ‘‘beginning after De-
cember 31, 1953,’’ and by striking the last sentence.
(25) BOND
REPURCHASE
PREMIUM.—Section
249(b)(1) is amended by striking ‘‘, in the case of
bonds or other evidences of indebtedness issued after
February 28, 1913,’’.
(26) AMOUNT
OF
GAIN
WHERE
LOSS
PRE-
VIOUSLY DISALLOWED.—Section 267(d) is amended
by striking ‘‘(or by reason of section 24(b) of the In-
ternal Revenue Code of 1939)’’ in paragraph (1), by
striking ‘‘after December 31, 1953,’’ in paragraph
(2), by striking the second sentence, and by striking
‘‘or by reason of section 118 of the Internal Revenue
Code of 1939’’ in the last sentence.
(27) ACQUISITIONS MADE TO EVADE OR AVOID
INCOME TAX.—Paragraphs (1) and (2) of section
269(a) are each amended by striking ‘‘or acquired
on or after October 8, 1940,’’.
(28) INTEREST ON INDEBTEDNESS INCURRED
BY CORPORATIONS TO ACQUIRE STOCK OR ASSETS
124
OF
ANOTHER
CORPORATION.—Section 
279 
is
amended—
(A) by striking ‘‘after December 31,
1967,’’ in subsection (a)(2),
(B) by striking ‘‘after October 9, 1969,’’ in
subsection (b),
(C) by striking ‘‘after October 9, 1969,
and’’ in subsection (d)(5), and
(D) by striking subsection (i) and redesig-
nating subsection (j) as subsection (i).
(29) SPECIAL RULES RELATING TO CORPORATE
PREFERENCE
ITEMS.—Paragraph (4) of section
291(a) is amended by striking ‘‘In the case of tax-
able years beginning after December 31, 1984, sec-
tion’’ and inserting ‘‘Section’’.
(30) DISTRIBUTIONS
OF
PROPERTY.—Section
301(c)(3) is amended to read as follows:
‘‘(3) AMOUNTS
IN
EXCESS
OF
BASIS.—That
portion of the distribution which is not a dividend,
to the extent that it exceeds the adjusted basis of
the stock, shall be treated as gain from the sale or
exchange of property.’’.
(31) EFFECT
ON
EARNINGS
AND
PROFITS.—
Subsection (d) of section 312 is amended by striking
125
paragraph (2) and redesignating paragraph (3) as
paragraph (2).
(32) BASIS TO CORPORATIONS.—Section 362 is
amended—
(A) by striking ‘‘on or after June 22,
1954,’’ in subsection (a), and
(B) by striking ‘‘, on or after June 22,
1954,’’ each place it appears in subsection (c).
(33) QUALIFICATIONS
FOR
TAX
CREDIT
EM-
PLOYEE STOCK OWNERSHIP PLAN.—Section 409 is
amended by striking subsections (a), (g), and (p).
(34) 
FUNDING
STANDARDS.—Section
412(m)(4) is amended—
(A) by striking ‘‘the applicable percentage’’
in subparagraph (A) and inserting ‘‘25 per-
cent’’, and
(B) by striking subparagraph (C) and re-
designating subparagraph (D) as subparagraph
(C).
(35) RETIREE
HEALTH
ACCOUNTS.—Section
420 is amended—
(A) by striking paragraph (4) in subsection
(b) and redesignating paragraph (5) as para-
graph (4), and
126
(B) by amending paragraph (2) of sub-
section (c) to read as follows:
‘‘(2) REQUIREMENTS
RELATING
TO
PENSION
BENEFITS ACCRUING BEFORE TRANSFER.—The re-
quirements of this paragraph are met if the plan
provides that the accrued pension benefits of any
participant or beneficiary under the plan become
nonforfeitable in the same manner which would be
required if the plan had terminated immediately be-
fore the qualified transfer (or in the case of a partic-
ipant who separated during the 1-year period ending
on the date of the transfer, immediately before such
separation).’’.
(36) EMPLOYEE
STOCK
PURCHASE
PLANS.—
Section 423(a) is amended by striking ‘‘after De-
cember 31, 1963,’’.
(37) LIMITATION
ON
DEDUCTIONS
FOR
CER-
TAIN FARMING.—Section 464 is amended—
(A) by striking ‘‘any farming syndicate (as
defined in subsection (c))’’ both places it ap-
pears in subsections (a) and (b) and inserting
‘‘any taxpayer to whom subsection (f) applies’’,
and
(B) by striking subsection (g).
127
(38) DEDUCTIONS
LIMITED
TO
AMOUNT
AT
RISK.—
(A) Paragraph (3) of section 465(c) is
amended by striking ‘‘In the case of taxable
years beginning after December 31, 1978, this’’
and inserting ‘‘This’’.
(B) Paragraph (2) of section 465(e)(2)(A)
is amended by striking ‘‘beginning after Decem-
ber 31, 1978’’.
(39) NUCLEAR DECOMMISSIONING COSTS.—Sec-
tion 468A(e)(2) is amended—
(A) by striking ‘‘at the rate set forth in
subparagraph (B)’’ in subparagraph (A) and in-
serting ‘‘at a rate of 20 percent’’, and
(B) by striking subparagraph (B) and re-
designating subparagraphs (C) and (D) as sub-
paragraphs (B) and (C), respectively.
(40) PASSIVE ACTIVITY LOSSES AND CREDITS
LIMITED.—Section 469 is amended by striking sub-
section (m).
(41) ADJUSTMENTS REQUIRED BY CHANGES IN
METHOD
OF
ACCOUNTING.—Section 481(b)(3) is
amended by striking subparagraph (C).
128
(42) EXEMPTION FROM TAX ON CORPORATIONS,
CERTAIN TRUSTS, ETC.—Section 501 is amended by
striking subsection (p).
(43) REQUIREMENTS FOR EXEMPTION.—
(A) Section 503(a)(1) is amended to read
as follows:
‘‘(1) GENERAL
RULE.—An organization de-
scribed in paragraph (17) or (18) of section 501(a)
or described in section 401(a) and referred to in sec-
tion 4975(g)(2) or (3) shall not be exempt from tax-
ation under section 501(a) if it has engaged in a
prohibited transaction.’’.
(B) Paragraph (2) of section 503(a) is
amended by striking ‘‘described in section
501(c)(17) or (18) or paragraph (a)(1)(B)’’ and
inserting ‘‘described in paragraph (1)’’.
(C) Subsection (c) of section 503 is
amended by striking ‘‘described in section
501(c)(17) or (18) or subsection (a)(1)(B)’’ and
inserting ‘‘described in subsection (a)(1)’’.
(44) ACCUMULATED TAXABLE INCOME.—Para-
graph (1) of section 535(b), paragraph (1) of section
545(b), and paragraph (1) of section 556(b) are
each amended by striking ‘‘section 531’’ and all that
129
follows and inserting ‘‘section 531 or the personal
holding company tax imposed by section 541.’’.
(45) DEFINITION
OF
FOREIGN
PERSONAL
HOLDING
COMPANY.—Paragraph (1) of section
552(a) is amended by striking ‘‘ending after August
26, 1937,’’.
(46) SPECIAL RULES AS TO OPERATING MIN-
ERAL INTEREST IN OIL AND GAS WELLS OR GEO-
THERMAL DEPOSITS.—Section 614(b) is amended—
(A) by striking paragraphs (3)(C) and (5),
and
(B) by striking ‘‘whichever of the following
taxable years is the later: The first taxable year
beginning after December 31, 1963, or’’ in
paragraph (4)(A).
(47) AMOUNTS RECEIVED BY SURVIVING ANNU-
ITANT UNDER JOINT AND SURVIVOR ANNUITY CON-
TRACT.—Subparagraph (A) of section 691(d)(1) is
amended by striking ‘‘after December 31, 1953,
and’’.
(48) INCOME TAXES OF MEMBERS OF ARMED
FORCES ON DEATH.—Section 692(a)(1) is amended
by striking ‘‘after June 24, 1950’’.
(49) SPECIAL
RULES
FOR
COMPUTING
RE-
SERVES.—Section 807(e)(7) is amended by striking
130
subparagraph (B) and redesignating subparagraph
(C) as subparagraph (B).
(50) TRANSITIONAL RULE FOR CERTAIN HIGH
SURPLUS MUTUAL LIFE INSURANCE COMPANIES.—
Section 809 is amended by striking subsection (i)
and redesignating subsection (j) as subsection (i).
(51) INSURANCE COMPANY TAXABLE INCOME.—
(A) Section 832(e) is amended by striking
‘‘of taxable years beginning after December 31,
1966,’’.
(B) Section 832(e)(6) is amended by strik-
ing ‘‘In the case of any taxable year beginning
after December 31, 1970, the’’ and by inserting
‘‘The’’.
(52) CAPITALIZATION OF CERTAIN POLICY AC-
QUISITION EXPENSES.—Section 848 is amended by
striking subsection (j).
(53) TAX
ON
NONRESIDENT
ALIEN
INDIVID-
UALS.—Subparagraph (B) of section 871(a)(1) is
amended to read as follows:
‘‘(B) gains described in section 631(b) or
(c),’’.
(54) LIMITATION ON CREDIT.—Paragraph (2)
of section 904(d) is amended by striking subpara-
graph (I).
131
(55) BASIS OF PROPERTY ACQUIRED FROM A
DECEDENT.—Section 1014(b) is amended by strik-
ing paragraphs (7) and (8) and redesignating para-
graphs (9) and (10) as paragraphs (7) and (8), re-
spectively.
(56) 
ADJUSTMENTS
TO
BASIS.—Section
1016(a) is amended by striking paragraphs (4) and
(12).
(57) PROPERTY ON WHICH LESSEE HAS MADE
IMPROVEMENTS.—Section 1019 is amended by strik-
ing the last sentence.
(58) PROPERTY
ACQUIRED
DURING
AFFILI-
ATION.—Section 1051 is repealed and the table of
sections for part IV of subchapter O of chapter 1 is
amended by striking the item relating to section
1051.
(59) SECTION 1081: NONRECOGNITION OF GAIN
OR LOSS ON EXCHANGES OR DISTRIBUTIONS IN OBE-
DIENCE TO ORDERS OF S.E.C.—
(A) Part VI of subchapter O of chapter 1
(relating to exchanges in obedience to S.E.C.
orders) is repealed, and the table of parts for
subchapter O is amended by striking the item
relating to part VI.
132
(B) Paragraph (3) of section 1223 is re-
pealed.
(C) Paragraph (5) of section 1245(b) is re-
pealed.
(D) Paragraph (5) of section 1250(d) is
repealed.
(60) REDEEMABLE
GROUND
RENTS.—Sub-
section (b) of section 1055 is repealed and sub-
sections (c) and (d) are redesignated as subsections
(b) and (c), respectively.
(61) HOLDING PERIOD OF PROPERTY.—
(A) Paragraph (5) of section 1223 is
amended by striking ‘‘(or under so much of sec-
tion 1052(c) as refers to section 113(a)(23) of
the Internal Revenue Code of 1939)’’.
(B) Paragraph (7) of section 1223 is
amended by striking the last sentence.
(C) Paragraph (9) of section 1223 is re-
pealed.
(62) PROPERTY USED IN THE TRADE OR BUSI-
NESS AND INVOLUNTARY CONVERSIONS.—Subpara-
graph (A) of section 1231(c)(2) is amended by strik-
ing ‘‘beginning after December 31, 1981’’.
(63) SALE OR EXCHANGE OF PATENTS.—Sec-
tion 1235 is amended by striking subsection (c) and