‘‘(1) IN GENERAL.—In the case of a child to 
whom this subsection applies, the tax imposed by 
this section shall be the sum of—
‘‘(A) a tax computed at the rates and in 
the same manner as if this subsection had not 
been enacted on taxable income reduced by net 
unearned income, plus 
‘‘(B) the excess (if any) of the tax deter-
mined under subsection (e) on total taxable in-
come over the tax determined under subsection 
(e) on taxable income reduced by net unearned 
income.’’. 
(b) EXPANSION
OF PARENTAL ELECTION.—Para-
graph (5) of section 1(g) (as redesignated under sub-
section (a)) is amended to read as follows: 
‘‘(5) ELECTION TO CLAIM INCOME OF CHILD ON 
PARENT’S RETURN.—
‘‘(A) IN GENERAL.—If the parent of any 
child to whom this subsection applies elects the 
application of subparagraph (B), such child—
‘‘(i) shall be treated (other than for 
purposes of this paragraph)—
‘‘(I) as having no gross income 
for such year, and
‘‘(II) as not being entitled to any 
deductions or credits for such year, 
and 
‘‘(ii) shall not be required to file a re-
turn under section 6012 for such year. 
‘‘(B) INCOME INCLUDED ON PARENT’S RE-
TURN.—In the case of a parent making the 
election under this paragraph—
‘‘(i) the gross income of each child to 
whom such election applies shall be in-
cluded in such parent’s gross income for 
the taxable year, 
‘‘(ii) the deductions to which such 
child would be entitled without regard to 
such election shall be allowed to such par-
ent but only to the extent the aggregate of 
such deductions does not exceed the gross 
income of such child, 
‘‘(iii) any estimated tax payment, and 
any amount which has been deducted and 
withheld under chapter 24, for such year 
that is made in the name and TIN of such 
child shall be treated as an estimated tax 
payment or as an amount deducted and 
withheld in the name and TIN of such par-
ent for such year (including for purposes 
of section 31), and 
‘‘(iv) any interest which is an item of 
tax preference under section 57(a)(5) of 
the child shall be treated as an item of tax 
preference of such parent (and not of such 
child). 
‘‘(C) SPECIAL
RULE
FOR
DETERMINING 
WHICH
PARENT
MAY
MAKE
ELECTION.—For 
purposes of this paragraph, the parent of a 
child to whom this subsection applies who may 
make an election under this paragraph shall 
be—
‘‘(i) in the case of parents who are not 
married (within the meaning of section 
7703), the custodial parent (within the 
meaning of section 151(c)(7)) of the child, 
and 
‘‘(ii) in the case of married individuals 
filing separately, the individual with the 
greater taxable income. 
‘‘(D) CARRYOVERS
ALLOWED.—Subpara-
graph (A)(i)(II) shall not prohibit the carryover
of any amount that the child would be entitled
to carryover without regard to the election 
under this paragraph. 
‘‘(E) REGULATIONS.—The Secretary shall 
prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this 
paragraph.’’. 
(c) CONFORMING AMENDMENT.—The heading for 
subsection (g) of section 1 is amended to read as follows: 
‘‘(g) TREATMENT OF CERTAIN INCOME OF MINOR 
CHILDREN.—’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 108. SIMPLIFICATION OF DEPENDENT CARE TAX BEN-
EFITS. 
(a) REPEAL OF REDUCTION OF CREDIT BASED ON 
ADJUSTED GROSS INCOME.—Subsection (a) of section 21 
(relating to allowance of credit) is amended—
(1) in paragraph (1), by striking ‘‘applicable 
percentage’’ and inserting ‘‘35 percent’’, 
(2) by striking paragraph (2), and 
(3) by striking ‘‘(1) IN GENERAL.—’’ and mov-
ing the text 2 ems to the left.
(b) DOLLAR LIMIT ON AMOUNT CREDITABLE MADE 
$5,500 REGARDLESS OF NUMBER OF QUALIFYING INDI-
VIDUALS.—
(1) IN GENERAL.—Subsection (c) of section 21 
(relating to dollar limit on amount creditable) is 
amended to read as follows: 
‘‘(c) DOLLAR LIMIT ON AMOUNT CREDITABLE.—The 
amount of employment-related expenses incurred during 
any taxable year which may be taken into account under 
subsection (a) shall not exceed $5,500, reduced by the ag-
gregate amount excludable from gross income under sec-
tion 129 for the taxable year.’’. 
(2) EXCLUSION.—Subparagraph (A) of section 
129(a)(2) is amended by striking ‘‘$5,000 ($2,500’’ 
and inserting ‘‘$5,500 ($2,750’’.
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 109. ACCELERATION OF PHASEOUT OF PHASEOUT OF 
OVERALL LIMITATION ON ITEMIZED DEDUC-
TIONS. 
(a) IN GENERAL.—Section 68 (relating to overall 
limitation on itemized deductions) is hereby repealed. 
(b) CONFORMING AMENDMENTS.—
(1) Section 1(f)(6)(A) is amended by striking ‘‘, 
section 68(b)(2)’’. 
(2) Section 773(a)(3)(B) is amended by strik-
ing clause (i) and redesignating clauses (ii), (iii), 
and (iv) as clauses (i), (ii), and (iii), respectively. 
(3) The table of sections for part I of sub-
chapter B of chapter 1 is amended by striking the 
item relating to section 68. 
(c) EFFECTIVE DATE.—The amendments by this sec-
tion shall apply to taxable years beginning after December 
31, 2002. 
SEC. 110. ACCELERATION OF REPEAL OF PHASEOUT OF 
PERSONAL EXEMPTIONS. 
(a) IN GENERAL.—Subsection (e) of section 151 (re-
lating to phaseout of exemption amount), as amended by 
the preceding sections of this Act, is amended by striking 
paragraph (3) and redesignating paragraph (4) as para-
graph (3). 
(b) CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 151(e), as amend-
ed by subsection (a), is amended to read as follows: 
‘‘(3) INFLATION ADJUSTMENT.—In the case of 
any taxable year beginning in a calendar year after 
1989, the dollar amount contained in paragraph (1) 
shall be increased by an amount equal to—
‘‘(A) such dollar amount, multiplied by 
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar 
year in which the taxable year begins, by sub-
stituting ‘calendar year 1988’ for ‘calendar year 
1992’ in subparagraph (B) thereof.’’. 
(2) Section 1(f)(6) is amended—
(A) in subparagraph (A) by striking 
‘‘151(e)(4)’’ and inserting ‘‘151(e)(3)’’, and 
(B) in subparagraph (B), both as in effect 
on the date of the enactment of this Act and as 
amended by the Economic Growth and Tax Re-
lief Reconciliation Act of 2001, by striking 
‘‘151(e)(4)(A)’’ and inserting ‘‘151(e)(3)’’. 
(3) Subparagraph (C) of section 642(b)(2), as 
amended by the preceding sections of this Act, is 
amended by striking ‘‘, determined by treating such 
trust 
as 
an 
individual 
described 
in 
section 
151(e)(3)(C)(ii)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002.
Subtitle B—Uniform Definition of 
Child 
SEC. 121. UNIFORM DEFINITION OF CHILD. 
(a) PERSONAL EXEMPTION.—
(1) IN GENERAL.—Section 151, as amended by 
the preceding sections of this Act, is amended by re-
designating subsections (c), (d), (e), and (f) as sub-
sections (d), (e), (f), and (g), respectively, and by in-
serting after subsection (b) the following new sub-
section: 
‘‘(c) ADDITIONAL
EXEMPTION
FOR
QUALIFYING 
CHILDREN.—
‘‘(1) IN GENERAL.—An exemption of the ex-
emption amount for each qualifying child. 
‘‘(2) QUALIFYING CHILD.—For purposes of this 
section, the term ‘qualifying child’ means, with re-
spect to any taxpayer for any taxable year, an indi-
vidual—
‘‘(A) who bears a relationship to the tax-
payer described in paragraph (3), 
‘‘(B) who has the same principal place of 
abode as the taxpayer for more than 1⁄2 of such 
taxable year, and 
‘‘(C) who meets the age requirements of 
paragraph (4).
An individual shall not be treated as failing to meet 
the requirements of subparagraph (B) by reason of 
time of birth or death or by reason of temporary ab-
sences or other circumstances specified in the regu-
lations prescribed by the Secretary. 
‘‘(3) RELATIONSHIP TEST.—
‘‘(A) IN GENERAL.—For purposes of para-
graph (2)(A), an individual bears a relationship 
to the taxpayer described in this paragraph if 
such individual is—
‘‘(i) a son, daughter, stepson, or step-
daughter of the taxpayer or a descendant 
of any such relative, 
‘‘(ii) a brother, sister, stepbrother, or 
stepsister of the taxpayer or a descendant 
of any such relative, whom the taxpayer 
cares for as the taxpayer’s own child, or 
‘‘(iii) an eligible foster child of the 
taxpayer. 
‘‘(B) ADOPTED CHILD.—For purposes of 
subparagraph (A), a child who is legally adopt-
ed, or who is placed with the taxpayer by an 
authorized placement agency for adoption by 
the taxpayer, shall be treated as a child by 
blood.
‘‘(C) ELIGIBLE FOSTER CHILD.—For pur-
poses of subparagraph (A), the term ‘eligible 
foster child’ means an individual—
‘‘(i) who is placed with the taxpayer 
by an authorized placement agency or by 
judgment, decree, or other order of any 
court of competent jurisdiction, and 
‘‘(ii) whom the taxpayer cares for as 
the taxpayer’s own child. 
‘‘(4) AGE
REQUIREMENTS.—For purposes of 
paragraph (2)(C), an individual meets the require-
ments of this paragraph if such individual—
‘‘(A) has not attained the age of 19 as of 
the close of the calendar year in which the tax-
able year of the taxpayer begins, 
‘‘(B) is a student who has not attained the 
age of 24 as of the close of such calendar year, 
or 
‘‘(C) is permanently and totally disabled 
(as defined in section 22(e)(3)) at any time 
during the taxable year. 
‘‘(5) SPECIAL RULES.—
‘‘(A) MARRIED
DEPENDENTS.—An indi-
vidual shall not be a qualifying child of a tax-
payer if such individual makes a joint return
with the individual’s spouse under section 6013 
for the taxable year beginning in the calendar 
year in which the taxable year of the taxpayer 
begins. 
‘‘(B) INDIVIDUALS WHO SUPPORT THEM-
SELVES.—An individual shall not be a quali-
fying child of a taxpayer if such individual pro-
vides over half of such individual’s own support 
for the calendar year in which the taxable year 
of the taxpayer begins. 
‘‘(C) ONLY
EXEMPTION
AMOUNT.—An 
individual who is a qualifying child of any tax-
payer shall not be treated as the dependent of 
any taxpayer for purposes of this part.
‘‘(6) SPECIAL RULE RELATING TO 2 OR MORE 
CLAIMING QUALIFYING CHILD.—
‘‘(A) IN GENERAL.—Except as provided in 
paragraph (7), if an individual would (but for 
this paragraph) be a qualifying child of 2 or 
more taxpayers for taxable years beginning in 
the same calendar year, such individual shall be 
treated as the qualifying child of the taxpayer 
who is—
‘‘(i) a parent of the individual, or
‘‘(ii) if none of such taxpayers is a 
parent of the individual, the taxpayer with 
the highest adjusted gross income for such 
taxable year. 
‘‘(B) PARENTS
NOT
FILING
JOINT
RE-
TURNS.—If an individual would (but for this 
paragraph) be a qualifying child of both parents 
of such individual and such parents do not file 
a joint return together, such child shall be 
treated as the qualifying child of—
‘‘(i) the parent with whom the child 
resided for the longest period during the 
taxable year, or 
‘‘(ii) if the child resides with both par-
ents for the same length of time during 
such taxable year, the parent with the 
highest adjusted gross income. 
‘‘(C) FOSTER CHILDREN.—For purposes of 
this paragraph, the taxpayer shall be treated as 
a parent of any eligible foster child who has the 
same principal place of abode as the taxpayer 
for more than one-half of such taxable year. 
‘‘(7) SPECIAL RULE FOR CERTAIN PRE-2004 IN-
STRUMENTS.—
‘‘(A) IN GENERAL.—Notwithstanding para-
graph (6), a child who has parents who—
‘‘(i) are divorced or legally separated 
under a decree of divorce or separate 
maintenance, 
‘‘(ii) are separated under a written 
separation agreement, or 
‘‘(iii) live apart at all times during the 
last 6 months of the calendar year, 
shall be treated as being the qualifying child of 
the noncustodial parent for a calendar year if 
the requirements of subparagraph (B) are met. 
‘‘(B) REQUIREMENTS.—For purposes of 
subparagraph (A), the requirements of this sub-
paragraph are met if—
‘‘(i) such child would, but for this 
paragraph, be the qualifying child of the 
custodial parent, and 
‘‘(ii) a qualified pre-2004 instrument 
between the parents is applicable to such 
child for the taxable year beginning in such 
calendar year. 
In the case of an agreement executed before 
January 1, 1985, the requirements of this sub-
paragraph are met only if, in addition to meet-
ing the requirements of clauses (i) and (ii), the 
noncustodial parent provides at least $600 for 
the support of such child during such calendar 
year. 
‘‘(C) QUALIFIED PRE-2004 INSTRUMENT.—
For purposes of this paragraph, the term 
‘qualified pre-2004 instrument’ means any writ-
ten declaration referred to in subsection (e)(2) 
(as in effect on the day before the date of the 
enactment of the Individual and Small Business 
Tax Simplification Act of 2002)— 
‘‘(i) which is executed before January 
1, 2004, and 
‘‘(ii) which is not modified on or after 
such date in a modification which expressly 
provides that this subsection shall not 
apply to such declaration. 
‘‘(D) CUSTODIAL PARENT AND NONCUSTO-
DIAL
PARENT.—For purposes of this sub-
section—
‘‘(i) CUSTODIAL PARENT.—The term 
‘custodial parent’ means the parent with 
whom a child shared the same principal 
place of abode for the greater portion of 
the calendar year.
‘‘(ii) NONCUSTODIAL
PARENT.—The 
term ‘noncustodial parent’ means the par-
ent who is not the custodial parent. 
‘‘(E) SPECIAL RULES FOR SUPPORT.—For 
purposes of this subsection—
‘‘(i) amounts expended for the support 
of a child or children shall be treated as 
received from the noncustodial parent to 
the extent that such parent provided 
amounts for such support, and 
‘‘(ii) in the case of the remarriage of 
a parent, support of a child received from 
the parent’s spouse shall be treated as re-
ceived from the parent.’’. 
(2) CONFORMING AMENDMENTS.—
(A) Section 152 is amended by striking 
subsection (g) (relating to support test in case 
of child of divorced parents, etc.), as redesig-
nated by the preceding sections this Act. 
(B) Paragraph (6) of section 1(f), as 
amended by the preceding sections of this Act, 
is amended by striking ‘‘151(e)(3)(A)’’ and in-
serting ‘‘151(f)(3)(A)’’. 
(C) Paragraph (5) of section 21(e) is 
amended—
(i) by striking ‘‘paragraph (2) or (4) 
of section 152(e)’’ and inserting ‘‘section 
151(c)(7)’’, and 
(ii) by striking ‘‘section 152(e)(1)’’ 
and inserting ‘‘section 151(c)(7)’’. 
(D) Sections 21(e)(6) and 129(c) are each 
amended—
(i) by striking ‘‘151(c)’’ and inserting 
‘‘151(d)’’, and 
(ii) by striking ‘‘151(c)(3)’’ and in-
serting ‘‘151(d)(3)’’. 
(E) Sections 25(c)(2)(B), 32(c)(3)(C)(ii), 
152(d)(2), 
and 
2032A(c)(7)(D) 
are 
each 
amended by striking ‘‘151(c)(4)’’ and inserting 
‘‘151(d)(4)’’. 
(F) 
Sections 
72(t)(7)(A)(iii) 
and 
132(h)(2)(B) are each amended by striking 
‘‘151(c)(3)’’ and inserting ‘‘151(d)(3)’’. 
(G) 
Subparagraph 
(C) 
of 
section 
642(b)(2), as amended by the preceding sec-
tions of this Act, is amended by striking 
‘‘151(e)’’ and inserting ‘‘151(f)’’. 
(H) Paragraph (1) of section 3402(f) is 
amended by striking ‘‘151(e)(2)’’ and inserting 
‘‘151(f)(2)’’.
(I) 
Subparagraph 
(B) 
of 
section 
3402(r)(2), as so amended, is amended by 
striking ‘‘151(e)’’ and inserting ‘‘151(f)’’. 
(J) Clause (ii) of section 6012(a)(1)(D), as 
so amended, is amended—
(i) by striking ‘‘151(e)’’ and inserting 
‘‘151(f)’’, and 
(ii) by striking ‘‘151(e)(2)’’ and in-
serting ‘‘151(f)(2)’’. 
(K) 
The 
last 
sentence 
of 
section 
6013(b)(3)(A), as so amended is amended by 
striking ‘‘151(e)’’ and inserting ‘‘151(f)’’. 
(b) APPLICATION OF UNIFORM DEFINITION TO DE-
PENDENT CARE CREDIT.—Section 21(b)(1)(A) is amend-
ed to read as follows: 
‘‘(A) a qualifying child of the taxpayer (as 
defined in section 151(c)) who has not attained 
age 13,’’. 
(c) APPLICATION
OF
UNIFORM
DEFINITION
TO 
CHILD TAX CREDIT.—Section 24(c)(1) is amended to 
read as follows: 
‘‘(1) IN GENERAL.—The term ‘qualifying child’ 
means a qualifying child of the taxpayer (as defined 
in section 151(c)) who has not attained age 17 as
of the close of the calendar year in which the taxable 
year of the taxpayer begins.’’. 
(d) APPLICATION
OF
UNIFORM
DEFINITION
TO 
EARNED INCOME CREDIT.—
(1) IN
GENERAL.—Paragraph (3) of section 
32(c) is amended to read as follows: 
‘‘(3) QUALIFYING CHILD.—
‘‘(A) IN GENERAL.—The term ‘qualifying 
child’ means a qualifying child of the taxpayer 
(as defined in section 151(c)). 
‘‘(B) PLACE OF ABODE.—For purposes of 
subparagraph (A), the requirements of section 
151(c)(2)(B) shall be met only if the principal 
place of abode is in the United States. 
‘‘(C) IDENTIFICATION REQUIREMENTS.—
‘‘(i) IN GENERAL—A qualifying child 
shall not be taken into account under sub-
section (b) unless the taxpayer includes the 
name, age, and TIN of the qualifying child 
on the return of tax for the taxable year. 
‘‘(ii) OTHER
METHODS.—The Sec-
retary may prescribe other methods for 
providing the information described in 
clause (i).’’. 
(2) CONFORMING AMENDMENTS.—
(A) Section 32(c)(1) is amended by strik-
ing subparagraph (C) and by redesignating sub-
paragraphs (D), (E), (F), and (G) as subpara-
graphs (C), (D), (E), and (F), respectively. 
(B) Section 32(c)(4) is amended by strik-
ing ‘‘(3)(E)’’ and inserting ‘‘(3)(B)’’. 
(C) Section 32(m) is amended by striking 
‘‘subsections (c)(1)(F)’’ and inserting ‘‘sub-
sections (c)(1)(E)’’. 
SEC. 122. TREATMENT OF GOVERNMENT BENEFITS IN DE-
TERMINING SUPPORT AND COST OF MAIN-
TAINING HOUSEHOLD. 
(a) DEPENDENCY
EXEMPTION.—Section 152 is 
amended by adding at the end the following new sub-
section: 
‘‘(f) SPECIAL RULE RELATING TO TREATMENT OF 
GOVERNMENT BENEFITS IN DETERMINING SUPPORT.—
For purposes of this part, any means-tested benefits ob-
tained under programs described in section 6103(l)(7) or 
substantially similar government programs shall not be 
taken into account for purposes of determining—
‘‘(1) whether over half of the support of an in-
dividual for a calendar year is received from a tax-
payer, and
‘‘(2) whether over half of the cost of maintain-
ing a household is furnished by a taxpayer.’’. 
(b) DEPENDENT CARE CREDIT.—Section 21(e)(1) is 
amended by adding at the end the following: ‘‘Any means-
tested benefits obtained under programs described in sec-
tion 6103(l)(7) or substantially similar government pro-
grams shall not be taken into account for purposes of de-
termining whether over half of the cost of maintaining a 
household is furnished by the individual.’’. 
(c) MARITAL STATUS.—Section 7703 (relating to de-
termination of marital status) is amended by adding at 
the end the following new subsection: 
‘‘(c) SPECIAL RULE RELATING TO TREATMENT OF 
GOVERNMENT BENEFITS
IN DETERMINING COST
OF 
MAINTAINING HOUSEHOLD.—For purposes of subsection 
(b)(2), any means-tested benefits obtained under pro-
grams described in section 6103(l)(7) or substantially 
similar government programs shall not be taken into ac-
count for purposes of determining whether over half of the 
cost of maintaining a household is furnished by the indi-
vidual.’’. 
SEC. 123. EFFECTIVE DATE. 
The amendments made by this subtitle shall apply to 
taxable years beginning after December 31, 2002.
Subtitle C—Education Tax 
Incentives 
SEC. 131. HOPE AND LIFETIME LEARNING CREDITS COM-
BINED. 
(a) IN GENERAL.—So much of section 25A (relating 
to Hope and Lifetime Learning Credits) as precedes sub-
section (d) is amended to read as follows: 
‘‘SEC. 25A. EDUCATION CREDIT. 
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax 
imposed by this chapter for the taxable year the amount 
equal to 50 percent of so much of the qualified expenses 
paid by the taxpayer during the taxable year (for edu-
cation furnished to an individual during any academic pe-
riod beginning in such taxable year) as does not exceed 
$3,000 for such taxable year with respect to such indi-
vidual. 
‘‘(b) QUALIFIED EXPENSES.—For purposes of sub-
section (a), the term ‘qualified expenses’ means the sum 
of—
‘‘(1) qualified higher education expenses, and 
‘‘(2) the expenses described in subsection (d)(1) 
with respect to any course of instruction at an eligi-
ble educational institution to acquire or improve job 
skills of the individual.’’.
(b) CONFORMING AMENDMENTS TO CREDIT.—
(1) Section 25A is amended—
(A) by striking subsection (h), and 
(B) by redesignating subsections (e), (f), 
(g), and (i) as subsections (c), (d), (e), and (f), 
respectively. 
(2) Subsection (e)(2) of section 25A, as so re-
designated, is amended by striking ‘‘(before the ap-
plication of subsections (b), (c), and (d))’’. 
(c) OTHER CONFORMING AND CLERICAL AMEND-
MENTS.—
(1) The following provisions are each amended 
by striking ‘‘section 25A(g)(2)’’ and inserting ‘‘sec-
tion 25A(e)(2)’’: 
(A) Section 72(t)(7)(B). 
(B) Section 221(d)(2)(B). 
(C) Section 222(d)(1) (as amended by sec-
tion 132 of this Act). 
(D) Section 529(c)(3)(B)(v)(I). 
(E) Section 530(b)(2)(A). 
(F) Section 530(d)(2)(C)(i)(I). 
(G) Section 530(d)(4)(B)(iii). 
(2) Section 221(d) is amended—
(A) in paragraph (2) by striking ‘‘section 
25A(f)(2)’’ and inserting ‘‘section 25A(d)(2)’’, 
and 
(B) by amending paragraph (3) to read as 
follows: 
‘‘(3) ELIGIBLE STUDENT.—The term ‘eligible 
student’ means, with respect to any academic period, 
a student who—
‘‘(A) meets the requirements of section 
484(a)(1) of the Higher Education Act of 1965 
(20 U.S.C. 1091(a)(1)), as in effect on the date 
of the enactment of this section, and 
‘‘(B) is carrying at least 1⁄2 the normal 
full-time work load for the course of study the 
student is pursuing.’’. 
(3) Section 529(e)(3)(B)(i) is amended by strik-
ing ‘‘section 25A(b)(3)’’ and inserting ‘‘section 
221(d)(3)’’. 
(4) The heading of section 529(c)(3)(B)(v) is 
amended to read as follows: ‘‘COORDINATION WITH 
EDUCATION CREDIT.—’’. 
(5) The heading of section 530(d)(2)(C) is 
amended to read as follows: ‘‘COORDINATION WITH 
EDUCATION CREDIT AND QUALIFIED TUITION PRO-
GRAMS.—’’.
(6) Section 6050S(e) is amended by striking 
‘‘subsection 
(g)(2)’’ 
and 
inserting 
‘‘subsection 
(e)(2)’’. 
(7) Section 6213(g)(2)(J) is amended by strik-
ing ‘‘section 25A(g)(1)’’ and inserting ‘‘section 
25A(e)(1)’’. 
(8) The item relating to section 25A in the 
table of sections for subpart A of part IV of sub-
chapter A of chapter 1 is amended to read as fol-
lows:
‘‘Sec. 25A. Education Credit.’’.
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 132. UNIFORM DEFINITION OF QUALIFYING HIGHER 
EDUCATION EXPENSES. 
(a) IN GENERAL.—Paragraph (3) of section 529(e) 
(relating to other definitions and special rules) is amended 
to read as follows: 
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified 
higher education expenses’ means—
‘‘(i) tuition, fees, books, supplies, and 
equipment required for the enrollment or
attendance of a designated beneficiary at 
an eligible educational institution; and 
‘‘(ii) expenses for special needs serv-
ices in the case of a special needs bene-
ficiary which are incurred in connection 
with such enrollment or attendance. 
‘‘(B) ROOM
AND
BOARD
INCLUDED
FOR 
STUDENTS WHO ARE AT LEAST HALF-TIME.—
‘‘(i) IN GENERAL.—In the case of an 
individual who is an eligible student for 
any academic period, such term shall also 
include reasonable costs for such period (as 
determined under the qualified tuition pro-
gram) incurred by the designated bene-
ficiary for room and board while attending 
such institution. For purposes of sub-
section (b)(7), a designated beneficiary 
shall be treated as meeting the require-
ments of this clause. 
‘‘(ii) LIMITATION.—The amount treat-
ed as qualified higher education expenses 
by reason of clause (i) shall not exceed—
‘‘(I) the allowance (applicable to 
the student) for room and board in-
cluded in the cost of attendance (as
defined in section 472 of the Higher 
Education Act of 1965 (20 U.S.C. 
1087ll), as in effect on the date of the 
enactment of the Economic Growth 
and Tax Relief Reconciliation Act of 
2001) as determined by the eligible 
educational institution for such pe-
riod, or 
‘‘(II) if greater, the actual invoice 
amount the student residing in hous-
ing owned or operated by the eligible 
educational institution is charged by 
such institution for room and board 
costs for such period. 
‘‘(iii) ELIGIBLE STUDENT.—For pur-
poses of this subparagraph, the term ‘eligi-
ble student’ means, with respect to any 
academic period, a student who—
‘‘(I) meets the requirements of 
section 484(a)(1) of the Higher Edu-
cation Act of 1965 (20 U.S.C. 
1091(a)(1)), as in effect on the date 
of the enactment of this section, and 
‘‘(II) is carrying at least 1⁄2 the 
normal full-time work load for the
course of study the student is pur-
suing. 
‘‘(C) EXCEPTIONS.—
‘‘(i) EXCEPTION FOR EDUCATION IN-
VOLVING
SPORTS, ETC.—Such term does 
not include expenses with respect to any 
course or other education involving sports, 
games, or hobbies, unless such course or 
other education is part of the individual’s 
degree program. 
‘‘(ii) EXCEPTION FOR NONACADEMIC 
FEES.—Such term does not include stu-
dent activity fees, athletic fees, insurance 
expenses, or other expenses unrelated to an 
individual’s academic course of instruc-
tion.’’. 
(b) CONFORMING AMENDMENTS.—
(1) Section 25A and 6050S are each amended 
by striking ‘‘qualified tuition and related expenses’’ 
each place it appears and inserting ‘‘qualified higher 
education expenses’’. 
(2) Section 25A(f)(1) is amended to read as fol-
lows: 
‘‘(1) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ means the qualified higher education ex-
penses (as defined by section 529(e)(3) without re-
gard to subparagraph (B) thereof) required for the 
enrollment or attendance of—
‘‘(A) the taxpayer, 
‘‘(B) the taxpayer’s spouse, or 
‘‘(C) any dependent of the taxpayer with 
respect to whom the taxpayer is allowed a de-
duction under section 151, 
at an eligible educational institution for courses of 
instruction of such individual at such institution.’’. 
(3) Section 135(c)(2) is amended—
(A) by striking ‘‘tuition and fees’’ and in-
serting ‘‘the qualified higher education expenses 
(as defined by section 529(e)(3) without regard 
to subparagraph (B) thereof)’’, and 
(B) by striking subparagraph (B) and re-
designating subparagraph (C) as subparagraph 
(B). 
(4) Section 221(d)(2) is amended by striking 
‘‘the cost of attendance (as defined in section 472 of 
the Higher Education Act of 1965, 20 U.S.C. 
1087ll, as in effect on the day before the date of the 
enactment of this Act)’’ and inserting ‘‘the qualified 
higher education expenses (as defined by section
529(e)(3) without regard to subparagraph (B) there-
of) incurred for attendance’’. 
(5)(A) Section 222 is amended by striking 
‘‘qualified tuition and related expenses’’ each place 
it appears and inserting ‘‘qualified higher education 
expenses’’. 
(B) Section 222(d)(1) is amended to read as 
follows: 
‘‘(1) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ has the meaning given such term by section 
529(e)(3) (without regard to subparagraph (B) 
thereof). Such expenses shall be reduced in the same 
manner as under section 25A(g)(2).’’. 
(C) Section 222(d) is amended by redesignating 
paragraph (6) as paragraph (7) and by inserting 
after paragraph (5) the following new paragraph: 
‘‘(6) ROOM AND BOARD INCLUDED FOR STU-
DENTS WHO ARE FULL-TIME.—No amount shall be 
taken into account under this section for an expense 
described in section 529(e)(3)(B) (relating to room 
and board included for students who are at least 
half-time) unless such individual is an eligible stu-
dent (as defined in section 25A(b)(3), determined by 
substituting ‘the normal full-time work load’ in lieu
of ‘1⁄2 the normal full-time work load’ in subpara-
graph (B) thereof.’’. 
(D) The heading for section 222 is amended by 
striking ‘‘TUITION AND RELATED’’ and in-
serting ‘‘HIGHER EDUCATION’’. 
(E) The table of sections for part VII of sub-
chapter B of chapter 1 is amended by amending the 
item relating to section 222 to read as follows:
‘‘Sec. 222. Qualified higher education expenses.’’.
(6)(A) Section 6724(d) is amended—
(i) in paragraph (1)(B)(x) by striking 
‘‘qualified tuition and related expenses’’ and in-
serting ‘‘qualified higher education expenses’’, 
and 
(ii) in paragraph (2)(Z) by striking ‘‘quali-
fied tuition and related expenses’’ and inserting 
‘‘qualified higher education expenses’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts paid in taxable years 
beginning after December 31, 2002, for education fur-
nished in periods beginning after such date. 
TITLE II—SMALL BUSINESS TAX 
SIMPLIFICATION 
SEC. 201. UNIFIED PASS-THRU ENTITY REGIME. 
(a) TERMINATION OF S CORPORATION STATUS.—
(1) NO
NEW
S
CORPORATION
ELECTIONS.—
Subsection (a) of section 1362 is amended by adding 
at the end the following new paragraph: 
‘‘(3) TERMINATION
OF
AUTHORITY
TO
MAKE 
ELECTION.—No election may be made under para-
graph (1) for any taxable year beginning after De-
cember 31, 2002.’’. 
(2) TERMINATION OF STATUS.—Subsection (d) 
of section 1362 (relating to termination) is amended 
by adding at the end the following new paragraph: 
‘‘(4) TREATMENT
AS
PARTNERSHIP
AFTER 
2012.—An election under subsection (a)—
‘‘(A) shall not be effective for any taxable 
year beginning after December 31, 2012, and 
‘‘(B) shall be treated as an election under 
section 7701(a)(2)(B)(iii) for taxable years be-
ginning after such date.’’. 
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years begin-
ning after December 31, 2002. 
(b) ELECTION BY CERTAIN CORPORATIONS TO BE 
TAXED AS PARTNERSHIP.—
(1) IN
GENERAL.—Paragraph (2) of section 
7701 (defining partnership and partner) is amended 
to read as follows:
‘‘(2) PARTNERSHIP AND PARTNER.—
‘‘(A) 
IN
GENERAL.—The 
term 
‘partnership‘ includes a syndicate, group, pool, 
joint venture, or other unincorporated organiza-
tion, through or by means of which any busi-
ness, financial operation, or venture is carried 
on, and which is not, within the meaning of this 
title, a trust or estate or a corporation; and the 
term ‘partner’ includes a member in such a syn-
dicate, group, pool, joint venture, or organiza-
tion. 
‘‘(B) ELECTION BY CORPORATION TO BE 
TAXED AS PARTNERSHIP.—
‘‘(i) IN
GENERAL.—An eligible cor-
poration may elect to be treated as a part-
nership for purposes of this title. 
‘‘(ii) ELIGIBLE
CORPORATION.—For 
purposes of clause (i), the term ‘eligible 
corporation’ means an entity—
‘‘(I) which, without regard to this 
subparagraph, is a domestic corpora-
tion no stock of which is readily 
tradable on an established securities 
market or otherwise, and
‘‘(II) which is not an ineligible 
corporation (as defined by section 
1361(b)(2)). 
‘‘(iii) 
ELECTION
AND
TERMI-
NATION.—For purposes of this subpara-
graph, rules similar to the rules of section 
1362 (other than subsections (a)(3), (d)(3) 
and (4), and (e) thereof) shall apply. 
‘‘(iv) EFFECT
OF
ELECTION.—No 
gain or loss shall be recognized by the 
shareholders or the corporation by reason 
of an election under this subparagraph, 
and rules similar to the rules of sections 
1366(f)(2) and 1374 shall apply. 
‘‘(v) 
DISTRIBUTIONS, 
ETC.—Each 
partner shall include in gross income as a 
dividend, any amount that would have been 
so includible had the entity been an S cor-
poration during the period the entity was 
treated as a partnership. Notwithstanding 
the preceding sentence, the provisions of 
subchapter K of chapter 1 shall apply to 
determine the basis of any property dis-
tributed and the basis of any interest in 
the partnership.’’
(2) MODIFICATION TO TREATMENT OF SECTION 
1374 TAX FOR EARNINGS AND PROFITS PURPOSES.—
Paragraph (2) of section 1366(f) is amended to read 
as follows: 
‘‘(2) TREATMENT OF TAX IMPOSED ON BUILD-
IN GAINS.—
‘‘(A) IN
GENERAL.—The amount of the 
items of the net recognized built-in-gain taken 
into account under section 1374(b)(1) (reduced 
by 
any 
deduction 
allowed 
under 
section 
1374(b)(2)) shall not be taken into account 
under this section. 
‘‘(B) EARNINGS AND PROFITS.—The accu-
mulated earnings and profits of the corporation 
shall be increased at the beginning of the tax-
able year by the amount not taken into account 
under this section by reason of subparagraph 
(A) (determined without regard to section 
1374(b)(2)) reduced by the tax imposed by sec-
tion 1374 (net of credits allowed).’’
(3) EFFECTIVE DATE.—The amendments made 
by this subsection shall apply to taxable years begin-
ning after December 31, 2002.
(c) STEP TRANSACTION DOCTRINE NOT TO APPLY 
TO PARTNERSHIP INCORPORATION FOLLOWED BY COR-
PORATE REORGANIZATION.—
(1) IN GENERAL.—Section 351 is amended by 
redesignating subsection (h) as subsection (i) and by 
inserting after subsection (g) the following new sub-
section: 
‘‘(h) SPECIAL RULE FOR PARTNERSHIPS WHICH IN-
CORPORATE
AND
SUBSEQUENTLY
REORGANIZE.—The 
step transaction doctrine and any similar doctrine shall 
not apply for purposes of determining whether the control 
requirement of subsection (a) is met in any case in 
which—
‘‘(1) a partnership engaged in an active trade 
or business transfers substantially all of the property 
used in carrying on such trade or business to a cor-
poration which is not publicly traded, and 
‘‘(2) such corporation subsequently enters into 
a reorganization under this chapter.’’. 
(2) EFFECTIVE DATE.—The amendment made 
by this subsection shall apply to transactions after 
December 31, 2002. 
SEC. 202. INCREASE IN EXPENSING UNDER SECTION 179. 
(a) INCREASE IN DOLLAR LIMITATIONS.—
(1) IN
GENERAL.—Paragraph (1) of section 
179(b) (relating to dollar limitation) is amended to 
read as follows: 
‘‘(1) DOLLAR LIMITATION.—The aggregate cost 
which may be taken into account under subsection 
(a) for any taxable year shall not exceed $25,000 
($40,000 in the case of taxable years beginning after 
December 31, 2012).’’
(2) INCREASE
IN
PHASEOUT
THRESHOLD.—
Paragraph (2) of section 179(b) is amended by in-
serting before the period ‘‘($325,000 in the case of 
taxable years beginning after December 31, 2012).’’. 
(b) INFLATION ADJUSTMENTS.—
(1) IN
GENERAL.—Subsection (b) of section 
179 is amended by redesignating paragraphs (3) and 
(4) as paragraphs (4) and (5), respectively, and by 
inserting after paragraph (2) the following new 
paragraph: 
‘‘(3) INFLATION ADJUSTMENT.—In the case of 
any taxable year beginning in a calendar year after 
2004, the dollar amounts contained in paragraphs 
(1) and (2) which would (but for this paragraph) 
apply to such taxable year shall be increased by an 
amount equal to the product of—
‘‘(A) such dollar amount, and
‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for the calendar 
year in which the taxable year begins, deter-
mined by substituting in subparagraph (B) 
thereof—
‘‘(i) ‘calendar year 2003’ for ‘calendar 
year 1992’ with respect to the $25,000 
and $200,000 amounts, and 
‘‘(ii) ‘calendar year 2011’ for ‘cal-
endar year 1992’ with respect to the 
$40,000 and $325,000 amounts. 
If any amount after adjustment under the preceding 
sentence is not a multiple of $1,000, such amount 
shall be rounded to the next lowest multiple of 
$1,000.’’
(2) CONFORMING AMENDMENT.—Subparagraph 
(B) of section 179(b)(5), as redesignated by para-
graph (1), is amended by striking ‘‘paragraph (3)’’ 
and inserting ‘‘paragraph (4)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002.
‘‘(i) Stock in trade or other property 
held primarily for sale. 
‘‘(ii) Stocks, bonds, or notes. 
‘‘(iii) Other securities or evidences of 
indebtedness or interest. 
‘‘(iv) Interests in a partnership. 
‘‘(v) Certificates of trust or beneficial 
interests. 
‘‘(vi) Choses in action. 
‘‘(2) 
REPLACEMENT
SECTION
1031
PROP-
ERTY.—The term ‘replacement section 1031 prop-
erty’ means, with respect to the sale of any section 
1031 property, other section 1031 property which is 
of a like kind to the section 1031 property sold. 
‘‘(3) ROLLOVER
PERIOD.—The term ‘rollover 
period’ means, with respect to the sale of any prop-
erty, the period which begins 180 days before the 
date of such sale and ends on the earlier of—
‘‘(A) the date which is 180 days after the 
date of such sale, or 
‘‘(B) the due date (determined with regard 
to extension) for the taxpayer’s return of the 
tax imposed by this chapter for the taxable year 
which includes the date of such sale.
‘‘(c) BASIS ADJUSTMENTS.—If gain from any sale is 
not recognized by reason of subsection (a), such gain shall 
be applied to reduce the basis for determining the gain 
or loss of replacement section 1031 property purchased 
during the rollover period. If more than one replacement 
section 1031 property is purchased during the rollover pe-
riod, such reduction shall be allocated among such prop-
erties in such amounts as the taxpayer elects. 
‘‘(d) SPECIAL RULES FOR TRANSACTIONS BETWEEN 
RELATED PERSONS.—
‘‘(1) SALE BY TAXPAYER.—If—
‘‘(A) the taxpayer sells property to a re-
lated person, 
‘‘(B) there is nonrecognition of gain under 
this section with respect to such sale (deter-
mined without regard to this subsection), and 
‘‘(C) before the date 2 years after the date 
of such sale the related person disposes of such 
property, 
there shall be no nonrecognition of gain under this 
section to the taxpayer with respect to such sale, 
and any gain recognized by the taxpayer by reason 
of this subsection shall be taken into account as of 
the date on which the disposition referred to in sub-
paragraph (C) occurs.
‘‘(2) PURCHASE
BY
TAXPAYER.—If the tax-
payer—
‘‘(A) purchases property from a related 
person which is taken into account under sub-
section (a)(1) (determined without regard to 
this subsection), and 
‘‘(B) disposes of such property before the 
date 2 years after the date of such purchase, 
such property shall not be taken into account under 
subsection (a)(1), and any gain recognized by reason 
of this subsection shall be taken into account on the 
date on which the disposition referred to in subpara-
graph (B) occurs. 
‘‘(3) CERTAIN DISPOSITIONS NOT TAKEN INTO 
ACCOUNT.— For purposes of paragraphs (1)(C) and 
(2)(B), there shall not be taken into account any 
disposition—
‘‘(A) after the earlier of the death of the 
taxpayer or the death of the related person, 
‘‘(B) in a compulsory or involuntary con-
version (within the meaning of section 1033) if 
the transaction occurred before the threat or 
imminence of such conversion, or 
‘‘(C) with respect to which it is established 
to the satisfaction of the Secretary that neither
the transaction nor such disposition had as one 
of its principal purposes the avoidance of Fed-
eral income tax. 
‘‘(4) RELATED PERSON.— For purposes of this 
subsection, the term ‘related person’ means any per-
son bearing a relationship to the taxpayer described 
in section 267(b) or 707(b)(1). 
‘‘(5) SPECIAL RULE WHERE SUBSTANTIAL DIMI-
NUTION OF RISK.—
‘‘(A) IN GENERAL.—If subparagraph (B) 
applies to any property for any period, the run-
ning of the period set forth in paragraph (1)(C) 
with respect to such property shall be sus-
pended during such period. 
‘‘(B) PROPERTY
TO
WHICH
PARAGRAPH 
APPLIES.—This subparagraph shall apply to 
any property for any period during which the 
holder’s risk of loss with respect to the property 
is substantially diminished by—
‘‘(i) the holding of a put with respect 
to such property, 
‘‘(ii) the holding by another person of 
a right to acquire such property, or 
‘‘(iii) a short sale or any other trans-
action.
‘‘(6) 
TREATMENT
OF
CERTAIN
TRANS-
ACTIONS.—This section shall not apply to any trans-
action which is part of a series of transactions struc-
tured to avoid the purposes of this subsection. 
‘‘(e) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) EXCHANGES.—A contemporaneous ex-
change by the taxpayer of section 1031 property for 
replacement section 1031 property shall be treated 
as a sale of such section 1031 property and a pur-
chase of such replacement section 1031 property 
without regard to whether the taxpayer makes the 
election described in subsection (a). In the case of 
such an exchange, no loss shall be recognized. 
‘‘(2) CERTAIN PARTNERSHIPS.—An interest in 
a partnership which has in effect a valid election 
under section 761(a) to be excluded from the appli-
cation of all of subchapter K shall be treated as an 
interest in each of the assets of such partnership 
and not as an interest in a partnership. 
‘‘(3) LIVESTOCK OF DIFFERENT SEXES.—Live-
stock of different sexes are not property of a like 
kind. 
‘‘(4) FOREIGN REAL PROPERTY.—Real property 
located in the United States and real property lo-