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(other than by reason of death or dis-
ability)—
‘‘(I) before the close of the 5-year
period beginning with the date of the
first payment and after the employee
attains age 591⁄2, or
‘‘(II) before the employee attains
age 591⁄2, the taxpayer’s tax for the
1st taxable year in which such modi-
fication occurs shall be increased by
an amount, determined under regula-
tions, equal to the tax which (but for
paragraph (2)(A)(iv)) would have
been imposed, plus interest for the de-
ferral period.
‘‘(B) DEFERRAL
PERIOD.—For purposes
of this paragraph, the term ‘deferral period’
means the period beginning with the taxable
year in which (without regard to paragraph
(2)(A)(iv)) the distribution would have been in-
cludible in gross income and ending with the
taxable year in which the modification described
in subparagraph (A) occurs.
‘‘(5) EMPLOYEE.—For purposes of this sub-
section, the term ‘employee’ includes any partici-
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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)).
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‘‘(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
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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
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(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.
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‘‘(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, 2002, in an asset
acquired before that date, shall be its adjusted basis as
of December 31, 2001, as determined under the Internal
Revenue Code of 1986.
‘‘SEC. 73. BASIS IN BUSINESS ENTITIES.
‘‘(a) RULES FOR ALL BUSINESS ENTITIES.—
‘‘(1) IN GENERAL.—A taxpayer’s basis in an in-
terest in a business entity shall equal—
‘‘(A) the cost of acquiring the interest,
‘‘(B) increased by the amount of cash and
basis of any property contributed to the entity,
and
‘‘(C) decreased by the portion of any liqui-
dating distributions from the entity that are
treated as returns of capital in accordance with
rules prescribed by the Secretary.
‘‘(2) INITIAL BASIS.—Except as otherwise pro-
vided in this section, a taxpayer’s basis on January
1, 2002, or any interest in a business entity held as
of December 31, 2001, shall be the basis of such in-