282 
‘‘(E) Stock or other equity interest con-
structively owned by a person by reason of the 
application of subparagraph (A) shall, for the 
purpose of applying subparagraph (A), (B), or 
(C), be treated as actually owned by such per-
son, but stock or other equity interest construc-
tively owned by an individual by reason of the 
application of subparagraph (B) or (C) shall 
not be treated as owned by him for the purpose 
of again applying either of such paragraphs in 
order to make another the constructive owner of 
such stock or equity interest. 
‘‘(7) EARNED INCOME.— 
‘‘(A) 
IN
GENERAL.—‘Earned 
income’ 
means— 
‘‘(i) wages, salaries, tips, and other 
employee compensation, plus 
‘‘(ii) the amount of the taxpayer’s net 
earnings from self-employment for the tax-
able year (within the meaning of section 
1402(a)). 
‘‘(B) SPECIAL
RULES.—For purposes of 
subparagraph (A)—
283 
‘‘(i) the earned income of an indi-
vidual shall be computed without regard to 
any community property laws, 
‘‘(ii) no amount received as a pension 
or annuity shall be taken into account, 
‘‘(iii) no income of nonresident alien 
individuals not connected with United 
States business shall be taken into ac-
count, and 
‘‘(iv) no amount received for services 
provided by an individual while the indi-
vidual is an inmate at a penal institution 
shall be taken into account. 
‘‘(b) TERMS DEFINED IN CHAPTER 1.—If a term 
that is used but not defined in this chapter or in section 
7701 is defined in chapter 2, the definition in chapter 2 
shall apply except if manifestly incompatible with the in-
tent of the provision in which the term is used. 
‘‘SEC. 172. RULES OF APPLICATION. 
‘‘(a) DEFINITIONS.—Any definition included in this 
chapter shall apply for all purposes of this chapter un-
less— 
‘‘(1) such definition is limited to the purposes 
of a particular chapter, section, or subsection, or
284 
‘‘(2) the definition clearly would not be applica-
ble in a particular context. 
‘‘(b) INTERPRETATIONS CONSISTENT WITH INTER-
NAL REVENUE CODE OF 1986.—Terms not defined in this 
chapter or elsewhere in this title, but defined in the Inter-
nal Revenue Code of 1986, shall be interpreted in a man-
ner consistent with the Internal Revenue Code of 1986, 
except to the extent such interpretation would be incon-
sistent with the principles and purposes of this chapter.’’ 
(c) EXEMPTION FROM PROHIBITED TRANSACTION 
TAX.—Section 4975(g) of the Code is amended by— 
(1) striking ‘‘or’’ at the end of paragraph (2), 
(2) deleting the period at the end of paragraph 
(3) and inserting ‘‘; or’’, 
(3) and inserting the following new paragraph 
(4): 
‘‘(4) to a Roth IRA in the case of a loan to or 
equity investment in a controlled business entity as 
permitted by section 30(f)).’’
285 
TITLE III—SIMPLIFIED USA TAX 
FOR BUSINESSES 
SEC. 301. REPEAL OF CORPORATE INCOME TAX; NEW TAX 
PAID BY CORPORATIONS AND OTHER BUSI-
NESSES. 
(a) IN GENERAL.—Chapter 2 of the Internal Rev-
enue Code is renumbered chapter 3 and following new 
chapter is inserted after chapter 1: 
‘‘CHAPTER 2—SIMPLIFIED USA TAX FOR 
BUSINESSES 
‘‘Subchapter A. Imposition of tax. 
‘‘Subchapter B. Basic rules for business tax. 
‘‘Subchapter C. Capital contributions, mergers, acquisitions, and distributions. 
‘‘Subchapter D. Accounting methods. 
‘‘Subchapter E. Land and rental property. 
‘‘Subchapter F. Insurance and financial products. 
‘‘Subchapter G. Financial intermediation and financial institutions. 
‘‘Subchapter H. Tax-exempt organizations. 
‘‘Subchapter I. Cooperatives. 
‘‘Subchapter J. Sourcing rules. 
‘‘Subchapter K. Business conducted in a possession. 
‘‘Subchapter L. Payroll tax credit. 
‘‘Subchapter M. Import tax. 
‘‘Subchapter N. Transition rules. 
‘‘Subchapter O. Rules for administration, consolidated returns. 
‘‘Subchapter P. Definitions and rules of applications. 
‘‘Subchapter A—Imposition of Tax 
‘‘Sec. 201. Tax imposed. 
‘‘SEC. 201. TAX IMPOSED. 
‘‘(a) TAXABLE BUSINESS ACTIVITY.—A tax is im-
posed on the sale of goods and services in the United 
States by a business entity. The amount of the tax equals 
the amount by which—
286 
‘‘(1) the business tax exceeds, 
‘‘(2) the payroll tax credit. 
‘‘(b) BUSINESS TAX IMPOSED.— 
‘‘(1) IN GENERAL.—The ‘business tax’ imposed 
on a business entity that sells or leases property or 
sells services in the United States equals the sum 
of— 
‘‘(A) 8 percent of the portion of the gross 
profits of the business entity for the taxable 
year that does not exceed $150,000, and 
‘‘(B) 12 percent of such portion of the 
gross profits of the business entity for the tax-
able year that exceeds $150,000. 
‘‘(2) LIMITATION ON APPLICATION OF BENE-
FITS OF GRADUATED RATE SCHEDULE.—The Sec-
retary shall prescribe rules under which the gross 
profits of business entities under common control 
are aggregated for purposes of applying the benefit 
of the lower rate described in subparagraph (A) of 
paragraph (1). Such rules shall be similar to rules 
applicable under sections 1551 and 1561 of the In-
ternal Revenue Code of 1986. 
‘‘(c) PAYROLL TAX CREDIT.—The ‘payroll tax credit’ 
is a credit for the social security, railroad retirement and 
hospital insurance taxes paid by an employer, as deter-
287 
mined in accordance with subchapter L (sections 281 
through 283). 
‘‘(d) IMPORT TAX.—For rules relating to the import 
tax imposed by this chapter, see subchapter M (sections 
286 through 288). 
‘‘Subchapter B—Basic Rules for Business Tax 
‘‘Sec. 202. Gross profits. 
‘‘Sec. 203. Taxable receipts. 
‘‘Sec. 204. Deductible amounts. 
‘‘Sec. 205. Cost of business purchases. 
‘‘Sec. 206. Business entity and business activity. 
‘‘Sec. 207. Loss carryover deduction. 
‘‘SEC. 202. GROSS PROFITS. 
‘‘‘Gross profits’ means for a taxable year of a busi-
ness entity the amount by which— 
‘‘(1) the taxable receipts of the business entity 
for the taxable year exceed, 
‘‘(2) the deductible amounts for the business 
entity for the taxable year. 
‘‘SEC. 203. TAXABLE RECEIPTS. 
‘‘(a) IN GENERAL.—‘Taxable receipts’ means all re-
ceipts from the sale of property, use of property, and per-
formance of services in the United States. 
‘‘(b) GAMES
OF CHANCE.—Amounts received for 
playing games of chance by business entities engaging in 
the activity of providing such games shall be treated as 
receipts from the sale of property or services.
288 
‘‘(c) IN-KIND RECEIPTS.—The taxable receipts at-
tributable to the receipt of property, use of property or 
services in whole or partial exchange for property, use of 
property or services equal the fair market value of the 
services or property received. 
‘‘(d) TAXES.—Taxable receipts do not include any ex-
cise tax, sales tax, custom duty, or other separately stated 
levy imposed by a Federal, State, or local government re-
ceived by a business entity in connection with the sale of 
property or services or the use of property. 
‘‘(e) FINANCIAL RECEIPTS.— 
‘‘(1) IN GENERAL.—Except as provided in sub-
chapter G (relating to financial intermediation and 
financial institutions), taxable receipts do not in-
clude financial receipts. 
‘‘(2) FINANCIAL
RECEIPTS.—‘Financial re-
ceipts’ include— 
‘‘(A) interest, 
‘‘(B) dividends and other distributions by a 
business entity, 
‘‘(C) proceeds from the sale of stock, other 
ownership interests in business entities, or 
other financial instruments (as defined in sec-
tion 242(b)(3)), 
‘‘(D) proceeds from life insurance policies,
289 
‘‘(E) proceeds from annuities, 
‘‘(F) proceeds from currency hedging or 
exchanges, and 
‘‘(G) proceeds from other financial trans-
actions. 
‘‘(f) CROSS REFERENCES.— 
‘‘(1) FINANCIAL
INTERMEDIATION.—See sub-
chapters F and G for rules relating to financial 
intermediation. 
‘‘(2) 
EXPORTS, 
SALES
IN
THE
UNITED 
STATES.—See subchapter J for the exclusion from 
gross receipts for export sales and for rules on sales 
of property and services in the United States. 
‘‘(3) LAND.—See subchapter E for rules relat-
ing to certain sales of land. 
‘‘(4) INSURANCE PROCEEDS.—See section 237 
for rules on the inclusion of certain insurance pro-
ceeds in taxable receipts. 
‘‘SEC. 204. DEDUCTIBLE AMOUNTS. 
‘‘(a) IN GENERAL.—‘Deductible amounts’ for a busi-
ness entity in a taxable year include— 
‘‘(1) the cost of business purchases in the tax-
able year (as determined under section 205), 
‘‘(2) such entity’s loss carryover deduction (as 
determined under section 207) , and
290 
‘‘(3) the transition basis deduction (as deter-
mined under section 290). 
‘‘(b) FINANCIAL INTERMEDIATION.—See subchapters 
F and G for special rules for business entities engaging 
in financial intermediation. 
‘‘SEC. 205. COST OF BUSINESS PURCHASES. 
‘‘(a) BUSINESS PURCHASES.— 
‘‘(1) IN GENERAL.—‘Business purchases’ means 
the acquisition of— 
‘‘(A) property, 
‘‘(B) the use of property, or 
‘‘(C) services 
in the United States for use in a business activity. 
‘‘(2) EXAMPLES.—Business purchases include 
(without limitation) the— 
‘‘(A) purchase or rental of real property, 
‘‘(B) purchase or rental of capital equip-
ment, 
‘‘(C) purchase of supplies and inventory, 
‘‘(D) purchase of services from inde-
pendent contractors, 
‘‘(E) purchase of financial intermediation 
services (as determined in accordance with sec-
tion 236),
291 
‘‘(F) purchase of a business loss policy (as 
determined in accordance with section 237), 
and 
‘‘(G) imports for use in a business activity. 
‘‘(3) EXCLUSIONS.—Business purchases do not 
include— 
‘‘(A) payments for use of money or capital, 
such as interest or dividends (except to the ex-
tent that a portion so paid is a fee for financial 
intermediation services), 
‘‘(B) premiums for life insurance, 
‘‘(C) the acquisition of savings assets or 
other financial instruments (as defined in sec-
tion 242(b)(3)). 
‘‘(D) property acquired outside the United 
States (but such property shall be taken into 
account as an import if imported), 
‘‘(E) services performed outside the United 
States (unless treated as imported into the 
United States), 
‘‘(F) compensation expenses for an indi-
vidual (other than amounts paid to an indi-
vidual in his capacity as a business entity), or 
‘‘(G) taxes (except as provided in sub-
section (b)(2) relating to product taxes).
292 
‘‘(4) COMPENSATION
EXPENSES.—‘Compensa-
tion expenses’ means— 
‘‘(A) wages, salaries or other cash payable 
for services, 
‘‘(B) any taxes imposed on the recipient 
that are withheld by the business entity, 
‘‘(C) the cost of property purchased to pro-
vide employees with compensation (other than 
property incidental to the provision of fringe 
benefits that are excluded from income under 
the individual tax), 
‘‘(D) the cost of fringe benefits which are 
includible in an employee’s, partner’s, or propri-
etor’s income under the Simplified USA Income 
Tax (or are excluded solely because they con-
stitute employee savings), including (without 
limitation)— 
‘‘(i) contributions to retirement and 
severance benefit plans, 
‘‘(ii) premiums for the cost of life, 
health, accident, disability and other insur-
ance policies for which the service provider, 
members of his family, or persons des-
ignated by him or members of his family 
are the beneficiaries,
293 
‘‘(iii) rental of parking spaces or park-
ing fees (unless the parking space is used 
for a vehicle that is regularly used in a 
business activity); 
‘‘(iv) employer paid educational bene-
fits; 
‘‘(v) employer paid housing (other 
than housing provided for the convenience 
of the employer); and 
‘‘(vi) employer paid meals (other than 
meals provided for the convenience of the 
employer). 
‘‘(b) COST OF BUSINESS PURCHASES.— 
‘‘(1) IN
GENERAL.—The ‘cost of a business 
purchase’ is the amount paid or to be paid for the 
business purchase. 
‘‘(2) TAXES.— 
‘‘(A) IN GENERAL.—The ‘cost of business 
purchases’ includes any product taxes paid with 
respect to the property or services purchased. 
‘‘(B) PRODUCT TAX.—‘Product tax’ means 
any excise tax, sales or use tax, custom duty, or 
other separately stated levy imposed by a Fed-
eral, State, or local government on the produc-
tion, severance or consumption of property or
294 
on the provision of services, whether or not sep-
arately stated, and including any such taxes 
that are technically imposed on the seller of 
property or services. 
‘‘(C) TAXES NOT PRODUCT TAXES.—Prod-
uct taxes do not include— 
‘‘(i) the import tax, 
‘‘(ii) state and local property taxes, 
‘‘(iii) franchise or income taxes, 
‘‘(iv) payroll taxes and self-employ-
ment taxes, or 
‘‘(v) the business tax. 
‘‘(3) IMPORTS.—In the case of an import by a 
business entity, the cost of the import is the import 
price for purposes of the import tax. The import tax 
is not part of the cost of the import. 
‘‘(c) PROPERTY
AND
SERVICES
ACQUIRED
FOR 
PROPERTY.—If a business entity receives property or serv-
ices from a business entity in whole or partial exchange 
for property or services, the property or services acquired 
shall be treated as if they were purchased for an amount 
equal to the fair market value of the services or property 
received. For purposes of this section, property includes 
stock and other equity interests in business other than 
stock or an equity interest in the business entity acquiring
295 
the property or services. See section 210(b) for rules on 
property or services received in exchange for an equity in-
terest in the recipient. 
‘‘(d) GAMBLING PAYMENTS.—In the case of a busi-
ness involving gambling, lotteries, or other games of 
chance, business purchases include amounts paid to win-
ners. 
‘‘(e) SAVINGS
ASSETS.—‘Savings assets’ means 
stocks, bonds, securities, certificates of deposits, invest-
ments in partnerships and limited liability companies, 
shares of mutual funds, life insurance policies, annuities, 
and other similar savings or investment assets. 
‘‘(f) CROSS REFERENCES.— 
‘‘(1) FINANCIAL INTERMEDIATION AND INSUR-
ANCE.—For rules relating to fees for financial inter-
mediation services and insurance, see subchapter F. 
‘‘(2) LAND.—For special rules relating to the 
acquisition of land, see subchapter E. 
‘‘(3) RENTAL REAL ESTATE.—For special rules 
relating to the rental of real estate previously occu-
pied by an owner of the real estate, see section 232. 
‘‘(4) OUTSIDE THE UNITED STATES.—For spe-
cial rules relating to services performed outside the 
United States but used inside the United States and 
international services, see subchapter J.
296 
‘‘SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY. 
‘‘(a) BUSINESS ENTITY.—For purposes of the busi-
ness tax, ‘business entity’ means any corporation, unincor-
porated association, partnership, limited liability company, 
proprietorship, independent contractor, individual, or any 
other person engaging in business activity in the United 
States. An individual shall be considered a business entity 
only with respect to the individual’s business activities. 
‘‘(b) BUSINESS ACTIVITY.—‘Business activity’ means 
the sale of property or services, the leasing of property, 
the development of property or services for subsequent 
sale or use in producing property or services for subse-
quent sale. ‘Business activity’ does not include casual or 
occasional sales of property used by an individual (other 
than in a business activity), such as the sale by an indi-
vidual of a vehicle used by the individual. 
‘‘(c) EXCEPTION FOR CERTAIN EMPLOYEES.— 
‘‘(1) IN GENERAL.—‘Business activity’ does not 
include— 
‘‘(A) the performance of services by an em-
ployee for an employer that is a business entity 
with respect to the activity in which the em-
ployee is engaged, or 
‘‘(B) the performance of regular domestic 
household 
services 
(including 
babysitting, 
housecleaning, and lawn cutting) by an em-
297 
ployee of an employer that is an individual or 
family. 
‘‘(2) EMPLOYEE
DEFINED.—For purposes of 
this subsection, ‘employee’ includes an individual 
partner who provides services to a partnership or an 
individual member who provides services to a limited 
liability company, or a proprietor with respect to 
compensation for services from his proprietorship. 
‘‘SEC. 207. LOSS CARRYOVER DEDUCTION. 
‘‘(a) DEDUCTION.—The ‘loss carryover deduction’ for 
a taxable year is the lesser of— 
‘‘(1) the business entity’s gross profits for the 
taxable year (determined without the loss carryover 
deduction), or 
‘‘(2) the amount of the loss carryover to the 
taxable year. 
‘‘(b) LOSS CARRYOVER.— 
‘‘(1) GENERAL RULE.—A loss for any taxable 
year shall be a loss carryover to each of the 215 tax-
able years following the taxable year of the loss. 
‘‘(2) LOSS CARRYOVERS TO A TAXABLE YEAR.— 
The loss carryover to a taxable year is the sum of 
the loss carryovers from all prior taxable years be-
ginning on or after January 1, 2007, that can be 
carried over to the taxable year.
298 
‘‘(3) REDUCTION OF LOSS CARRYOVERS AS A 
RESULT OF THE DEDUCTION.—A business entity’s 
loss carryovers shall be reduced each year by the 
amount of the loss carryover deduction for the year. 
Loss carryovers shall be reduced in the order that 
they arose. 
‘‘(c) LOSS FOR TAXABLE YEAR.—A business entity’s 
loss (if any) for the taxable year equals the excess (if any) 
of— 
‘‘(1) the sum of— 
‘‘(A) the cost of business purchases for the 
taxable year, and 
‘‘(B) the transition basis adjustment for 
the taxable year, over 
‘‘(2) taxable receipts for the taxable year. 
‘‘(d) SPECIAL RULES.— 
‘‘(1) CONSOLIDATED RETURNS.—In the case of 
a consolidated return, the loss for a taxable year 
shall be determined on a consolidated group basis. 
In the case of a deconsolidation, the loss carryovers 
from the consolidated group shall be allocated in ac-
cordance with rules to be prescribed by the Sec-
retary. 
‘‘(2) LOSS
CARRYOVERS
OF
ACQUIRED
BUSI-
NESS ENTITY.—
299 
‘‘(A) IN GENERAL.—If a business entity 
acquires another business entity in a trans-
action that is considered the acquisition of a 
business entity and the two entities file a con-
solidated return or if two business entities 
merge, the loss carryovers will survive and can 
be applied against the taxable receipts attrib-
utable to the business activities carried on (or 
in the case of a merger formerly carried on) by 
either entity. 
‘‘(B) ASSET ACQUISITION.—If a business 
entity acquires all or substantially all of the as-
sets of another entity in a transaction that is 
considered an asset acquisition rather than the 
acquisition of a business entity, the acquirer 
will be treated as if it acquired the loss 
carryovers of the selling entity. For purposes of 
this rule, the assets of a business entity include 
ownership interests in other business entities. 
‘‘(C) SUBSTANTIALLY ALL.—For purposes 
of this paragraph ‘substantially all’ means more 
than 80 percent of the fair market value of a 
business entity’s net assets. Under rules pre-
scribed by the Secretary, the parties to a trans-
action may elect to treat acquisitions in excess
300 
of 70 percent of the fair market value of a busi-
ness entity’s net assets as acquisitions of ‘sub-
stantially all’ of a business entity’s net assets. 
‘‘Subchapter C—Capital Contributions, 
Mergers, Acquisitions, and Distributions 
‘‘Sec. 210. Contributions to a business entity. 
‘‘Sec. 211. Distributions of property. 
‘‘Sec. 212. Asset acquisitions. 
‘‘Sec. 213. Mergers and stock acquisitions. 
‘‘Sec. 214. Spin-offs, split-off, etc. 
‘‘Sec. 215. Allocation of certain tax attributes. 
‘‘SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY. 
‘‘(a) BY BUSINESS ENTITY.— 
‘‘(1) CASH.—If a business entity contributes 
cash to a business entity of which it is or becomes 
a partial or full owner, the amount contributed is 
not a deductible amount to the contributor or a tax-
able receipt to the recipient. 
‘‘(2) PROPERTY OR SERVICES.—If a business 
entity contributes property or services to a business 
entity of which it is or becomes a partial or full 
owner, the transaction will not result in taxable re-
ceipts to the contributor or a deduction for a busi-
ness purchase for the recipient and will not con-
stitute a sale resulting in taxable receipts to the con-
tributor. 
‘‘(b) BY INDIVIDUAL.—
301 
‘‘(1) CASH.—If an individual contributes cash 
to a business entity, the cash received is not a tax-
able receipt. 
‘‘(2) NEW PROPERTY.—If an individual contrib-
utes to a business entity property that the individual 
purchased for the business entity but which was not 
used by any person after its purchase, the property 
shall be considered purchased by such business enti-
ty from the person from which the individual pur-
chased the property. 
‘‘(3) PERSONAL USE PROPERTY.— 
‘‘(A) IN GENERAL.—If an individual con-
tributes personal use property to a business en-
tity in which the individual has an ownership 
interest or for which the individual receives an 
ownership interest, the business entity shall not 
be permitted to deduct the value of the property 
received as a business expense. The business 
entity will have a tax basis in the contributed 
property equal to the contributor’s basis. 
‘‘(B) PERSONAL
USE
PROPERTY.—‘Per-
sonal use property’ means any property used by 
an individual at any time other than in a busi-
ness activity.
302 
‘‘(4) SERVICES.—If an individual contributes 
services to a business entity in which the individual 
has an ownership interest or receives an ownership 
interest, the business entity shall not be permitted to 
deduct the value of the services received (or the 
value of the equity interest provided to the services 
provider). 
‘‘SEC. 211. DISTRIBUTIONS OF PROPERTY. 
‘‘(a) DISTRIBUTIONS OTHER THAN TO CONTROL-
LING BUSINESS.—If a business entity distributes all or a 
portion of its assets to its owners (other than a controlling 
business entity), the business entity will be treated as if 
it sold the assets to its owners at fair market value. The 
fair market value will be determined by the distributing 
corporation and those determinations, unless unreason-
able, will be binding on the recipients. 
‘‘(b) DISTRIBUTIONS
TO
A CONTROLLING BUSI-
NESS.—If a business entity distributes all or a portion of 
its assets to a controlling business, the controlling busi-
ness will assume the distributing entity’s tax attributes 
with respect to the assets and neither entity will have tax-
able receipts or a deduction as a result of the transaction. 
‘‘(c) DISTRIBUTION
OF
PERSONAL
USE
PROP-
ERTY.—If personal use property is distributed to the indi-
vidual who contributed the personal use property to a busi-
303 
ness entity, the fair market value of the property for pur-
poses of paragraph (a) shall equal the basis of the prop-
erty plus any enhancement in value of the property attrib-
utable to business purchases with respect to the property. 
‘‘(d) CONTROLLING BUSINESS ENTITY.—A business 
entity is a ‘controlling business entity’ with respect to an-
other business entity if it owns directly or indirectly more 
than 50 percent of the profits or capital interest in the 
other business entity. 
‘‘(e) APPLICATION OF THIS SECTION.—This section 
applies to both liquidating and nonliquidating distribu-
tions. Property shall be treated as distributed if the prop-
erty is used for a nonbusiness purpose (as defined in sec-
tion 232) for more than an insubstantial period of time 
during a taxable year. See section 232 for rules relating 
to certain rental property. 
‘‘SEC. 212. ASSET ACQUISITIONS. 
‘‘(a) IN GENERAL.—If a business entity transfers 
some or all of its assets, the consideration received for 
such assets shall be allocated among the assets transferred 
in the same manner as was required by section 1060 of 
the Internal Revenue Code of 1986. If the transferee and 
transferor agree in writing on the allocation of any consid-
eration, or as to the fair market value of any of the assets, 
such agreement shall be binding on both the transferor
304 
and transferee unless the Secretary determines that such 
allocation (or fair market value) is not appropriate. 
‘‘(b) TAX CONSEQUENCES.—The tax consequences of 
an asset acquisition shall be determined in accordance 
with the rules of this chapter and shall be dependent upon 
allocations made under subsection (a). In general, consid-
eration allocable to savings assets, such as stock in an-
other business entity, would not be included in taxable re-
ceipts of the transferor and would not be a business pur-
chase of the purchaser, but consideration allocable to the 
sale of tangible property and intangible property (other 
than savings assets) will constitute taxable receipts of the 
seller and a business purchase of the purchaser. 
‘‘(c) ELECTION TO TREAT ASSET ACQUISITION AS A 
STOCK ACQUISITION.—In the case of the sale of substan-
tially all of the assets of a business entity or substantially 
all of the assets of a line of business or a separately stand-
ing business of a business entity, the transferee and trans-
feror can jointly elect to treat the acquisition as if it were 
an acquisition of the stock of a business entity holding 
the assets so transferred. In such case, the rules of section 
213 shall apply. 
‘‘(d) AUTHORITY TO REQUIRE ALLOCATION AGREE-
MENT AND NOTICE TO THE SECRETARY.—If the Sec-
retary determines that certain types of asset acquisitions
305 
have significant possibilities of tax avoidance, the Sec-
retary may require— 
‘‘(1) parties to such types of acquisitions to 
enter into agreements allocating consideration, 
‘‘(2) parties to acquisitions involving certain 
kinds of assets to enter into agreements allocating 
part of the consideration to those assets, or 
‘‘(3) parties to certain acquisitions to report in-
formation to the Secretary. 
‘‘(e) ASSET ACQUISITION RULES DO NOT APPLY IF 
CONSIDERATION INCLUDES EQUITY IN PURCHASER.— 
‘‘(1) IN GENERAL.—If a business entity issues 
its own equity or equity in a subsidiary or other con-
trolled entity as part of the consideration for the 
transfer of assets to it, the transaction shall not be 
treated as an asset acquisition and the rules of sec-
tion 10 shall apply. 
‘‘(2) EQUITY.—For purposes of this subsection, 
equity means— 
‘‘(A) stock, in the case of a corporation, 
‘‘(B) partnership or similar interest, in the 
case of a partnership or limited liability com-
pany, and 
‘‘(C) an ownership interest or interest in 
profits in the case of any other business entity.
306 
‘‘SEC. 213. MERGERS AND STOCK ACQUISITIONS. 
‘‘(a) MERGERS.—A merger of one business entity 
into another or two businesses entities into a third busi-
ness entity or any other similar transaction shall have no 
direct consequences under the business tax. The surviving 
entity shall assume the tax attributes of the merged cor-
porations, including any loss carryovers and credit 
carryovers. 
‘‘(b) STOCK ACQUISITION.—The acquisition of all or 
substantially all of the ownership interest in one business 
entity either for cash or in exchange for ownership in the 
acquiring entity or an entity controlled by the acquired 
entity shall have no direct consequences under the busi-
ness tax. 
‘‘SEC. 214. SPIN-OFFS, SPLIT-OFFS, ETC. 
‘‘A spin-off, split-off or split-up of a business entity 
shall have no direct tax consequences under the business 
tax. 
‘‘SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES. 
‘‘The Secretary shall prescribe rules for allocation of 
loss carryovers and payroll tax credit carryovers in cases 
of substantial shifts of assets from one business entity to 
another business entity. Under such rules, a portion of a 
business entity’s carryovers may be deemed transferred 
when assets are transferred.
307 
‘‘Subchapter D—Accounting Method Rules 
‘‘Sec. 220. General accounting rules. 
‘‘Sec. 221. Use of the cash method of accounting. 
‘‘Sec. 222. Taxable year. 
‘‘Sec. 223. Long-term contracts. 
‘‘Sec. 224. Post-sale price adjustments and refunds. 
‘‘Sec. 225. Bad debts. 
‘‘Sec. 226. Transition rules. 
‘‘SEC. 220. GENERAL ACCOUNTING RULES. 
‘‘(a) IN GENERAL.—Except as provided in section 
221, a business entity shall use an accrual method of ac-
counting for purposes of determining the timing of rec-
ognition of taxable receipts and deduction of business pur-
chases. All business purchases shall be deducted when in-
curred (in the case of a business entity using the accrual 
method of accounting) or when paid (in case of a business 
entity using the cash method of accounting) without re-
gard to whether the business purchases are for or relate 
to— 
‘‘(1) inventory, 
‘‘(2) assets with a useful life of more than one 
year, or 
‘‘(3) property that will be used to produce other 
property. 
‘‘(b) ECONOMIC PERFORMANCE.—For purposes of 
determining whether an amount has been incurred, the all 
events test shall not be treated as met any earlier than 
when economic performance with respect to such item oc-
curs.
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‘‘(c) CONSISTENT ACCOUNTING METHODS.—Except 
as otherwise expressly provided in this chapter, a business 
entity shall secure the consent of the Secretary before 
changing the method of accounting by which it determines 
gross profits. This provision shall not apply to changes 
required by the adoption of the business tax. 
‘‘SEC. 221. USE OF THE CASH METHOD OF ACCOUNTING. 
‘‘(a) IN GENERAL.—A business entity that was per-
mitted to use and used the cash method of accounting 
under the Internal Revenue Code of 1986 shall be per-
mitted to continue to use the cash method of accounting. 
‘‘(b) NEW BUSINESS ENTITIES.—A new business en-
tity shall be permitted to use the cash method of account-
ing if permitted to under regulations prescribed by the 
Secretary. 
‘‘(c) CHANGE OR EXPANSION OF BUSINESS.—Sub-
section (a) shall cease to apply to a business entity that 
changes or expands its business such that under regula-
tions prescribed by the Secretary it is no longer eligible 
to use the cash method of accounting. 
‘‘(d) REGULATIONS.— 
‘‘(1) USE OF CASH METHOD.—The Secretary 
shall prescribe regulations defining which business 
entities may use the cash method of accounting. In 
general, those regulations shall be consistent with
309 
the rules under sections 447 and 448 of the Internal 
Revenue Code of 1986, except that all corporations 
shall be treated as C corporations were treated 
under those sections. The regulations shall not re-
quire a business entity described in subsection (a) to 
convert to the accrual method prior to January 1, 
2008. 
‘‘(2) CHANGE IN ACCOUNTING METHOD.—The 
Secretary shall prescribe regulations to prevent dou-
ble counting of taxable receipts and deductible ex-
penses in the case of a change in accounting method. 
‘‘SEC. 222. TAXABLE YEAR. 
‘‘(a) COMPUTATION
OF
GROSS
PROFITS.—Gross 
profits shall be computed on the basis of a business enti-
ty’s taxable year. 
‘‘(b) TAXABLE YEAR.—‘Taxable year’ means— 
‘‘(1) the taxpayer’s annual accounting period, if 
it is a calendar year or a fiscal year; 
‘‘(2) the calendar year, if subsection (g) applies; 
or 
‘‘(3) the period for which the return is made if 
the return is made for a period of less than 12 
months.
310 
‘‘(c) ANNUAL ACCOUNTING PERIOD.—‘Annual ac-
counting period’ means the annual period on the basis of 
which the business entity regularly keeps its books. 
‘‘(d) CALENDAR YEAR.—‘Calendar year’ means a pe-
riod of 12 months ending on December 31. 
‘‘(e) FISCAL YEAR.—‘Fiscal year’ means a period of 
12 months ending on the last day of any month other than 
December. In the case of any business entity that has 
made the election provided by subsection (f), the term 
means the annual period (varying from 52 to 53 weeks) 
so elected. 
‘‘(f) ELECTION OF 52–53 WEEK YEAR.— 
‘‘(1) GENERAL RULE.—A business entity which, 
in keeping its books, regularly computes its income 
or profits on a basis of an annual period which var-
ies from 52 to 53 weeks and ends always on the 
same day of the week and ends always— 
‘‘(A) on whatever date such same day of 
the week last occurs in a calendar month, or 
‘‘(B) on whatever date such same day of 
the week falls which is nearest to the last day 
of a calendar month, may elect to compute its 
gross profits on the basis of such annual period. 
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe such regulations as he deems necessary for
311 
the application of this subsection, including regula-
tions relating to the application of effective dates to 
taxpayers using a 52–53 week year. 
‘‘(g) CALENDAR YEAR REQUIRED.— 
‘‘(1) NO ACCOUNTING PERIOD.—A business en-
tity’s taxable year shall be the calendar year if the 
business entity does not have an annual accounting 
period or has an annual accounting period that does 
not qualify as a fiscal year. 
‘‘(2) NEW
BUSINESS
ENTITY.—The taxable 
year of a business entity that begins business activ-
ity after December 31, 2006, shall be the calendar 
year (or a 52–53 week fiscal year ending in Decem-
ber) unless the business entity can demonstrate a 
business reason for selecting an accounting period 
other than the calendar year. 
‘‘(h) TRANSITION RULE FOR BUSINESS ENTITIES 
WITH A FISCAL YEAR.— 
‘‘(1) IN GENERAL.—A business entity with a 
taxable year that is not the calendar year shall have 
a short taxable year ending on December 31, 2006, 
and a subsequent taxable year beginning on January 
1, 2007, and ending on the day immediately pre-
ceding the beginning of the business entity’s next 
fiscal year.
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‘‘(2) BUSINESS
ENTITIES
WITH
52–53
WEEK 
YEAR ENDING IN DECEMBER.— 
‘‘(A) IN GENERAL.—If a business entity 
has a 52–53 week taxable year (under the In-
ternal Revenue Code of 1986) that ends in De-
cember 2006, it may elect to begin its first tax-
able year for the business tax on the first day 
immediately following the last day of such tax-
able year. 
‘‘(B) NO ELECTION.—If a business entity 
that has a 52–53 week taxable year that ends 
in December 2006, does not make the election 
under subparagraph (A) or is prohibited from 
making such election by subparagraph (C), the 
business entity’s taxable year under the Inter-
nal Revenue Code of 1986 that would end in 
December 2006 shall end on December 31, 
2006. 
‘‘(C) ANTI-ABUSE
RULE.—Subparagraph 
(A) shall not apply to any taxpayer that enters 
into business transactions in 2006 following the 
scheduled end of its fiscal year with business 
entities that are not subject to the business tax 
at the time of such transactions if such trans-