I
106TH CONGRESS
1ST SESSION
H. R. 134
To amend the Internal Revenue Code of 1986 to restructure and replace
the income tax system of the United States to meet national priorities,
and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 6, 1999
Mr. ENGLISH introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to restructure
and replace the income tax system of the United States
to meet national priorities, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE;
TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Simplified USA Tax Act of 1999’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act a reference
is made to the Code or to a section or provision of the
Code, the reference shall be considered to be made to the
Internal Revenue Code of 1986 or to a section or provision
thereof.
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I—FINDINGS; NEED TO REPLACE THE INCOME TAX
Sec. 101. Replacing the income tax of the United States.
TITLE II—SIMPLIFIED USA TAX FOR INDIVIDUALS
Sec. 201. Simplified USA Tax for individuals.
Sec. 202. Reorganization of the Code.
TITLE III—SIMPLIFIED USA TAX FOR BUSINESSES
Sec. 301. Repeal of present corporate income tax; new tax paid by corporations
and other businesses.
Sec. 302. Repeal of chapter 6.
TITLE IV—DEFERRED COMPENSATION PLANS
Sec. 401. Provisions saved.
Sec. 402. Clerical Amendments.
Sec. 403. Clerical Amendments.
TITLE V—REPEAL OF ESTATE AND GIFT TAXES
Sec. 501. Repeal of gratuitous transfer taxes.
Sec. 502. Effective Date.
TITLE VI—TECHNICAL AND ADMINISTRATIVE CHANGES;
EFFECTIVE DATES
Sec. 601. USA Tax Code.
Sec. 602. Revisions to the Code.
Sec. 603. Application of subtitle F.
Sec. 604. Clerical amendment.
TITLE I—FINDINGS; NEED TO
REPLACE THE INCOME TAX
SEC. 101. REPLACING THE INCOME TAX OF THE UNITED
STATES.
(a) FINDINGS.—The Congress finds that—
(1) the current Tax Code is irreparably flawed
and must be replaced;
(2) to enhance the liberty and protect the pri-
vacy of individuals, the Tax Code must be made sim-
pler and nonintrusive, and it must be applied
evenhandedly to all;
(3) to be fair and to provide for the prosperity
of current and future generation, the Tax Code must
give all individuals at all income levels an oppor-
tunity to save, invest and raise their standard of liv-
ing and that of their children; and
(4) future economic growth requires a tax sys-
tem that facilitates successful competition in the
global marketplace.
(b) MAIN FEATURES OF SIMPLIFIED USA TAX SYS-
TEM.—
(1) REPLACEMENT
OF
OLD
TAX
SYSTEM.—
Chapter 1 of subtitle A (related to income taxes) of
the Code is repealed and replaced for years begin-
ning after 1999.
(2) ESTATE AND GIFT TAX REPEALED.
(3) NEW TAX SYSTEM.—The Simplified USA
Tax consists of—
(A) a simplified tax collected from individ-
uals, that for years after 1999 replaces the in-
(E) Under the Simplified USA Tax, the
deferral of taxation on investments in human
capital represents an investment by the Federal
government in the nation’s capital stock and
the Federal government shares in the return on
its investment in the form of higher economic
output and revenues in the future.
(2) SINGLE TAX IN 2 PARTS.—The Simplified
USA Tax is composed of a business tax and an indi-
vidual tax which are 2 parts of a single tax system
that subjects all income produced and received to
taxation once and only once. The 2 parts are as fol-
lows:
(A) BUSINESS TAX AT THE SOURCE OF IN-
COME.—Tax is paid by corporations and other
businesses which produce and sell goods and
services that are—
(i) the source of nearly all the gross
domestic product of the United States, and
(ii) the ultimate source of income re-
ceived by individuals.
(B) INDIVIDUAL
TAX
ON
INCOME
RE-
CEIVED.—Tax is paid by individuals when they
receive wages and salaries as compensation for
gross domestic product created by their work.
(3) SAVING AND INVESTMENT.—The Simplified
USA Tax allows people to save and businesses to in-
vest as follows:
(A) FAIR OPPORTUNITY FOR PEOPLE TO
SAVE.—
(i) OPTIONAL ELIMINATION OF DOU-
BLE TAXATION.—When an individual earns
income and is taxed on that income, the
individual can save that income in a Roth
IRA and not pay income taxes on the in-
vestment earnings.
(ii) DEDUCTIBLE
AND
EXCLUDABLE
SAVINGS.—The Simplified USA Tax con-
tinues provisions of present law that
allow—
(I) lower income individuals and
certain other to make deductible con-
tributions to individual retirement ac-
counts, and
(II) encourage employer spon-
sored savings and retirement plans
that defer taxation of income through
use of 401(k) plans and other quali-
fied retirement plans.
(B) FAIR OPPORTUNITY FOR BUSINESSES
TO INVEST.—
(i) NO PREPAYMENT OF TAX.—When
a 
business 
invests 
in 
plant 
and
equipment—
(I) a deduction is allowed for the
cost, and
(II) tax is deferred.
(ii) TAX ON EARNINGS AND RECOVERY
OF COST.—When recovered out of business
revenues, both the cost of the investment
and the earnings on the investment are in-
cluded in gross profit subject to tax.
(iii) EXPENSING.—The deduction for
investment is the equivalent of allowing the
cost of plant and equipment to be expensed
instead of depreciated.
(4) FAIR OPPORTUNITY TO COMPETE IN THE
GLOBAL MARKETPLACE.—The Simplified USA Tax
serves the strategic interests of the United States in
international markets as follows:
(A) BORDER ADJUSTABLE TAX.—
(i) 
AMERICAN-MADE
EXPORTS.—
Goods and services produced in the United
States can be sold into world markets free
of tax.
(ii) FOREIGN-MADE IMPORTS.—Goods
and services imported into the United
States bear a fair and proportionate share
of the tax burden in the United States.
(iii) LEVELING THE INTERNATIONAL
PLAYING FIELD.—Border adjustments for
exports and imports are consistent with
international standards and practice.
(5) A SIMPLE AND UNDERSTANDABLE TAX.—
The Simplified USA Tax for individuals—
(A) is written in a simple, understandable
form,
(B) contains only a few exemptions, deduc-
tions, and credits, and can be reported on a tax
return only a small fraction the size of Form
1040.
(6) A NONINTRUSIVE, EVENHANDED TAX.—
(A) TAXPAYERS ARE IN CONTROL.—When
the rules are few and clear, taxpayers can cal-
culate their own tax correctly and file their own
returns without fear of mistake or of getting
caught up in an argument with the IRS.
(B) LIMITED ROLE FOR IRS.—When the
rules are few and clear, the IRS does not have
the broad interpretive power that puts tax-
payers at risk of being treated unfairly and un-
evenly.
(C) 
RESTORING
VOLUNTARY
COMPLI-
ANCE.—When the rules are few and clear, the
IRS can concentrate on helping taxpayers vol-
untarily pay their correct share of tax revenues
for public use and benefit under a tax system
that is understood and respected.
(7) MAINTAINING TAX PROGRESSIVITY FOR IN-
DIVIDUALS.—
(A) GRADUATED TAX.—Like the tax im-
posed by section 1 of the current Code, the
Simplified USA Tax for individuals is a grad-
uated tax.
(B) FAMILY
LIVING
ALLOWANCE.—The
Simplified USA Tax recognizes that every fami-
ly’s budget includes necessities. The Simplified
USA Tax provides a family living allowance
that exempts from taxation the first dollars
earned and spent to maintain a basic standard
of living.
(8) BUSINESSES AND INDIVIDUAL SHARE THE
TAX BURDEN.—
(A) BUSINESS
PORTION
OF
TAX
BUR-
DEN.—Corporations and other businesses pay
about the same portion of the total tax as
under the current Code.
(B) INDIVIDUAL
PORTION
OF
TAX
BUR-
DEN.—Individuals pay about the same portion
of the total tax as under the current Code.
(9) EMPHASIZING
PERSONAL
INDEPENDENCE
AND RESPONSIBILITY.—
(A) REINFORCING A CULTURE OF WORK
AND THRIFT.—Instead of being solely a calcula-
tion of how much they must pay to the govern-
ment, the Simplified USA Tax converts the in-
come tax into an annual calculation of how
much people produce and contribute to the
economy.
(B) GREATER CONTROL AND RESPONSIBIL-
ITY.—Because people are not double taxed on
their saving, they have—
(i) more control over their own income
and taxes,
(ii) a greater ability to plan and pro-
vide for their own future, and
(iii) a fair opportunity to do so.
(10) MORE OPPORTUNITY FOR WAGE EARNERS
AT LOWER INCOME LEVELS.—
(A) REFUNDABLE CREDIT FOR EMPLOYEE
PAYROLL TAX.—The amount of the payroll tax
paid or withheld under the Code from an em-
ployee’s wages (and paid into the Social Secu-
rity and Hospital Insurance Trust Funds) is—
(i) credited against the employee’s in-
come tax, and
(ii) refunded to the employee to the
extent in excess of the employee’s income
tax.
(B) NO EFFECT ON TRUST FUND OR BEN-
EFITS.—The income tax credit allowed for pay-
roll taxes deposited in the Social Security Trust
Fund does not—
(i) reduce the amount in such fund, or
(ii) reduce the payment of any per-
son’s benefits from the fund.
TITLE II—SIMPLIFIED USA TAX
FOR INDIVIDUALS
SEC. 201. SIMPLIFIED USA TAX FOR INDIVIDUALS.
(a) IN GENERAL.—Chapter 1 of the Code is amended
to read as follows:
‘‘CHAPTER 1—SIMPLIFIED USA TAX FOR
INDIVIDUALS
‘‘Subchapter A. Basic rules.
‘‘Subchapter B. Roth IRA and other savings provisions.
‘‘Subchapter C. Basis, business transactions, and nonrecognition transactions.
‘‘Subchapter D. Rules for exclusions from gross income.
‘‘Subchapter E. Rules relating to deductions.
‘‘Subchapter F. Special business activities.
‘‘Subchapter G. Accounting methods.
‘‘Subchapter H. Nonresident aliens.
‘‘Subchapter I. Trusts and estates.
‘‘Subchapter J. Definitions and rules of application.
‘‘Subchapter A—Basic Rules
‘‘Sec.
1.
Simplified USA tax for individuals.
‘‘Sec.
2.
Persons liable for the Simplified USA for individuals.
‘‘Sec.
3.
Gross income.
‘‘Sec.
4.
Exclusions from gross income.
‘‘Sec.
5.
Alimony and child support deductions.
‘‘Sec.
6.
Personal and dependency deduction.
‘‘Sec.
7.
Family Living Allowance.
‘‘Sec.
8.
USA deductions.
‘‘Sec.
9.
Homeowner deduction.
‘‘Sec.
10.
Education deduction.
‘‘Sec.
11.
Philanthropic transfer deduction.
‘‘Sec.
13.
Limitation on deductions.
‘‘Sec.
15.
Tax rates.
‘‘Sec.
16.
Kiddie tax.
‘‘Sec.
17.
Rules for filing status and rate tables.
‘‘Sec.
20.
USA tax credits.
‘‘Sec.
21.
Payroll tax credit.
‘‘Sec.
22.
Taxes-paid tax credit.
‘‘Sec.
23.
Indexing for inflation.
‘‘SEC.
1.
SIMPLIFIED USA TAX FOR INDIVIDUALS.
‘‘(a) IMPOSITION OF TAX.—An income tax is imposed
on each individual described in section 2. The income tax
shall equal the amount determined by applying the tax
schedules in section 15 to the taxable income of the tax-
payer for the taxable year and reducing the tax so deter-
mined by the USA tax credits for the taxable year.
‘‘(b) TAXABLE INCOME.—‘Taxable income’ means
adjusted gross income, reduced by—
‘‘(1) the personal and dependency deduction,
‘‘(2) the Family Living Allowance, and
‘‘(3) the USA deductions, including—
‘‘(A) the homeowner deduction,
‘‘(B) the education deduction, and
‘‘(C) the philanthropic transfer deduction.
‘‘(c) ADJUSTED GROSS INCOME.—‘Adjusted gross in-
come’ means gross income, reduced by—
‘‘(1) the alimony and child support deductions,
and
‘‘(2) the qualified IRA deduction.
‘‘(d) NAME.—The tax imposed by this chapter shall
be known as the ‘Simplified USA Tax for Individuals’.
‘‘SEC. 2. PERSONS LIABLE FOR THE SIMPLIFIED USA TAX
FOR INDIVIDUALS.
‘‘(a) INDIVIDUALS ONLY.—The Simplified USA Tax
for Individuals shall apply only to individuals.
‘‘(b) CITIZENS AND RESIDENT ALIENS.—The Sim-
plified USA Tax for Individuals shall apply to all citizens
of the United States and to all resident aliens of the
United States. Except as specifically provided in this chap-
ter, the Simplified USA Tax for Individuals shall not
apply to nonresident aliens.
‘‘(c) NONRESIDENT ALIENS.—For rules applicable to
the compensation income of nonresident aliens, see sub-
chapter H (sections 131 and 132). For rules on the with-
holding of tax on nonresident aliens, see chapter 5 (sec-
tions 1441–1464).
‘‘(d) TAXPAYER.—For purposes of this chapter, ‘tax-
payer’ means an individual, or, in the case of a joint re-
turn, the husband and the wife.
‘‘SEC. 3. GROSS INCOME.
‘‘(a) GENERAL DEFINITION.—Except as otherwise
provided in this chapter, ‘gross income for the taxable
year’ means all income from whatever source derived by
a taxpayer during the taxable year, including (but not lim-
ited to) the following items:
‘‘(1) Compensation for services, including (but
not limited to)—
‘‘(A) salaries,
‘‘(B) wages,
‘‘(C) commissions,
‘‘(D) tips, and
‘‘(E) distributions from business entities
(as defined in section 171).
‘‘(2) Fringe benefits (except as specifically ex-
cluded by section 4(a)), including (but not limited
to)—
‘‘(A) the cost of health, disability, life or
other similar insurance paid by an employer if
the taxpayer is indirectly or directly the bene-
ficiary of the policy or has the right to name
the beneficiary of the policy,
‘‘(B) employer-paid parking (unless the
employee uses the automobile parked in the
space regularly on employer business),
‘‘(C) employer-paid educational benefits,
‘‘(D) employer-paid housing (other than
housing provided for the convenience of the em-
ployer),
‘‘(E) employer-paid meals (other than
meals provided for the convenience of the em-
ployer or reimbursement for the reasonable cost
of meals incurred on overnight travel),
‘‘(F) amounts contributed by an employer
on behalf of an employee to a group legal serv-
ices plan, and
‘‘(G) dependent care assistance received
from an employer.
‘‘(3) Distributions from business entities (as de-
fined in section 171) constituting—
‘‘(A) compensation for use of capital, in-
cluding interest, or
‘‘(B) shares of profits (including divi-
dends).
‘‘(4) Interest not described in paragraph (3)(A).
‘‘(5) Rents.
‘‘(6) Royalties.
‘‘(7) Alimony, child support, and separate
maintenance payments.
‘‘(8) Includible social security benefits.
‘‘(9) Income from the discharge of indebted-
ness.
‘‘(10) Gains on the sale or disposition of assets.
‘‘(11) Amounts stolen or embezzled.
‘‘(12) Distributions from retirement plans and
annuities (other than USA Roth IRAs) to the extent
not previously included as income, as determined in
accordance with section 33.
‘‘(13) Amounts received through health, acci-
dent or disability insurance to the extent that—
‘‘(A) the cost of such insurance was paid
by an employer and not included in the employ-
ee’s taxable income and
‘‘(B) such amounts exceed the actual medi-
cal expenses incurred and not paid or treated as
paid with amounts otherwise excluded from in-
come.
‘‘(b) DEFINITIONS.—For purposes of subsection (a)
and section 4—
‘‘(1) EMPLOYER.—‘Employer’ includes—
‘‘(A) in the case of a partner who provides
services for a partnership, the partnership,
‘‘(B) in the case of a proprietor, the pro-
prietorship, and
‘‘(C) in the case of an independent con-
tractor, any business or individual that hires
the independent contractor.
‘‘(2) SOCIAL SECURITY BENEFITS.—
‘‘(A) IN GENERAL.—‘Social Security bene-
fits’ means any amount received by the tax-
payer by reason of entitlement to—
‘‘(i) a monthly benefit under title II of
the Social Security Act, or
‘‘(ii) a tier 1 railroad retirement bene-
fit. The amount received by a taxpayer
shall be determined as if the Social Secu-
rity Act did not contain section 203(i)
thereof.
‘‘(B) TIER 1 RAILROAD RETIREMENT BEN-
EFIT.—‘Tier 1 railroad retirement benefit’
means—
‘‘(i) the amount of the annuity under
the Railroad Retirement Act of 1974 equal
to the amount of the benefit to which the
taxpayer would have been entitled under
the Social Security Act if all of the service
after December 31, 1936, of the employee
(on whose record the annuity is being
paid) has been included in the term ‘em-
ployment’ as defined in the Social Security
Act, and
‘‘(ii) a monthly annuity amount under
section 3(f)(3) of the Railroad Retirement
Act of 1974.
‘‘(C) 
WORKERS’ 
COMPENSATION
SUB-
STITUTES.—If by reason of section 224 of the
Social Security Act or section 3(a)(1) of the
Railroad Retirement Act of 1974, any social se-
curity benefit is reduced because of the receipt
of a benefit under a workers’ compensation act,
the term ‘social security benefit’ includes that
portion of such benefit which equals such reduc-
tion.
‘‘(D) EFFECT OF EARLY PAYMENT.—If so-
cial security benefits checks are delivered before
the end of the calendar month for which they
are issued and are not deposited until the
month for which they are issued, they will be
treated as received in the month for which they
are issued.
‘‘(3) INCLUDIBLE
SOCIAL
SECURITY
BENE-
FITS.—‘Includible social security benefits’ means the
portion of social security benefits that would be in-
cluded in gross income under section 86(a) of the
Internal Revenue Code of 1986, except that for pur-
poses of applying such section, the term ‘modified
adjusted gross income’ means adjusted gross income
(as defined in section 1(c)), determined without re-
gard to the inclusion of any social security benefits.
‘‘(c) PROPERTY RECEIVED FOR SERVICES.—
‘‘(1) IN GENERAL.—If, in connection with the
performance of services, property is transferred to
any person other than the person for whom such
services are performed, the excess of—
‘‘(A) the fair market value of such prop-
erty (determined without regard to any restric-
tion other than a restriction which by its terms
will never lapse) at the first time the rights of
the person having the beneficial interest in such
property are transferable or are not subject to
a substantial risk of forfeiture, whichever oc-
curs earlier, over
‘‘(B) the amount (if any) paid for such
property, shall be included in the gross income
of the person who performed such services in
the first taxable year in which the rights of the
person having the beneficial interest in such
property are transferable or are not subject to
a substantial risk of forfeiture, whichever is ap-
plicable. The preceding sentence shall not apply
if such person sells or otherwise disposes of
such property in an arm’s length transaction
before his rights in such property become trans-
ferable or not subject to a substantial risk of
forfeiture.
‘‘(2) RULES
AND
REGULATIONS.—The Sec-
retary shall prescribe rules and regulations similar
to those applicable under section 83 of the Internal
Revenue Code of 1986 for purposes of implementing
this subsection.
‘‘SEC. 4. EXCLUSIONS FROM GROSS INCOME.
‘‘(a) GENERAL RULE.—Gross income does not in-
clude:
‘‘(1) RETURNS
OR
BENEFITS
FROM
PRE-
VIOUSLY TAXED INCOME.—
‘‘(A) Social security benefits (as defined in
section 3(b)(2)), other than includible social se-
curity benefits (as defined in section 3(b)(3)).
‘‘(B) Amounts received under accident or
health benefit plans (except as provided in sec-
tion 3(a)(13)).
‘‘(C) Value of services provided pursuant
to a group legal service plan (but only if the
cost of such services was paid by the employee
or paid by the employer and included in the
gross income of the employee).
‘‘(D) Amounts received under an insurance
contract for certain living expenses in the case
of an individual whose principal residence is
damaged or destroyed or who is denied access
because of the threat of such occurrence.
‘‘(E) Amounts treated as recovery of basis
under any other provision of chapter 1.
‘‘(2) COMPENSATION FOR SPECIAL KINDS OF
SERVICE.—
‘‘(A) In the case of a minister of the
gospel—
‘‘(i) the rental value of a home fur-
nished to him, or
‘‘(ii) the rental allowance paid to him
as part of his compensation, to the extent
used by him to rent or provide a home.
‘‘(B) Certain combat pay of members of
the Armed Forces of the United States (as pro-
vided in section 92).
‘‘(C) Certain reduced uniform services re-
tirement pay (as defined in section 122 of the
Internal Revenue Code of 1986).
‘‘(D) Qualified military benefits (as defined
in section 93).
‘‘(E) Moving allowances for active military
personnel (as defined in section 217(g) of the
Internal Revenue Code of 1986).
‘‘(F) Certain foster care payments (as de-
fined in section 94).
‘‘(3) GRATUITOUS, CHARITABLE, AND GOVERN-
MENTAL TRANSFERS.—
‘‘(A) Gifts.
‘‘(B) Inheritances.
‘‘(C) Supplemental security income, aid to
families with dependent children, food stamps,
section 8 low-income rental assistance, benefits
under the low-income home energy assistance
program, and benefits under other similar Fed-
eral and State assistance programs for low-in-
come individuals and families.
‘‘(D) Benefits or assistance received from
a charitable organization as the result of a dis-
aster or by reason of financial need.
‘‘(4) TAX-EXEMPT
BOND
INTEREST.—Interest
on State and local bonds (as provided in section 91);
‘‘(5) COMPENSATION
FOR
INJURY
AND
SICK-
NESS.—
‘‘(A) Amounts received as compensation
for personal injury or sickness (as provided in
section 95).
‘‘(B) Reimbursement and direct payments
under Medicare and Medicaid.
‘‘(6) BENEFITS PRIMARILY FOR THE CONVEN-
IENCE
OF
THE
EMPLOYER
AND
CERTAIN
FRINGE
BENEFITS.—
‘‘(A) Meals or lodging furnished for the
convenience of the employer (as provided in sec-
tion 96).
‘‘(B) Value of a parking space if employee
uses the car parked in the space regularly on
company business.
‘‘(C) A fringe benefit that is a no-addi-
tional-cost service (as defined in section 97(b)),
subject to rules prohibiting discrimination in
favor of the highly compensated.
‘‘(D) A qualified employee discount (as de-
fined in section 97(c)), subject to rules prohibit-
ing discrimination in favor of the highly com-
pensated.
‘‘(E) Any property or services provided to
an employee to the extent that if the employee
were treated as a business and the business
paid for those services, the employee could de-
duct the cost of such property or services under
the business tax.
‘‘(F) A de minimis fringe benefit (as de-
fined in section 97(d)).
‘‘(G) Transportation in a commuter high-
way vehicle if such transportation is in connec-
tion with travel between the employee’s resi-
dence and place of employment.
‘‘(H) Any amount received directly or indi-
rectly by an individual from an employer for
moving expenses if—
‘‘(i) the move is associated with a
change in job locations for the same em-
ployer, and
‘‘(ii) the expenses of such move would
have been deductible under the rules under
section 217 of the Internal Revenue Code
of 1986 if paid directly by the employee.
‘‘(I) Employer provided coverage under an
accident or health plan.
‘‘(7) REPAYABLE RECEIPTS.—The proceeds of
borrowing or any other amounts legally received that
the taxpayer is legally obligated to return (except
that the imputed interest rules of section 7872 may
apply if there is inadequate stated interest).
‘‘(8) CERTAIN INCOME EARNED ABROAD.—Cer-
tain income and housing costs of citizens and resi-
dents of the United States living outside the United
States in accordance with the rules under section
911 of the Internal Revenue Code of 1986.
‘‘(9) DISCHARGE
OF
INDEBTEDNESS.—The
amount of indebtedness discharged unless the dis-
charge is for services, property, or other valuable
right.
‘‘(10) 
NONRECOGNITION
TRANSACTIONS.—
Amounts to which the nonrecognition transaction
rules of section 77 apply.
‘‘(11) PROCEEDS
FROM
SALE
OF
PRINCIPAL
RESIDENCE.—Amounts excludable under section 76
(relating to certain proceeds from the sale of the
taxpayer’s principal residence).
‘‘(12) TAXABLE RECEIPTS OF A BUSINESS EN-
TITY.—Amounts that are treated as taxable receipts
of a business entity under the Simplified USA Tax
for businesses and are not distributed to the individ-
ual taxpayer.
‘‘(13) QUALIFIED
RETIREMENT
CONTRIBU-
TIONS.—Employer contributions to retirement plans
that are exempt from taxation under chapter 3, in-
cluding contributions pursuant to a cash or deferred
payment plan described in section 401(k).
‘‘(b) CROSS REFERENCES.—
‘‘(1) ROTH IRAS.—For rules excluding from in-
come earnings on, and distributions from, Roth
IRAs, see sections 30 and 408A.
‘‘(2) OTHER RETIREMENT PLANS.—For rules
excluding or deferring from income earnings on
other retirement plans, see chapter 3.
‘‘SEC. 5. ALIMONY AND CHILD SUPPORT DEDUCTIONS.
‘‘(a) GENERAL RULE.—A taxpayer shall be allowed
an alimony and child support deductions for an amount
equal to the alimony, child support, or separate mainte-
nance payments paid during the taxpayer’s taxable year.
‘‘(b) DEFINITION
OF ALIMONY, CHILD SUPPORT,
AND SEPARATE MAINTENANCE PAYMENTS.—‘Alimony,
child support, and separate maintenance payments’ means
any alimony, child support, or separate maintenance pay-
ment which is includible in gross income of the recipient
under section 3.
‘‘SEC. 6. PERSONAL AND DEPENDENCY DEDUCTION.
‘‘(a) AMOUNT OF EXEMPTION.—The personal and
dependency deduction for an individual shall equal the
number of exemptions multiplied by $2,700.
‘‘(b) NUMBER OF EXEMPTIONS.—
‘‘(1) TAXPAYER.—One exemption shall be al-
lowed for the taxpayer unless the taxpayer files a
joint return with a spouse, in which case 1 exemp-
tion shall be allowed for the husband and 1 for the
wife.
‘‘(2) ELIGIBLE
DEPENDENT.—An exemption
shall be allowed for each eligible dependent.
‘‘(c) DEPENDENT.—
‘‘(1) DEFINITION.—‘Dependent’ means any of
the following individuals over half of whose support,
for the calendar year was received from the taxpayer
or is treated as received from the taxpayer:
‘‘(A) A son or daughter of the taxpayer, or
a descendant of either.
‘‘(B) A stepson, stepdaughter, stepfather,
or stepmother of the taxpayer.
‘‘(C) A brother, sister, stepbrother, or
stepsister of the taxpayer.
‘‘(D) The father or mother of the taxpayer,
or an ancestor of either.
‘‘(E) A son or daughter of a brother or sis-
ter of the taxpayer.
‘‘(F) A brother or sister of the mother or
father of the taxpayer.
‘‘(G) A son-in-law, daughter-in-law, father-
in-law, mother-in-law, brother-in-law, or sister-
in-law of the taxpayer.
‘‘(H) An individual (other than an individ-
ual who at any time during the taxable year
was the spouse, determined without regard to
section 7703, of a taxpayer) who, for the tax-
able year of the taxpayer, has as his principal
place of abode the home of the taxpayer and is
a member of the taxpayer’s household.
‘‘(2) RULES RELATING TO THE GENERAL DEFI-
NITION.—The Secretary shall prescribe rules similar
to the rules under section 152 of the Internal Reve-
nue Code of 1986 that shall apply to the general
definition of ‘dependent’, including definitional rules,
rules relating to multiple support agreements, and
support tests in cases of children of divorced par-
ents.
‘‘(d) ELIGIBLE DEPENDENT.—
‘‘(1) IN GENERAL.—‘Eligible dependent’ means
a dependent—
‘‘(A) whose gross income for the calendar
year in which the taxable year of the taxpayer
begins is less than the exemption amount, or
‘‘(B) who is a child of the taxpayer and
who—
‘‘(i) has not attained the age of 19 at
the close of the calendar year in which the
taxable year of the taxpayer begins, or
‘‘(ii) is a student who has not attained
the age of 24 at the close of such calendar
year.
‘‘(2) EXCLUSIONS.—A dependent who files a
joint return with a spouse for the calendar year is
not an eligible dependent.
‘‘(3) RULES RELATING TO DEFINITIONS.—The
Secretary shall prescribe rules similar to those in-
cluded in or applicable under the Internal Revenue
Code of 1986 relating to this subsection, including
rules defining ‘child’ and ‘student’ and rules relating
to the income of handicapped dependents.
‘‘(e) INFLATION ADJUSTMENT.—The dollar amount
contained in subsection (a) shall be adjusted for inflation
beginning with calendar year 2000 in accordance with the
procedures of section 23.
‘‘SEC. 7. FAMILY LIVING ALLOWANCE.
‘‘(a) AMOUNT OF ALLOWANCE.—The Family Living
Allowance for a taxpayer shall be determined in accord-
ance with the following schedule:
‘‘Form of Return:
Family Living Allowance:
Taxpayers filing joint return .........
$8,140.
Surviving spouse ............................
$8,140.
Head of household .........................
$5,940.
Individual who is not married or a
head of household.
$4,840.
Married filing separate return .......
$4,070.
‘‘(b) LIMITATION IN THE CASE OF CERTAIN DE-
PENDENTS.—In the case of an individual for whom an-
other taxpayer can claim an exemption under section 6,
the Family Living Allowance for such individual shall not
exceed the greater of $700 or such individual’s earned in-
come (as defined in section 171(a)(6)).
‘‘(c) ADJUSTMENTS
FOR INFLATION.—The dollar
amounts contained in subsections (a) and (b) shall be ad-
justed for inflation beginning with calendar year 2000 in
accordance with the procedures of section 23.
‘‘SEC. 8. USA DEDUCTIONS.
‘‘In computing taxable income, an individual shall be
entitled to the following deductions:
‘‘(1) The homeowner deduction described in
section 9.
‘‘(2) The education deduction described in sec-
tion 10.
‘‘(3) The philanthropic transfer deduction de-
scribed in section 11.
‘‘SEC. 9. HOMEOWNER DEDUCTION.
‘‘(a) IN GENERAL.—The homeowner deduction shall
equal the amount of interest paid by the taxpayer during
the taxable year on acquisition indebtedness with respect
to any qualified residence of the taxpayer.
‘‘(b) DEFINITIONS.—
‘‘(1) ACQUISITION
INDEBTEDNESS.—‘Acquisi-
tion indebtedness’ means any indebtedness that is
secured by a qualified residence and that—
‘‘(A) was incurred in acquiring, construct-
ing, or substantially improving the qualified res-
idence, or
‘‘(B) was incurred to refinance any indebt-
edness that is described in subparagraph (A) or
this subparagraph (B) but only to the extent
that the refinancing does not exceed the
amount refinanced.
The aggregate amount treated as acquisition indebt-
edness shall not exceed $1,000,000 ($500,000 in the
case of a married individual filing separately).
‘‘(2) QUALIFIED
RESIDENCE.—‘Qualified resi-
dence’ means the principal residence of the taxpayer
and 1 other residence of the taxpayer that is des-
ignated by the taxpayer and which—
‘‘(A) is used by the taxpayer as a residence
for more than 14 days during such year for
which such unit is rented, and
‘‘(B) is not rented for more than 14 days
during such year.
‘‘(c) COOPERATIVE HOUSING CORPORATION TEN-
ANT.—Any indebtedness secured by stock held by a tax-
payer as a tenant-stockholder in a cooperative housing cor-
poration shall be treated as secured by the house or apart-
ment which the taxpayer is entitled to occupy as a tenant-
stockholder. If such stock cannot be used to secure indebt-
edness, the indebtedness will be treated as so secured if
the taxpayer establishes that such indebtedness was in-
curred to acquire stock.
‘‘SEC. 10. EDUCATION DEDUCTION.
‘‘(a) IN GENERAL.—The education deduction shall
equal the sum of the qualified educational expenses for
each eligible student.
‘‘(b) QUALIFIED EDUCATION EXPENSES.—
‘‘(1) IN
GENERAL.—‘Qualified education ex-
penses’ means with respect to an eligible student the
lesser of—
‘‘(A) $4,000, or
‘‘(B) the qualified higher education ex-
penses of the eligible student paid by the tax-
payer during the taxable year.
‘‘(2) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN GENERAL.—‘Qualified higher edu-
cation expenses’ means tuition and fees re-
quired for the enrollment of an eligible student
at an eligible education institution. Such term
shall not include expenses with respect to any
course or other education involving sports,
games, or hobbies other than as part of a de-
gree program.
‘‘(B) ELIGIBLE
EDUCATIONAL
INSTITU-
TION.—‘Eligible 
educational 
institution’
means—
‘‘(i) an institution which is described
in section 481 of the Higher Education
Act of 1965 (as in effect on May 15,
1998), and which is eligible to participate
in a program under title IV of such Act.
‘‘(ii) in the case of a student who has
attained the age of 18 before the beginning
of the taxable year, and not graduated
from high school before the beginning of
the taxable year, an accredited school pro-
viding remedial education.
‘‘(3) ELIGIBLE
STUDENT.—‘Eligible student’
means—
‘‘(A) the taxpayer, but only if no other tax-
payer treats the taxpayer as a dependent for
which an exemption is allowed in computing the
dependency deduction under section 6,
‘‘(B) the taxpayer’s spouse if a joint return
is filed, and
‘‘(C) any dependent of the taxpayer for
whom the taxpayer is allowed an exemption in
computing the dependency deduction under sec-
tion 6.
‘‘(c) LIMITATION.—The maximum education deduc-
tion in a taxable year is $12,000 ($6,000 in the case of
married individuals filing separate returns).
‘‘(d) 
INFLATION
ADJUSTMENTS.—The 
dollar
amounts contained in subsections (b)(1)(A) and (c) shall
be adjusted for inflation beginning with calendar year
2000 in accordance with section 23.
‘‘SEC. 11. PHILANTHROPIC TRANSFER DEDUCTION.
‘‘(a) IN GENERAL.—The philanthropic transfer de-
duction shall equal the amount of charitable contributions
made by the taxpayer in the taxable year, subject to the
limitations in subsection (b). A deduction shall be allow-
able as a deduction only if verified under regulations pre-
scribed by the Secretary.
‘‘(b) LIMITATION ON AMOUNT.—
‘‘(1) GENERAL
RULE.—A deduction for con-
tributions to regular charities in any taxable year
shall be allowed only to the extent that such con-
tributions do not exceed 50 percent of the taxpayer’s
adjusted gross income. Other charitable contribu-
tions shall be allowed only to the extent that such
contributions do not exceed the lesser of—
‘‘(A) 30 percent of the taxpayer’s adjusted
gross income, or
‘‘(B) the excess, if any, of 50 percent of
the taxpayer’s adjusted gross income over the
amount of charitable contributions to regular
charities.
‘‘(2) CARRYOVER.—If the amount of charitable
contributions made in a taxable year exceeds the
amount which can be deducted in such year, the ex-
cess shall be carried over for a period of up to 5
years in accordance with rules to be prescribed by
the Secretary.
‘‘(3) REGULAR CHARITY.—For purposes of this
subsection, ‘regular charity’ means an organization
described in section 101, that is not a private foun-
dation (other than a private operating foundation)
(as such terms are defined in section 102).
‘‘(c) CHARITABLE CONTRIBUTION.—‘Charitable con-
tribution’ means a contribution or gift to or for the use
of a governmental or charitable recipient (as defined in
section 101).
‘‘(d) CONTRIBUTIONS OF PROPERTY.—
‘‘(1) GENERAL RULE.—In the case of a chari-
table contribution of property, the amount of the
contribution shall equal the lesser of the fair market
value of the property or the taxpayer’s basis in the
property.
‘‘(2) FAIR
MARKET
VALUE
DEDUCTIONS
IN
CERTAIN
CASES.—Notwithstanding paragraph (1),
in the case of a charitable contribution (other than
a contribution to a private foundation that is not a
private operating foundation) of—
‘‘(A) real property,
‘‘(B) tangible property if the use by the
donee is related to its purpose or function con-
stituting the basis for its exemption from the
business tax or in the case of a governmental
unit, to any governmental unit, and
‘‘(C) stocks, bonds, or other securities held
for more than one year,
the amount of the charitable contribution shall equal
the fair market value of the property.
‘‘(3) CONTRIBUTIONS
OF
STOCK
FOR
WHICH
MARKET QUOTATIONS ARE READILY AVAILABLE.—
‘‘(A) IN GENERAL.—In the case of con-
tributions of qualified appreciated stock, para-
graph (2) shall apply without regard to whether
the stock is contributed to a private foundation.
‘‘(B) QUALIFIED APPRECIATED STOCK.—
‘Qualified appreciated stock’ means any stock
of a corporation for which (as of the date of the
contribution) market quotations are readily
available on an established securities market,
except that in the case of a donor to a private
foundation, the term does not include stock to
the extent that the amount so contributed,
when increased by prior contributions by the
donor of stock in the same corporation, exceeds
10 percent in value of the outstanding stock of
such corporation.
‘‘(e) OTHER RULES.—The Secretary shall prescribe
rules limiting the availability of the philanthropic transfer
deduction in certain cases, including rules for—
‘‘(1) contributions of property placed in trust,
‘‘(2) contributions of partial interests in prop-
erty,
‘‘(3) contributions subject to liabilities that are
assumed,
‘‘(4) out-of-pocket expenditures on behalf of a
charity to influence legislation,
‘‘(5) substantiation of contributions in excess of
$250,
‘‘(6) contributions designated for lobbying activ-
ity,
‘‘(7) amounts paid to maintain certain students
as members of taxpayer’s household,
‘‘(8) qualified conservation contributions, and
‘‘(9) deductions for travel expenses on behalf of
a charity where there is a significant element of per-
sonal pleasure.
‘‘SEC. 13. LIMITATION ON DEDUCTIONS.
‘‘(a) IN GENERAL.—A taxpayer’s deductions shall
not reduce the taxpayer’s taxable income below zero. Ex-
cept as provided in section 11(b) (relating to the limitation
on the philanthropic transfer deduction), a taxpayer shall
not be entitled to carry over any unused deductions.
‘‘(b) DEDUCTIONS.—For purposes of this section,
‘deductions’ means—
‘‘(1) the alimony and child support deductions,
‘‘(2) the personal and dependency deduction,
‘‘(3) the Family Living Allowance,
‘‘(4) the USA deductions, and
‘‘(5) the qualified IRA deduction.
‘‘SEC. 15. TAX RATES.
‘‘(a) MARRIED INDIVIDUALS FILING JOINT RETURNS
AND SURVIVING SPOUSES.—The tax schedule for every
married individual who files a joint return with a spouse
and for every surviving spouse (as defined in section
17(a)) is—
‘‘If taxable income is:
The tax is:
Not over $40,000 ..........................
15% of taxable income.
Over 
$40,000, 
but 
not 
over
$80,000.
$6,000, plus 25% of the excess over
$40,000.
Over $80,000 .................................
$16,000, plus 30% of the excess over
$80,000.
‘‘(b) HEADS OF HOUSEHOLDS.—The tax schedule for
every head of household (as defined in section 17(b)) is—
‘‘If taxable income is:
The tax is:
Not over $35,000 ..........................
15% of taxable income.
Over 
$35,000, 
but 
not 
over
$70,000.
$5,250, plus 25% of the excess over
$35,000.
Over $70,000 .................................
$14,000, plus 30% of the excess over
$70,000.
‘‘(c) UNMARRIED INDIVIDUALS.—The tax schedule
for an unmarried individual who is not a head of a house-
hold or a surviving spouse is—
‘‘If taxable income is:
The tax is:
Not over $24,000 ..........................
15% of taxable income.
Over 
$24,000, 
but 
not 
over
$48,000.
$3,600, plus 25% of the excess over
$24,000.
Over $48,000 .................................
$9,600, plus 30% of the excess over
$48,000.
‘‘(d) MARRIED INDIVIDUALS FILING SEPARATE RE-
TURNS.—The tax schedule for a married individual filing
a separate return is—
‘‘If taxable income is:
The tax is:
Not over $20,000 ..........................
15% of taxable income.
Over 
$20,000, 
but 
not 
over
$40,000.
$3,000, plus 25% of the excess over
$20,000.
Over $40,000 .................................
$8,000, plus 30% of the excess over
$40,000.
‘‘(e) ADJUSTMENTS
FOR
INFLATION.—Beginning
with calendar year 2000, the tax schedules in subsections
(a) through (d) shall be adjusted so that inflation will not
result in tax increases in accordance with the procedures
under section 23.
‘‘(f) DEFINITIONS.—See section 17 for rules on filing
status.
‘‘SEC. 16. KIDDIE TAX.
‘‘(a) GENERAL RULE.—If a child has a living parent
and net unearned income and the child has not attained
the age of 14 before the close of the taxable year—
‘‘(1) the net unearned income of the child shall
be included in the taxable income of the eligible par-
ent for purposes of determining the parent’s tax li-
ability, or
‘‘(2) the tax calculated under the tax rate
schedules for the child as a separate taxpayer shall
not be less than the sum of—
‘‘(A) the tax which would have been deter-
mined under the rate schedule if the taxable in-
come of the child were reduced by the net un-
earned income of the child, plus
‘‘(B) such child’s share of the allocable pa-
rental tax.
‘‘(b) CHILD’S SHARE
OF ALLOCABLE PARENTAL
TAX.—
‘‘(1) ALLOCABLE
PARENTAL
TAX.—‘Allocable
parental tax’ means the excess of—
‘‘(A) the tax that would have been deter-
mined under the rate schedules on the eligible
parent’s taxable income if such income included
the net unearned income of all of the eligible
parent’s children to which this section applies,
over
‘‘(B) the tax actually determined under the
rate schedules without regard to this section.
‘‘(2) CHILD’S SHARE.—A child’s share of the
allocable parental tax is equal to the amount that
bears the same ratio to the total allocable parental
tax as the child’s net unearned income bears to the
aggregate net unearned income of all children to
whom this section applies for whom the eligible par-
ent is the eligible parent.
‘‘(c) ELIGIBLE PARENT.—‘Eligible parent’ means—
‘‘(1) both parents of the child if the parents file
a joint return,
‘‘(2) the surviving parent of a child if the child
has only 1 surviving parent,
‘‘(3) the custodial parent if the child’s parents
are not married, or
‘‘(4) the parent with the greater taxable income
if the parents are married and filing separate re-
turns.
‘‘(d) NET UNEARNED INCOME.—‘Net unearned in-
come’ means the excess, if any, of—
‘‘(1) the adjusted gross income of the child,
over
‘‘(2) the sum of—
‘‘(A) the earned income (as defined in sec-
tion 171(a)(6)) of the child, and
‘‘(B) an amount equal to the Family Liv-
ing Allowance for a dependent child.
‘‘SEC. 17. RULES FOR FILING STATUS AND RATE TABLES.
‘‘(a) DEFINITION OF SURVIVING SPOUSE.—
‘‘(1) IN GENERAL.—‘Surviving spouse’ means
an individual—
‘‘(A) whose spouse died during either of
his 2 calendar years immediately preceding the
calendar year, and
‘‘(B) who maintains as his home a house-
hold which constitutes for the taxable year the
principal place of abode (as a member of such
household) of a dependent—
‘‘(i) who (within the meaning of sec-
tion 6) is a son, stepson, daughter, or step-
daughter of the taxpayer, and
‘‘(ii) who the taxpayer is entitled to
treat as an exemption for purposes of com-
puting the personal dependency deduction
for the taxable year under section 6.
For purposes of this paragraph, an individual shall
be considered as maintaining a household only if
over half of the cost of maintaining the household
during the taxable year is furnished by such individ-
ual.
‘‘(2) 
LIMITATIONS.—Notwithstanding 
para-
graph (1), for purposes of section 15, an individual
shall not be considered to be a surviving spouse—
‘‘(A) if the individual has remarried at any
time before the close of the taxable year, or
‘‘(B) unless, for the individual’s taxable
year during which his spouse died, a joint re-
turn could have been made under the provisions
of section 6013 (without regard to subsection
(a)(3) thereof).
‘‘(3) SPECIAL RULE WHERE DECEASED SPOUSE
WAS IN MISSING STATUS.—If an individual was in a
missing status (within the meaning of section
6013(f)(3)) as a result of service in a combat zone
and if such individual remains in such status until
the date referred to in subparagraph (A) or (B),
then, for purposes of paragraph (1)(A), the date on
which such individual died shall be treated as the
earlier of the date determined under subparagraph
(A) or the date determined under subparagraph (B):
‘‘(A) the date on which the determination
is made under section 556 of title 37 of the
United States Code or under section 5566 of
title 5 of such Code (whichever is applicable)
that such individual died while in such missing
status, or
‘‘(B) the date which is 2 years after the
date designated under section 92 (relating to
exemption for combat zones) as the date of ter-
mination of combatant activities in that zone.
‘‘(b) DEFINITION OF HEAD OF HOUSEHOLD.—
‘‘(1) IN GENERAL.—An individual shall be con-
sidered a head of a household if, and only if, such
individual is not married at the close of his taxable
year, is not a surviving spouse (as defined in sub-
section (a)), and either—
‘‘(A) maintains as his home a household
which constitutes for more than one-half of
such taxable year the principal place of abode,
as a member of such household, of—
‘‘(i) a son, stepson, daughter, or step-
daughter of the taxpayer, or a descendant
of a son or daughter of the taxpayer, but
if such son, stepson, daughter, step-
daughter, or descendant is married at the
close of the taxpayer’s taxable year, only if
the taxpayer is entitled to claim such per-
son as an exemption for the taxable year
for purposes of computing the dependency
deduction under section 6 (or would be so
entitled but for the release of a claim to
such exemption by the custodial parent),
‘‘(ii) any other person who is a de-
pendent of the taxpayer, if the taxpayer is
entitled to claim such person as an exemp-
tion in determining the personal depend-
ency deduction for the taxable year, or
‘‘(B) maintains a household which con-
stitutes for such taxable year the principal place
of abode of the father or mother of the tax-
payer, if the taxpayer is entitled to a personal
dependency deduction for the taxable year for
such father or mother.
For purposes of this paragraph, an individual shall
be considered as maintaining a household only if
over half of the cost of maintaining the household
during the taxable year is furnished by such individ-
ual.
‘‘(2) DETERMINATION
OF
STATUS.—For pur-
poses of this subsection—
‘‘(A) a legally adopted child of a person
shall be considered a child of such person by
blood;
‘‘(B) an individual who is legally separated
from his spouse under a decree of divorce or of
separate maintenance shall not be considered as
married;
‘‘(C) a taxpayer shall be considered as not
married at the close of his taxable year if at
any time during the taxable year his spouse is
a nonresident alien; and
‘‘(D) a taxpayer shall be considered as
married at the close of his taxable year if his
spouse (other than a spouse described in sub-
paragraph (C)) died during the taxable year.
‘‘(3) 
LIMITATIONS.—Notwithstanding 
para-
graph (1), for purposes of this chapter, a taxpayer
shall not be considered to be a head of a
household—
‘‘(A) if at any time during the taxable year
he is a nonresident alien; or
‘‘(B) by reason of an individual who would
not be a dependent for the taxable year but
for—
‘‘(i) subparagraph (H) of section
6(c)(1) or
‘‘(ii) multiple support rules prescribed
by the Secretary.
‘‘(c) 
CERTAIN
MARRIED
INDIVIDUALS
LIVING
APART.—For purposes of this part, an individual shall be
treated as not married at the close of the taxable year
if such individual is so treated under the provisions of sec-
tion 7703(b).
‘‘(d) NONRESIDENT ALIENS.—In the case of a non-
resident alien individual, the taxes imposed by section 1
shall not apply.
‘‘SEC. 20. USA TAX CREDITS.
‘‘(a) IN GENERAL.—The USA tax credits are and
shall be applied in the following order:
‘‘(1) The foreign tax credit as prescribed by the
Secretary under rules similar to the rules of subpart
A of part III of subchapter N of chapter 1 of the
Internal Revenue Code of 1986, but only with re-
spect to foreign taxes on amounts that are included
in the gross income of the taxpayer.
‘‘(2) The payroll tax credit under section 21.
‘‘(3) The taxes-paid tax credit under section 22.
‘‘(b) REFUNDABLE CREDITS.—If a taxpayer’s USA
tax credits (other than the foreign tax credit) for a taxable
year exceed the taxpayer’s tax liability for the taxable year
(after application of the foreign tax credit but before appli-
cation of the other USA tax credits), the taxpayer shall
be entitled to a refund for such excess. The taxpayer may
elect in lieu of a refund to apply such excess as a tax paid
for the following taxable year.
‘‘SEC. 21. PAYROLL TAX CREDIT.
‘‘(a) IN GENERAL.—A taxpayer shall be allowed a
payroll tax credit in an amount equal to the sum of—
‘‘(1) the employee’s share of the basic FICA
tax,
‘‘(2) the employee’s share of the basic Tier 1
railroad retirement tax, and
‘‘(3) one-half of the basic SECA tax payable
with respect to the taxpayer’s compensation or earn-
ings during the taxable year.
‘‘(b) DEFINITIONS.—
‘‘(1) EMPLOYEE’S SHARE OF THE BASIC FICA
TAX.—‘Employee’s share of the basic FICA tax’
means the old-age, survivors and disability insurance
tax imposed by section 3101(a) and the portion of
the hospital insurance tax imposed by section
3101(b) that is attributable to the wage base on
which the section 3101(a) tax is imposed.
‘‘(2) EMPLOYEE’S SHARE OF THE BASIC TIER 1
RAILROAD RETIREMENT TAX.—Employee’s share of
the basic Tier 1 railroad retirement tax’ means—
‘‘(A) the portion of the tax imposed by sec-
tion 3201 with respect to compensation below
the applicable base (as defined in section
3231(e)(2)); and
‘‘(B) the portion of the tax imposed by sec-
tion 3211(a)(1) on railroad employee represent-
atives attributable to the tax imposed by section
3101(a) and the portion of the hospital insur-
ance tax imposed by section 3101(b) that is at-
tributable to the wage base on which the section
3101(a) tax is imposed.
‘‘(3) BASIC
SECA
TAX.—‘Basic SECA tax’
means the old-age, survivors and disability insurance
tax imposed by section 1401(a) on self-employment
income and the portion of the hospital insurance tax
imposed by section 1401(b) on self-employment in-
come that is attributable to the amount of self-em-
ployment income (as determined under section
1402(b)) on which the section 1401(a) tax is im-
posed.
‘‘(c) NO CREDIT FOR REFUNDABLE TAX.—No credit
shall be allowed with respect to any FICA tax or railroad
retirement tax for which a taxpayer is entitled to a refund
because of overpayment of tax on the applicable wage
base.
‘‘SEC. 22. TAXES-PAID TAX CREDIT.
‘‘The taxes-paid tax credit shall equal the sum of—
‘‘(1) WAGE WITHHOLDING.—The amount with-
held as tax under chapter 24.
‘‘(2) SPECIAL REFUNDS OF SOCIAL SECURITY
TAX WHEN WAGES EARNED FROM MORE THAN 1 EM-
PLOYER.—The amount allowable under section
6413(c) as a special refund of taxes imposed on
wages.
‘‘(3) OVERPAYMENTS
OF
PRIOR-YEAR
TAX.—
Any overpayment of a prior tax obligation that the
taxpayer or the Secretary applies to the tax for the
taxable year.
‘‘(4) ESTIMATED TAXES.—Any estimated taxes
paid by the taxpayer with respect to the taxpayer’s
tax liability for the taxable year which are treated as
payment on account of income tax for purposes of
section 6315 (relating to estimated taxes).
‘‘SEC. 23. INDEXING FOR INFLATION.
‘‘(a) PUBLICATION OF TABLES AND NUMBERS.—Not
later than December 15 of 1999, and each subsequent cal-
endar year, the Secretary shall prescribe tables and dollar
amounts which shall apply in the immediately following
calendar year in lieu of the tables and dollar amounts that
are required to be adjusted for inflation in accordance with
this section.
‘‘(b) METHOD OF ADJUSTMENT.—
‘‘(1) IN GENERAL.—The dollar amounts which
are required to be adjusted pursuant to this section
for a calendar year shall be the dollar amounts as
stated in this chapter multiplied by the cost of living
adjustment for such calendar year, rounded as pro-
vided in subsection (d).
‘‘(2) TAX RATE TABLES.—In the case of a tax
rate table, the dollar amounts to be adjusted in ac-
cordance with paragraph (1) are the minimum and
maximum dollar amounts for each rate bracket for
which a tax is imposed. The amounts setting forth
the bottom tax for each bracket shall be adjusted to
the extent necessary to reflect the adjustments in
the rate brackets.
‘‘(c) COST-OF-LIVING ADJUSTMENT.—
‘‘(1) IN GENERAL.—The cost-of-living adjust-
ment for any calendar year is the percentage (if any)
by which—
‘‘(A) the CPI for the preceding calendar
year, exceeds
‘‘(B) the CPI for the calendar year 1998.
‘‘(2) CPI FOR ANY CALENDAR YEAR.—For pur-
poses of paragraph (1), the CPI for any calendar
year is the average of the Consumer Price Index as
of the close of the 12-month period ending on Au-
gust 31 of such calendar year.
‘‘(3) CONSUMER PRICE INDEX.—For purposes
of paragraph (2), ‘Consumer Price Index’ means the
last Consumer Price Index for all-urban consumers
published by the Department of Labor. For pur-
poses of the preceding sentence, the revision of the
Consumer Price Index which is most consistent with
the Consumer Price Index for calendar year 1999
shall be used.
‘‘(d) ROUNDING.—
‘‘(1) IN GENERAL.—If any increase determined
under subsection (b) is not a multiple of $50, such
increase shall be rounded to the next lowest multiple
of $50.
‘‘(2) MULTIPLES OF $25.—Paragraph (1) shall
be applied by substituting ‘$25’ for ‘$50’ in the case
of—
‘‘(A) amounts for married individuals filing
separately, and
‘‘(B) any other dollar amount that is to be
adjusted for inflation if that dollar amount is
less than $1,000.
‘‘Subchapter B—Roth IRA and Other Savings
Provisions
‘‘Sec. 30. Roth IRAs.
‘‘Sec. 31. Deductible IRAs.
‘‘Sec. 32. Effect of repeal of special savings provisions.
‘‘SEC. 30. ROTH IRAS.
‘‘(a) GENERAL RULE.—Except as provided in this
section, a Roth IRA shall be treated for purposes of this
title in the same manner as an individual retirement plan.
‘‘(b) ROTH IRA.—‘Roth IRA’ means an individual
retirement plan (as defined in section 7701(a)(37)) which
is designated (in such manner as the Secretary may pre-
scribe) at the time of establishment of the plan as a Roth
IRA. Such designation shall be made in such manner as
the Secretary may prescribe.
‘‘(c) TREATMENT OF CONTRIBUTIONS.—
‘‘(1) NO DEDUCTION ALLOWED.—No deduction
shall be allowed for a contribution to a Roth IRA.
‘‘(2) CONTRIBUTION
LIMIT.—The aggregate
amount of contributions for any taxable year to all
Roth IRAs maintained for the benefit of an individ-
ual (or, in the case of individuals filing a joint re-
turn, either spouse) shall not exceed the taxpayer’s
adjusted gross income for the taxable year.
‘‘(3) ROLLOVER FROM IRA.—
‘‘(A) 
ROLLOVER
CONTRIBUTIONS.—No
rollover contribution may be made to a Roth
IRA unless it is a qualified rollover contribu-
tion.
‘‘(B) LIMITS.—A taxpayer shall not be al-
lowed to make a qualified rollover contribution
to a Roth IRA from an individual retirement
plan other than a Roth IRA during any taxable
year if—
‘‘(i) the taxpayer’s adjusted gross in-
come for such taxable year exceeds
$100,000, or
‘‘(ii) the taxpayer is a married individ-
ual filing a separate return.
‘‘(C) MARITAL STATUS.—Section 31(g)(4)
shall apply for purposes of this paragraph.
‘‘(4) CONTRIBUTIONS PERMITTED AFTER AGE
701⁄2.—Contributions to a Roth IRA may be made
even after the individual for whom the account is
maintained has attained age 701⁄2.
‘‘(5) MANDATORY
DISTRIBUTION
RULES
NOT
TO APPLY BEFORE DEATH.—Notwithstanding sub-
sections (a)(6) and (b)(3) of section 408 (relating to
required distributions), the following provisions shall
not apply to any Roth IRA:
‘‘(A) Section 401(a)(9)(A).
‘‘(B) The incidental death benefit require-
ments of section 401(a).
‘‘(6) TIME
WHEN
CONTRIBUTIONS
MADE.—A
taxpayer shall be deemed to have made a contribu-
tion to a Roth IRA during a year if the contribution
is made on account of such year and is made not
later than April 15 of the following year.
‘‘(d) EXCLUSION FROM INCOME.—For purposes of
this chapter—
‘‘(1) GENERAL RULES.—A distribution from a
Roth IRA shall not be includible in gross income.
‘‘(2) 
NONQUALIFIED
DISTRIBUTION.—The
automatic exclusion from gross income under para-
graph (1) shall not apply to any distribution, other
than a qualified special purpose distribution if—
‘‘(A) it is made within the 5-taxable year
period beginning with the 1st taxable year for
which the individual made a contribution to a
Roth IRA (or such individual’s spouse made a
contribution to a Roth IRA) established for
such individual, or
‘‘(B) in the case of a payment or distribu-
tion properly allocable (as determined in the
manner prescribed by the Secretary) to a quali-
fied rollover contribution from an individual re-
tirement plan other than a Roth IRA (or in-
come allocable thereto), it is made within the 5-
taxable year period beginning with the taxable
year in which the rollover contribution was
made.
‘‘(3) NONQUALIFIED
DISTRIBUTIONS.—In ap-
plying section 33 to any distribution from a Roth
IRA described in paragraph (2), such distribution
shall be treated as made from contributions to the
Roth IRA to the extent that such distribution, when
added to all previous distributions from the Roth
IRA, does not exceed the aggregate amount of con-
tributions to the Roth IRA. Only distributions at-
tributable to earnings on accounts (as opposed to
distributions of contributions) shall be included in
gross income.
‘‘(4) ROLLOVERS FROM AN IRA OTHER THAN A
ROTH IRA.—
‘‘(A) IN GENERAL.—Notwithstanding sec-
tion 408(d)(3), in the case of any distribution
to which this paragraph applies there shall be
included in gross income any amount which
would be includible were it not part of a quali-
fied rollover contribution.
‘‘(B) DISTRIBUTIONS
TO
WHICH
PARA-
GRAPH APPLIES.—This paragraph shall apply
to a distribution from an individual retirement
plan (other than a Roth IRA) maintained for
the benefit of an individual which is contributed
to a Roth IRA maintained for the benefit of
such individual in a qualified rollover contribu-
tion.
‘‘(C) CONVERSIONS.—The conversion of an
individual retirement plan (other than a Roth
IRA) to a Roth IRA shall be treated for pur-
poses of this paragraph as a distribution to
which this paragraph applies.
‘‘(D) CONVERSION OF EXCESS CONTRIBU-
TIONS.—If, no later than the due date for filing
the return of tax for any taxable year (without
regard to extensions), an individual transfers,
from an individual retirement plan (other than
a Roth IRA), contributions for such taxable
year (and any earnings allocable thereto) to a
Roth IRA, no such amount shall be includible
in gross income to the extent no deduction was
allowed with respect to such amount.
‘‘(E) ADDITIONAL
REPORTING
REQUIRE-
MENTS.—Trustees of Roth IRAs, trustees of in-
dividual retirement plans, or both, whichever is
appropriate, shall include such additional infor-
mation in reports required under section 408(i)
as the Secretary may require to ensure that
amounts required to be included in gross in-
come under subparagraph (A) are so included.
‘‘(4) COORDINATION WITH INDIVIDUAL RETIRE-
MENT ACCOUNTS.—Section 408(d)(2) shall be ap-
plied separately with respect to Roth IRAs and other
individual retirement plans.
‘‘(5) QUALIFIED SPECIAL PURPOSE DISTRIBU-
TION.—‘Qualified 
special 
purpose 
distribution’
means—
‘‘(i) DISTRIBUTIONS UPON DEATH.—
Distributions made to a beneficiary (or to
the estate of the individual) on or after the
death of the individual.
‘‘(ii) DISTRIBUTIONS UPON DISABIL-
ITY.—Distributions attributable to the in-
dividual’s being disabled.
‘‘(iii) DISTRIBUTIONS TO PAY MEDI-
CAL
EXPENSES.—Distributions made to
the individual for amounts paid during the
year for medical care, but only to the ex-
tent that the amounts paid for medical
care exceed 7.5% of the adjusted gross in-
come of the taxpayer. (determined without
regard to whether the employee itemizes
deductions for such taxable year).
‘‘(iv) QDROS.—Any distribution to
an alternate payee pursuant to a qualified
domestic relations order (within the mean-
ing of section 414(p)(1)).
‘‘(v) DISTRIBUTIONS TO UNEMPLOYED
INDIVIDUALS
FOR
HEALTH
INSURANCE
PREMIUMS.—Distributions 
to 
an
individual—
‘‘(I) if such individual has re-
ceived unemployment compensation
for 12 consecutive weeks under any
Federal or State unemployment com-
pensation law by reason of such sepa-
ration (or in the case of a self-em-
ployed individual, to the extent pro-
vided in regulations, if the individual
would have received unemployment
compensation but for the fact the in-
dividual was self-employed),
‘‘(II) if such distributions are
made during any taxable year during
which such unemployment compensa-
tion is paid or the succeeding taxable
year,
‘‘(III) to the extent such distribu-
tions do not exceed the amount paid
during the taxable year for insurance
for the diagnosis, cure, mitigation,
treatment, or prevention of disease, or
for the purpose of affecting any struc-
ture or function of the body (or for
transportation primarily for and es-
sential to such medical care) (includ-
ing amounts paid as premiums under
part B of title XVIII of the Social Se-
curity Act, relating to supplementary
medical insurance for the aged) or for
any qualified long-term care insurance
contract 
(as 
defined 
in 
section
7702B(b)) with respect to the individ-
ual and the individual’s spouse and
dependents, and
‘‘(IV) such distributions are not
made after the individual has been
employed for at least 60 days after
the separation from employment to
which clause (I) applies.
‘‘(v) DISTRIBUTIONS TO PAY HIGHER
EDUCATION
EXPENSES.—Distributions to
the extent such distributions do not exceed
the qualified higher education expenses (as
defined in section 10(a)(2)) of—
‘‘(I) the taxpayer,
‘‘(II) the taxpayer’s spouse, or
‘‘(III) any child or grandchild of
the taxpayer or the taxpayer’s spouse.
‘‘(vi) 
DISTRIBUTIONS
FOR
FIRST
HOME
PURCHASES.—Distributions which
are qualified first-time homebuyer distribu-
tions (as defined in paragraph (6)).
‘‘(6) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.—
‘‘(A) IN
GENERAL.—‘Qualified first-time
homebuyer distribution’ means any payment or
distribution received by an individual to the ex-
tent such payment or distribution is used by the
individual before the close of the 120th day
after the day on which such payment or dis-
tribution is received to pay qualified acquisition
costs with respect to a principal residence of a
first-time homebuyer who is such individual, the
spouse of such individual, or any child, grand-
child, or ancestor of such individual or the indi-
vidual’s spouse.
‘‘(B) LIFETIME
DOLLAR
LIMITATION.—
The aggregate amount of payments or distribu-
tions received by an individual which may be
treated as qualified first-time homebuyer dis-
tributions for any taxable year shall not exceed
the excess (if any) of—
‘‘(i) $10,000, over
‘‘(ii) the aggregate amounts treated as
qualified first-time homebuyer distributions
with respect to such individual for all prior
taxable years.
‘‘(C) QUALIFIED
ACQUISITION
COSTS.—
‘Qualified acquisition costs’ means the costs of
acquiring, constructing, or reconstructing a res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing
costs.
‘‘(D) FIRST-TIME
HOMEBUYER; 
OTHER
DEFINITIONS.—For 
purposes 
of 
this
paragraph—
‘‘(i) 
FIRST-TIME
HOMEBUYER.—
‘First-time homebuyer’ means any individ-
ual if such individual (and if married, such
individual’s spouse) had no present owner-
ship interest in a principal residence dur-
ing the 2-year period ending on the date of
acquisition of the principal residence to
which this paragraph applies, and
‘‘(ii) DATE
OF
ACQUISITION.—‘Date
of acquisition’ means the date—
‘‘(I) on which a binding contract
to acquire the principal residence to
which subparagraph (A) applies is en-
tered into, or
‘‘(II) on which construction or re-
construction of such a principal resi-
dence is commenced.
‘‘(E) SPECIAL RULE WHERE DELAY IN AC-
QUISITION.—The Secretary shall prescribe rules
under which a distribution will not be penalized
if made in anticipation of being a qualified
first-time homeowner distribution but construc-
tion delays or other unanticipated factors delay
the closing.
‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For
purposes of this section, the term qualified rollover con-
tribution means a rollover contribution to a Roth IRA
from another such account, or from an individual retire-
ment plan, but only if such rollover contribution meets the
requirements of section 408(d)(3). For purposes of section
408(d)(3)(B), there shall be disregarded any qualified roll-
over contribution from an individual retirement plan
(other than a Roth IRA) to a Roth IRA.
‘‘(f) PERMITTED INVESTMENTS.—
‘‘(1) INVESTMENT PERMITTED.—A Roth IRA
shall not cease to be an individual retirement ac-
count pursuant to section 408(e)(2) solely because
funds from such account are used to make a debt
or equity investment in a controlled business entity.
‘‘(2) LOANS TO A CONTROLLED BUSINESS EN-
TITY.—
‘‘(A) EXCESS
RETURN.—If funds in a
Roth IRA are loaned to a controlled business
entity, any return on such loans in excess of a
fair return shall be treated as gross income of
the beneficiary that is then deposited in the
Roth IRA.
‘‘(B) LOAN.—For purposes of this section,
an amount shall be treated as loaned to a con-
trolled business entity only if—
‘‘(i) the amount is treated in the
books and records of the business entity as
a loan,
‘‘(ii) the transaction is reflected in a
written note or other evidence of indebted-
ness, and
‘‘(iii) the business entity is required to
pay interest at least once per year and at
the time such loan is made it is reasonable
to expect that such interest will be paid on
a timely basis.
‘‘(C) FAIR RETURN.—For purposes of this
subsection, a ‘fair return’ with respect to a loan
is interest at a rate not in excess of 3 percent-
age points plus the minimum rate of interest
that would have to be charged with respect to
such loan to prevent it from being a below-mar-
ket loan for purposes of section 7872 (deter-
mined as if section 7872 applied to such loan).
‘‘(3) EQUITY INVESTMENT IN A CONTROLLED
BUSINESS ENTITY.—If funds in a Roth IRA are con-
tributed to the capital of, applied to acquire stock or
other equity interest in, or otherwise transferred to,
a controlled business entity in a transaction that is
not considered a loan for purposes of this sub-
section, any return on such equity shall be treated
as gross income of the beneficiary that is then de-
posited in the Roth IRA. The preceding sentence
shall not apply to—
‘‘(A) the proceeds of the sale of such eq-
uity interest to a third party, or
‘‘(B) the proceeds received by the Roth
IRA as the result of a complete redemption of
the beneficiary’s interest in the business entity
(including any interests held through a Roth
IRA).
‘‘(4) CONTROLLED
BUSINESS
ENTITY.—‘Con-
trolled business entity’ means any business entity in
which the beneficiary of the Roth IRA holds at least
a 5 percent interest in the profits and losses (after
taking into account the investment through the Roth
IRA) and in which an investment would cause the
Roth IRA to cease to be an individual retirement
account by reason of section 408(e)(2) but for this
subsection.
‘‘(5) APPLICATION OF SECTION 4975.—Section
4975 shall not apply to a loan or equity investment
by a Roth IRA in a controlled business entity.
‘‘(6) TAX AND PENALTY AVOIDANCE.—The Sec-
retary shall prescribe regulations that prohibit the
provisions of this subsection to be used to cir-
cumvent the application of subsection (d)(2) (relat-
ing to taxable distributions). The regulations shall
not prohibit bona fide investments in controlled busi-
ness entities. The regulations shall address loans to
and investments in a controlled business entity that
are used to fund distributions or dividends from the
business entity to the account beneficiary or a mem-
ber of the beneficiary’s family.
‘‘SEC. 31. DEDUCTIBLE IRAS.
‘‘(a) ALLOWANCE OF DEDUCTION.—The ‘qualified
IRA deduction’ shall be an amount equal to the qualified
retirement contributions of the individual for the taxable
year, except as limited by subsection (b).
‘‘(b) MAXIMUM AMOUNT OF DEDUCTION.—
‘‘(1) IN GENERAL.—The amount allowable as a
deduction under subsection (a) to any individual for
any taxable year shall not exceed the lesser of—
‘‘(A) $2,000, or
‘‘(1) IN GENERAL.—In the case of an individual
to whom this paragraph applies for the taxable year,
the limitation of paragraph (1) of subsection (b)
shall be equal to the lesser of—
‘‘(A) the dollar amount in effect under
subsection (b)(1)(A) for the taxable year, or
‘‘(B) the sum of—
‘‘(i) the compensation includible in
such individual’s gross income for the tax-
able year, plus
‘‘(ii) the compensation includible in
the gross income of such individual’s
spouse for the taxable year reduced by—
‘‘(I) the amount allowed as a de-
duction under subsection (a) to such
spouse for such taxable year, and
‘‘(II) the amount of any contribu-
tion on behalf of such spouse to a
Roth IRA under section 30 for such
taxable year.
‘‘(2) INDIVIDUALS
TO
WHOM
PARAGRAPH
(1)
APPLIES.—Paragraph (1) shall apply to any individ-
ual if—
‘‘(A) such individual files a joint return for
the taxable year, and
‘‘(B) the amount of compensation (if any)
includible in such individual’s gross income for
the taxable year is less than the compensation
includible in the gross income of such individ-
ual’s spouse for the taxable year.
‘‘(d) OTHER LIMITATIONS AND RESTRICTIONS.—
‘‘(1) BENEFICIARY
MUST
BE
UNDER
AGE
701⁄2.—No deduction shall be allowed under this sec-
tion with respect to any qualified retirement con-
tribution for the benefit of an individual if such indi-
vidual has attained age 701⁄2 before the close of such
individual’s taxable year for which the contribution
was made.
‘‘(2) RECONTRIBUTED
AMOUNTS.—No deduc-
tion shall be allowed under this section with respect
to a rollover contribution described in section 402(c),
403(a)(4), 403(b)(8), or 408(d)(3).
‘‘(3) AMOUNTS CONTRIBUTED UNDER ENDOW-
MENT
CONTRACT.—In the case of an endowment
contract described in section 408(b), no deduction
shall be allowed under this section for that portion
of the amounts paid under the contract for the tax-
able year which is properly allocable, under regula-
tions prescribed by the Secretary, to the cost of life
insurance.
‘‘(4) DENIAL
OF
DEDUCTION
FOR
AMOUNT
CONTRIBUTED
TO
INHERITED
ANNUITIES
OR
AC-
COUNTS.—No deduction shall be allowed under this
section with respect to any amount paid to an inher-
ited individual retirement account or individual re-
tirement annuity (within the meaning of section
408(d)(3)(C)(ii)).
‘‘(e) QUALIFIED RETIREMENT CONTRIBUTION.—For
purposes of this section, the term ‘qualified retirement
contribution’ means—
‘‘(1) any amount paid in cash for the taxable
year by or on behalf of an individual to an individual
retirement plan for such individual’s benefit, and
‘‘(2) any amount contributed on behalf of any
individual to a plan described in section 501(c)(18)
of the Internal Revenue Code of 1986.
‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.—
‘‘(1) COMPENSATION.—For purposes of this
section, the term ‘compensation’ includes earned in-
come (as defined in section 401(c)(2)). The term
‘compensation’ does not include any amount received
as a pension or annuity and does not include any
amount received as deferred compensation. The term
‘compensation’ shall include any alimony, child sup-
port and separate maintenance payments includible
in the individual’s gross income with respect to a di-
vorce or separation instrument. For purposes of this
paragraph, section 401(c)(2) shall be applied as if
the term trade or business for purposes of section
1402 included service described in subsection (c)(6).
‘‘(2) MARRIED
INDIVIDUALS.—The maximum
deduction under subsection (b) shall be computed
separately for each individual, and this section shall
be applied without regard to any community prop-
erty laws.
‘‘(3) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—For purposes of this section, a taxpayer
shall be deemed to have made a contribution to an
individual retirement plan during a year if the con-
tribution is made on account of such year and is
made not later than April 15 of the following year.
‘‘(4) REPORTS.—The Secretary shall prescribe
regulations which prescribe the time and the manner
in which reports to the Secretary and plan partici-
pants shall be made by the plan administrator of a
qualified employer or government plan receiving
qualified voluntary employee contributions.
‘‘(5) EMPLOYER PAYMENTS.—For purposes of
this title, any amount paid by an employer to an in-
dividual retirement plan shall be treated as payment
of compensation to the employee (other than a self-
employed individual who is an employee within the
meaning of section 401(c)(1)) includible in his gross
income in the taxable year for which the amount was
contributed, whether or not a deduction for such
payment is allowable under this section to the em-
ployee.
‘‘(6) EXCESS
CONTRIBUTIONS
TREATED
AS
CONTRIBUTION
MADE
DURING
SUBSEQUENT
YEAR
FOR WHICH THERE IS AN UNUSED LIMITATION.—
‘‘(A) IN GENERAL.—If for the taxable year
the maximum amount allowable as a deduction
under this section for contributions to an indi-
vidual retirement plan exceeds the amount con-
tributed, then the taxpayer shall be treated as
having made an additional contribution for the
taxable year in an amount equal to the lesser
of—
‘‘(i) the amount of such excess, or
‘‘(ii) the amount of the excess con-
tributions for such taxable year (deter-
mined under section 4973(b)(2) without
regard to subparagraph (C) thereof).
‘‘(B) AMOUNT
CONTRIBUTED.—For pur-
poses 
of 
this 
paragraph, 
the 
amount
contributed—
‘‘(i) shall be determined without re-
gard to this paragraph, and
‘‘(ii) shall not include any rollover
contribution.
‘‘(C) SPECIAL RULE WHERE EXCESS DE-
DUCTION WAS ALLOWED FOR CLOSED YEAR.—
Proper reduction shall be made in the amount
allowable as a deduction by reason of this para-
graph for any amount allowed as a deduction
under this section for a prior taxable year for
which the period for assessing deficiency has ex-
pired if the amount so allowed exceeds the
amount which should have been allowed for
such prior taxable year.
‘‘(7) ELECTION
NOT
TO
DEDUCT
CONTRIBU-
TIONS.—For election not to deduct contributions to
individual 
retirement 
plans, 
see 
section
408(o)(2)(B)(ii).
‘‘(g) LIMITATION ON DEDUCTION FOR ACTIVE PAR-
TICIPANTS IN CERTAIN PENSION PLANS.—
‘‘(1) IN GENERAL.—If (for any part of any plan
year ending with or within a taxable year) an indi-
vidual is an active participant, each of the dollar
limitations contained in subsections (b)(1)(A) and
(c)(1)(A) for such taxable year shall be reduced (but
not below zero) by the amount determined under
paragraph (2).
‘‘(2) AMOUNT OF REDUCTION.—
‘‘(A) IN
GENERAL.—The amount deter-
mined under this paragraph with respect to any
dollar limitation shall be the amount which
bears the same ratio to such limitation as—
‘‘(i) the excess of—
‘‘(I) 
the 
taxpayer’s 
adjusted
gross income for such taxable year,
over
‘‘(II) 
the 
applicable 
dollar
amount, bears to
‘‘(ii) $10,000 ($20,000 in the case of
a joint return for a taxable year beginning
after December 31, 2007).
‘‘(B) NO REDUCTION BELOW $200 UNTIL
COMPLETE
PHASE-OUT.—No dollar limitation
shall be reduced below $200 under paragraph
(1) unless (without regard to this subpara-
graph) such limitation is reduced to zero.
‘‘(C) ROUNDING.—Any amount determined
under this paragraph which is not a multiple of
$10 shall be rounded to the next lowest $10.
‘‘(3) ADJUSTED
GROSS
INCOME; APPLICABLE
DOLLAR
AMOUNT.—For 
purposes 
of 
this
subsection—
‘‘(A) ADJUSTED
GROSS
INCOME.—Ad-
justed gross income of any taxpayer shall be de-
termined without regard to the qualified IRA
deduction.
‘‘(B) APPLICABLE DOLLAR AMOUNT.—The
term ‘applicable dollar amount’ means the fol-
lowing:
‘‘(i) In the case of a taxpayer filing a
joint return:
‘‘For taxable years beginning
in:
‘‘The applicable dollar amount
is:
2000 ...............................................
$51,000
2001 ...............................................
$52,000
2002 ...............................................
$53,000
2003 ...............................................
$54,000
2004 ...............................................
$60,000
2005 ...............................................
$65,000
2006 ...............................................
$70,000
2007 ...............................................
$75,000
2008 and thereafter .......................
$80,000.
‘‘(ii) In the case of any other taxpayer
(other than a married individual filing a
separate return):
For taxable years beginning
in:
The applicable dollar amount
is:
2000 ...............................................
$31,000
For taxable years beginning
in:
The applicable dollar amount
is:
2001 ...............................................
$32,000
2002 ...............................................
$33,000
2003 ...............................................
$34,000
2004 ...............................................
$40,000
2005 ...............................................
$45,000
2006 and thereafter .......................
$50,000.
‘‘(iii) In the case of a married individ-
ual filing a separate return, zero.
‘‘(4) SPECIAL RULE FOR MARRIED INDIVIDUALS
FILING SEPARATELY AND LIVING APART.—A hus-
band and wife who—
‘‘(A) file separate returns for any taxable
year, and
‘‘(B) live apart at all times during such
taxable year, shall not be treated as married in-
dividuals for purposes of this subsection.
‘‘(5) ACTIVE
PARTICIPANT.—For purposes of
this subsection, the term ‘active participant’ means,
with respect to any plan year, an individual—
‘‘(A) who is an active participant in—
‘‘(i) a plan described in section 401(a)
which includes a trust exempt from tax,
‘‘(ii) an annuity plan described in sec-
tion 403(a),
‘‘(iii) a plan established for its em-
ployees by the United States, by a State or
political subdivision thereof, or by an agen-
cy or instrumentality of any of the fore-
going,
‘‘(iv) an annuity contract described in
section 403(b),
‘‘(v) a simplified employee pension
(within the meaning of section 408(k)), or
‘‘(vi) any simple retirement account
(within the meaning of section 408(p), or
‘‘(B) who makes deductible contributions
to a trust described in section 501(c)(18).
The determination of whether an individual is an ac-
tive participant shall be made without regard to
whether or not such individual’s rights under a plan,
trust, or contract are nonforfeitable. An eligible de-
ferred compensation plan (within the meaning of
section 457(b) of the Internal Revenue Code of
1986) shall not be treated as a plan described in
subparagraph (A)(iii).
‘‘(6) CERTAIN INDIVIDUALS NOT TREATED AS
ACTIVE PARTICIPANTS.—For purposes of this sub-
section, any individual described in any of the follow-
ing subparagraphs shall not be treated as an active
participant for any taxable year solely because of
any participation so described:
‘‘(A) MEMBERS
OF
RESERVE
COMPO-
NENTS.—Participation in a plan described in
subparagraph (A)(iii) of paragraph (5) by rea-
son of service as a member of a reserve compo-
nent of the Armed Forces (as defined in section
10101 of title 10, unless such individual has
served in excess of 90 days on active duty
(other than active duty for training) during the
year.
‘‘(B) VOLUNTEER FIREFIGHTERS.—A vol-
unteer firefighter—
‘‘(i) who is a participant in a plan de-
scribed in subparagraph (A)(iii) of para-
graph (5) based on his activity as a volun-
teer firefighter, and
‘‘(ii) whose accrued benefit as of the
beginning of the taxable year is not more
than an annual benefit of $1,800 (when
expressed as a single life annuity com-
mencing at age 65).
‘‘(7) SPECIAL RULE FOR CERTAIN SPOUSES.—
In the case of an individual who is an active partici-
pant at no time during any plan year ending with
or within the taxable year but whose spouse is an
active participant for any part of any such plan
year—
‘‘(A) the applicable dollar amount under
paragraph (3)(B)(i) with respect to the tax-
payer shall be $150,000, and
‘‘(B) the amount applicable under para-
graph (2)(A)(ii) shall be $10,000.
‘‘(h) CROSS REFERENCE.—For failure to provide re-
quired reports, see section 6652(g).
‘‘SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVI-
SIONS.
‘‘(a) EDUCATION IRA’S.—
‘‘(1) IN GENERAL.—An account that qualifies
as an education IRA under the Internal Revenue
Code of 1986 as in effect immediately before adop-
tion of the Simplified USA Tax Act shall be treated
as a Roth IRA for purposes of this chapter (includ-
ing rules allowing for tax-free rollover).
‘‘(2) NO NEW CONTRIBUTIONS.—Neither para-
graph (1) nor section 530 of the Internal Revenue
Code of 1986 shall apply to an education IRA to
which contributions are made after December 31,
1999.
‘‘(3) SPECIAL RULE.—For purposes of applying
section 30 to an account that was an educational
‘‘SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT
AND LIFE INSURANCE CONTRACTS.
‘‘(a) GENERAL RULE FOR ANNUITIES.—Except as
otherwise provided in this chapter, gross income includes
any amount received as an annuity (whether for a period
certain or during one or more lives) under an annuity, en-
dowment, or life insurance contract.
‘‘(b) EXCLUSION RATIO.—
‘‘(1) IN GENERAL.—Gross income does not in-
clude that part of any amount received as an annu-
ity under an annuity, endowment, or life insurance
contract which bears the same ratio to such amount
as the investment in the contract (as of the annuity
starting date) bears to the expected return under the
contract (as of such date).
‘‘(2) EXCLUSION LIMITED TO INVESTMENT.—
The portion of any amount received as an annuity
which is excluded from gross income under para-
graph (1) shall not exceed the unrecovered invest-
ment in the contract immediately before the receipt
of such amount.
‘‘(3) DEDUCTION WHERE ANNUITY PAYMENTS
CEASE BEFORE ENTIRE INVESTMENT RECOVERED.—
‘‘(A) IN GENERAL.—If—
‘‘(i) after the annuity starting date,
payments as an annuity under the contract
cease by reason of the death of an annu-
itant, and
‘‘(ii) as of the date of such cessation,
there is unrecovered investment in the con-
tract,
the amount of such unrecovered investment (in
excess of any amount specified in subsection
(e)(5) which was not included in gross income)
shall be allowed as a deduction from adjusted
gross income in determining taxable income of
the annuitant for his last taxable year.
‘‘(B) PAYMENTS TO OTHER PERSONS.—In
the case of any contract which provides for pay-
ments meeting the requirements of subpara-
graphs (B) and (C) of subsection (c)(2), the de-
duction under subparagraph (A) shall be al-
lowed to the person entitled to such payments
for the taxable year in which such payments are
received.
‘‘(c) DEFINITIONS.—
‘‘(1) INVESTMENT
IN
THE
CONTRACT.—For
purposes of subsection (b), the investment in the
contract as of the annuity starting date is—
‘‘(A) the aggregate amount of premiums or
other consideration paid for the contract (in-
cluding any amounts earned on the contract
which were included in gross income and rein-
vested in the contract), minus
‘‘(B) the aggregate amount received under
the contract before such date, to the extent that
such amount was excludable from gross income
under this subtitle or prior income tax laws.
‘‘(2) OTHER
TERMS
USED
IN
SUBSECTION
(b).—Calculations under subsections (a) and (b)
shall be made in accordance with regulations pre-
scribed by the Secretary, which regulations shall
generally be consistent with the section 72 of the In-
ternal Revenue Code of 1986.
‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER
RETIREMENT PLANS.—
‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY
PAYMENTS.—
‘‘(A) IN
GENERAL.—In the case of any
amount received as an annuity under a quali-
fied employer retirement plan—
‘‘(i) subsection (b) shall not apply,
and
‘‘(ii) the investment in the contract
shall be recovered as provided in this para-
graph.
‘‘(B) METHOD
OF
RECOVERING
INVEST-
MENT IN CONTRACT.—
‘‘(i) 
IN
GENERAL.—Gross 
income
shall not include so much of any monthly
annuity payment under a qualified em-
ployer retirement plan as does not exceed
the amount obtained by dividing—
‘‘(I) the investment in the con-
tract (as of the annuity starting date),
by
‘‘(II) the number of anticipated
payments determined under the table
contained in clause (iii) (or, in the
case of a contract to which subsection
(c)(3)(B) applies, the number of
monthly annuity payments under such
contract).
‘‘(ii) CERTAIN RULES MADE APPLICA-
BLE.—Rules similar to the rules of para-
graphs (2) and (3) of subsection (b) shall
apply for purposes of this paragraph.
‘‘(iii) NUMBER OF ANTICIPATED PAY-
MENTS.—If the annuity is payable over the
life of a single individual, the number of
anticipated payments shall be determined
as follows:
If the age of the annuitant on
the annuity starting date
is:
The number:
Not more than 55 ..........................
360
More than 55 but not more than
60.
310
More than 60 but not more than
65.
260
More than 65 but not more than
70.
210
More than 70 .................................
160
‘‘(iv) NUMBER OF ANTICIPATED PAY-
MENTS WHERE MORE THAN ONE LIFE.—If
the annuity is payable over the lives of
more than 1 individual, the number of an-
ticipated payments shall be determined as
follows:
If the combined ages of the
annuitants are:
The number:
Not more than 110 ........................
410
More than 110 but not more than
120.
360
More than 120 but not more than
130.
310
More than 130 but not more than
140.
260
More than 140 ...............................
210
‘‘(C) SPECIAL
RULE
WHERE
LUMP
SUM
PAID
IN
CONNECTION
WITH
COMMENCEMENT
OF ANNUITY PAYMENTS.—If, in connection with
the commencement of annuity payments under
any qualified employer retirement plan, the tax-
payer receives a lump sum payment—
‘‘(i) such payment shall be taxable
under subsection (e) as if received before
the annuity starting date, and
‘‘(ii) the investment in the contract
for purposes of this paragraph shall be de-
termined as if such payment had been so
received.
‘‘(D) EXCEPTION.—This paragraph shall
not apply in any case where the primary annu-
itant has attained age 75 on the annuity start-
ing date unless there are fewer than 5 years of
guaranteed payments under the annuity.
‘‘(E) ADJUSTMENT WHERE ANNUITY PAY-
MENTS
NOT
ON
A
MONTHLY
BASIS.—In any
case where the annuity payments are not made
on a monthly basis, appropriate adjustments in
the application of this paragraph shall be made
to take into account the period on the basis of
which such payments are made.
‘‘(F) QUALIFIED EMPLOYER RETIREMENT
PLAN.—For purposes of this paragraph, the
term ‘qualified employer retirement plan’ means
any plan or contract described in paragraph
(1), (2), or (3) of section 4974(c).
‘‘(2) TREATMENT
OF
EMPLOYEE
CONTRIBU-
TIONS
UNDER
DEFINED
CONTRIBUTION
PLANS.—
For purposes of this section, employee contributions
(and any income allocable thereto) under a defined
contribution plan may be treated as a separate con-
tract.
‘‘(e) AMOUNTS NOT RECEIVED AS ANNUITIES.—
‘‘(1) APPLICATION OF SUBSECTION.—
‘‘(A) IN GENERAL.—This subsection shall
apply to any amount which—
‘‘(i) is received under an annuity, en-
dowment, or life insurance contract, and
‘‘(ii) is not received as an annuity,
if no provision of this subtitle (other than this
subsection) applies with respect to such
amount.
‘‘(B) DIVIDENDS.—For purposes of this
section, any amount received which is in the na-
ture of a dividend or similar distribution shall
be treated as an amount not received as an an-
nuity.
‘‘(2) GENERAL RULE.—Any amount to which
this subsection applies—
‘‘(A) if received on or after the annuity
starting date, shall be included in gross income,
or
‘‘(B) if received before the annuity starting
date—
‘‘(i) shall be included in gross income
to the extent allocable to income on the
contract, and
‘‘(ii) shall not be included in gross in-
come to the extent allocable to the invest-
ment in the contract.
‘‘(3) ALLOCATION
OF
AMOUNTS
TO
INCOME
AND
INVESTMENT.—For purposes of paragraph
(2)(B):
‘‘(A) Any amount to which this subsection
applies shall be treated as allocable to income
on the contract to the extent that such amount
does not exceed the excess (if any) of—
‘‘(i) the cash value of the contract
(determined without regard to any surren-
der charge) immediately before the amount
is received, over
‘‘(ii) the investment in the contract at
such time.
‘‘(B) Any amount to which this subsection
applies shall be treated as allocable to invest-
ment in the contract to the extent that such
amount is not allocated to income under sub-
paragraph (A).
‘‘(4) SPECIAL
RULES
FOR
APPLICATION
OF
PARAGRAPH
(2)(B).—For purposes of paragraph
(2)(B):
‘‘(A) 
LOANS
TREATED
AS
DISTRIBU-
TIONS.—If, during any taxable year, an
individual—
‘‘(i) receives (directly or indirectly)
any amount as a loan under any contract
to which this subsection applies, or
‘‘(ii) assigns or pledges (or agrees to
assign or pledge) any portion of the value
of any such contract,
such amount or portion shall be treated as re-
ceived under the contract as an amount not re-
ceived as an annuity. The preceding sentence
shall not apply for purposes of determining in-
vestment in the contract, except that the invest-
ment in the contract shall be increased by any
amount included in gross income by reason of
the amount treated as received under the pre-
ceding sentence.
‘‘(B) TREATMENT
OF
TRANSFERS
WITH-
OUT ADEQUATE CONSIDERATION.—
‘‘(i) IN
GENERAL.—If an individual
who holds an annuity contract transfers it
without full and adequate consideration,
such individual shall be treated as receiv-
ing an amount equal to the excess of—
‘‘(I) the cash surrender value of
such contract at the time of transfer,
over
‘‘(II) the investment in such con-
tract at such time,
under the contract as an amount not re-
ceived as an annuity.
‘‘(ii) 
EXCEPTION
FOR
CERTAIN
TRANSFERS
BETWEEN
SPOUSES
OR
FORMER
SPOUSES.—Clause (i) shall not
apply to any transfer to which section
77(c) (relating to transfers of property be-
tween spouses or incident to divorce) ap-
plies.
‘‘(iii) ADJUSTMENT
TO
INVESTMENT
IN CONTRACT OF TRANSFEREE.—If under
clause (i) an amount is included in the
gross income of the transferor of an annu-
ity contract, the investment in the contract
of the transferee in such contract shall be
increased by the amount so included.
‘‘(5) RETENTION OF EXISTING RULES IN CER-
TAIN CASES.—Paragraph (5) of section 72(e) of the
Internal Revenue Code of 1986 shall apply to con-
tracts described in subparagraph (B) of such para-
graph to the extent provided therein.
‘‘(6) INVESTMENT
IN
THE
CONTRACT.—For
purposes of this subsection, the investment in the
contract as of any date is—
‘‘(A) the aggregate amount of premiums or
other consideration paid for the contract before
such date, minus
‘‘(B) the aggregate amount received under
the contract before such date, to the extent that
such amount was excludable from gross income
under this subtitle or prior income tax laws.
‘‘(7) APPLICATION
OF
PARAGRAPH
(2)(B)
TO
QUALIFIED PLANS.—
‘‘(A) IN GENERAL.—Notwithstanding any
other provision of this subsection, in the case of
any amount received before the annuity starting
date from a trust or contract described in para-
graph (5)(D), paragraph (2)(B) shall apply to
such amounts.
‘‘(B) 
ALLOCATION
OF
AMOUNT
RE-
CEIVED.—For purposes of paragraph (2)(B),
the amount allocated to the investment in the
contract shall be the portion of the amount de-
scribed in subparagraph (A) which bears the
same ratio to such amount as the investment in
the contract bears to the account balance. The
determination under the preceding sentence
shall be made as of the time of the distribution
or at such other time as the Secretary may pre-
scribe.
‘‘(C) 
TREATMENT
OF
FORFEITABLE
RIGHTS.—If an employee does not have a non-
forfeitable right to any amount under any trust
or contract to which subparagraph (A) applies,
such amount shall not be treated as part of the
account balance.
‘‘(D) INVESTMENT IN THE CONTRACT BE-
FORE 1987.—In the case of a plan which on
May 5, 1986, permitted withdrawal of any em-
ployee contributions before separation from
service, subparagraph (A) shall apply only to
the extent that amounts received before the an-
nuity starting date (when increased by amounts
previously received under the contract after De-
cember 31, 1986) exceed the investment in the
contract as of December 31, 1986.
‘‘(8) TREATMENT OF MODIFIED ENDOWMENT
CONTRACTS.—
‘‘(A) IN GENERAL.—Notwithstanding para-
graph (5)(C), in the case of any modified en-
dowment contract (as defined in section
7702A)—
‘‘(i) paragraphs (2)(B) and (4)(A)
shall apply, and
‘‘(ii) in applying paragraph (4)(A),
‘any person’ shall be substituted for ‘an in-
dividual’.
‘‘(B) TREATMENT
OF
CERTAIN
BURIAL
CONTRACTS.—Notwithstanding 
subparagraph
(A), paragraph (4)(A) shall not apply to any as-
signment (or pledge) of a modified endowment
contract if such assignment (or pledge) is solely
to cover the payment of expenses referred to in
section 7702(e)(2)(C)(iii) and if the maximum
death benefit under such contract does not ex-
ceed $25,000.
‘‘(9) ANTI-ABUSE RULES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount includible in gross income
under this subsection—
‘‘(i) all modified endowment contracts
issued by the same company to the same
policyholder during any calendar year shall
be treated as 1 modified endowment con-
tract, and
‘‘(ii) all annuity contracts issued by
the same company to the same policyholder
during any calendar year shall be treated
as 1 annuity contract.
The preceding sentence shall not apply to any
contract described in paragraph (5)(D).
‘‘(B) REGULATORY AUTHORITY.—The Sec-
retary may by regulations prescribe such addi-
tional rules as may be necessary or appropriate
to prevent avoidance of the purposes of this
subsection through serial purchases of contracts
or otherwise.
‘‘(f) SPECIAL RULES FOR COMPUTING EMPLOYEES’
CONTRIBUTIONS.—In computing, for purposes of sub-
section (c)(1)(A), the aggregate amount of premiums or
other consideration paid for the contract, and for purposes
100
of subsection (e)(6), the aggregate premiums or other con-
sideration paid, amounts contributed by the employer shall
be included, but only to the extent that—
‘‘(1) such amounts were includible in the gross
income of the employee under this subtitle or prior
income tax laws; or
‘‘(2) if such amounts had been paid directly to
the employee at the time they were contributed, they
would not have been includible in the gross income
of the employee under the law applicable at the time
of such contribution.
‘‘(g) RULES FOR TRANSFEREE WHERE TRANSFER
WAS FOR VALUE.—Where any contract (or any interest
therein) is transferred (by assignment or otherwise) for
a valuable consideration, to the extent that the contract
(or interest therein) does not, in the hands of the trans-
feree, have a basis which is determined by reference to
the basis in the hands of the transferor, then—
‘‘(1) for purposes of this section, only the ac-
tual value of such consideration, plus the amount of
the premiums and other consideration paid by the
transferee after the transfer, shall be taken into ac-
count in computing the aggregate amount of the
premiums or other consideration paid for the con-
tract;
101
‘‘(2) for purposes of subsection (c)(1)(B), there
shall be taken into account only the aggregate
amount received under the contract by the trans-
feree before the annuity starting date, to the extent
that such amount was excludable from gross income
under this subtitle or prior income tax laws; and
‘‘(3) the annuity starting date is January 1,
1954, or the first day of the first period for which
the transferee received an amount under the con-
tract as an annuity, whichever is the later.
‘‘(h) OPTION TO RECEIVE ANNUITY IN LIEU OF
LUMP SUM.—If—
‘‘(1) a contract provides for payment of a lump
sum in full discharge of an obligation under the con-
tract, subject to an option to receive an annuity in
lieu of such lump sum;
‘‘(2) the option is exercised within 60 days after
the day on which such lump sum first became pay-
able; and
‘‘(3) part or all of such lump sum would (but
for this subsection) be includible in gross income by
reason of subsection (e)(1),
then, for purposes of this subtitle, no part of such lump
sum shall be considered as includible in gross income at
the time such lump sum first became payable.
102
‘‘(i) INTEREST.—Notwithstanding any other provi-
sion of this section, if any amount is held under an agree-
ment to pay interest thereon, the interest payments shall
be included in gross income.
‘‘(j) FACE-AMOUNT CERTIFICATES.—For purposes of
this section, the term ‘endowment contract’ includes a
face-amount certificate, as defined in section 2(a)(15) of
the Investment Company Act of 1940 (15 U.S.C., sec.
80a–2), issued after December 31, 1954.
‘‘(k) SPECIAL RULES APPLICABLE TO EMPLOYEE
ANNUITIES
AND
DISTRIBUTIONS
UNDER
EMPLOYEE
PLANS.—
‘‘(1) COMPUTATION
OF
CONSIDERATION
PAID
BY THE EMPLOYEE.—In computing—
‘‘(A) the aggregate amount of premiums or
other consideration paid for the contract for
purposes of subsection (c)(1)(A) (relating to the
investment in the contract), and
‘‘(B) the aggregate premiums or other con-
sideration paid for purposes of subsection (e)(6)
(relating to certain amounts not received as an
annuity),
any amount allowed as a deduction with respect to
the contract under section 404 which was paid while
the employee was an employee within the meaning of
103
section 401(c)(1) shall be treated as consideration
contributed by the employer, and there shall not be
taken into account any portion of the premiums or
other consideration for the contract paid while the
employee was an owner-employee which is properly
allocable (as determined under regulations pre-
scribed by the Secretary) to the cost of life, accident,
health, or other insurance.
‘‘(2) LIFE INSURANCE CONTRACTS.—
‘‘(A) This paragraph shall apply to any life
insurance contract—
‘‘(i) purchased as a part of a plan de-
scribed in section 403(a), or
‘‘(ii) purchased by a trust described in
section 401(a) which is exempt from tax if
the proceeds of such contract are payable
directly or indirectly to a participant in
such trust or to a beneficiary of such par-
ticipant.
‘‘(B) Any contribution to a plan described
in subparagraph (A)(i) or a trust described in
subparagraph (A)(ii) which is allowed as a de-
duction under section 404, and any income of
a trust described in subparagraph (A)(ii), which
is determined in accordance with regulations
104
prescribed by the Secretary to have been ap-
plied to purchase the life insurance protection
under a contract described in subparagraph
(A), is includible in the gross income of the par-
ticipant for the taxable year when so applied.
‘‘(C) In the case of the death of an individ-
ual insured under a contract described in sub-
paragraph (A), an amount equal to the cash
surrender value of the contract immediately be-
fore the death of the insured shall be treated as
a payment under such plan or a distribution by
such trust, and the excess of the amount pay-
able by reason of the death of the insured over
such cash surrender value shall not be includ-
ible in gross income under this section and shall
be treated as provided in section 101.
‘‘(3) PENALTIES
APPLICABLE
TO
CERTAIN
AMOUNTS RECEIVED BY 5-PERCENT OWNERS.—
‘‘(A) This paragraph applies to amounts
which are received from a qualified trust de-
scribed in section 401(a) or under a plan de-
scribed in section 403(a) at any time by an in-
dividual who is, or has been, a 5-percent owner,
or by a successor of such an individual, but only
to the extent such amounts are determined,
105
under regulations prescribed by the Secretary,
to exceed the benefits provided for such individ-
ual under the plan formula.
‘‘(B) If a person receives an amount to
which this paragraph applies, his tax under this
chapter for the taxable year in which such
amount is received shall be increased by an
amount equal to 10 percent of the portion of
the amount so received which is includible in
his gross income for such taxable year.
‘‘(C) For purposes of this paragraph, the
term ‘5-percent owner’ means any individual
who, at any time during the 5 plan years pre-
ceding the plan year ending in the taxable year
in which the amount is received, is a 5-percent
owner (as defined in section 416(i)(1)(B).
‘‘(4) OWNER-EMPLOYEE
DEFINED.—For pur-
poses of this subsection, the term ‘owner-employee’
has the meaning assigned to it by section 401(c)(3)
and includes an individual for whose benefit an indi-
vidual retirement account or annuity described in
section 408(a) or (b) is maintained. For purposes of
the preceding sentence, the term ‘owner-employee’
shall include an employee within the meaning of sec-
tion 401(c)(1).
106
‘‘(5) MEANING OF DISABLED.—For purposes of
this section, an individual shall be considered to be
disabled if he is unable to engage in any substantial
gainful activity by reason of any medically deter-
minable physical or mental impairment which can be
expected to result in death or to be of long-continued
and indefinite duration. An individual shall not be
considered to be disabled unless he furnishes proof
of the existence thereof in such form and manner as
the Secretary may require.
‘‘(6) DETERMINATION OF INVESTMENT IN THE
CONTRACT IN THE CASE OF QUALIFIED DOMESTIC
RELATIONS ORDERS.—Under regulations prescribed
by the Secretary, in the case of a distribution or
payment made to an alternate payee who is the
spouse or former spouse of the participant pursuant
to a qualified domestic relations order (as defined in
section 414(p)), the investment in the contract as of
the date prescribed in such regulations shall be allo-
cated on a pro rata basis between the present value
of such distribution or payment and the present
value of all other benefits payable with respect to the
participant to which such order relates.
‘‘(l) ANNUITIES UNDER RETIRED SERVICEMAN’S
FAMILY
PROTECTION
PLAN
OR
SURVIVOR
BENEFIT
107
PLAN.—Subsection (b) shall not apply in the case of
amounts received after December 31, 1965, as an annuity
under chapter 73 of title 10 of the United States Code,
but all such amounts shall be excluded from gross income
until there has been so excluded (under section 122(b)(1)
of the Internal Revenue Code of 1986, section 93, or this
section, including amounts excluded before January 1,
1966) an amount equal to the consideration for the con-
tract (as defined by section 122(b)(2) of the Internal Rev-
enue Code of 1986). Thereafter all amounts so received
shall be included in gross income.
‘‘(m) SPECIAL RULES FOR DISTRIBUTIONS FROM
QUALIFIED PLANS
TO WHICH EMPLOYEE MADE DE-
DUCTIBLE CONTRIBUTIONS.—
‘‘(1) TREATMENT
OF
CONTRIBUTIONS.—For
purposes of this section and sections 402 and 403,
notwithstanding section 414(h), any deductible em-
ployee contribution made to a qualified employer
plan or government plan shall be treated as an
amount contributed by the employer which is not in-
cludible in the gross income of the employee.
‘‘(2) AMOUNTS CONSTRUCTIVELY RECEIVED.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, rules similar to the rules provided
108
by subsection (n) (other than the exception con-
tained in paragraph (2) thereof) shall apply.
‘‘(B) PURCHASE OF LIFE INSURANCE.—To
the extent any amount of accumulated deduct-
ible employee contributions of an employee are
applied to the purchase of life insurance con-
tracts, such amount shall be treated as distrib-
uted to the employee in the year so applied.
‘‘(3) SPECIAL RULE FOR TREATMENT OF ROLL-
OVER AMOUNTS.—For purposes of sections 402(c),
403(a)(4), and 408(d)(3), the Secretary shall pre-
scribe regulations providing for such allocations of
amounts attributable to accumulated deductible em-
ployee contributions, and for such other rules, as
may be necessary to insure that such accumulated
deductible employee contributions do not become eli-
gible for additional tax benefits (or freed from limi-
tations) through the use of rollovers.
‘‘(4) ORDERING RULES.—Unless the plan speci-
fies otherwise, any distribution from such plan shall
not be treated as being made from the accumulated
deductible employee contributions, until all other
amounts to the credit of the employee have been dis-
tributed.
109
‘‘(n) LOANS TREATED AS DISTRIBUTIONS.—For pur-
poses of this section—
‘‘(1) TREATMENT AS DISTRIBUTIONS.—
‘‘(A) LOANS.—If during any taxable year a
participant or beneficiary receives (directly or
indirectly) any amount as a loan from a quali-
fied employer plan, such amount shall be treat-
ed as having been received by such individual as
a distribution under such plan.
‘‘(B) ASSIGNMENTS OR PLEDGES.—If dur-
ing any taxable year a participant or beneficiary
assigns (or agrees to assign) or pledges (or
agrees to pledge) any portion of his interest in
a qualified employer plan, such portion shall be
treated as having been received by such individ-
ual as a loan from such plan.
‘‘(2) EXCEPTION FOR CERTAIN LOANS.—
‘‘(A) GENERAL
RULE.—Paragraph (1)
shall not apply to any loan to the extent that
such loan (when added to the outstanding bal-
ance of all other loans from such plan whether
made on, before, or after August 13, 1982),
does not exceed the lesser of—
‘‘(i) $50,000, reduced by the excess (if
any) of—
110
‘‘(I) the highest outstanding bal-
ance of loans from the plan during the
1-year period ending on the day be-
fore the date on which such loan was
made, over
‘‘(II) the outstanding balance of
loans from the plan on the date on
which such loan was made, or
‘‘(ii) the greater of (I) one-half of the
present value of the nonforfeitable accrued
benefit of the employee under the plan, or
(II) $10,000.
for purposes of clause (ii), the present value of
the nonforfeitable accrued benefit shall be de-
termined without regard to any accumulated
deductible employee contributions (as defined in
subsection (m)(5)(B)).
‘‘(B) REQUIREMENT THAT LOAN BE RE-
PAYABLE WITHIN 5 YEARS.—
‘‘(i) IN GENERAL.—Subparagraph (A)
shall not apply to any loan unless such
loan, by its terms, is required to be repaid
within 5 years.
‘‘(ii) EXCEPTION FOR HOME LOANS.—
Clause (i) shall not apply to any loan used
111
to acquire any dwelling unit which within
a reasonable time is to be used (deter-
mined at the time the loan is made) as the
principal residence of the participant.
‘‘(C) REQUIREMENT OF LEVEL AMORTIZA-
TION.—Except as provided in regulations, this
paragraph shall not apply to any loan unless
substantially level amortization of such loan
(with payments not less frequently than quar-
terly) is required over the term of the loan.
‘‘(D) RELATED EMPLOYERS AND RELATED
PLANS.—For purposes of this paragraph—
‘‘(i) the rules of subsections (b), (c),
and (m) of section 414 shall apply, and
‘‘(ii) all plans of an employer (deter-
mined after the application of such sub-
sections) shall be treated as 1 plan.
‘‘(o) 10-PERCENT PENALTY FOR PREMATURE DIS-
TRIBUTIONS FROM ANNUITY CONTRACTS.—
‘‘(1) IMPOSITION
OF
PENALTY.—If any tax-
payer receives any amount under an annuity con-
tract, the taxpayer’s tax under this chapter for the
taxable year in which such amount is received shall
be increased by an amount equal to 10 percent of
112
the portion of such amount which is includible in
gross income.
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN
DISTRIBUTIONS.—Paragraph (1) shall not apply to
any distribution—
‘‘(A) made on or after the date on which
the taxpayer attains age 591⁄2,
‘‘(B) made on or after the death of the
holder (or, where the holder is not an individ-
ual, the death of the primary annuitant),
‘‘(C) attributable to the taxpayer’s becom-
ing disabled within the meaning of subsection
(k)(5),
‘‘(D) which is a part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life
expectancy) of the taxpayer or the joint lives
(or joint life expectancies) of such taxpayer and
his designated beneficiary,
‘‘(E) from a plan, contract, account, trust,
or annuity described in section 72(e)(5)(D) of
the Internal Revenue Code of 1986,
‘‘(F) allocable to investment in the con-
tract before August 14, 1982,
‘‘(G) under a qualified funding asset,
113
‘‘(H) to which subsection (r) applies (with-
out regard to paragraph (2) thereof),
‘‘(I) under an immediate annuity contract,
or
‘‘(J) which is purchased by an employer
upon the termination of a plan described in sec-
tion 401(a) or 403(a) and which is held by the
employer until such time as the employee sepa-
rates from service.
‘‘(3) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.—If—
‘‘(A) paragraph (1) does not apply to a
distribution by reason of paragraph (2)(D), and
‘‘(B) the series of payments under such
paragraph are subsequently modified (other
than by reason of death or disability)—
‘‘(i) before the close of the 5-year pe-
riod beginning on the date of the first pay-
ment and after the taxpayer attains age
591⁄2, or
‘‘(ii) before the taxpayer attains age
591⁄2,
the taxpayer’s tax for the 1st taxable year in which
such modification occurs shall be increased by an
amount, determined under regulations, equal to the
114
tax which (but for paragraph (2)(D)) would have
been imposed, plus interest for the deferral period
(within the meaning of subsection (r)(4)(B)).
‘‘(p) CERTAIN RAILROAD RETIREMENT BENEFITS
TREATED AS RECEIVED UNDER EMPLOYER PLANS.—
‘‘(1) IN GENERAL.—Notwithstanding any other
provision of law, any benefit provided under the
Railroad Retirement Act of 1974 (other than a tier
1 railroad retirement benefit) shall be treated for
purposes of this title as a benefit provided under an
employer plan which meets the requirements of sec-
tion 401(a).
‘‘(2) TIER
TAXES
TREATED
AS
CONTRIBU-
TIONS.—For purposes of paragraph (1)—
‘‘(i) the tier 2 portion of the tax im-
posed by section 3201 (relating to tax on
employees) shall be treated as an employee
contribution,
‘‘(ii) the tier 2 portion of the tax im-
posed by section 3211 (relating to tax on
employee representatives) shall be treated
as an employee contribution, and
‘‘(iii) the tier 2 portion of the tax im-
posed by section 3221 (relating to tax on
115
employers) shall be treated as an employer
contribution.
‘‘(B) TIER 2 PORTION.—For purposes of
subparagraph (A)—
‘‘(1) AFTER 1984.—With respect to compensa-
tion paid after 1984, the tier 2 portion shall be the
taxes imposed by sections 3201(b), 3211(a)(2), and
3221(b).
‘‘(2) BEFORE 1985.—With respect to compensa-
tion paid before 1985, see section 72(r) of Internal
Revenue Code of 1986 for the definition of tier 2
portion.
‘‘(C) CONTRIBUTIONS NOT ALLOCABLE TO
SUPPLEMENTAL ANNUITY OR WINDFALL BENE-
FITS.—For purposes of paragraph (1), no
amount treated as an employee contribution
under this paragraph shall be allocated to—
‘‘(i) any supplemental annuity paid
under section 2(b) of the Railroad Retire-
ment Act of 1974, or
‘‘(ii) any benefit paid under section
3(h), 4(e), or 4(h) of such Act.
‘‘(3) TIER
RAILROAD
RETIREMENT
BENE-
FIT.—For purposes of paragraph (1), the term ‘tier
116
1 railroad retirement benefit’ has the meaning given
such term by section 3(b)(2)(B).
‘‘(q) REQUIRED DISTRIBUTIONS WHERE HOLDER
DIES BEFORE ENTIRE INTEREST IS DISTRIBUTED.—
‘‘(1) IN
GENERAL.—A contract shall not be
treated as an annuity contract for purposes of this
chapter unless it provides that—
‘‘(A) if any holder of such contract dies on
or after the annuity starting date and before
the entire interest in such contract has been
distributed, the remaining portion of such inter-
est will be distributed at least as rapidly as
under the method of distributions being used as
of the date of his death, and
‘‘(B) if any holder of such contract dies be-
fore the annuity starting date, the entire inter-
est in such contract will be distributed within 5
years after the death of such holder.
‘‘(2) EXCEPTION FOR CERTAIN AMOUNTS PAY-
ABLE OVER LIFE OF BENEFICIARY.—IF—
‘‘(A) any portion of the holder’s interest is
payable to (or for the benefit of) a designated
beneficiary,
‘‘(B) such portion will be distributed (in
accordance with regulations) over the life of
117
such designated beneficiary (or over a period
not extending beyond the life expectancy of
such beneficiary), and
‘‘(C) such distributions begin not later
than 1 year after the date of the holder’s death
or such later date as the Secretary may by reg-
ulations prescribe,
then for purposes of paragraph (1), the portion re-
ferred to in subparagraph (A) shall be treated as
distributed on the day on which such distributions
begin.
‘‘(3) SPECIAL RULE WHERE SURVIVING SPOUSE
BENEFICIARY.—If the designated beneficiary re-
ferred to in paragraph (2)(A) is the surviving spouse
of the holder of the contract, paragraphs (1) and (2)
shall be applied by treating such spouse as the hold-
er of such contract.
‘‘(4) DESIGNATED
BENEFICIARY.—For pur-
poses of this subsection, the term ‘designated bene-
ficiary’ means any individual designated a bene-
ficiary by the holder of the contract.
‘‘(5) EXCEPTION FOR CERTAIN ANNUITY CON-
TRACTS.—This subsection shall not apply to any an-
nuity contract—
‘‘(A) which is provided—
118
‘‘(i) under a plan described in section
401(a) which includes a trust exempt from
tax under section 501, or
‘‘(ii) under a plan described in section
403(a),
‘‘(B) which is described in section 403(b),
‘‘(C) which is an individual retirement an-
nuity or provided under an individual retire-
ment account or annuity, or
‘‘(D) which is a qualified funding asset.
‘‘(6) SPECIAL RULE WHERE HOLDER IS COR-
PORATION OR OTHER NON-INDIVIDUAL.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, if the holder of the contract is not
an individual, the primary annuitant shall be
treated as the holder of the contract.
‘‘(B) PRIMARY ANNUITANT.—For purposes
of subparagraph (A), the term ‘primary annu-
itant’ means the individual, the events in the
life of whom are of primary importance in af-
fecting the timing or amount of the payout
under the contract.
‘‘(7) TREATMENT OF CHANGES IN PRIMARY AN-
NUITANT WHERE HOLDER OF CONTRACT IS NOT AN
INDIVIDUAL.—For purposes of this subsection, in
119
the case of a holder of an annuity contract which
is not an individual, if there is a change in a pri-
mary annuitant (as defined in paragraph (6)(B)),
such change shall be treated as the death of the
holder.
‘‘(r) 10-PERCENT ADDITIONAL TAX ON EARLY DIS-
TRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.—
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any
taxpayer receives any amount from a qualified re-
tirement plan (as defined in section 4974(c)), the
taxpayer’s tax under this chapter for the taxable
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the
portion of such amount which is includible in gross
income.
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN
DISTRIBUTIONS.—Except as provided in paragraphs
(3) and (4), paragraph (1) shall not apply to any of
the following distributions:
‘‘(A) IN
GENERAL.—Distributions which
are—
‘‘(i) made on or after the date on
which the employee attains age 591⁄2,
120
‘‘(ii) made to a beneficiary (or to the
estate of the employee) on or after the
death of the employee,
‘‘(iii) attributable to the employee’s
being disabled within the meaning of sub-
section 72(m)(7) of the Internal Revenue
Code of 1986,
‘‘(iv) part of a series of substantially
equal periodic payments (not less fre-
quently than annually) made for the life
(or life expectancy) of the employee or the
joint lives (or joint life expectancies) of
such employee and his designated bene-
ficiary,
‘‘(v) made to an employee after sepa-
ration from service after attainment of age
55,
‘‘(vi) dividends paid with respect to
stock of a corporation which are described
in section 404(k), or
‘‘(vii) made from a Roth IRA (other
than a distribution described in section
30(d)(2)).
‘‘(B) MEDICAL
EXPENSES.—Distributions
made to the employee (other than distributions
121
described in subparagraph (A), (C), or (D)) to
the extent such distributions do not exceed the
amount allowable as a deduction under section
31 to the employee for amounts paid during the
taxable year for medical care (determined with-
out regard to whether the employee itemizes de-
ductions for such taxable year).
‘‘(C) PAYMENTS
TO
ALTERNATE
PAYEES
PURSUANT
TO
QUALIFIED
DOMESTIC
RELA-
TIONS ORDERS.—Any distribution to an alter-
nate payee pursuant to a qualified domestic re-
lations order (within the meaning of section
414(p)(1)).
‘‘(D) DISTRIBUTIONS TO UNEMPLOYED IN-
DIVIDUALS
FOR
HEALTH
INSURANCE
PRE-
MIUMS.—
‘‘(i) IN GENERAL.—Distributions from
an individual retirement plan to an individ-
ual after separation from employment—
‘‘(I) if such individual has re-
ceived unemployment compensation
for 12 consecutive weeks under any
Federal or State unemployment com-
pensation law by reason of such sepa-
ration,
122
‘‘(II) if such distributions are
made during any taxable year during
which such unemployment compensa-
tion is paid or the succeeding taxable
year, and
‘‘(III) to the extent such distribu-
tions do not exceed the amount paid
during the taxable year for insurance
described in section 213(d)(1)(D) of
the Internal Revenue Code of 1986
with respect to the individual and the
individual’s spouse and dependents.
‘‘(ii) DISTRIBUTIONS
AFTER
REEM-
PLOYMENT.—Clause (i) shall not apply to
any distribution made after the individual
has been employed for at least 60 days
after the separation from employment to
which clause (i) applies.
‘‘(iii) 
SELF-EMPLOYED
INDIVID-
UALS.—To the extent provided in regula-
tions, a self-employed individual shall be
treated as meeting the requirements of
clause (i)(I) if, under Federal or State law,
the individual would have received unem-
123
ployment compensation but for the fact the
individual was self-employed.
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL
RETIREMENT PLANS FOR HIGHER EDUCATION
EXPENSES.—Distributions 
to 
an 
individual
from an individual retirement plan to the extent
such distributions do not exceed the qualified
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable year.
Distributions shall not be taken into account
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C), or
(D) or to the extent paragraph (1) does not
apply to such distributions by reason of sub-
paragraph (B).
‘‘(F) 
DISTRIBUTIONS
FROM
CERTAIN
PLANS
FOR
FIRST
HOME
PURCHASES.—Dis-
tributions to an individual from an individual
retirement plan which are qualified first-time
homebuyer distributions (as defined in para-
graph (8)). Distributions shall not be taken into
account under the preceding sentence if such
distributions are described in subparagraph (A),
(C), (D), or (E) or to the extent paragraph (1)
124
does not apply to such distributions by reason
of subparagraph (B).
‘‘(3) LIMITATIONS.—
‘‘(A) CERTAIN EXCEPTIONS NOT TO APPLY
TO
INDIVIDUAL
RETIREMENT
PLANS.—Sub-
paragraphs (A)(v), and (C) of paragraph (2)
shall not apply to distributions from an individ-
ual retirement plan.
‘‘(B) PERIODIC PAYMENTS UNDER QUALI-
FIED
PLANS
MUST
BEGIN
AFTER
SEPARA-
TION.—Paragraph (2)(A)(iv) shall not apply to
any amount paid from a trust described in sec-
tion 401(a) which is exempt from tax under
section 501(a) or from a contract described in
section 72(e)(5)(D)(ii) of the Internal Revenue
Code of 1986 unless the series of payments be-
gins after the employee separates from service.
‘‘(4) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) paragraph (1) does not apply to
a distribution by reason of paragraph
(2)(A)(iv), and
‘‘(ii) the series of payments under
such paragraph are subsequently modified
125
(other than by reason of death or disabil-
ity)—
‘‘(I) before the close of the 5-year
period beginning with the date of the
first payment and after the employee
attains age 591⁄2, or
‘‘(II) before the employee attains
age 591⁄2, the taxpayer’s tax for the
1st taxable year in which such modi-
fication occurs shall be increased by
an amount, determined under regula-
tions, equal to the tax which (but for
paragraph (2)(A)(iv)) would have
been imposed, plus interest for the de-
ferral period.
‘‘(B) DEFERRAL
PERIOD.—For purposes
of this paragraph, the term ‘deferral period’
means the period beginning with the taxable
year in which (without regard to paragraph
(2)(A)(iv)) the distribution would have been in-
cludible in gross income and ending with the
taxable year in which the modification described
in subparagraph (A) occurs.
‘‘(5) EMPLOYEE.—For purposes of this sub-
section, the term ‘employee’ includes any partici-
126
pant, and in the case of an individual retirement
plan, the individual for whose benefit such plan was
established.
‘‘(6) SPECIAL RULES FOR SIMPLE RETIREMENT
ACCOUNTS.—In the case of any amount received
from a simple retirement account (within the mean-
ing of section 408(p) during the 2-year period begin-
ning on the date such individual first participated in
any qualified salary reduction arrangement main-
tained by the individual’s employer under section
408(p)(2), paragraph (1) shall be applied by sub-
stituting ‘25 percent’ for ‘10 percent’.
‘‘(7) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means qualified
higher education expenses (as defined in section
10(b)(2)) for education furnished to—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any child or grandchild of the
taxpayer or the taxpayer’s spouse, at an el-
igible educational institution (as defined in
section 10(b)(2)(B)).
127
‘‘(B) COORDINATION WITH OTHER PROVI-
SIONS.—For purposes of this subsection, sec-
tion 30 and section 32, qualified higher edu-
cation expenses in any taxable year shall be
treated as first paid with distributions under
section 32, next with distributions to which sec-
tion 30(d)(5)(v) (relating to early withdrawals
from Roth IRAs to pay higher education ex-
penses) applies, and finally from withdrawals to
which this subsection applies.
‘‘(8) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.—For purposes of this subsection, the
term ‘qualified first-time homebuyer distribution’
has the meaning given to it in section 30(d)(6) and
the limits contained in such section shall apply on a
combined basis to this subsection and section 30.
Qualified acquisition costs (as defined in section
30(d)(6)) taken into account for purposes of section
30(d)(5)(vi) shall not also be taken into account sep-
arately for purposes of this subsection. A taxpayer
may elect to treat distributions from an account
other than Roth IRAs to which this subsection ap-
plies as a qualified first-time homeowner distribution
before determining whether a distribution from a
128
Roth IRA is a qualified first-time homeowner dis-
tribution.
‘‘(r) 10-PERCENT ADDITIONAL TAX FOR TAXABLE
DISTRIBUTIONS FROM MODIFIED ENDOWMENT CON-
TRACTS.—
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any
taxpayer receives any amount under a modified en-
dowment contract (as defined in section 7702A), the
taxpayer’s tax under this chapter for the taxable
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the
portion of such amount which is includible in gross
income.
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN
DISTRIBUTIONS.—Paragraph (1) shall not apply to
any distribution—
‘‘(A) made on or after the date on which
the taxpayer attains age 591⁄2,
‘‘(B) which is attributable to the tax-
payer’s becoming disabled (within the meaning
of subsection (m)(7)), or
‘‘(C) which is part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life
expectancy) of the taxpayer or the joint lives
129
(or joint life expectancies) of such taxpayer and
his beneficiary.
‘‘Subchapter C—Basis, Business Transactions
and Nonrecognition Transactions
‘‘Sec. 71. Gain or loss on the sale of an asset.
‘‘Sec. 72. Basis.
‘‘Sec. 73. Basis in business entities.
‘‘Sec. 74. Gratuitous transfers.
‘‘Sec. 75. Transactions involving business entities.
‘‘Sec. 76. Rollover on residence sale.
‘‘Sec. 77. Other nonrecognition transactions.
‘‘Sec. 78. Wash sales and straddles.
‘‘SEC. 71. GAIN OR LOSS ON THE SALE OF AN ASSET.
‘‘(a) IN GENERAL.—Except as otherwise provided in
this chapter, the amount of gross income to be recognized
on the sale, exchange, or other disposition of property
equals the excess of—
‘‘(1) the amount realized from the disposition,
over
‘‘(2) the taxpayer’s adjusted basis in the prop-
erty.
‘‘(b) AMOUNT REALIZED.—The amount realized from
the disposition of property shall be sum of money received
plus the fair market value of the property (other than
money) received. See section 122(c) for the treatment of
installment sales.
‘‘(c) NONRECOGNITION TRANSACTION.—Subsection
(a) shall not apply to nonrecognition transactions de-
scribed in this chapter.
130
‘‘(d) CONTRACTS MARKED TO MARKET.—
‘‘(1) IN
GENERAL.—Under regulations pre-
scribed by the Secretary, a markable contract held
by the taxpayer at the end of the year shall be treat-
ed as sold and reacquired for its fair market value
on the last business day of the taxable year. The
regulations shall adopt principles and definitions
similar to those that applied under section 1256 of
the Internal Revenue Code of 1986.
‘‘(2) MARKABLE CONTRACT.—For purposes of
this subsection, ‘markable contract’ means—
‘‘(A) any regulated futures contract,
‘‘(B) any foreign currency contract,
‘‘(C) any nonequity option,
‘‘(D) any dealer equity option
as such terms were defined for purposes of section
1256 of the Internal Revenue Code of 1986.
‘‘SEC. 72. BASIS.
‘‘(a) BASIS, SALE, OR EXCHANGE.—Except to the ex-
tent inconsistent with provisions of this chapter, adjusted
basis and the existence of a sale or exchange shall be de-
termined in accordance with principles applicable under
the Internal Revenue Code of 1986.
‘‘(b) DEFINITION OF BASIS.—For purposes of this
chapter, ‘basis’ means the adjusted basis of property. The
131
adjusted basis of property is generally its cost, as adjusted
for actions or transactions that increase or decrease the
basis of property. Except as provided in section 73 (relat-
ing to business entities and basis in business entities), the
taxpayer’s adjusted basis on January 1, 2000, in an asset
acquired before that date, shall be its adjusted basis as
of December 31, 1999, as determined under the Internal
Revenue Code of 1986.
‘‘SEC. 73. BASIS IN BUSINESS ENTITIES.
‘‘(a) RULES FOR ALL BUSINESS ENTITIES.—
‘‘(1) IN GENERAL.—A taxpayer’s basis in an in-
terest in a business entity shall equal—
‘‘(A) the cost of acquiring the interest,
‘‘(B) increased by the amount of cash and
basis of any property contributed to the entity,
and
‘‘(C) decreased by the portion of any liq-
uidating distributions from the entity that are
treated as returns of capital in accordance with
rules prescribed by the Secretary.
‘‘(2) INITIAL BASIS.—Except as otherwise pro-
vided in this section, a taxpayer’s basis on January
1, 2000, or any interest in a business entity held as
of December 31, 1999, shall be the basis of such in-
132
terest as of December 31, 1999, as determined
under the Internal Revenue Code of 1986.
‘‘(3) CROSS REFERENCES.—See section 75 for
rules relating to the effect of certain business trans-
actions on a taxpayer’s basis.
‘‘(4) SPECIAL
RULE
FOR
CONTRIBUTION
OF
PERSONAL USE PROPERTY.—If a taxpayer contrib-
utes personal-use property (as defined in section
210(b)(3)(B)), the taxpayer’s basis in the property
shall not be increased by an amount in excess of the
fair market value of the property contributed.
‘‘(b) SPECIAL RULES
FOR PARTNERSHIP INTER-
ESTS.—
‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A
partner’s basis in a partnership interest as of Janu-
ary 1, 2000, equals—
‘‘(A) the partner’s basis in the partnership
as of the end of the taxable year ending on De-
cember 31, 1999, minus
‘‘(B) the amount of the partner’s share of
the indebtedness of the partnership taken into
account in determining such basis.
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the taxpayer
has a negative basis in the partnership and such
133
negative basis shall increase the gain on the sale or
disposition of the partnership interest (except to the
extent such negative basis has been adjusted by rea-
son of capital contributions).
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a partner’s basis in a
partnership interest shall be determined in accord-
ance with the general principles of this chapter ap-
plicable to an individual’s basis in an interest in a
business entity. A partner’s basis in a partnership
shall not be adjusted by reason of any—
‘‘(A) distribution from the partnership (ex-
cept to the extent such distribution is treated as
distribution of basis in accordance with the gen-
eral principles of this chapter applicable to an
individual’s basis in an interest in a business
entity),
‘‘(B) income, earnings, or loss of the part-
nership, or
‘‘(C) any change in the partner’s share of
the partnership’s indebtedness.
‘‘(4) SPECIAL RULE FOR TRANSITION DISTRIBU-
TIONS.—
134
‘‘(A) EFFECT OF TRANSITION DISTRIBU-
TION.—A transition distribution from partner-
ship to a partner shall—
‘‘(i) reduce the partner’s basis in the
partnership, and
‘‘(ii) not be included in gross income.
‘‘(B) DEFINITION.—A ‘transition distribu-
tion’ is a distribution by a business entity to an
individual made during the first three months
of 2000 but only to the extent that such dis-
tribution, when added to all other distributions
of the entity to the individual after March 31,
1999, does not exceed the amount of taxable in-
come allocated by the entity to the individual
during the taxable year of the entity ending on
December 31, 1999.
‘‘(5) PARTNERSHIP.—For purposes of this sec-
tion, ‘partnership’ includes a limited liability com-
pany that was taxable as a partnership under the
Internal Revenue Code of 1986.
‘‘(c) SPECIAL RULES FOR SHARES OF S CORPORA-
TIONS.—Rules similar to those contained in subsection (b)
shall apply with respect to the basis of stock of a corpora-
tion that was treated as an S corporation under the Inter-
nal Revenue Code of 1986.
135
‘‘(d) SPECIAL RULES FOR PROPRIETORSHIPS.—
‘‘(1) OLD
PROPRIETORSHIP.—A proprietor’s
basis in any business activity conducted before Janu-
ary 1, 2000, which is treated as a business activity
as of such date equals—
‘‘(A) the proprietor’s adjusted basis in the
assets of such business entity as of the end of
the taxable year ending on December 31, 1999,
minus
‘‘(B) the balance of any indebtedness the
interest on which the proprietor had treated as
business interest under section 163(h)(2)(A) of
the Internal Revenue Code of 1986.
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the propri-
etor has a negative basis in the proprietorship and
such negative basis shall increase the gain on the
sale or disposition of the entity (except to the extent
such negative basis has been adjusted by reason of
capital contributions).
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a proprietor’s basis in
a proprietorship shall be determined in accordance
with the general principles of this chapter applicable
136
to an individual’s basis in an interest in a business
entity.
‘‘(4) 
PROPRIETORSHIP.—‘Proprietorship’
includes—
‘‘(A) any family business that is not a
partnership, and
‘‘(B) any business activity conducted by a
taxpayer other than as an employee if such ac-
tivity constitutes a business entity.
‘‘(e) ANTI-AVOIDANCE RULE.—
‘‘(1) IN GENERAL.—If a pass-through entity’s
distributions to an individual in its taxable year or
taxable years ending in 1999 exceeds 125 percent of
the individual’s distributive share of income for such
period, the amount of such excess distribution shall
be treated as a cash distribution to the partner on
January 1, 2000, and shall not reduce the partner’s
basis in his partnership interest.
‘‘(2) PASS THROUGH ENTITY.—‘Pass through
entity’ means a partnership, proprietorship, or S
corporation.
‘‘SEC. 74. GRATUITOUS TRANSFERS.
‘‘(a) IN GENERAL.—If after December 31, 1999, a
taxpayer receives any property by gift, inheritance, or
137
other gratuitous transfer, the taxpayer’s basis in the prop-
erty shall be the lesser of—
‘‘(1) the fair market value of the property at
the time of transfer, or
‘‘(2) the transferee’s basis in the property at
the time of transfer.
‘‘(b) PROOF REQUIRED.—A taxpayer’s basis in an
asset received by gift, inheritance, or other gratuitous
transfer shall be presumed to be zero unless the taxpayer
can demonstrate to the satisfaction of the Secretary the
basis claimed by the taxpayer.
‘‘SEC. 75. DISTRIBUTIONS FROM BUSINESS ENTITIES.
‘‘(a) IN GENERAL.—Except as otherwise provided in
this section or in regulations issued by the Secretary in
accordance with this section—
‘‘(1) CASH
DISTRIBUTIONS.—Distributions of
cash by a business entity with respect to its equity
ownership shall be treated as dividends and included
in gross income.
‘‘(2) DISTRIBUTIONS OF PROPERTY.—If a busi-
ness entity distributes property (other than stock or
other equity ownership described in paragraph (3) in
connection with a merger, acquisition or reorganiza-
tion), the fair market value of the property received
138
shall be treated as a dividend and included in gross
income.
‘‘(3) DISTRIBUTIONS OF STOCK OR OTHER EQ-
UITY OWNERSHIP.—If a taxpayer receives with re-
spect to its ownership interest in a business entity
stock or other ownership interests in such business
entity (as reorganized) or in another business entity
that is controlled by such business entity or is ac-
quiring or merging with such business entity, no
gain or loss shall be recognized on the distribution.
‘‘(b) BASIS IN BUSINESS DIVISIONS.—In the case of
a spin-off, split-off, or split-up of a business entity in
which a taxpayer has basis, the taxpayer’s basis in the
original business entity shall be allocated among the new
and surviving entities in accordance with the relative fair
market values of the taxpayer’s interests in those entities.
If interests in the entities are publicly traded, fair market
values shall be based on public trading prices. In other
cases, the Secretary shall accept any reasonable allocation
made by the taxpayer if the taxpayer notifies the Secretary
of the allocation in an attachment to its tax return for
the taxable year of the transaction.
‘‘(c) DISTRIBUTIONS CONSTITUTING RETURN
OF
BASIS.—
‘‘(1) COMPLETE LIQUIDATIONS.—
139
‘‘(A) IN GENERAL.—In the case of a dis-
tribution in complete liquidation of a business
entity, a taxpayer shall be treated as receiving
cash and assets of the entity in exchange for
the taxpayer’s equity in the business entity. In
such case, the taxpayer shall recognize gain to
the extent that the sum of the cash and fair
market value of assets received exceeds the tax-
payer’s basis in its interest in the business en-
tity or shall recognize loss to the extent that the
basis exceeds the fair market value of cash and
assets received.
‘‘(B) DISTRIBUTION
OF
EQUITY
INTER-
ESTS.—In the case of a complete liquidation in
which at least 90 percent of the value of assets
and cash distributed to an equity holder is eq-
uity interests in other business entities con-
trolled by the distributing entity—
‘‘(i) subparagraph (A) shall not apply,
‘‘(ii) paragraph (3) of subsection (a)
shall apply,
‘‘(iii) the cash and fair market value
of assets other than equity interests in
controlled entities shall be applied to re-
duce the taxpayer’s basis in the distribut-
140
ing entity and gain will be recognized only
to the extent that the cash and such fair
market value exceeds the taxpayer’s basis
in the distributing entity, and
‘‘(iv) the taxpayer’s remaining basis
shall be allocated among the distributed
equity interests in controlled entities in ac-
cordance with the relative fair market val-
ues of such interests.
‘‘(C) DISTRIBUTION
OF
BUSINESS
PROP-
ERTY.—Under regulations prescribed by the
Secretary, rules similar to those that applied to
partnerships under the Internal Revenue Code
of 1986 shall apply in lieu of subparagraph (A)
to distributions that include property used in a
trade or business if such property is contributed
to a new business entity within 180 days of the
distribution.
‘‘(2) TRANSITION RULES.—See subsections (b)
and (d) of section 73 for transition rules relating to
partnerships and proprietorships.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) CERTAIN RULES OF APPLICATION.—
141
‘‘(A) PRINCIPLES APPLICABLE TO INTER-
NAL REVENUE CODE.—This section shall be ap-
plied without regard to—
‘‘(i) continuity of business interest,
‘‘(ii) continuity of ownership interest,
‘‘(iii) requirements of section 355 of
the Internal Revenue Code of 1986 for
spin-offs, split-offs and split-ups,
‘‘(iv) business purposes for a cor-
porate reorganization or restructuring (ex-
cept if the transaction is potentially abu-
sive), and
‘‘(v) except as provided in paragraph
(3), rules treating dividends as returns of
capital because of the absence of earnings
and profits.
‘‘(B) CONSTRUCTIVE RECEIPT.—If a tax-
payer is given the choice of receiving cash or an
equity interest in a business entity, the tax-
payer will be treated for purposes of this sec-
tion as if he received the cash and purchased
the equity interest.
‘‘(C) DEBT
VERSUS
EQUITY.—The prin-
ciples distinguishing debt and equity that ap-
plied prior to the adopt of the Simplified USA
142
Tax generally shall apply for purposes of apply-
ing this section. An investment in a business
entity shall not be considered debt unless—
‘‘(i) it is reflected in the books and
records of the business entity as debt, and
‘‘(ii) there is written evidence of the
investment that treats such investment as
indebtedness.
‘‘(2) CONTROL.—For purposes of this section,
‘control’ of a business entity means—
‘‘(A) ownership of more than 50% of the
voting power held by equity holders of such en-
tity, or
‘‘(B) ownership of rights to more than
50% of the periodic distributions that the busi-
ness entity may make to its equity holders and
50% of the distributions if the business entity
were liquidated.
‘‘(3) REGULATIONS.—
‘‘(A) SIGNIFICANT DOWNSIZING AND PAR-
TIAL LIQUIDATIONS.—The Secretary is author-
ized to issue regulations under which distribu-
tions resulting from a significant downsizing of
a business entity will be treated in part as re-
turn of equity holders’ capital.
143
‘‘(B) ASSUMPTION AND RELEASE OF LI-
ABILITY.—The Secretary shall prescribe regula-
tions 
addressing 
the 
consequences 
of 
a
distributee’s assumption of the liabilities of the
distributor.
‘‘SEC. 76. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL
RESIDENCE.
‘‘(a) EXCLUSION.—Gross income shall not include
gain from the sale or exchange of property if, during the
5-year period ending on the date of the sale or exchange,
such property has been owned and used by the taxpayer
as the taxpayer’s principal residence for periods aggregat-
ing 2 years or more.
‘‘(b) LIMITATIONS.—
‘‘(1) IN GENERAL.—The amount of gain ex-
cluded from gross income under subsection (a) with
respect to any sale or exchange shall not exceed
$250,000.
‘‘(2) $500,000 LIMITATION FOR CERTAIN JOINT
RETURNS.—Paragraph (1) shall be applied by sub-
stituting ‘$500,000’ for ‘$250,000’ if—
‘‘(A) a husband and wife make a joint re-
turn for the taxable year of the sale or ex-
change of the property,
144
‘‘(B) either spouse meets the ownership re-
quirements of subsection (a) with respect to
such property,
‘‘(C) both spouses meet the use require-
ments of subsection (a) with respect to such
property, and
‘‘(D) neither spouse is ineligible for the
benefits of subsection (a) with respect to such
property by reason of paragraph (3).
‘‘(3) APPLICATION
TO
ONLY
SALE
OR
EX-
CHANGE EVERY 2 YEARS.—
‘‘(A) IN
GENERAL.—Subsection (a) shall
not apply to any sale or exchange by the tax-
payer if, during the 2-year period ending on the
date of such sale or exchange, there was any
other sale or exchange by the taxpayer to which
subsection (a) applied.
‘‘(B) PRE-MAY 7, 1997, SALES NOT TAKEN
INTO
ACCOUNT.—Subparagraph (A) shall be
applied without regard to any sale or exchange
before May 7, 1997.
‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET
CERTAIN REQUIREMENTS.—
‘‘(1) IN GENERAL.—In the case of a sale or ex-
change to which this subsection applies, the owner-
145
ship and use requirements of subsection (a) shall not
apply and subsection (b)(3) shall not apply; but the
amount of gain excluded from gross income under
subsection (a) with respect to such sale or exchange
shall not exceed—
‘‘(A) the amount which bears the same
ratio to the amount which would be so excluded
under this section if such requirements had
been met, as
‘‘(B) the shorter of—
‘‘(i) the aggregate periods, during the
5-year period ending on the date of such
sale or exchange, such property has been
owned and used by the taxpayer as the
taxpayer’s principal residence, or
‘‘(ii) the period after the date of the
most recent prior sale or exchange by the
taxpayer to which subsection (a) applied
and before the date of such sale or ex-
change,
bears to 2 years.
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION APPLIES.—This subsection shall apply to
any sale or exchange if—
146
‘‘(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by
reason of—
‘‘(i) a failure to meet the ownership
and use requirements of subsection (a), or
‘‘(ii) subsection (b)(3), and
‘‘(B) such sale or exchange is by reason of
a change in place of employment, health, or, to
the extent provided in regulations, unforeseen
circumstances.
‘‘(d) SPECIAL RULES.—
‘‘(1) JOINT RETURNS.—If a husband and wife
make a joint return for the taxable year of the sale
or exchange of the property, subsections (a) and (c)
shall apply if either spouse meets the ownership and
use requirements of subsection (a) with respect to
such property.
‘‘(2) PROPERTY OF DECEASED SPOUSE.—For
purposes of this section, in the case of an unmarried
individual whose spouse is deceased on the date of
the sale or exchange of property, the period such un-
married individual owned and used such property
shall include the period such deceased spouse owned
and used such property before death.
147
‘‘(3) PROPERTY OWNED BY SPOUSE OR FORMER
SPOUSE.—For purposes of this section—
‘‘(A) PROPERTY TRANSFERRED TO INDI-
VIDUAL FROM SPOUSE OR FORMER SPOUSE.—
In the case of an individual holding property
transferred to such individual by such individ-
ual’s spouse or former spouse in a transaction
incident to divorce, the period such individual
owns such property shall include the period the
transferor owned the property.
‘‘(B) PROPERTY USED BY FORMER SPOUSE
PURSUANT TO DIVORCE DECREE, ETC.—Solely
for purposes of this section, an individual shall
be treated as using property as such individ-
ual’s principal residence during any period of
ownership while such individual’s spouse or
former spouse is granted use of the property
under a divorce or separation instrument.
‘‘(4) TENANT-STOCKHOLDER IN COOPERATIVE
HOUSING CORPORATION.—For purposes of this sec-
tion, if the taxpayer holds stock as a tenant-stock-
holder in a cooperative housing corporation—
‘‘(A) the holding requirements of sub-
section (a) shall be applied to the holding of
such stock, and
148
‘‘(B) the use requirements of subsection
(a) shall be applied to the house or apartment
which the taxpayer was entitled to occupy as
such stockholder.
‘‘(5) INVOLUNTARY
CONVERSIONS.—For pur-
poses of this section, the destruction, theft, seizure,
requisition, or condemnation of property shall be
treated as the sale of such property.
‘‘(6) DETERMINATION OF USE DURING PERIODS
OF OUT-OF-RESIDENCE CARE.—In the case of a tax-
payer who—
‘‘(A) becomes physically or mentally in-
capable of self-care, and
‘‘(B) owns property and uses such property
as the taxpayer’s principal residence during the
5-year period described in subsection (a) for pe-
riods aggregating at least 1 year,
then the taxpayer shall be treated as using such
property as the taxpayer’s principal residence during
any time during such 5-year period in which the tax-
payer owns the property and resides in any facility
(including a nursing home) licensed by a State or
political subdivision to care for an individual in the
taxpayer’s condition.
149
‘‘(7) SALES OF REMAINDER INTERESTS.—For
purposes of this section—
‘‘(A) IN GENERAL.—At the election of the
taxpayer, this section shall not fail to apply to
the sale or exchange of an interest in a prin-
cipal residence by reason of such interest being
a remainder interest in such residence, but this
section shall not apply to any other interest in
such residence which is sold or exchanged sepa-
rately.
‘‘(B) EXCEPTION FOR SALES TO RELATED
PARTIES.—Subparagraph (A) shall not apply to
any sale to, or exchange with, a related party
(as defined in section 171).
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—
This section shall not apply to any sale or exchange by
an individual if rules relating to expatriation to avoid tax
apply to such individual.
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—
This section shall not apply to any sale or exchange with
respect to which the taxpayer elects not to have this sec-
tion apply.
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER
SECTION 1034.—For purposes of this section, in the case
of property the acquisition of which by the taxpayer re-
150
sulted under section 1034 of the Internal Revenue Code
of 1986 (as in effect on the day before the date of the
enactment of the Taxpayer Relief Act of 1997) in the non-
recognition of any part of the gain realized on the sale
or exchange of another residence, in determining the pe-
riod for which the taxpayer has owned and used such
property as the taxpayer’s principal residence, there shall
be included the aggregate periods for which such other
residence (and each prior residence taken into account in
determining the holding period of such property) had been
so owned and used.
‘‘SEC. 77. OTHER NONRECOGNITION TRANSACTIONS.
‘‘(a) INVOLUNTARY CONVERSIONS.—Under regula-
tions prescribed by the Secretary, the involuntary conver-
sion of property held by an individual shall not result in
gross income to the individual to the extent that the indi-
vidual receives property in exchange for the involuntarily
converted property. To the extent that income is not rec-
ognized under this subsection, the taxpayer’s basis in the
converted property shall carry over to the new property.
‘‘(b) CERTAIN REACQUISITIONS
OF REAL PROP-
ERTY.—Under regulations prescribed by the Secretary,
gross income shall not be recognized in the case of certain
reacquisitions of real property. The regulations shall adopt
151
principles similar to those under section 1038 of the Inter-
nal Revenue Code of 1986.
‘‘(c) TRANSFERS OF PROPERTY BETWEEN SPOUSES
OR INCIDENT TO DIVORCE.—
‘‘(1) GENERAL RULE.—Gross income shall not
be recognized on the transfer of property from an
individual to (or in trust for the benefit of)—
‘‘(A) a spouse, or
‘‘(B) a former spouse, but only if the
transfer is incident to divorce.
‘‘(2) TRANSFER
TREATED
AS
A
GIFT.—
Any transfer described in paragraph (1) shall
be treated as a gift.
‘‘(d) CERTAIN EXCHANGES
OF INSURANCE POLI-
CIES.—Under regulations prescribed by the Secretary,
gross income shall not be recognized on the exchange of
insurance policies or another life insurance policy or an
annuity contract or the exchange of annuity contracts.
The regulations shall adopt principles similar to those
under section 1035 of the Internal Revenue Code of 1986.
‘‘(e) CERTAIN EXCHANGES OF UNITED STATES OB-
LIGATIONS.—When so provided by regulations promul-
gated by the Secretary in connection with the issue of obli-
gations of the United States, no gain or loss shall be rec-
ognized on the surrender to the United States of obliga-
152
tions of the United States issued under chapter 31 of title
31 in exchange solely for other obligations issued under
such chapter.
‘‘SEC. 78. WASH SALES AND STRADDLES.
‘‘(a) LOSSES FROM WASH SALES OF STOCK OR SE-
CURITIES.—Under regulations prescribed by the Sec-
retary, no loss shall be recognized on the wash sale of
stock or securities. The regulations shall adopt principles
similar to those under section 1091 of the Internal Reve-
nue Code of 1986.
‘‘(b) STRADDLES.—Under regulations prescribed by
the Secretary, the loss that can be taken into account from
1 or more straddle positions shall be limited. The regula-
tions shall adopt principles similar to those under section
1038 of the Internal Revenue Code of 1986.
‘‘SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANS-
ACTIONS.
‘‘(a) NO LOSS ON PERSONAL USE PROPERTY.—No
loss shall be recognized on the sale or exchange of personal
use property (as defined in section 210(b)(3)(B)).
‘‘(b) LIMITATION ON NET CAPITAL LOSS.—
‘‘(1) IN GENERAL.—Losses from sales or ex-
changes of capital assets in a taxable year shall be
allowed only to the extent of the gains from such
153
sales or exchanges, plus $3,000 ($1,500 in the case
of a married individual filing a separate return).
‘‘(2) CAPITAL LOSS CARRYOVERS.—Under regu-
lations prescribed by the Secretary, any loss not al-
lowed by reason of paragraph (1) shall be carried
over to the following taxable year and treated as a
capital loss incurred in such year. There shall be no
limit on the number of years that a capital loss can
be carried forward.
‘‘(3) CAPITAL ASSETS.—Under regulations pre-
scribed by the Secretary, the principles of the Inter-
nal Revenue Code of 1986 (including, without limi-
tation, sections 1234 (relating to options), 1234A
(relating to gains or losses from certain termi-
nations), 1253 (relating to franchises and trade-
marks) and 1258 (gain from certain financial trans-
actions) shall apply for purposes of determining
what is a capital asset and whether an event is to
be treated as a sale or exchange of capital assets, ex-
cept to the extent inconsistent with principles of this
chapter.
‘‘(4) RECAPTURE.—If a taxpayer claimed de-
preciation, amortization or other cost recovery de-
ductions under the Internal Revenue Code of 1986
with respect to property which is subsequently sold
154
or exchanged in a transactions that is not treated as
transaction of a business entity, the amount of gain
on the exchange of such property which is treated as
gain from the sale or exchange of a capital asset
shall be reduced (but not below zero) by the amount
of such deductions claimed with respect to the prop-
erty.
‘‘Subchapter D—Rules for Exclusions from
Gross Income
‘‘Sec. 91. Interest on tax-exempt bonds.
‘‘Sec. 92. Combat pay.
‘‘Sec. 93. Qualified military benefits.
‘‘Sec. 94. Qualified foster care payments.
‘‘Sec. 95. Compensation for injury and sickness.
‘‘Sec. 96. Meals or lodging for convenience of employer.
‘‘Sec. 97. Certain fringe benefits.
‘‘SEC. 91. INTEREST ON TAX-EXEMPT BONDS.
‘‘(a) EXCLUSION.—Except as provided in subsection
(b), gross income does not include interest on any State
or local bond.
‘‘(b) EXCEPTIONS.—Subsection (a) shall not apply
to—
‘‘(1) PRIVATE ACTIVITY BOND WHICH IS NOT A
QUALIFIED BOND.—Any private activity bond which
is not a qualified bond (within the meaning of para-
graph (3) of subsection (c)).
‘‘(2) ARBITRAGE BOND.—Any arbitrage bond.
155
‘‘(3) BOND NOT IN REGISTERED FORM, ETC.—
Any bond unless such bond meets the applicable re-
quirements set forth in regulations.
‘‘(c) DEFINITIONS—For purposes of this section—
‘‘(1) STATE OR LOCAL BOND.—‘State or local
bond’ means an obligation of a State or political
subdivision thereof.
‘‘(2) STATE.—‘State’ includes the District of
Columbia and any possession of the United States.
‘‘(3) 
QUALIFIED
BOND.—‘Qualified 
bond’
means any private activity bond if—
‘‘(A) IN GENERAL.—Such bond is—
‘‘(i) an exempt facility bond,
‘‘(ii) a qualified mortgage bond,
‘‘(iii) a qualified veterans’ mortgage
bond,
‘‘(iv) a qualified small issue bond,
‘‘(v) a qualified student loan bond,
‘‘(vi) a qualified 253(c)(3) bond.
‘‘(B) VOLUME CAP.—Such bond is issued
as part of an issue which meets the applicable
volume cap requirements set forth in regula-
tions.
156
‘‘(C) OTHER REQUIREMENTS.—Such bond
meets the applicable requirements set forth in
regulations.
‘‘(d) REGULATIONS.—
‘‘(1) STATUTORY
REGULATIONS.—The Sec-
retary shall publish as regulations governing the ap-
plication of this section the text of part IV of sub-
chapter B of chapter 1 of the Internal Revenue Code
of 1986 (sections 141 through 149) with only such
changes as are required to conform cross references.
‘‘(2) OTHER
REGULATIONS.—The Secretary
shall have the authority to promulgate such other
regulations as he deems necessary or proper to im-
plement this section, except that no such regulations
shall conflict with the regulations mandated by para-
graph (1) except as provided in this subtitle.
‘‘SEC. 92. COMBAT PAY.
‘‘(a) ENLISTED PERSONNEL.—Gross income does not
include compensation received for active service as a mem-
ber below the grade of commissioned officer in the Armed
Forces of the United States for any month during any
part of which such member—
‘‘(1) served in a combat zone, or
‘‘(2) was hospitalized as a result of wounds, dis-
ease, or injury incurred while serving in a combat
157
zone; but this paragraph shall not apply for any
month beginning more than 2 years after the date
of the termination of combatant activities in such
zone.
‘‘(b) COMMISSIONED OFFICERS.—Gross income does
not include so much of the compensation as does not ex-
ceed $500 received for active service as a commissioned
officer in the Armed Forces of the United States for any
month during any part of which such officer—
‘‘(1) served in a combat zone, or
‘‘(2) was hospitalized as a result of wounds, dis-
ease, or injury incurred while serving in a combat
zone; but this paragraph shall not apply for any
month beginning more than 2 years after the date
of the termination of combatant activities in such
zone.
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) ‘Commissioned officer’ does not include a
commissioned warrant officer.
‘‘(2) ‘Combat zone’ means any area which the
President of the United States by Executive Order
designates, for purposes of this section or cor-
responding provisions of prior income tax laws, an
area in which Armed Forces of the United States
158
are or have (after June 24, 1950) engaged in com-
bat.
‘‘(3) Service is performed in a combat zone only
if performed on or after the date designated by the
President by Executive Order as the date of the
commencing of combatant activities in such zone,
and on or before the date designated by the Presi-
dent by Executive Order as the date of the termi-
nation of combatant activities in such zone; except
that June 25, 1950, shall be considered the date of
the commencing of combatant activities in the com-
bat zone designated in Executive Order 10195.
‘‘(4) The term ‘compensation’ does not include
pensions and retirement pay.
‘‘SEC. 93. QUALIFIED MILITARY BENEFIT.
‘‘(a) IN
GENERAL.—‘Qualified military benefit’
means any allowance or in-kind benefit (other than per-
sonal use of a vehicle) which—
‘‘(1) is received by any member or former mem-
ber of the uniformed service of the United States or
any dependent of such member by reason of such
member’s status or service as a member of such uni-
formed services, and
‘‘(2) was excludable from gross income on Sep-
tember 9, 1986, under any provision of law, regula-
159
tion, or administrative practice which was in effect
on such date (other than a provision of this title).
‘‘(b) NO OTHER BENEFIT TO BE EXCLUDABLE AS
PROVIDED BY THIS TITLE.—Notwithstanding any other
provision of law, no benefit shall be treated as a qualified
military benefit unless such benefit—
‘‘(1) is a benefit described in subsection (a), or
‘‘(2) is excludable from gross income under this
title without regard to any provision of law which is
not contained in this title and which is not contained
in a revenue Act.
‘‘(c) LIMITATIONS ON MODIFICATIONS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), no modification or adjustment of any
qualified military benefit after September 9, 1986,
shall be taken into account.
‘‘(2) EXCEPTION FOR CERTAIN ADJUSTMENTS
TO CASH BENEFITS.—Paragraph (1) shall not apply
to any adjustment to any qualified military benefit
payable in cash which—
‘‘(A) is pursuant to a provision of law or
regulation (as in effect on September 9, 1986),
and
160
‘‘(B) is determined by reference to any
fluctuation in cost, price, currency, or other
similar index.
‘‘SEC. 94. QUALIFIED FOSTER CARE PAYMENTS.
‘‘(a) QUALIFIED
FOSTER
CARE
PAYMENT
DE-
FINED.—
‘‘(1) IN GENERAL.—‘Qualified foster care pay-
ment’ means any amount—
‘‘(A) which is paid by a state or political
subdivision thereof or by a placement agency
which is described in section 253(c)(3) and ex-
empt from tax under section 253(a), and
‘‘(B) which is—
‘‘(i) paid to the foster care provider
for caring for a qualified foster individual
in the foster care provider’s home, or
‘‘(ii) a difficulty of care payment.
‘‘(2) QUALIFIED FOSTER INDIVIDUAL.—‘Quali-
fied foster individual’ means any individual who is
living in a foster family home in which such individ-
ual was placed by—
‘‘(A) an agency of a State or a political
subdivision thereof, or
‘‘(B) in the case of an individual who has
not attained age 19, an organization which is li-
161
censed by a State (or political subdivision there-
of) as a placement agency and which is de-
scribed in section 253(c)(3) and exempt from
tax under section 253(a).
‘‘(3) LIMITATION BASED ON NUMBER OF INDI-
VIDUALS OVER THE AGE OF 18.—In the case of any
foster home in which there is a qualified foster care
individual who has attained age 19, foster care pay-
ments (other than difficulty of care payments) for
any period to which such payments relate shall not
be excludable from gross income under subsection
(a) to the extent such payments are made for more
than 5 such qualified foster individuals.
‘‘(b) DIFFICULTY OF CARE PAYMENTS.—For pur-
poses of this section—
‘‘(1) DIFFICULTY OF CARE PAYMENTS.—‘Dif-
ficulty of care payments’ means payments to individ-
uals 
which 
are 
not 
described 
in 
subsection
(a)(1)(B)(i), and which—
‘‘(A) are compensation for providing the
additional care of a qualified foster individual
which is—
‘‘(i) required by reason of a physical,
mental, or emotional handicap of such in-
dividual with respect to which the State
162
has determined that there is a need for ad-
ditional compensation, and
‘‘(ii) provided in the home of the fos-
ter care provider, and
‘‘(B) are designated by the payor as com-
pensation described in subparagraph (A).
‘‘(2) LIMITATION BASED ON NUMBER OF INDI-
VIDUALS.—In the case of any foster home, difficulty
of care payments for any period to which such pay-
ments relate shall not be excludable from gross in-
come under subsection (a) to the extent such pay-
ments are made for more than—
‘‘(A) 10 qualified foster individuals who
have not attained age 19, and
‘‘(B) 5 qualified foster individuals not de-
scribed in subparagraph (A).
‘‘SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS.
‘‘(a) IN GENERAL.—Gross income does not include—
‘‘(1) amounts received under workers’ com-
pensation acts as compensation for personal injuries
or sickness;
‘‘(2) the amount of any damages received
(whether by suit or agreement and whether as lump
sums or as periodic payments) on account of per-
sonal injuries or sickness;
163
‘‘(3) amounts received through accident or
health insurance for medical care;
‘‘(4) amounts received through accident or
health insurance for personal injuries or sickness
(other than for medical care), but only to the extent
such amounts (A) are not attributable to contribu-
tions by the employer which were not includible in
the gross income of the employee, and are (B) not
are paid by the employer;
‘‘(5) amounts received as pension, annuity, or
similar allowance for personal injuries or sickness re-
sulting from active service in the armed forces of
any country or in the Coast and Geodetic Survey or
the Public Health Service, or as a disability annuity
payable under the provisions of section 808 of the
Foreign Service Act of 1980; and
‘‘(6) amounts received by an individual as dis-
ability income attributable to injuries incurred as a
direct result of a violent attack which the Secretary
of State determines to be a terrorist attack and
which occurred while such individual was an em-
ployee of the United States engaged in the perform-
ance of his official duties outside the United States.
164
Paragraph (2) shall not apply to any punitive dam-
ages in connection with a case not involving physical
injury or physical sickness.
‘‘(b) TERMINATION OF APPLICATION OF SUBSECTION
(a)(4) IN CERTAIN CASES.—
‘‘(1) IN GENERAL.—Subsection (a)(4) shall not
apply in the case of an individual who is not de-
scribed in paragraph (2).
‘‘(2) INDIVIDUALS
TO
WHOM
SUBSECTION
(a)(4) CONTINUES TO APPLY.—An individual is de-
scribed in this paragraph if—
‘‘(A) on or before September 24, 1975, he
was entitled to receive any amount described in
subsection (a)(4),
‘‘(B) on September 24, 1975, he was a
member of any organization (or reserve compo-
nent thereof) referred to in subsection (a)(4) or
under a binding written commitment to become
such a member,
‘‘(C) he receives an amount described in
subsection (a)(4) by reason of a combat-related
injury, or
‘‘(D) on application therefore, he would be
entitled to receive disability compensation from
the Veterans’ Administration.
165
‘‘(3) SPECIAL RULES FOR COMBAT-RELATED IN-
JURIES.—For purposes of this subsection, the term
‘combat-related injury’ means personal injury or
sickness—
‘‘(A) which is incurred—
‘‘(i) as a direct result of armed con-
flict,
‘‘(ii) while engaged in extrahazardous
service, or
‘‘(iii) under conditions simulating war;
or
‘‘(B) which is caused by an instrumentality
of war.
In the case of an individual who is not described in
subparagraph (A) or (B) of paragraph (2), except as
provided in paragraph (4), the only amounts taken
into account under subsection (a)(4) shall be the
amounts which he receives by reason of a combat-
related injury.
‘‘(4) AMOUNT
EXCLUDED
TO
BE
NOT
LESS
THAN
VETERANS’ DISABILITY
COMPENSATION.—In
the case of any individual described in paragraph
(2), the amounts excludable under subsection (a)(4)
for any period with respect to any individual shall
not be less than the maximum amount which such
166
individual, on application therefor, would be entitled
to receive as disability compensation from the Veter-
ans’ Administration.
‘‘SEC. 96. MEALS OR LODGING FURNISHED FOR THE CON-
VENIENCE OF THE EMPLOYER.
‘‘(a) MEALS
AND LODGING FURNISHED
TO EM-
PLOYEE, HIS SPOUSE, AND HIS DEPENDENTS, PURSU-
ANT TO EMPLOYMENT.—There shall be excluded from
gross income of an employee the value of any meals or
lodging furnished to him, his spouse, or any of his depend-
ents by or on behalf of his employer for the convenience
of the employer, but only if—
‘‘(1) in the case of meals, the meals are fur-
nished on the business premises of the employer, or
‘‘(2) in the case of lodging, the employee is re-
quired to accept such lodging on the business prem-
ises of his employer as a condition of his employ-
ment.
‘‘(b) SPECIAL RULES.—For the purposes of sub-
section (a)—
‘‘(1) PROVISIONS OF EMPLOYMENT CONTRACT
OR STATE STATUTE NOT TO BE DETERMINATIVE.—
In determining whether meals or lodging are fur-
nished for the convenience of the employer, the pro-
visions of an employment contract or of a State stat-
167
ute fixing terms of employment shall not be deter-
minative of whether the meals or lodging are in-
tended as compensation.
‘‘(2) CERTAIN FACTORS NOT TAKEN INTO AC-
COUNT WITH RESPECT TO MEALS.—In determining
whether meals are furnished for the convenience of
the employer, the fact that a charge is made for
such meals, and the fact that the employee may ac-
cept or decline such meals, shall not be taken into
account.
‘‘(3) CERTAIN FIXED CHARGES FOR MEALS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) an employee is required to pay on
a periodic basis a fixed charge for his
meals, and
‘‘(ii) such meals are furnished by the
employer for the convenience of the em-
ployer,
there shall be excluded from the employee’s
gross income an amount equal to such fixed
charge.
‘‘(B) APPLICATION
OF
SUBPARAGRAPH
(A).—Subparagraph (A) shall apply—
168
‘‘(i) whether the employee pays the fixed charge
out of his stated compensation or out of his own
funds, and
‘‘(ii) only if the employee is required to make
the payment whether he accepts or declines the
meals.
‘‘(c) EMPLOYEES LIVING IN CERTAIN CAMPS.—
‘‘(1) IN GENERAL.—In the case of an individual
who is furnished lodging in a camp located in a for-
eign country by or on behalf of his employer, such
camp shall be considered to be part of the business
premises of the employer.
‘‘(2) CAMP.—For purposes of this section, a
camp constitutes lodging which is—
‘‘(A) provided by or on behalf of the em-
ployer for the convenience of the employer be-
cause the place at which such individual renders
services is in a remote area where satisfactory
housing is not available on the open market,
‘‘(B) located, as near as practicable, in the
vicinity of the place at which such individual
renders services, and
‘‘(C) furnished in a common area (or en-
clave) which is not available to the public and
169
which normally accommodates 10 or more em-
ployees.
‘‘(d) LODGING
FURNISHED
BY
CERTAIN
EDU-
CATIONAL INSTITUTIONS TO EMPLOYEES.—
‘‘(1) IN GENERAL.—In the case of an employee
of an educational institution, gross income shall not
include the value of qualified campus lodging fur-
nished to such employee during the taxable year.
‘‘(2) EXCEPTION
IN
CASES
OF
INADEQUATE
RENT.—Paragraph (1) shall not apply to the extent
of the excess of—
‘‘(A) the lesser of—
‘‘(i) 5 percent of the appraised value
of the qualified campus lodging, or
‘‘(ii) the average of the rentals paid
by individuals (other than employees or
students of the educational institution)
during such calendar year for lodging pro-
vided by the educational institution which
is comparable to the qualified campus lodg-
ing provided to the employee, over
‘‘(B) the rent paid by the employee for the
qualified campus lodging during such calendar
year.
170
The appraised value under subparagraph (A)(i) shall
be determined as of the close of the calendar year
in which the taxable year begins, or, in the case of
a rental period not greater than 1 year, at any time
during the calendar year in which such period be-
gins.
‘‘(3) QUALIFIED CAMPUS LODGING.—For pur-
poses of this subsection, the term ‘qualified campus
lodging’ means lodging to which subsection (a) does
not apply and which is—
‘‘(A) located on, or in the proximity of, a
campus of the educational institution, and
‘‘(B) furnished to the employee, his spouse,
and any of his dependents by or on behalf of
such institution for use as a residence.
‘‘(4) EDUCATIONAL
INSTITUTION.—For pur-
poses of this paragraph, the term ‘educational insti-
tution’ means an eligible educational institution as
defined in section 10(b)(2)(B).
‘‘SEC. 97. CERTAIN FRINGE BENEFITS.
‘‘(a) PURPOSE.—This section includes definitions and
rules applicable to the exclusion from gross income for cer-
tain fringe benefits.
171
‘‘(b) NO-ADDITIONAL-COST SERVICE DEFINED.—
‘No-additional-cost service’ means any service provided by
an employer to an employee for use by such employee if—
‘‘(1) such service is offered for sale to cus-
tomers in the ordinary course of the line of business
of the employer in which the employee is performing
services, and
‘‘(2) the employer incurs no substantial addi-
tional cost (including forgone revenue) in providing
such service to the employee (determined without re-
gard to any amount paid by the employee for such
service).
‘‘(c) QUALIFIED EMPLOYEE DISCOUNT DEFINED.—
‘‘(1) QUALIFIED
EMPLOYEE
DISCOUNT.—The
term ‘qualified employee discount’ means any em-
ployee discount with respect to qualified property or
services to the extent such discount does not
exceed—
‘‘(A) in the case of property, the gross
profit percentage of the price at which the prop-
erty is being offered by the employer to cus-
tomers, or
‘‘(B) in the case of services, 20 percent of
the price at which the services are being offered
by the employer to customers.
172
‘‘(2) GROSS PROFIT PERCENTAGE.—
‘‘(A) IN GENERAL.—‘Gross profit percent-
age’ means the percent which—
‘‘(i) the excess of the aggregate sales
price of property sold by the employer to
customers over the aggregate cost of such
property to the employer, is of
‘‘(ii) the aggregate sales price of such
property.
‘‘(B) DETERMINATION OF GROSS PROFIT
PERCENTAGE.—Gross profit percentage shall be
determined on the basis of—
‘‘(i) all property offered to customers
in the ordinary course of the line of busi-
ness of the employer in which the employee
is performing services (or a reasonable
classification of property selected by the
employer), and
‘‘(ii) the employer’s experience during a
representative period.
‘‘(3) EMPLOYEE
DISCOUNT
DEFINED.—‘Em-
ployee discount’ means the amount by which—
‘‘(A) the price at which the property or
services are provided by the employer to an em-
ployee for use by such employee, is less than
173
‘‘(B) the price at which such property or
services are being offered by the employer to
customers.
‘‘(4) QUALIFIED
PROPERTY
OR
SERVICES.—
‘Qualified property or services’ means any property
(other than real property and other than personal
property of a kind held for investment) or services
which are offered for sale to customers in the ordi-
nary course of the line of business of the employer
in which the employee is performing services.
‘‘(c) DE MINIMIS FRINGE DEFINED.—
‘‘(1) IN GENERAL.—‘De minimis fringe’ means
any property or service the value of which is (after
taking into account the frequency with which similar
fringes are provided by the employer to the employ-
er’s employees) so small as to make accounting for
it unreasonable or administratively impracticable.
‘‘(2) TREATMENT OF CERTAIN EATING FACILI-
TIES.—The operation by an employer of any eating
facility for employees shall be treated as a de mini-
mis fringe if—
‘‘(A) such facility is located on or near the
business premises of the employer, and
174
‘‘(B) revenue derived from such facility
normally equals or exceeds the direct operating
costs of such facility.
The preceding sentence shall apply with respect to
any highly compensated employee only if access to
the facility is available on substantially the same
terms to each member of a group of employees
which is defined under a reasonable classification set
up by the employer which does not discriminate in
favor of highly compensated employees.
‘‘(3) ON-PREMISES GYMS AND OTHER ATHLETIC
FACILITIES.—
‘‘(A) IN
GENERAL.—De minimis fringe
benefits include the provision of on-premises
athletic facility by an employer to its employees.
‘‘(B) ON-PREMISES ATHLETIC FACILITY.—
For purposes of this paragraph, ‘on-premises
athletic facility’ means any gym or other ath-
letic facility—
‘‘(i) which is located on the premises
of the employer,
‘‘(ii) which is operated by the em-
ployer, and
175
‘‘(iii) substantially all the use of which
is by employees of the employer, their
spouses, and their dependent children.
‘‘(d) CERTAIN
EDUCATIONAL
TRAINING
BENE-
FITS.—Amounts paid or expenses incurred by the em-
ployer for education or training provided to the employee
shall be excluded from gross income under section 4 if
(and only if) such amounts or expenses are ordinary and
necessary business expenses and are not for an advanced
degree or to qualify an employee for a new line of work.
‘‘(e) REGULATIONS.—The Secretary shall prescribe
regulations under this section, including regulations that
continue certain rules contained in section 132 to the In-
ternal Revenue Code of 1986 related to the fringe benefits
described in this section.
‘‘Subchapter E—Rules Relating to Deductions
‘‘Sec. 101. Charitable, etc. organizations.
‘‘Sec. 102. Private foundations.
‘‘SEC. 101. CHARITABLE, ETC. ORGANIZATIONS.
‘‘(a) PURPOSE.—This section provides definitions for
purposes of determining the philanthropic transfer deduc-
tion and for other purposes of this chapter and chapter
2.
‘‘(b) REGULAR CHARITY.—
‘‘(1) IN GENERAL.—
178
under section 253(a)) from a governmental
unit referred to in subsection (c)(1) or
from direct or indirect contributions from
the general public,
‘‘(vii) a private foundation described
in subparagraph (C), or
‘‘(viii) an organization described in
section 102(a) (2) or (3).
‘‘(B) SPECIAL
RULE
FOR
MEDICAL
RE-
SEARCH ORGANIZATIONS.—For purposes of de-
termining whether a contribution is to a regular
charity, a medical research organization shall
not be treated as described in clause (iii) of
paragraph (2) unless during the calendar year
in which the contribution is made such organi-
zation is committed to spend such contributions
for such research before January 1 of the fifth
calendar year which begins after the date such
contribution is made,
‘‘(C) CERTAIN PRIVATE FOUNDATIONS.—
The private foundations referred to in subpara-
graph (A)(vii) and subsection (e)(1)(B) are—
‘‘(i) a private operating foundation (as
defined in section 4942(j)(3)),
179
‘‘(ii) any other private foundation (as
defined in section 102(a)) which, not later
than the 15th day of the third month after
the close of the foundation’s taxable year
in which contributions are received, makes
qualifying distributions (as defined in sec-
tion 4942(g), without regard to paragraph
(3) thereof), which are treated, after the
application of section 4942(g)(3), as dis-
tributions out of corpus (in accordance
with section 4942(h)) in an amount equal
to 100 percent of such contributions, and
with respect to which the taxpayer obtains
adequate records or other sufficient evi-
dence from the foundation showing that
the foundation made such qualifying dis-
tributions, and
‘‘(iii) a private foundation all of the
contributions to which are pooled in a com-
mon fund and which would be described in
section 102(a)(3) but for the right of any
substantial contributor (hereafter in this
clause called ‘donor’) or his spouse to des-
ignate annually the recipients, from among
organizations described in paragraph (1) of
180
section 102(a), of the income attributable
to the donor’s contribution to the fund and
to direct (by deed or by will) the payment,
to an organization described in such para-
graph (1), of the corpus in the common
fund attributable to the donor’s contribu-
tion; but this clause shall apply only if all
of the income of the common fund is re-
quired to be (and is) distributed to one or
more organizations described in such para-
graph (1) not later than the 15th day of
the third month after the close of the tax-
able year in which the income is realized
by the fund and only if all of the corpus
attributable to any donor’s contribution to
the fund is required to be (and is) distrib-
uted to one or more of such organizations
not later than one year after his death or
after the death of his surviving spouse if
she has the right to designate the recipi-
ents of such corpus.
‘‘(2) REFERENCES.—Any reference in other law
or in legal documents to an organization described
in a clause of section 170(b)(1)(A) of the Internal
Revenue Code of 1986 shall constitute a reference to
181
an organization described in the same clause of sec-
tion 101(b)(1)(A).
‘‘(c) CHARITY.—For purposes of determining the de-
ductibility of a philanthropic transfer, ‘charitable contribu-
tion’ means a contribution or gift for the use of—
‘‘(1) A State, a possession of the United States,
or any political subdivision of any of the foregoing,
or the United States or the District of Columbia,
but only if the contribution or gift is made for exclu-
sively public purposes.
‘‘(2) A corporation, trust, or community chest,
fund, or foundation—
‘‘(A) created or organized in the United
States or in any possession thereof, or under
the law of the United States, any State, the
District of Columbia, or any possession of the
United States;
‘‘(B) organized and operated exclusively
for religious, charitable, scientific, literary, or
educational purposes (but only if no part of its
activities involve the provision of athletic facili-
ties or equipment) or for the prevention of cru-
elty to children or animals,
182
‘‘(C) no part of the net earnings of which
inures to the benefit of any private shareholder
or individual, and
‘‘(D) which qualifies for exemption from
the business tax under section 253(c) and is not
disqualified for tax exemption by reason of at-
tempting to influence legislation, and which
does not participate in, or intervene in (includ-
ing the publishing or distributing of state-
ments), any political campaign on behalf of (or
in opposition to) any candidate for public office.
‘‘(3) [intentionally deleted]
‘‘(4) In the case of a contribution or gift by an
individual, a domestic fraternal society, order, or as-
sociation, operating under the lodge system, but only
if such contribution or gift is to be used exclusively
for religious, charitable, scientific, literary, or edu-
cational purposes, or for the prevention of cruelty to
children or animals.
‘‘(5) A cemetery company owned and operated
exclusively for the benefit of its members, or any
corporation chartered solely for burial purposes as a
cemetery corporation and not permitted by its char-
ter to engage in any business not necessarily inci-
dent to that purpose, if such company or corporation
183
is not operated for profit and no part of the net
earnings of such company or corporation inures to
the benefit of any private shareholder or individual.
‘‘(d) RULES FOR SUBSECTION (c).—
‘‘(1) LIMITATIONS.—A contribution or gift by a
corporation to a trust, chest, fund, or foundation
shall be deductible by reason of subsection (c)(2)(B)
only if it is to be used within the United States or
any of its possessions exclusively for purposes speci-
fied in subparagraph (B).
‘‘(2) REFERENCES.—Any reference in other law
or in legal documents to an organization described
in a paragraph of section 170(c) of the Internal Rev-
enue Code of 1986 shall constitute a reference to an
organization described in the same paragraph num-
ber of section 101(c) if an organization is described
in such paragraph.
‘‘(e) QUALIFIED CONSERVATION CONTRIBUTION.—
‘‘(1) IN GENERAL.—‘Qualified conservation con-
tribution’ means a contribution—
‘‘(A) of a qualified real property interest,
‘‘(B) to a qualified organization,
‘‘(C) exclusively for conservation purposes.
184
‘‘(2) QUALIFIED REAL PROPERTY INTEREST.—
‘Qualified real property interest’ means any of the
following interests in real property:
‘‘(A) the entire interest of the donor other
than a qualified mineral interest,
‘‘(B) a remainder interest, and
‘‘(C) a restriction (granted in perpetuity)
on the use which may be made of the real prop-
erty.
‘‘(3) QUALIFIED ORGANIZATION.—For purposes
of paragraph (1), the term ’qualified organization’
means an organization which—
‘‘(A) is described in clause (v) or (vi) of
subsection (b)(1)(A), or
‘‘(B) is described in section 253(c)(3)
and—
‘‘(i) meets the requirements of section
102(a)(2), or
‘‘(ii) meets the requirements of sec-
tion 102(a)(3) and is controlled by an or-
ganization described in subparagraph (A)
or in clause (i) of this subparagraph.
‘‘(4) CONSERVATION PURPOSE DEFINED.—
185
‘‘(A) IN GENERAL.—For purposes of this
subsection, the term ’conservation purpose’
means—
‘‘(i) the preservation of land areas for
outdoor recreation by, or the education of,
the general public,
‘‘(ii) the protection of a relatively nat-
ural habitat of fish, wildlife, or plants, or
similar ecosystem,
‘‘(iii) the preservation of open space
(including farmland and forest land) where
such preservation is—
‘‘(I) for the scenic enjoyment of
the general public, or
‘‘(II) pursuant to a clearly delin-
eated Federal, State, or local govern-
mental conservation policy, and will
yield a significant public benefit, or
‘‘(iv) the preservation of an histori-
cally important land area or a certified his-
toric structure.
‘‘(B) CERTIFIED HISTORIC STRUCTURE.—
For purposes of subparagraph (A)(iv), the term
‘certified historic structure’ means any building,
structure, or land area which—
186
‘‘(i) is listed in the National Register,
or
‘‘(ii) is located in a registered historic
district and is certified by the Secretary of
the Interior to the Secretary as being of
historic significance to the district.
A building, structure, or land area satisfies the
preceding sentence if it satisfies such sentence
either at the time of the transfer or on the due
date (including extensions) for filing the trans-
feror’s return under this chapter for the taxable
year in which the transfer is made.
‘‘(5) EXCLUSIVELY
FOR
CONSERVATION
PUR-
POSES.—For purposes of this subsection—
‘‘(A) CONSERVATION
PURPOSE
MUST
BE
PROTECTED.—A contribution shall not be treat-
ed as exclusively for conservation purposes un-
less the conservation purpose is protected in
perpetuity.
‘‘(B) NO SURFACE MINING PERMITTED.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), in the case of a con-
tribution of any interest where there is a
retention of a qualified mineral interest,
subparagraph (A) shall not be treated as
187
met if at any time there may be extraction
or removal of minerals by any surface min-
ing method.
‘‘(ii) SPECIAL RULE.—With respect to
any contribution of property in which the
ownership of the surface estate and min-
eral interests were separated before June
13, 1976, and remain so separated, sub-
paragraph (A) shall be treated as met if
the probability of surface mining occurring
on such property is so remote as to be neg-
ligible.
‘‘(6) QUALIFIED
MINERAL
INTEREST.—For
purposes of this subsection, the term ‘qualified min-
eral interest’ means—
‘‘(A) subsurface oil, gas, or other minerals,
and
‘‘(B) the right to access to such minerals.
‘‘(f) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL
EXPENSES.—No deduction shall be allowed under section
211 for traveling expenses (including amounts expended
for meals and lodging) while away from home, whether
paid directly or by reimbursement, unless there is no sig-
nificant element of personal pleasure, recreation, or vaca-
tion in such travel.
188
‘‘(g) TREATMENT OF CERTAIN AMOUNTS PAID TO OR
FOR THE BENEFIT OF INSTITUTIONS OF HIGHER EDU-
CATION.—For purposes of section 11, if as the result of
a contribution to or for the benefit of an educational
organization—
‘‘(1) 
which 
is 
described 
in 
subsection
(b)(1)(A)(ii), and
‘‘(2) which is an institution of higher education
(as defined in section 3304(f))
the taxpayer receives (directly or indirectly) as a result
of paying such amount the right to purchase tickets for
seating at an athletic event in an athletic stadium of such
institution, 80 percent of such contribution shall be treat-
ed as a charitable contribution (but only if such amount
would be allowable as a deduction but for the fact that
the taxpayer received the right to purchase tickets). If any
portion of a payment is for the purchase of such tickets,
such portion and the remaining portion (if any) of such
payment shall be treated as separate amounts for purposes
of this subsection.
‘‘Subchapter F—Special Business Activities
‘‘Sec. 111. Rules for rental of real estate.
‘‘SEC. 111. RULES FOR RENTAL OF REAL ESTATE.
‘‘(a) IN GENERAL.—Except as provided in subsection
(b)—
189
‘‘(1) the activity of rental of real estate is a
business activity to which the Simplified USA Tax
for businesses under chapter 2 applies,
‘‘(2) a taxpayer shall not be entitled to any de-
ductions under this chapter with respect to rental
property, and
‘‘(3) a taxpayer shall recognize gross income
only with respect to distributions from the rental ac-
tivity.
‘‘(b) INSUBSTANTIAL RENTAL ACTIVITY.—
‘‘(1) NOT RENTAL PROPERTY.—If an individual
or individuals own property, such individual or indi-
viduals and their families use the property on more
than 14 days during the taxable year for nonbusi-
ness purposes, the property is rented for no more
than 14 days during the taxable year, and the total
rental received by the individuals with respect to
such property does not exceed $10,000, the property
shall not be considered rental property or used in
the activity of rental of real estate during the tax-
able year for purposes of subsection (a) and the
Simplified USA Tax for businesses under chapter 2.
‘‘(2) RENTS
FROM
NONRENTAL
PROPERTY.—
Any rent from property described in paragraph (1)
190
shall be included in gross income for purposes of the
Simplified USA Income Tax.
‘‘(c) USE FOR A NONBUSINESS PURPOSE.—For pur-
poses of this section, ‘use for a nonbusiness purpose’
means use other than—
‘‘(1) use for which fair rent is paid,
‘‘(2) use in connection with the preparation of
the property for rental, or
‘‘(3) use that serves a clear business purpose.
Use during any part of a day shall constitute use for that
day.
‘‘Subchapter G—Accounting Methods and
Periods
‘‘Sec. 121. Taxable year.
‘‘Sec. 122. Cash method of accounting; installment sales.
‘‘SEC. 121. TAXABLE YEAR.
‘‘(a) IN GENERAL.—The taxable year for all individ-
uals subject to tax under this chapter shall be the calendar
year except as provided in subsection (b).
‘‘(b) SHORT TAXABLE YEARS.—
‘‘(1) BIRTH.—An individual’s taxable year in
year of his birth shall begin on the date of his birth.
‘‘(2) DEATH.—An individual’s taxable year in
the year of his death shall end on the date of his
death.
191
‘‘SEC. 122. CASH METHOD OF ACCOUNTING; INSTALLMENT
SALES.
‘‘(a) IN GENERAL.—All individuals shall determine
their income and deductions using the cash receipts and
disbursement method.
‘‘(b) OID RULES.—
‘‘(1) IN
GENERAL.—Original issue discount
shall not be included in gross income until received.
‘‘(2) PREVIOUSLY RECOGNIZED OID.—Original
issue discount included in income under the Internal
Revenue Code of 1986 shall increase the adjusted
basis of the instrument to which the original issue
discount related and shall not again be included in
income when received.
‘‘(c) INSTALLMENT SALES.—
‘‘(1) IN GENERAL.—Taxpayers shall take into
account income from installment sales when re-
ceived.
‘‘(2) REGULATIONS.—The Secretary shall pro-
mulgate regulations implementing paragraph (1).
Such regulations shall generally follow the principles
of sections 453, 453A and 453B of the Internal Rev-
enue Code of 1986, except to the extent such prin-
ciples are inconsistent with other provisions of this
chapter.
192
‘‘(d) CONSTRUCTIVE
RECEIPT.—Income shall be
treated as received when constructively received.
‘‘(e) EFFECT OF CHANGE OF ACCOUNTING METH-
OD.—Rules similar to those under section 226 shall apply
to ensure that a taxpayer does not deduct the same ex-
pense twice or include the same item in income twice.
‘‘Subchapter H—Nonresident Aliens
‘‘Sec.
131.
Tax on nonresident alien individuals.
‘‘Sec.
132.
Tax treatment of certain community income of nonresident aliens.
‘‘SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS.
‘‘(a) NONBUSINESS INCOME.—
‘‘(1) INCOME OTHER THAN CERTAIN GAINS.—
There is hereby imposed for each taxable year a tax
of 30 percent of the amount received from sources
within the United States by a nonresident alien indi-
vidual as—
‘‘(A) interest (other than portfolio interest
(as defined in subsection (b)(2)), deposit inter-
est (as defined in subsection (b)(3)) and origi-
nal issue discount, dividends, rents, salaries,
wages, premiums, annuities, compensations, re-
munerations, emoluments, and other fixed or
determinable annual periodical gains, profits
and income,
193
‘‘(B) gains from the disposal of timber,
coal, or iron ore with a retained economic inter-
est,
‘‘(C) in the case of the sale of an original
discount obligation or payment on an original
issue discount obligation, the interest accrued
while the individual was a nonresident alien,
and
‘‘(D) includible social security benefits (as
defined in section 3(b)(2)).
‘‘(2) CAPITAL GAINS OF CERTAIN ALIENS.—In
the case of a nonresident alien individual present in
the United States for a period or periods aggregat-
ing 183 days or more during the taxable year, there
is hereby imposed a tax of 30 percent of the amount
by which the gains, derived from sources within the
United States, from the sale or exchange at any
time during such year exceeds his losses, allocable
to sources within the United States, from the sale
or exchange at any time during such year of capital
assets.
‘‘(3) TAX DOES NOT APPLY TO BUSINESS IN-
COME.—The taxes imposed by this section shall not
apply to the income of any business entity, except to
194
the extent such income is distributed as compensa-
tion, dividends, or interest.
‘‘(b) SPECIAL RULES AND DEFINITIONS.—
‘‘(1) CERTAIN ANNUITIES.—The taxes imposed
by subsection (a) shall not apply to any amount re-
ceived as an annuity under a qualified annuity plan
described in section 403(a)(1), or from a qualified
trust described in section 401(a) and exempt under
section 253(a) if—
‘‘(A) all of the personal services by reason
of which the annuity is payable were either—
‘‘(i) personal services performed out-
side the United States by an individual
who, at the time of performance of such
personal services, was a nonresident alien,
or
‘‘(ii) personal services by a non-
resident alien temporarily present in the
United States for a period or periods not
exceeding 90 days during a taxable year,
whose compensation for such services did
not exceed $3,000, and who performed
such services for—
‘‘(I) a nonresident alien individ-
ual, foreign partnership, or foreign
195
corporation, not engaged in a trade or
business within the United States, or
‘‘(II) for an office or place of
business maintained in a foreign coun-
try or in a possession of the United
States by an individual who is a citi-
zen or resident of the United States
or by a domestic partnership or a do-
mestic corporation, and
‘‘(B) at the time the first amount is paid
as annuity under the annuity plan or by the
trust, 90 percent or more of the employees for
whom contributions or benefits are provided
under such plan are citizens or residents of the
United States.
‘‘(2) PORTFOLIO INTEREST.—
‘‘(A) IN
GENERAL.—‘Portfolio interest’
means—
‘‘(i) interest on obligations in reg-
istered form if the United States person
who would otherwise be required to with-
hold tax on such interest under section
1441(a) receives a statement that the ben-
eficial owner of the obligation is not a
United States person, and
196
‘‘(ii) interest on obligations in nonreg-
istered form if appropriate precautions are
taken to ensure that such obligations will
be sold only to persons who are not United
States persons and such interest is paid
outside the United States.
‘‘(B) EXCEPTIONS.—Under rules to be
prescribed by the Secretary, portfolio interest
does not include—
‘‘(i) interest received by a 10-percent
equity owner, or
‘‘(ii) contingent interest.
‘‘(3) DEPOSIT
INTEREST.—‘Deposit interest’
means interest on deposits which are—
‘‘(A) deposits with persons carrying on a
banking business (including savings and loans),
and
‘‘(B) amounts held by an insurance com-
pany under an agreement to pay interest there-
on.
‘‘(4) OTHER EXCEPTIONS.—The taxes imposed
by subsection (a) shall not apply to—
‘‘(A) a percentage of any dividend paid by
a business entity, 80 percent of whose gross re-
ceipts are not taken into account under chapter
197
1 because they are from outside the United
States, equal to the percentage of gross receipts
not so taken into account,
‘‘(B) gambling winnings (except to the ex-
tent that the Secretary determines by regula-
tion that the collection of the tax is administra-
tively feasible),
‘‘(C) compensation paid by a foreign em-
ployer to a nonresident alien individual for the
period he is temporarily present in the United
States as a nonimmigrant under subparagraph
(F) or (J) of section 101(a)(15) of the Immi-
gration and Nationality Act, as amended,
‘‘(D) interest from a series E or series H
savings bond if the individual acquired the bond
while a resident of the Ryuku Islands or the
Trust Territory of the Pacific Islands, or
‘‘(E) amounts earned or payable to any
person who is a bona fide resident of Puerto
Rico, Guam, American Samoa, or the Northern
Mariana Islands (and, therefore, is subject to
the tax imposed by subchapter A).
‘‘(c) EXPATRIATION TO AVOID TAX.—
‘‘(1) IN GENERAL.—A nonresident alien individ-
ual who at any time within the 10-year period imme-
198
diately preceding the close of the taxable year lost
United States citizenship shall be taxable in the
manner described in paragraph (2) unless none of
the principal purposes of losing citizenship was
avoidance of tax under subchapter A or subtitle B.
‘‘(2) ALTERNATIVE TAX.—A nonresident alien
individual described in paragraph (1) shall be sub-
ject to tax on the items taxable under subsection (a)
as determined without regard to exceptions listed or
based on definitions contained in subsection (b)
using the rate schedule for single individuals under
section 215. If the taxes determined under sub-
section (a) are greater than the tax determined
under this subsection, the greater tax shall apply.
‘‘SEC. 132. TAX TREATMENT OF CERTAIN COMMUNITY IN-
COME OF NONRESIDENT ALIENS.
‘‘(a) GENERAL RULE.—In the case of a married cou-
ple one or both of whom are nonresident alien individuals
and who have community income for the taxable year,
such community income shall be treated as follows:
‘‘(1) Compensation income shall be treated as
income of the spouse who rendered the services,
‘‘(2) Partnership distributions shall be treated
as the related distributive shares of partnership in-
come would be treated under section 1402(a)(5),
199
‘‘(3) Community income which is derived from
the separate property of a spouse shall be treated as
income of that spouse, and
‘‘(4) All other such community income shall be
treated as provided in the applicable community
property law.
‘‘(b) EXCEPTION WHERE ELECTION UNDER SEC-
TION 6013(g) IS IN EFFECT.—Subsection (a) shall not
apply if an election under subsection (g) or (h) of section
6013 (relating to election to treat nonresident alien indi-
viduals as residents of the United States) is in effect.
‘‘SEC. 133. RELATIONSHIP WITH TREATIES.
‘‘(a) STATEMENT OF POLICY.—It is the intention of
the USA Tax Code to promote a worldwide tax system
in which each nation taxes—
‘‘(1) under an individual tax, only the income of
individuals who are residents or citizens of that na-
tion, and
‘‘(2) under a business tax only the business ac-
tivity in such nation.
‘‘(b) EFFECT OF TREATIES.—No tax shall be im-
posed under section 131(a) on income that is exempt from
tax by reason of a treaty between the nation of which the
nonresident alien is a citizen or resident and the United
States. If any such treaty requires that a lower rate of
200
tax be imposed on some or all of the items of income sub-
ject to tax under section 331(a), such lower rate shall
apply to such items in the case of persons to whom such
treaty applies.
‘‘(c) EFFECT OF UNILATERAL ACTION BY FOREIGN
NATION.—No tax shall be imposed under section 331(a)
on nonresident aliens who are citizens or residents of an-
other nation if—
‘‘(1) such nation exempts from its income and
withholding taxes nonresident alien individuals who
are residents or citizens of the United States,
‘‘(2) such nation has entered into a tax infor-
mation sharing agreement with the United States,
and
‘‘(3) the Secretary certifies that the preceding
two requirements have been satisfied.
‘‘Subchapter I—Trusts and Estates
‘‘Sec. 140. Prepayment of tax by trusts and estates.
‘‘Sec. 141. Application of tax.
‘‘Sec. 142. Special rules for credits and deductions.
‘‘Sec. 143. Definitions and rules applicable to subchapter I.
‘‘Sec. 144. Deduction for trusts distributing current income only.
‘‘Sec. 145. Inclusion of amounts in gross income of beneficiaries of trusts dis-
tributing current income only.
‘‘Sec. 146. Deduction for estates and trusts accumulating income or distribut-
ing corpus.
‘‘Sec. 147. Inclusion of amounts in gross income of beneficiaries of estates and
trusts accumulating income or distributing corpus.
‘‘Sec. 148. Special rules applicable to sections 146 and 147.
‘‘Sec. 149. Charitable remainder trusts.
‘‘Sec. 150. Definitions applicable to excess distribution rules.
‘‘Sec. 151. Accumulation distribution allocated to preceding years.
‘‘Sec. 152. Treatment of amounts deemed distributed by trust in preceding
years.
201
‘‘Sec. 153. Trust income, deductions, and credits attributable to grantors and
others as substantial owners.
‘‘Sec. 154. Definitions and rules.
‘‘Sec. 155. Reversionary interests.
‘‘Sec. 156. Power to control beneficial enjoyment.
‘‘Sec. 157. Administrative powers.
‘‘Sec. 158. Power to revoke.
‘‘Sec. 159. Income for benefit of grantor.
‘‘Sec. 160. Person other than grantor treated as substantial owner.
‘‘Sec. 161. Foreign trusts having one or more United States beneficiaries.
‘‘Sec. 162. Limitation on charitable deduction.
‘‘Sec. 163. Income of an estate or trust in case of divorce, etc.
‘‘Sec. 164. Recognition of gain on certain transfers to certain foreign persons
and estates.
‘‘Sec. 165. Treatment of funeral trusts.
‘‘Sec. 166. Income in respect of a decedent.
‘‘SEC. 140. PREPAYMENT OF TAX BY TRUSTS AND ESTATES.
‘‘(a) PREPAYMENT OF TAX.—A trust or estate shall
prepay the Simplified USA Tax for individuals in accord-
ance with the provisions of this subchapter.
‘‘(b) IMPOSITION OF TAX.—There is hereby imposed
a tax on the taxable income of trusts and estates (as deter-
mined in accordance with this subchapter) a tax deter-
mined as follows:
‘‘If taxable income is:
The tax is:
Not over $1,600 ............................
15% of taxable income.
Over $1,600, but not over $3,800
$240, plus 25% of the excess over
$1,600.
Over $3,800 ...................................
$790, plus 30% of the excess over
$3,800.
‘‘(c) INFLATION ADJUSTMENT.—The schedule in
subsection (b) shall be adjusted for inflation in accordance
with section 23.
‘‘(d) BUSINESS ACTIVITIES.—
‘‘(1) TAX ON BUSINESS ACTIVITY DETERMINED
AT BUSINESS LEVEL.—If a trust engages in business
202
activity (as defined in section 206(b)), it shall be
considered a business entity with respect to such ac-
tivities for purposes of the business tax under chap-
ter 2. The business entity shall be considered an
asset of the trust.
‘‘(2) 
BUSINESS
ENTITY
AS
SOLE
BENE-
FICIARY.—If the only beneficiaries of a trust are
business entities, no tax shall be imposed on such
trust under this subchapter.
‘‘SEC. 141. APPLICATION OF TAX.
‘‘(a) IN GENERAL.—The tax imposed by section 140
shall apply to the taxable income of estates or of any kind
of property held in trust, including—
‘‘(1) income accumulated in trust for the bene-
fit of unborn or unascertained persons or persons
with contingent interests, and income accumulated
or held for future distribution under the terms of
the will or trust;
‘‘(2) income which is to be distributed currently
by the fiduciary to the beneficiaries, and income col-
lected by a guardian of an infant which is to be held
or distributed as the court may direct;
‘‘(3) income received by estates of deceased per-
sons during the period of administration or settle-
ment of the estate; and