243 
the proper application of this subchapter to an amount 
distributed by a trust, such amount shall be deemed to 
be an accumulation distribution consisting of undistrib-
uted net income earned during the earliest preceding tax-
able year of the trust in which it can be established that 
the trust was in existence. 
‘‘(e) DENIAL OF REFUND TO TRUSTS AND BENE-
FICIARIES.—No refund or credit shall be allowed to a trust 
or a beneficiary of such trust for any preceding taxable 
year by reason of a distribution deemed to have been made 
by such trust in such year under this section. 
‘‘SEC. 152. TREATMENT OF AMOUNTS DEEMED DISTRIB-
UTED BY TRUST IN PRECEDING YEARS. 
‘‘(a) GENERAL RULE.—The total of the amounts 
which are treated under section 151 as having been dis-
tributed by a trust in a preceding taxable year shall be 
included in the income of a beneficiary of the trust when 
paid, credited, or required to be distributed to the extent 
that such total would have been included in the income 
of such beneficiary under section 147(a)(2) (and, with re-
spect to any tax-exempt interest to which section 103 ap-
plies, under section 147(b)) if such total had been paid 
to such beneficiary on the last day of such preceding tax-
able year. The tax imposed by this subtitle on a beneficiary 
for a taxable year in which any such amount is included 
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in his income shall be determined only as provided in this 
section and shall consist of the sum of— 
‘‘(1) a partial tax computed on the taxable in-
come reduced by an amount equal to the total of 
such amounts, at the rate and in the manner as if 
this section had not been enacted, 
‘‘(2) a partial tax determined as provided in 
subsection (b) of this section, and 
‘‘(3) in the case of a foreign trust, the interest 
charge determined as provided in section 152. 
‘‘(b) TAX ON DISTRIBUTION.— 
‘‘(1) IN GENERAL.—The partial tax imposed by 
subsection (a)(2) shall be determined. 
‘‘(A) by determining the number of pre-
ceding taxable years of the trust on the last day 
of which an amount is deemed under section 
151(a) to have been distributed, 
‘‘(B) by taking from the 5 taxable years 
immediately preceding the year of the accumu-
lation distribution the 1 taxable year for which 
the beneficiary’s taxable income was the highest 
and the 1 taxable year for which his taxable in-
come was the lowest, 
‘‘(C) by adding to the beneficiary’s taxable 
income for each of the 3 taxable years remain-
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ing after the application of subparagraph (B) 
an amount determined by dividing the amount 
deemed distributed under section 151 and re-
quired to be included in income under sub-
section (a) by the number of preceding taxable 
years determined under subparagraph (A), and 
‘‘(D) by determining the average increase 
in tax for the 3 taxable years referred to in sub-
paragraph (C) resulting from the application of 
such subparagraph. 
The partial tax imposed by subsection (a)(2) shall be 
the excess (if any) of the average increase in tax de-
termined under subparagraph (D), multiplied by the 
number of preceding taxable years determined under 
subparagraph (A), over the amount of taxes (other 
than the amount of taxes described in section 
150(d)(2)) deemed distributed to the beneficiary 
under sections 151 (b) and (c). 
‘‘(2) TREATMENT OF LOSS YEARS.—For pur-
poses of paragraph (1), the taxable income of the 
beneficiary for any taxable year shall be deemed to 
be not less than zero. 
‘‘(3) CERTAIN PRECEDING TAXABLE YEARS NOT 
TAKEN INTO ACCOUNT.—For purposes of paragraph 
(1), if the amount of the undistributed net income 
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deemed distributed in any preceding taxable year of 
the trust is less than 25 percent of the amount of 
the accumulation distribution divided by the number 
of preceding taxable years to which the accumulation 
distribution is allocated under section 151(a), the 
number of preceding taxable years of the trust with 
respect to which an amount is deemed distributed to 
a beneficiary under section 151(a) shall be deter-
mined without regard to such year. 
‘‘(4) EFFECT OF OTHER ACCUMULATION DIS-
TRIBUTIONS.—In computing the partial tax under 
paragraph (1) for any beneficiary, the income of 
such beneficiary for each of his prior taxable years 
shall include amounts previously deemed distributed 
to such beneficiary in such year under section 151 
as a result of prior accumulation distributions 
(whether from the same or another trust). 
‘‘(5) MULTIPLE DISTRIBUTIONS IN THE SAME 
TAXABLE YEAR.—In the case of accumulation dis-
tributions made from more than one trust which are 
includible in the income of a beneficiary in the same 
taxable year, the distributions shall be deemed to 
have been made consecutively in whichever order the 
beneficiary shall determine. Generation-skipping 
transfer bears to the total accumulation distribution. 
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‘‘(c) SPECIAL RULE FOR MULTIPLE TRUSTS.— 
‘‘(1) IN GENERAL.—If, in the same prior tax-
able year of the beneficiary in which any part of the 
accumulation distribution from a trust (hereinafter 
in this paragraph referred to as ‘third trust’) is 
deemed under section 151(a) to have been distrib-
uted to such beneficiary, some part of prior distribu-
tions by each of 2 or more other trusts is deemed 
under section 151(a) to have been distributed to 
such beneficiary, then subsections (b) and (c) of sec-
tion 151 shall not apply with respect to such part 
of the accumulation distribution from such third 
trust. 
‘‘(2) ACCUMULATION
DISTRIBUTIONS
FROM 
TRUST NOT TAKEN INTO ACCOUNT UNLESS THEY 
EQUAL OR EXCEED $1,000.—For purposes of para-
graph (1), an accumulation distribution from a trust 
to a beneficiary shall be taken into account only if 
such distribution, when added to any prior accumu-
lation distributions from such trust which are 
deemed under section 151(a) to have been distrib-
uted to such beneficiary for the same prior taxable 
year of the beneficiary, equals or exceeds $1,000. 
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248 
‘‘SEC. 153. TRUST INCOME, DEDUCTIONS, AND CREDITS AT-
TRIBUTABLE TO GRANTORS AND OTHERS AS 
SUBSTANTIAL OWNERS. 
‘‘Where it is specified in sections 153 through 161 
that the grantor or another person shall be treated as the 
owner of any portion of a trust, there shall then be in-
cluded in computing the taxable income and credits of the 
grantor or the other person those items of income, deduc-
tions, and credits against tax of the trust which are attrib-
utable to that portion of the trust to the extent that such 
items would be taken into account under this chapter in 
computing taxable income or credits against the tax of an 
individual. Any remaining portion of the trust shall be 
subject to sections 140 through 152. No items of a trust 
shall be included in computing the taxable income and 
credits of the grantor or of any other person solely on the 
grounds of his dominion and control over the trust under 
section 61 (relating to definition of gross income) or any 
other provision of this title, except as specified in this sub-
part. 
‘‘SEC. 154. DEFINITIONS AND RULES. 
‘‘(a) ADVERSE PARTY.—For purposes of sections 153 
through 160, ‘adverse party’ means any person having a 
substantial beneficial interest in the trust which would be 
adversely affected by the exercise or nonexercise of the 
power which he possesses respecting the trust. A person 
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249 
having a general power of appointment over the trust 
property shall be deemed to have a beneficial interest in 
the trust. 
‘‘(b) NONADVERSE PARTY.—For purposes of sections 
153 through 160, ‘nonadverse party’ means any person 
who is not an adverse party. 
‘‘(c) RELATED OR SUBORDINATE PARTY.—For pur-
poses of sections 153 through 161, ‘related or subordinate 
party’ means any nonadverse party who is— 
‘‘(1) the grantor’s spouse if living with the 
grantor; 
‘‘(2) any one of the following: The grantor’s fa-
ther, mother, issue, brother or sister; an employee of 
the grantor; a corporation or any employee of a cor-
poration in which the stock holdings of the grantor 
and the trust are significant from the viewpoint of 
voting control; a subordinate employee of a corpora-
tion in which the grantor is an executive. 
For purposes of subsection (f) and sections 156 and 157, 
a related or subordinate party shall be presumed to be 
subservient to the grantor in respect of the exercise or 
nonexercise of the powers conferred on him unless such 
party is shown not to be subservient by a preponderance 
of the evidence. 
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250 
‘‘(d) RULE WHERE POWER IS SUBJECT TO CONDI-
TION PRECEDENT.—A person shall be considered to have 
a power described in sections 153 through 161 even 
though the exercise of the power is subject to a precedent 
giving of notice or takes effect only on the expiration of 
a certain period after the exercise of the power. 
‘‘(e) GRANTOR TREATED AS HOLDING ANY POWER 
OR INTEREST OF GRANTOR’S SPOUSE.— 
‘‘(1) IN GENERAL.—For purposes of sections 
153 through 160, a grantor shall be treated as hold-
ing any power or interest held by— 
‘‘(A) any individual who was the spouse of 
the grantor at the time of the creation of such 
power or interest, or 
‘‘(B) any individual who became the spouse 
of the grantor after the creation of such power 
or interest, but only with respect to periods 
after such individual became the spouse of the 
grantor. 
‘‘(2) MARITAL STATUS.—For purposes of para-
graph (1)(A), an individual legally separated from 
his spouse under a decree of divorce or of separate 
maintenance shall not be considered as married. 
‘‘(f) RULES NOT TO RESULT IN FOREIGN OWNER-
SHIP.— 
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251 
‘‘(1) IN GENERAL.—Notwithstanding any other 
provision in sections 153 through 160, sections 153 
through 160 shall apply only to the extent such ap-
plication results in an amount (if any) being cur-
rently taken into account (directly or through 1 or 
more entities) under this chapter in computing the 
income of a citizen or resident of the United States 
or a domestic corporation. 
‘‘(2) EXCEPTIONS.— 
‘‘(A) CERTAIN
REVOCABLE
AND
IRREV-
OCABLE
TRUSTS.—Paragraph (1) shall not 
apply to any portion of a trust if— 
‘‘(i) the power to revest absolutely in 
the grantor title to the trust property to 
which such portion is attributable is exer-
cisable solely by the grantor without the 
approval or consent of any other person or 
with the consent of a related or subordi-
nate party who is subservient to the grant-
or, or 
‘‘(ii) the only amounts distributable 
from such portion (whether income or cor-
pus) during the lifetime of the grantor are 
amounts distributable to the grantor or the 
spouse of the grantor. 
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252 
‘‘(B) COMPENSATORY TRUSTS.—Except as 
provided in regulations, paragraph (1) shall not 
apply to any portion of a trust distributions 
from which are taxable as compensation for 
services rendered. 
‘‘(3) SPECIAL
RULES.—Except as otherwise 
provided in regulations prescribed by the Secretary, 
a controlled foreign corporation shall be treated as 
a domestic corporation for purposes of paragraph 
(1). 
‘‘(4) RECHARACTERIZATION
OF
PURPORTED 
GIFTS.—In the case of any transfer directly or indi-
rectly from a partnership or foreign corporation 
which the transferee treats as a gift or bequest, the 
Secretary may recharacterize such transfer in such 
circumstances as the Secretary determines to be ap-
propriate to prevent the avoidance of the purposes of 
this subsection. 
‘‘(5) SPECIAL RULE WHERE GRANTOR IS FOR-
EIGN PERSON.—If— 
‘‘(A) but for this subsection, a foreign per-
son would be treated as the owner of any por-
tion of a trust, and 
‘‘(B) such trust has a beneficiary who is a 
United States person, such beneficiary shall be 
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253 
treated as the grantor of such portion to the ex-
tent such beneficiary has made (directly or indi-
rectly) transfers of property (other than in a 
sale for full and adequate consideration) to 
such foreign person. 
‘‘(6) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section, including regulations providing that para-
graph (1) shall not apply in appropriate cases. 
‘‘SEC. 155. REVERSIONARY INTERESTS. 
‘‘(a) GENERAL RULE.—The grantor shall be treated 
as the owner of any portion of a trust in which he has 
a reversionary interest in either the corpus or the income 
therefrom, if, as of the inception of that portion of the 
trust, the value of such interest exceeds 5 percent of the 
value of such portion. 
‘‘(b) REVERSIONARY INTEREST TAKING EFFECT AT 
DEATH
OF
MINOR
LINEAL
DESCENDANT
BENE-
FICIARY.—In the case of any beneficiary who— 
‘‘(1) is a lineal descendant of the grantor, and 
‘‘(2) holds all of the present interests in any 
portion of a trust, the grantor shall not be treated 
under subsection (a) as the owner of such portion 
solely by reason of a reversionary interest in such 
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254 
portion which takes effect upon the death of such 
beneficiary before such beneficiary attains age 21. 
‘‘(c) SPECIAL RULE FOR DETERMINING VALUE OF 
REVERSIONARY INTEREST.—For purposes of subsection 
(a), the value of the grantor’s reversionary interest shall 
be determined by assuming the maximum exercise of dis-
cretion in favor of the grantor. 
‘‘(d) POSTPONEMENT OF DATE SPECIFIED FOR RE-
ACQUISITION.—Any postponement of the date specified for 
the reacquisition of possession or enjoyment of the rever-
sionary interest shall be treated as a new transfer in trust 
commencing with the date on which the postponement is 
effective and terminating with the date prescribed by the 
postponement. However, income for any period shall not 
be included in the income of the grantor by reason of the 
preceding sentence if such income would not be so includ-
ible in the absence of such postponement. 
‘‘SEC. 156. POWER TO CONTROL BENEFICIAL ENJOYMENT. 
‘‘(a) GENERAL RULE.—The grantor shall be treated 
as the owner of any portion of a trust in respect of which 
the beneficial enjoyment of the corpus or the income there-
from is subject to a power of disposition, exercisable by 
the grantor or a nonadverse party, or both, without the 
approval or consent of any adverse party. 
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255 
‘‘(b) EXCEPTIONS
FOR CERTAIN POWERS.—Sub-
section (a) shall not apply to the following powers regard-
less of by whom held: 
‘‘(1) POWER TO APPLY INCOME TO SUPPORT OF 
A
DEPENDENT.—A power described in section 
159(b) to the extent that the grantor would not be 
subject to tax under that section. 
‘‘(2) POWER
AFFECTING
BENEFICIAL
ENJOY-
MENT
ONLY
AFTER
OCCURRENCE
OF
EVENT.—A 
power, the exercise of which can only affect the ben-
eficial enjoyment of the income for a period com-
mencing after the occurrence of an event such that 
a grantor would not be treated as the owner under 
section 155 if the power were a reversionary inter-
est; but the grantor may be treated as the owner 
after the occurrence of the event unless the power is 
relinquished. 
‘‘(3) POWER EXERCISABLE ONLY BY WILL.—A 
power exercisable only by will, other than a power in 
the grantor to appoint by will the income of the 
trust where the income is accumulated for such dis-
position by the grantor or may be so accumulated in 
the discretion of the grantor or a nonadverse party, 
or both, without the approval or consent of any ad-
verse party. 
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256 
‘‘(4) POWER TO ALLOCATE AMONG CHARITABLE 
BENEFICIARIES.—A power to determine the bene-
ficial enjoyment of the corpus or the income there-
from if the corpus or income is irrevocably payable 
for a purpose specified in section 101(c) (relating to 
definition of charitable contributions) or to an em-
ployee stock ownership plan (as defined in section 
4975(e)(7)) in a qualified gratuitous transfer (as de-
fined in section 149(g)(1)). 
‘‘(5) POWER
TO
DISTRIBUTE
CORPUS.—A 
power to distribute corpus either— 
‘‘(A) to or for a beneficiary or beneficiaries 
or to or for a class of beneficiaries (whether or 
not income beneficiaries) provided that the 
power is limited by a reasonably definite stand-
ard which is set forth in the trust instrument; 
or 
‘‘(B) to or for any current income bene-
ficiary, provided that the distribution of corpus 
must be chargeable against the proportionate 
share of corpus held in trust for the payment 
of income to the beneficiary as if the corpus 
constituted a separate trust. 
A power does not fall within the powers described in 
this paragraph if any person has a power to add to 
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257 
the beneficiary or beneficiaries or to a class of bene-
ficiaries designated to receive the income or corpus, 
except where such action is to provide for after-born 
or after-adopted children. 
‘‘(6) POWER
TO
WITHHOLD
INCOME
TEMPO-
RARILY.—A power to distribute or apply income to 
or for any current income beneficiary or to accumu-
late the income for him, provided that any accumu-
lated income must ultimately be payable— 
‘‘(A) to the beneficiary from whom dis-
tribution or application is withheld, to his es-
tate, or to his appointees (or persons named as 
alternate takers in default of appointment) pro-
vided that such beneficiary possesses a power of 
appointment which does not exclude from the 
class of possible appointees any person other 
than the beneficiary, his estate, his creditors, or 
the creditors of his estate, or 
‘‘(B) on termination of the trust, or in con-
junction with a distribution of corpus which is 
augmented by such accumulated income, to the 
current income beneficiaries in shares which 
have been irrevocably specified in the trust in-
strument. 
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258 
Accumulated income shall be considered so payable 
although it is provided that if any beneficiary does 
not survive a date of distribution which could rea-
sonably have been expected to occur within the bene-
ficiary’s lifetime, the share of the deceased bene-
ficiary is to be paid to his appointees or to one or 
more designated alternate takers (other than the 
grantor or the grantor’s estate) whose shares have 
been irrevocably specified. A power does not fall 
within the powers described in this paragraph if any 
person has a power to add to the beneficiary or 
beneficiaries or to a class of beneficiaries designated 
to receive the income or corpus except where such 
action is to provide for after-born or after-adopted 
children. 
‘‘(7) POWER
TO
WITHHOLD
INCOME
DURING 
DISABILITY
OF
A
BENEFICIARY.—A power exer-
cisable only during— 
‘‘(A) the existence of a legal disability of 
any current income beneficiary, or 
‘‘(B) the period during which any income 
beneficiary shall be under the age of 21 years, 
to distribute or apply income to or for such 
beneficiary or to accumulate and add the in-
come to corpus. A power does not fall within 
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259 
the powers described in this paragraph if any 
person has a power to add to the beneficiary or 
beneficiaries or to a class of beneficiaries des-
ignated to receive the income or corpus, except 
where such action is to provide for after-born or 
after-adopted children. 
‘‘(8) POWER TO ALLOCATE BETWEEN CORPUS 
AND INCOME.—A power to allocate receipts and dis-
bursements as between corpus and income, even 
though expressed in broad language. 
‘‘(c) EXCEPTION FOR CERTAIN POWERS OF INDE-
PENDENT TRUSTEES.—Subsection (a) shall not apply to 
a power solely exercisable (without the approval or consent 
of any other person) by a trustee or trustees, none of 
whom is the grantor, and no more than half of whom are 
related or subordinate parties who are subservient to the 
wishes of the grantor— 
‘‘(1) to distribute, apportion, or accumulate in-
come to or for a beneficiary or beneficiaries, or to, 
for, or within a class of beneficiaries; or 
‘‘(2) to pay out corpus to or for a beneficiary 
or beneficiaries or to or for a class of beneficiaries 
(whether or not income beneficiaries). 
A power does not fall within the powers described in this 
subsection if any person has a power to add to the bene-
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260 
ficiary or beneficiaries or to a class of beneficiaries des-
ignated to receive the income or corpus, except where such 
action is to provide for after-born or after-adopted chil-
dren. For periods during which an individual is the spouse 
of the grantor (within the meaning of section 154(e)(2)), 
any reference in this subsection to the grantor shall be 
treated as including a reference to such individual. 
‘‘(d) POWER TO ALLOCATE INCOME IF LIMITED BY 
A STANDARD.—Subsection (a) shall not apply to a power 
solely exercisable (without the approval or consent of any 
other person) by a trustee or trustees, none of whom is 
the grantor or spouse living with the grantor, to distribute, 
apportion, or accumulate income to or for a beneficiary 
or beneficiaries, or to, for, or within a class of bene-
ficiaries, whether or not the conditions of paragraph (6) 
or (7) of subsection (b) are satisfied, if such power is lim-
ited by a reasonably definite external standard which is 
set forth in the trust instrument. A power does not fall 
within the powers described in this subsection if any per-
son has a power to add to the beneficiary or beneficiaries 
or to a class of beneficiaries designated to receive the in-
come or corpus except where such action is to provide for 
after-born or after-adopted children. 
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261 
‘‘SEC. 157. ADMINISTRATIVE POWERS. 
‘‘The grantor shall be treated as the owner of any 
portion of a trust in respect of which— 
‘‘(1) POWER TO DEAL FOR LESS THAN ADE-
QUATE AND FULL CONSIDERATION.—A power exer-
cisable by the grantor or a nonadverse party, or 
both, without the approval or consent of any adverse 
party enables the grantor or any person to purchase, 
exchange, or otherwise deal with or dispose of the 
corpus or the income therefrom for less than an ade-
quate consideration in money or money’s worth. 
‘‘(2) POWER TO BORROW WITHOUT ADEQUATE 
INTEREST OR SECURITY.—A power exercisable by 
the grantor or a nonadverse party, or both, enables 
the grantor to borrow the corpus or income, directly 
or indirectly, without adequate interest or without 
adequate security except where a trustee (other than 
the grantor) is authorized under a general lending 
power to make loans to any person without regard 
to interest or security. 
‘‘(3) BORROWING OF THE TRUST FUNDS.—The 
grantor has directly or indirectly borrowed the cor-
pus or income and has not completely repaid the 
loan, including any interest, before the beginning of 
the taxable year. The preceding sentence shall not 
apply to a loan which provides for adequate interest 
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262 
and adequate security, if such loan is made by a 
trustee other than the grantor and other than a re-
lated or subordinate trustee subservient to the 
grantor. For periods during which an individual is 
the spouse of the grantor (within the meaning of 
section 154(e)(2)), any reference in this paragraph 
to the grantor shall be treated as including a ref-
erence to such individual. 
‘‘(4) GENERAL POWERS OF ADMINISTRATION.— 
A power of administration is exercisable in a non-
fiduciary capacity by any person without the ap-
proval or consent of any person in a fiduciary capac-
ity. For purposes of this paragraph, the term ‘power 
of administration’ means any one or more of the fol-
lowing powers: (A) a power to vote or direct the vot-
ing of stock or other securities of a corporation in 
which the holdings of the grantor and the trust are 
significant from the viewpoint of voting control; (B) 
a power to control the investment of the trust funds 
either by directing investments or reinvestments, or 
by vetoing proposed investments or reinvestments, to 
the extent that the trust funds consist of stocks or 
securities of corporations in which the holdings of 
the grantor and the trust are significant from the 
viewpoint of voting control; or (C) a power to reac-
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quire the trust corpus by substituting other property 
of an equivalent value. 
‘‘SEC. 158. POWER TO REVOKE. 
‘‘(a) GENERAL RULE.—The grantor shall be treated 
as the owner of any portion of a trust, whether or not 
he is treated as such owner under any other provision of 
this part, where at any time the power to revest in the 
grantor title to such portion is exercisable by the grantor 
or a non-adverse party, or both. 
‘‘(b) POWER AFFECTING BENEFICIAL ENJOYMENT 
ONLY AFTER OCCURRENCE OF EVENT.—Subsection (a) 
shall not apply to a power the exercise of which can only 
affect the beneficial enjoyment of the income for a period 
commencing after the occurrence of an event such that 
a grantor would not be treated as the owner under section 
155 if the power were a reversionary interest. But the 
grantor may be treated as the owner after the occurrence 
of such event unless the power is relinquished. 
‘‘SEC. 159. INCOME FOR BENEFIT OF GRANTOR. 
‘‘(a) GENERAL RULE.—The grantor shall be treated 
as the owner of any portion of a trust, whether or not 
he is treated as such owner under section 156, whose in-
come without the approval or consent of any adverse party 
is, or, in the discretion of the grantor or a nonadverse 
party, or both, may be— 
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‘‘(1) distributed to the grantor or the grantor’s 
spouse; 
‘‘(2) held or accumulated for future distribution 
to the grantor or the grantor’s spouse; or 
‘‘(3) applied to the payment of premiums on 
policies of insurance on the life of the grantor or the 
grantor’s spouse (except policies of insurance irrev-
ocably payable for a purpose specified in section 
101(c) (relating to definition of charitable contribu-
tions)). 
This subsection shall not apply to a power the exercise 
of which can only affect the beneficial enjoyment of the 
income for a period commencing after the occurrence of 
an event such that the grantor would not be treated as 
the owner under section 153 if the power were a rever-
sionary interest; but the grantor may be treated as the 
owner after the occurrence of the event unless the power 
is relinquished. 
‘‘(b) OBLIGATIONS OF SUPPORT.—Income of a trust 
shall not be considered taxable to the grantor under sub-
section (a) or any other provision of this chapter merely 
because such income in the discretion of another person, 
the trustee, or the grantor acting as trustee or co-trustee, 
may be applied or distributed for the support or mainte-
nance of a beneficiary (other than the grantor’s spouse) 
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whom the grantor is legally obligated to support or main-
tain, except to the extent that such income is so applied 
or distributed. In cases where the amounts so applied or 
distributed are paid out of corpus or out of other than 
income for the taxable year, such amounts shall be consid-
ered to be an amount paid or credited within the meaning 
of paragraph (2) of section 146(a) and shall be taxed to 
the grantor under section 147. 
‘‘SEC. 160. PERSON OTHER THAN GRANTOR TREATED AS 
SUBSTANTIAL OWNER. 
‘‘(a) GENERAL RULE.—A person other than the 
grantor shall be treated as the owner of any portion of 
a trust with respect to which: 
‘‘(1) such person has a power exercisable solely 
by himself to vest the corpus or the income there-
from in himself, or 
‘‘(2) such person has previously partially re-
leased or otherwise modified such a power and after 
the release or modification retains such control as 
would, within the principles of sections 153 to 159, 
inclusive, subject a grantor of a trust to treatment 
as the owner thereof. 
‘‘(b) EXCEPTION WHERE GRANTOR IS TAXABLE.— 
Subsection (a) shall not apply with respect to a power over 
income, as originally granted or thereafter modified, if the 
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grantor of the trust or a transferor (to whom section 161 
applies) is otherwise treated as the owner under sections 
153 through 159 or section 161. 
‘‘(c) OBLIGATIONS
OF SUPPORT.—Subsection (a) 
shall not apply to a power which enables such person, in 
the capacity of trustee or cotrustee, merely to apply the 
income of the trust to the support or maintenance of a 
person whom the holder of the power is obligated to sup-
port or maintain except to the extent that such income 
is so applied. In cases where the amounts so applied or 
distributed are paid out of corpus or out of other than 
income of the taxable year, such amounts shall be consid-
ered to be an amount paid or credited within the meaning 
of paragraph (2) of section 146(a) and shall be taxed to 
the holder of the power under section 147. 
‘‘(d) EFFECT OF RENUNCIATION OR DISCLAIMER.— 
Subsection (a) shall not apply with respect to a power 
which has been renounced or disclaimed within a reason-
able time after the holder of the power first became aware 
of its existence. 
‘‘SEC. 161. FOREIGN TRUSTS HAVING ONE OR MORE 
UNITED STATES BENEFICIARIES. 
‘‘(a) TRANSFEROR TREATED AS OWNER.— 
‘‘(1) IN
GENERAL.—A United States person 
who directly or indirectly transfers property to a for-
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eign trust (other than a trust described in section 
6048(a)(3)(B)(ii)) shall be treated as the owner for 
his taxable year of the portion of such trust attrib-
utable to such property if for such year there is a 
United States beneficiary of any portion of such 
trust. 
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not 
apply— 
‘‘(A) TRANSFERS BY REASON OF DEATH.— 
To any transfer by reason of the death of the 
transferor. 
‘‘(B) 
TRANSFERS
AT
FAIR
MARKET 
VALUE.—To any transfer of property to a trust 
in exchange for consideration of at least the fair 
market value of the transferred property. For 
purposes of the preceding sentence, consider-
ation other than cash shall be taken into ac-
count at its fair market value. 
‘‘(3) CERTAIN OBLIGATIONS NOT TAKEN INTO 
ACCOUNT
UNDER
FAIR
MARKET
VALUE
EXCEP-
TION.— 
‘‘(A) IN GENERAL.—In determining wheth-
er paragraph (2)(B) applies to any transfer by 
a person described in clause (ii) or (iii) of sub-
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paragraph (C), there shall not be taken into ac-
count— 
‘‘(i) except as provided in regulations, 
any obligation of a person described in 
subparagraph (C), and 
‘‘(ii) to the extent provided in regula-
tions, any obligation which is guaranteed 
by a person described in subparagraph (C). 
‘‘(B) TREATMENT
OF
PRINCIPAL
PAY-
MENTS
ON
OBLIGATION.—Principal payments 
by the trust on any obligation referred to in 
subparagraph (A) shall be taken into account 
on and after the date of the payment in deter-
mining the portion of the trust attributable to 
the property transferred. 
‘‘(C) PERSONS DESCRIBED.—The persons 
described in this subparagraph are— 
‘‘(i) the trust, 
‘‘(ii) any grantor, owner, or bene-
ficiary of the trust, and 
‘‘(iii) any person who is related (with-
in the meaning of section 143(i)(2)(B) to 
any grantor, owner, or beneficiary of the 
trust. 
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269 
‘‘(4) SPECIAL RULES APPLICABLE TO FOREIGN 
GRANTOR WHO LATER BECOMES A UNITED STATES 
PERSON.— 
‘‘(A) IN GENERAL.—If a nonresident alien 
individual has a residency starting date within 
5 years after directly or indirectly transferring 
property to a foreign trust, this section and sec-
tion 6048 shall be applied as if such individual 
transferred to such trust on the residency start-
ing date an amount equal to the portion of such 
trust attributable to the property transferred by 
such individual to such trust in such transfer. 
‘‘(B) TREATMENT OF UNDISTRIBUTED IN-
COME.—For purposes of this section, undistrib-
uted net income for periods before such individ-
ual’s residency starting date shall be taken into 
account in determining the portion of the trust 
which is attributable to property transferred by 
such individual to such trust but shall not oth-
erwise be taken into account. 
‘‘(C) RESIDENCY
STARTING
DATE.—For 
purposes of this paragraph, an individual’s resi-
dency starting date is the residency starting 
date determined under section 7701(b)(2)(A). 
‘‘(5) OUTBOUND TRUST MIGRATIONS.—If— 
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270 
‘‘(A) an individual who is a citizen or resi-
dent of the United States transferred property 
to a trust which was not a foreign trust, and 
‘‘(B) such trust becomes a foreign trust 
while such individual is alive, then this section 
and section 6048 shall be applied as if such in-
dividual transferred to such trust on the date 
such trust becomes a foreign trust an amount 
equal to the portion of such trust attributable 
to the property previously transferred by such 
individual to such trust. A rule similar to the 
rule of paragraph (4)(B) shall apply for pur-
poses of this paragraph. 
‘‘(b) TRUSTS ACQUIRING UNITED STATES BENE-
FICIARIES.—If— 
‘‘(1) subsection (a) applies to a trust for the 
transferor’s taxable year, and 
‘‘(2) subsection (a) would have applied to the 
trust for his immediately preceding taxable year but 
for the fact that for such preceding taxable year 
there was no United States beneficiary for any por-
tion of the trust, then, for purposes of this chapter, 
the transferor shall be treated as having income for 
the taxable year (in addition to his other income for 
such year) equal to the undistributed net income (at 
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the close of such immediately preceding taxable 
year) attributable to the portion of the trust referred 
to in subsection (a). 
‘‘(c) TRUSTS
TREATED
AS
HAVING
A
UNITED 
STATES BENEFICIARY.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, a trust shall be treated as having a United 
States beneficiary for the taxable year unless— 
‘‘(A) under the terms of the trust, no part 
of the income or corpus of the trust may be 
paid or accumulated during the taxable year to 
or for the benefit of a United States person, 
and 
‘‘(B) if the trust were terminated at any 
time during the taxable year, no part of the in-
come or corpus of such trust could be paid to 
or for the benefit of a United States person. 
‘‘(2) ATTRIBUTION OF OWNERSHIP.—For pur-
poses of paragraph (1), an amount shall be treated 
as paid or accumulated to or for the benefit of a 
United States person if such amount is paid to or 
accumulated for a foreign corporation, foreign part-
nership, or foreign trust or estate, and— 
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272 
‘‘(A) in the case of a foreign corporation, 
such corporation is a controlled foreign corpora-
tion, 
‘‘(B) in the case of a foreign partnership, 
a United States person is a partner of such 
partnership, or 
‘‘(C) in the case of a foreign trust or es-
tate, such trust or estate has a United States 
beneficiary (within the meaning of paragraph 
(1)). 
‘‘(3) CERTAIN UNITED STATES BENEFICIARIES 
DISREGARDED.—A beneficiary shall not be treated 
as a United States person in applying this section 
with respect to any transfer of property to foreign 
trust if such beneficiary first became a United 
States person more than 5 years after the date of 
such transfer. 
‘‘(d) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to 
carry out the purposes of this section. 
‘‘SEC. 162. LIMITATION ON CHARITABLE DEDUCTION. 
‘‘In computing the deduction allowable under section 
142(c) to a trust, no amount otherwise allowable under 
section 142(c) as a deduction shall be allowed as a deduc-
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273 
tion with respect to income of the taxable year which is 
allocable to unrelated business income for such year. 
‘‘SEC. 163. INCOME OF AN ESTATE OR TRUST IN CASE OF DI-
VORCE, ETC. 
‘‘(a) INCLUSION IN GROSS INCOME OF WIFE.—There 
shall be included in the gross income of a wife who is di-
vorced or legally separated under a decree of divorce or 
of separate maintenance (or who is separated from her 
husband under a written separation agreement) the 
amount of the income of any trust which such wife is enti-
tled to receive and which, except for this section, would 
be includible in the gross income of her husband, and such 
amount shall not, despite any other provision of this sub-
title, be includible in the gross income of such husband. 
This subsection shall not apply to that part of any such 
income of the trust which the terms of the decree, written 
separation agreement, or trust instrument fix, in terms 
of an amount of money or a portion of such income, as 
a sum which is payable for the support of minor children 
of such husband. In case such income is less than the 
amount specified in the decree, agreement, or instrument, 
for the purpose of applying the preceding sentence, such 
income, to the extent of such sum payable for such sup-
port, shall be considered a payment for such support. 
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274 
‘‘(b) WIFE CONSIDERED A BENEFICIARY.—For pur-
poses of computing the taxable income of the estate or 
trust and the taxable income of a wife to whom subsection 
(a) applies, such wife shall be considered as the bene-
ficiary. 
‘‘(c) CROSS REFERENCE.—For definitions of ‘hus-
band’ and ‘wife’, as used in this section, see section 
7701(a)(17). 
‘‘SEC. 164. RECOGNITION OF GAIN ON CERTAIN TRANSFERS 
TO CERTAIN FOREIGN TRUSTS AND ESTATES. 
‘‘(a) IN GENERAL.—Except as provided in regula-
tions, in the case of any transfer of property by a United 
States person to a foreign estate or trust, for purposes 
of this subtitle, such transfer shall be treated as a sale 
or exchange for an amount equal to the fair market value 
of the property transferred, and the transferor shall recog-
nize as gain the excess of— 
‘‘(1) the fair market value of the property so 
transferred, over 
‘‘(2) the adjusted basis (for purposes of deter-
mining gain) of such property in the hands of the 
transferor. 
‘‘(b) EXCEPTION.—Subsection (a) shall not apply to 
a transfer to a trust by a United States person to the 
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275 
extent that any person is treated as the owner of such 
trust under section 153. 
‘‘(c) TREATMENT OF TRUSTS WHICH BECOME FOR-
EIGN TRUSTS.—If a trust which is not a foreign trust be-
comes a foreign trust, such trust shall be treated for pur-
poses of this section as having transferred, immediately 
before becoming a foreign trust, all of its assets to a for-
eign trust. 
‘‘SEC. 165. TREATMENT OF FUNERAL TRUSTS. 
‘‘(a) IN GENERAL.—In the case of a qualified funeral 
trust, sections 144 through 161 shall not apply, and no 
deduction shall be allowed by section 142(b). 
‘‘(b) QUALIFIED FUNERAL TRUST.—‘Qualified fu-
neral trust’ means any trust (other than a foreign trust) 
if— 
‘‘(1) the trust arises as a result of a contract 
with a person engaged in the trade or business of 
providing funeral or burial services or property nec-
essary to provide such services, 
‘‘(2) the sole purpose of the trust is to hold, in-
vest, and reinvest funds in the trust and to use such 
funds solely to make payments for such services or 
property for the benefit of the beneficiaries of the 
trust, 
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276 
‘‘(3) the only beneficiaries of such trust are in-
dividuals with respect to whom such services or 
property are to be provided at their death under 
contracts described in paragraph (1), 
‘‘(4) the only contributions to the trust are con-
tributions by or for the benefit of such beneficiaries, 
‘‘(5) the trustee elects the application of this 
subsection, and 
‘‘(6) the trust would (but for the election de-
scribed in paragraph (5)) be treated as owned under 
sections 153 through 161 by the purchasers of the 
contracts described in paragraph (1). 
‘‘(c) DOLLAR LIMITATION ON CONTRIBUTIONS.— 
‘‘(1) IN
GENERAL.—Any trust which accepts 
aggregate contributions by or for the benefit of an 
individual in excess of $7,000 shall not be a quali-
fied funeral trust. 
‘‘(2) RELATED TRUSTS.—For purposes of para-
graph (1), all trusts having trustees which are re-
lated persons shall be treated as 1 trust. For pur-
poses of the preceding sentence, persons are related 
if— 
‘‘(A) the relationship between such persons 
is described in section 171(a)(5), or 
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277 
‘‘(B) the Secretary determines that treat-
ing such persons as related is necessary to pre-
vent avoidance of the purposes of this section. 
‘‘(3) INFLATION ADJUSTMENT.—In the case of 
any contract referred to in subsection (b)(1) which 
is entered into during any calendar year after 2007, 
the dollar amount referred to in paragraph (1) shall 
be adjusted for inflation in accordance with section 
25. 
‘‘(d) APPLICATION
OF RATE SCHEDULE.—Section 
140(b) shall be applied to each qualified funeral trust by 
treating each beneficiary’s interest in each such trust as 
a separate trust. 
‘‘(e) TREATMENT OF AMOUNTS REFUNDED TO PUR-
CHASER ON CANCELLATION.—No gain or loss shall be rec-
ognized to a purchaser of a contract described in sub-
section (b)(1) by reason of any payment from such trust 
to such purchaser by reason of cancellation of such con-
tract. If any payment referred to in the preceding sentence 
consists of property other than money, the basis of such 
property in the hands of such purchaser shall be the same 
as the trust’s basis in such property immediately before 
the payment. 
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278 
‘‘(f) SIMPLIFIED REPORTING.—The Secretary may 
prescribe rules for simplified reporting of all trusts having 
a single trustee. 
‘‘SEC. 166. INCOME IN RESPECT OF A DECEDENT. 
‘‘(a) INCLUSION IN GROSS INCOME.— 
‘‘(1) GENERAL USE.—The amount of all items 
of gross income in respect of a decedent which are 
not properly includible in respect of a taxable period 
in which falls the date of his death, or a prior pe-
riod, shall be included in gross income, for the tax-
able year when received, of— 
‘‘(A) the estate of the decedent, if the right 
to receive the amount is acquired by the dece-
dent’s estate, 
‘‘(B) the person who, by reason of the 
death of the decedent, acquires the right to re-
ceive the amount, if the right to receive the 
amount is not acquired by the decedent’s estate 
from the decedent, 
‘‘(C) the person who acquires from the de-
cedent the right to receive the amount by be-
quest, devise or inheritance, if the amount is re-
ceived after a distribution by the decedent’s es-
tate of such right. 
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279 
‘‘(2) DEFINITION.—The Secretary shall pre-
scribe regulations on the treatment of income from 
sales of rights to receive income and installment 
sales. 
‘‘(b) The amount of any homeowner deduction or for-
eign tax credit in respect of a decedent which is not prop-
erly allowable to the decedent with respect to the taxable 
period in which falls the date of his death, or a prior pe-
riod, shall be allowed in accordance with regulations that 
reflect the principles of section 691(b) of the Internal Rev-
enue Code of 1986. 
‘‘Subchapter II—Definitions and Rules of 
Application 
‘‘Sec. 171. Definitions. 
‘‘Sec. 172. Rules of application. 
‘‘SEC. 171. DEFINITIONS. 
‘‘(a) IN GENERAL.—When used in this chapter, 
where not otherwise distinctly expressed or manifestly in-
compatible with the intent thereof— 
‘‘(1) BUSINESS
ENTITY.—The definition of 
‘business entity’ in section 206 (relating to the busi-
ness tax) shall apply. 
‘‘(2) BUSINESS TAX.—‘Business tax’ and ‘Sim-
plified USA Tax for businesses’ mean the tax im-
posed by section 201 and, to the extent required by 
the context, the provisions of chapter 2. 
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280 
‘‘(3) INTERNAL REVENUE CODE OF 1986.—‘In-
ternal Revenue Code of 1986’ means the Internal 
Revenue Code of 1986 as in effect immediately be-
fore the enactment of the Simplified USA Tax Act 
of 2006. 
‘‘(4) UNITED STATES.—‘United States’ means 
the States and the District of Columbia. 
‘‘(5) 
RELATED
PARTY.—‘Related 
party’ 
means— 
‘‘(A) Members of a family, as defined in 
paragraph (6)(D); 
‘‘(B) An individual and a business entity 
more than 50 percent in value of which is 
owned, directly or indirectly, by or for such in-
dividual (applying rules of constructive owner-
ship); 
‘‘(C) Two business entities that are eligible 
to file a consolidated return under chapter 2; 
‘‘(D) A grantor and a fiduciary of any 
trust; 
‘‘(E) A fiduciary of a trust and a fiduciary 
of another trust, if the same person is a grantor 
of both trusts; 
‘‘(F) A fiduciary of a trust and a bene-
ficiary of such trust; 
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‘‘(G) A fiduciary of a trust and a bene-
ficiary of another trust, if the same person is 
a grantor of both trusts; 
‘‘(H) A fiduciary of a trust and a corpora-
tion more than 50 percent in value of the out-
standing stock of which is owned, directly or in-
directly, by or for the trust or by or for a per-
son who is a grantor of the trust; 
‘‘(I) A person and an organization to 
which section 251 (relating to certain edu-
cational and charitable organizations which are 
exempt from tax) applies and which is con-
trolled directly or indirectly by such person or 
(if such person is an individual) by members of 
the family of such individual; 
‘‘(J) Two business entities if the same per-
sons own more than 50 percent of the value of 
each (applying rules of constructive ownership), 
with value measured by— 
‘‘(i) the value of the outstanding stock 
in the case of a corporation, 
‘‘(ii) the capital interest or the profits 
interest, whichever is greater, in the case 
of a partnership or limited liability com-
pany; 
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‘‘(K) Except in the case of a sale or ex-
change in satisfaction of a pecuniary bequest, 
an executor of an estate and a beneficiary of 
such estate. 
‘‘(6) CONSTRUCTIVE
OWNERSHIP.—For pur-
poses of determining, in applying paragraph (5), the 
ownership of a business entity— 
‘‘(A) Stock or other equity interest owned, 
directly or indirectly, by or for a corporation, 
partnership, estate, or trust shall be considered 
as being owned proportionately by or for its 
shareholders, partners, or beneficiaries; 
‘‘(B) An individual shall be considered as 
owning the stock or other equity interest owned, 
directly or indirectly, by or for his family; 
‘‘(C) An individual owning (otherwise than 
by the application of subparagraph (B)) any 
stock in a corporation or other equity interest 
in another form of business entity shall be con-
sidered as owning the stock owned, directly or 
indirectly, by or for his partner; 
‘‘(D) The family of an individual shall in-
clude only his brothers and sisters (whether by 
the whole or half blood), spouse, ancestors, and 
lineal descendants; and 
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283 
‘‘(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)— 
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‘‘(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 
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285 
‘‘(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)).’’ 
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286 
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 the 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— 
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287 
‘‘(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-
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288 
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. 
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289 
‘‘(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, 
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290 
‘‘(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 
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‘‘(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), 
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‘‘(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). 
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293 
‘‘(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, 
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294 
‘‘(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 
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295 
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 
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296 
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. 
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‘‘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-
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298 
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. 
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304 
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 
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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 
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306 
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. 
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‘‘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. 
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‘‘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 
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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. 
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‘‘(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 
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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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313 
‘‘(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-
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actions deviate from the normal course of busi-
ness in order to achieve some tax benefit. 
‘‘SEC. 223. LONG-TERM CONTRACTS. 
‘‘(a) IN GENERAL.—In the case of a long-term con-
tract— 
‘‘(1) CONTRACTOR EXPENSES.—The contractor 
shall be entitled to deduct its business purchases 
when paid or incurred. 
‘‘(2) CONTRACTOR RECEIPTS.—The contractor 
shall recognize taxable receipts— 
‘‘(A) in the case of a project in which the 
acquirer has no ownership interest in the 
project until delivery— 
‘‘(i) upon delivery of the project, in 
the case of an accrual basis contractor, or 
‘‘(ii) upon the later of delivery of the 
project or the receipt of payment, in the 
case of cash-basis contractor. 
‘‘(B) in the case of a project in which the 
acquirer obtains an ownership interest as the 
project is constructed— 
‘‘(i) when the contractor has the right 
to payments, in the case of an accrual 
basis contractor, or 
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‘‘(ii) upon the later of when the con-
tractor receives the cash or has the right 
to payments, in the case of a cash basis 
contractor. 
‘‘(3) ACQUIRER EXPENSES.—The acquirer that 
is a business entity shall be entitled to deduct its 
costs of the business purchase— 
‘‘(A) in the case of a cash-basis acquirer, 
at such time as a cash basis contractor would 
be required to treat the amounts paid as tax-
able receipts, or 
‘‘(B) in the case of an accrual-basis 
acquirer, at such time as an accrual basis con-
tractor would be required to treat the amounts 
paid or due as taxable receipts. 
‘‘(b) RIGHT TO PAYMENTS.— 
‘‘(1) IN GENERAL.—A contractor shall be treat-
ed as having a right to payments with respect to a 
project at any time to the extent that the contractor 
would not be required to return payments received 
(or would be entitled to collect payments not yet re-
ceived) if the project were terminated at such time 
by the contractor. 
‘‘(2) CONTRACTUAL
PROVISIONS.—If a long- 
term contract includes a procedure for paying the 
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316 
contractor as work is completed (for example, by 
reason of a draw down from a trust account), the 
contractual provisions shall generally govern when a 
contractor has a right to payment. 
‘‘(3) PERCENTAGE
COMPLETION
METHOD
OF 
ACCOUNTING.—If a long-term contract does not in-
clude a mechanism for paying the contractor as 
work is completed, the percentage-of-completion 
method of accounting shall be used to determine the 
timing of taxable receipts of the contractor and busi-
ness purchases of the acquirer. 
‘‘(c) LONG-TERM CONTRACT.— 
‘‘(1) 
IN
GENERAL.—‘Long-term 
contract’ 
means— 
‘‘(A) any contract that covers service or 
production through parts of two different cal-
endar years if the contract includes a formal 
deposit and draw-down mechanism, and 
‘‘(B) any contract for the manufacture, 
building, installation, or construction of prop-
erty if such contract is not completed within the 
taxable year of the contractor in which such 
contract is entered into. 
‘‘(2) EXCEPTION.—A contract for the manufac-
ture of property shall not be treated as a long-term 
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contract unless such contract involves the manufac-
ture of— 
‘‘(A) any unique item of a type which is 
not normally included in the finished goods in-
ventory of the taxpayer, or 
‘‘(B) any item which normally requires 
more than 12 calendar months to complete. 
‘‘(d) CONSISTENCY.—The Secretary may require 
business entities to file statements containing such infor-
mation with respect to long-term contracts as the Sec-
retary may prescribe to ensure consistency in reporting. 
‘‘(e) FOREIGN CONTRACTS.—This section shall not 
be construed to permit a deduction for a business purchase 
for the cost of property produced outside the United 
States pursuant to a long-term contract at any time prior 
to the import of such property into the United States. 
‘‘SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS. 
‘‘(a) RECEIPT OF PRICE ADJUSTMENT.—In the case 
of a post-sale price adjustment attributable to a business 
purchase which was taken into account in computing gross 
profits for a prior taxable year, the amount of such adjust-
ment shall be treated as a reduction or increase, as the 
case may be, in the cost of business purchases for the tax-
able year in which the adjustment is made or incurred. 
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‘‘(b) ISSUANCE OF PRICE ADJUSTMENT.—In the case 
of a post-sale price adjustment attributable to a sale the 
receipts from which were taken into account in deter-
mining taxable receipts for a prior taxable year, the 
amount of such adjustment shall be treated as a reduction 
or increase, as the case may be, in taxable receipts for 
the taxable year in which the adjustment is made or in-
curred. 
‘‘(c) POST-SALE PRICE ADJUSTMENT.—‘Post-sale 
price adjustment’ means a refund, rebate, or other price 
allowance attributable to a sale of property or services or 
an upward adjustment in price that was not previously 
taken into account under the business entity’s method of 
accounting. 
‘‘SEC. 225. BAD DEBTS. 
‘‘(a) SELLER.—If an amount owed to an accrual 
basis business entity for property or services sold— 
‘‘(1) was taken into account as a taxable receipt 
in a prior taxable year, and 
‘‘(2) becomes wholly or partially uncollectible 
during the taxable year, then the seller shall treat 
the amount as a reduction in taxable receipts for the 
taxable year in which it becomes wholly or partially 
uncollectible. 
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‘‘(b) NOTICE REQUIREMENT.—No reduction shall be 
allowed under subsection (a) unless the seller notifies the 
purchaser of the amount which the seller has treated as 
wholly or partially uncollectible. 
‘‘(c) SUBSEQUENT
COLLECTION.—If an amount 
which was treated as uncollectible under subsection (a) is 
subsequently collected, it shall be treated as a taxable re-
ceipt when collected. 
‘‘(d) PURCHASER.—If a purchaser receives notice 
under subsection (b) from a seller and the purchaser has 
treated the amount labeled uncollectible as a business pur-
chase in a prior taxable year, then the purchaser shall 
treat such amount as a reduction in the cost of business 
purchases in the taxable year to which the notice relates. 
If the purchaser subsequently repays such amount, the re-
payment shall constitute the cost of a business purchase. 
‘‘SEC. 226. TRANSITION RULES. 
‘‘(a) NO DOUBLE DEDUCTIONS.—A business entity 
shall not be entitled to treat as a ‘cost of business pur-
chase’ any amount that the business entity deducted in 
computing taxable income under the income tax in effect 
prior the effective date of the business tax. 
‘‘(b) NO DOUBLE INCLUSION.—A business entity 
shall not be required to include in taxable receipts any 
receipt that the business entity took into account in com-
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puting taxable income under the income tax in effect prior 
to the effect date of the business tax. 
‘‘(c) NO LOSS OF DEDUCTION.—An expense which— 
‘‘(1) a business entity would have been able to 
deduct as a cost of a business purchase in an ac-
counting period before the effective date of the busi-
ness tax if the business tax had been in effect in 
such period, and 
‘‘(2) the business entity would have been able to 
deduct as an expense in computing taxable income 
in a period after the business tax is effective if the 
income tax had continued in effect, shall be treated 
as a cost of a business purchase incurred or paid at 
the time that it would have been paid or incurred 
under the income tax if the income tax had contin-
ued in effect. This subsection shall not apply to any 
amount which is to be taken into account under sub-
chapter N (relating to amortization of transition 
basis, inventory costs, and safe harbor leases), any 
amounts which would have been deducted under the 
income tax through loss carryover deductions, or any 
deductions deferred by the uniform capitalization 
rules under section 263A of the Internal Revenue 
Code of 1986. 
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‘‘(d) ALL TAXABLE RECEIPTS TAXED.—A receipt 
which— 
‘‘(1) a business entity would have been required 
to treat as a taxable receipt in an accounting period 
before the effective date of the business tax if the 
business tax had been in effect in such period, and 
‘‘(2) the business entity would have been re-
quired to include in gross income in a period after 
the business tax is effective if the income tax had 
continued in effect 
shall be treated as a taxable receipt at the time that it 
would have been included in income if the income tax had 
continued in effect. 
‘‘Subchapter E—Land and Rental Property 
‘‘Sec. 230. No deduction for land purchased for nonbusiness use. 
‘‘Sec. 231. Taxable receipts for land held for nonbusiness use. 
‘‘Sec. 232. Certain rental property. 
‘‘SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR 
NONBUSINESS USE. 
‘‘(a) IN GENERAL.—The acquisition of unimproved 
land shall not constitute a business purchase if the unim-
proved land is not acquired to be used in a business activ-
ity or if the land is acquired for— 
‘‘(1) speculation, 
‘‘(2) development (including subdivision), or 
‘‘(3) temporary leasing or other use not com-
mensurate with the value of the land, 
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‘‘(4) indefinite future use in a business activity, 
or 
‘‘(5) use in compensating employees. 
‘‘(b) FUTURE USE IN BUSINESS ACTIVITY.—Unim-
proved land will not be considered held for ‘indefinite fu-
ture use in a business activity’ if promptly upon acquisi-
tion, the purchaser or the lessee begins construction of im-
provements on the land (other than improvements, such 
as paving or sewage lines, intended for indefinite future 
development) that will be used in a business activity. Such 
improvement must be commensurate with the value of the 
land. 
‘‘(c) 
UNIMPROVED
LAND.—‘Unimproved 
land’ 
means— 
‘‘(1) land with no buildings on it, 
‘‘(2) land with improvements if the value of the 
improvements is relatively small in comparison to 
the value of the land and it is anticipated that the 
improvements will be demolished and not used, 
‘‘(3) land in excess of the amount reasonably 
needed for the buildings located on it. 
‘‘(d) CONVERSION TO BUSINESS USE.—If the acqui-
sition of land is not treated as a business purchase by rea-
son of subsection (a) and the land is subsequently used 
in a manner for which it could have been treated as a 
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business purchase, the cost of the land will be treated as 
a business purchase when the improvements on the land 
are placed in service (or in the case of construction for 
sale, substantially completed and advertised for sale). 
‘‘SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD 
FOR NONBUSINESS USE. 
‘‘(a) TAX BASIS.—A business entity shall have a tax 
basis in land equal to the cost of the land if such cost 
is not deductible by reason of section 230(a) and the land 
has not been converted to business use for purposes of 
section 230(d). 
‘‘(b) TAXABLE RECEIPTS OF A LAND SALE.—The 
taxable receipts from the sale of land (or portion thereof) 
in which a business entity has a tax basis by reason of 
subsection (a) shall be the amount by which the proceeds 
exceed the basis of such land (or portion thereof). 
‘‘SEC. 232. CERTAIN RENTAL PROPERTY. 
‘‘(a) IN GENERAL.—Except as provided in subsection 
(b), the activity of rental of real estate is a business activ-
ity to which the business tax applies. 
‘‘(b) NOT RENTAL PROPERTY.—Subsection (a) shall 
not apply to property described in section 111(b)(1) (relat-
ing to property owned by individuals and used for at least 
14 days for a nonbusiness purpose and rented for no more 
than 14 days during the taxable year). 
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‘‘(c) RENTAL
PROPERTY
BECOMES
NONRENTAL 
PROPERTY.—If property which is considered rental prop-
erty for purposes of subsection (a) in one taxable year 
ceases to be rental property (by reason of subsection (b)) 
in the following taxable year, the property (and any associ-
ated debt) shall be treated as distributed by the business 
entity to its owners. Section 211(a) shall apply to such 
distribution. 
‘‘Subchapter F—Insurance and Financial 
Products 
‘‘Sec. 235. General rules. 
‘‘Sec. 236. Fees for financial intermediation services. 
‘‘Sec. 237. Deductible insurance premiums. 
‘‘Sec. 238. Nondeductible insurance premiums. 
‘‘Sec. 239. Certain implicit fees for financial intermediate services. 
‘‘SEC. 235. GENERAL RULES. 
‘‘(a) TAXABLE RECEIPTS.—Except in the case of a 
financial intermediation business, taxable receipts do not 
include financial receipts (as defined in section 203(e)(2)). 
‘‘(b) BUSINESS PURCHASES.—Except in the case of 
a financial intermediation business, business purchases do 
not include the cost of financial instruments (as defined 
in section 242(b)(3)) or payments for use of money or cap-
ital, other than fees for financial intermediation services. 
‘‘SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERV-
ICES. 
‘‘(a) BUSINESS PURCHASE.—Business purchases in-
clude explicit fees and implicit fees for financial intermedi-
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ation services (except to the extent that such fees are for 
services treated as performed outside the United States 
and not imported into the United States or for services 
treated as exported.). 
‘‘(b) FINANCIAL INTERMEDIATION SERVICES.—The 
definition of ‘financial intermediation service’ in section 
241 applies for purposes of this section. 
‘‘(c) EXPLICIT FEES.— 
‘‘(1) IN GENERAL.—‘Explicit fees for financial 
intermediation services’ means separately stated fees 
for services provided by a business entity in the fi-
nancial intermediation business. Explicit fees do not 
include fees for use of money or capital. 
‘‘(2) EXAMPLES.—Explicit fees for financial 
intermediation services include (without limita-
tion)— 
‘‘(A) separately listed maintenance and 
service charges of providers of financial inter-
mediation services, 
‘‘(B) loan documentation fees, 
‘‘(C) brokerage fees, 
‘‘(D) loan origination fees, 
‘‘(E) underwriting fees, 
‘‘(F) trustees’ fees, and 
‘‘(G) fees for credit checks. 
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‘‘(3) EXCLUSIONS.—Explicit fees for financial 
intermediation services do not include prepaid inter-
est and other fees for use of money or capital even 
if such fees are separately stated or are labeled as 
service fees. 
‘‘(d) IMPLICIT FEES.— 
‘‘(1) IMPLICIT FEES ATTRIBUTABLE TO BOR-
ROWING.— 
‘‘(A) IN
GENERAL.—Implicit fees attrib-
utable to borrowing from banks and other fi-
nancial institutions shall include the portion of 
interest payments that the Secretary designates 
as constituting service fees. 
‘‘(B) TIMING.—Implicit fees determined 
under this paragraph shall not be deductible in 
any taxable year prior to the taxable year in 
which the interest is paid. If the amount of the 
interest to which implicit fees relate was de-
ducted as original issue discount under the In-
ternal Revenue Code of 1986, the implicit fees 
with respect to such interest shall not constitute 
a deductible business purchase. 
‘‘(C) DESIGNATION BY SECRETARY.— 
‘‘(i) ESTIMATE OF DIFFERENTIAL.— 
The Secretary shall estimate for each cal-
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endar year the difference between the cost 
of funds for banks and the rates of interest 
(including discount points) charged to the 
most credit-worthy depositors of banks. 
The determinations shall be made sepa-
rately for— 
‘‘(I) loans with terms of not more 
than 3 years, 
‘‘(II) loans with terms of over 3 
but not over 9 years, and 
‘‘(III) loans with terms of over 9 
years. 
‘‘(ii) 
DESIGNATION
OF
IMPLICIT 
FEES.—The Secretary shall designate the 
differences determined under clause (i) as 
the portion of interest expense on loans 
from banks and other financial institutions 
that constitutes an implicit fee for term 
loans originated during the following cal-
endar year for the respective periods listed 
in subclauses (I) through (III) of clause 
(i). The difference determined for loans de-
scribed in subclause (I) of clause (i) shall 
apply to determine the implicit fee portion 
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of interest on demand loans outstanding 
during the following calendar year. 
‘‘(iii) HISTORICAL DETERMINATION.— 
The Secretary shall make an historical de-
termination in accordance with the prin-
ciples of this subparagraph to designate 
the portion of interest on term loans made 
before January 1, 2006, that will con-
stitute implicit fees. 
‘‘(2) IMPLICIT
FEES
FOR
OTHER
FINANCIAL 
INTERMEDIATION ACTIVITY.—Implicit fees for finan-
cial intermediation services include the portion of the 
fees or other charges paid to a provider of financial 
intermediation services (other than lending) as such 
provider designates in accordance with section 39. 
‘‘SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS. 
‘‘(a) IN GENERAL.—The cost of insurance premiums 
on business loss policies that insure risks in the United 
States constitute costs of business purchases. Proceeds 
from such policies constitute taxable receipts. 
‘‘(b) BUSINESS LOSS POLICY.—A ‘business loss pol-
icy’ is an insurance policy— 
‘‘(1) owned by a business entity, 
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‘‘(2) the beneficiary of which is the business en-
tity or another business entity doing business with 
the owner of the policy, 
‘‘(3) that has no inside buildup or other savings 
component, 
‘‘(4) that covers losses on a loss incurred or 
claims made basis during the term of the policy, 
‘‘(5) that has a term of not more than 2 years, 
‘‘(6) that is not a direct or indirect form of 
compensation, and 
‘‘(7) that covers direct losses of the business, 
such as— 
‘‘(A) damage to or theft of property used 
in business activity, 
‘‘(B) tort claims against the business, 
‘‘(C) loss of use of business premises or 
services, 
‘‘(D) malpractice, or 
‘‘(E) alleged or actual breach of fiduciary 
obligations. 
‘‘SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS. 
‘‘(a) NONDEDUCTIBILITY.—The cost of insurance 
policies that are not business loss policies are not deduct-
ible costs of business purchases. 
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‘‘(b) PROCEEDS OF NONDEDUCTIBLE POLICIES.—In-
surance proceeds from policies described in subsection (a) 
do not constitute taxable receipts. 
‘‘(c) APPLICATION OF THIS SECTION TO CERTAIN 
INSURANCE.—This section shall apply to life insurance 
policies. 
‘‘SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL INTER-
MEDIATION SERVICES. 
‘‘(a) DEDUCTIBILITY OF FEES.—If a financial inter-
mediation business (as defined in section 241(b)) elects 
to determine implicit fees for financial intermediation 
services pursuant to this section and notify its business 
customers of their share of the implicit fees in accordance 
with this section, a business entity which receives such no-
tice may treat the amount reported in the notice as an 
implicit fee for financial intermediation services in the cal-
endar year to which such notice relates. 
‘‘(b) ALLOCATION AND REPORTING.— 
‘‘(1) IN GENERAL.—A financial intermediation 
business may— 
‘‘(A) allocate fees received for services for 
which no separately stated fees (or implicit fees 
for 
borrowing 
determined 
under 
section 
236(d)(1)) are charged among recipients of 
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such services on a reasonable and consistent 
basis, and 
‘‘(B) report to each recipient not later 
than February 15th of each year the amount so 
allocated to it with respect to the immediately 
preceding calendar year. 
‘‘(2) MAXIMUM FEES ALLOCATED.—The max-
imum amount that may be allocated by a financial 
intermediation business for a calendar is the excess 
of— 
‘‘(A) the gross profits of the financial 
intermediation business for the calendar year 
(as reasonably estimated by the financial inter-
mediation business), over 
‘‘(B) the explicit fees for financial inter-
mediation services received by the financial 
intermediation business. 
‘‘(3) REASONABLE ALLOCATION.—An allocation 
will not be considered reasonable unless it takes into 
account and allocates fees to— 
‘‘(A) both services provided to business en-
tities and services provided to individuals (other 
than in a business capacity), and 
‘‘(B) both persons who receive money from 
the financial intermediation business and per-
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sons who pay money to the financial intermedi-
ation business (even though amounts allocated 
to the former do not constitute implicit fees). 
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe regulations relating to the allocations under 
this subsection, including regulations addressing— 
‘‘(A) rules for timing of deductions of im-
plicit fees paid by fiscal year recipients, 
‘‘(B) subsequent year adjustments if a fi-
nancial intermediation business allocates too 
much in a calendar year, 
‘‘(C) rules for advance approval from the 
Secretary for allocation procedures, and 
‘‘(D) safe-harbor alternatives to the alloca-
tion procedures described in this subsection. 
‘‘(c) NOT APPLICABLE TO LENDING SERVICES.— 
This section shall not apply to lending services. 
‘‘Subchapter G—Financial Intermediation 
and Financial Institutions 
‘‘Sec. 241. Activities constituting a financial intermediation business. 
‘‘Sec. 242. General rule for taxation. 
‘‘Sec. 243. Special rule for banks. 
‘‘Sec. 244. Insurance companies. 
‘‘Sec. 245. Financial pass-through entities. 
‘‘Sec. 246. Financial intermediation by other businesses. 
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‘‘SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL INTER-
MEDIATION BUSINESS. 
‘‘(a) FINANCIAL INTERMEDIATION BUSINESS.—The 
providing of financial intermediation services shall be con-
sidered a business activity. The gross profit of a business 
entity providing financial intermediation services shall be 
determined by taking into account the rules of this sub-
chapter. 
‘‘(b) SEPARATE BUSINESS ACTIVITY.—The provision 
of financial intermediation services for unrelated persons 
shall be considered a separate business activity and a busi-
ness shall be considered a separate entity with respect to 
such activity. An entity engaging in such business is re-
ferred to in this chapter as a ‘financial intermediation 
business’. 
‘‘(c) FINANCIAL INTERMEDIATION BY A BUSINESS.— 
Section 246 shall apply to a business that provides finan-
cial intermediation services for itself and related parties 
but generally does not provide such services for unrelated 
parties. 
‘‘(d) DEFINITIONS.— 
‘‘(1) FINANCIAL INTERMEDIATION SERVICES.— 
‘Financial intermediation services’ include— 
‘‘(A) lending services, 
‘‘(B) insurance services, 
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‘‘(C) market-making and dealer services, 
and 
‘‘(D) any other service provided as busi-
ness activity in which a person acts as an inter-
mediary in— 
‘‘(i) the transfer of property, services, 
or financial assets, liabilities, risks or in-
struments (or income or expense derived 
therefrom) between two or more persons, 
or 
‘‘(ii) the pooling of economic risk 
among other persons 
and derives all or a portion of such person’s 
gross receipts from streams of income or ex-
pense, discounts, or other financial flows associ-
ated with the matter with respect to which such 
person is acting as an intermediary. 
‘‘(2) LENDING
SERVICES.—‘Lending services’ 
means the regular making of loans and providing 
credit to, or taking deposits from customers, but 
does not include an installment or delayed payment 
arrangement provided by a seller of property or serv-
ices under which additional charges or fees are im-
posed by the seller for the late payment. 
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zation organized and operated exclusively for 
charitable purposes. 
‘‘(g) EXPENDITURES BY PUBLIC CHARITIES TO IN-
FLUENCE LEGISLATION.— 
‘‘(1) GENERAL RULE.—In the case of an orga-
nization to which this subsection applies, exemption 
from taxation under subsection (a) shall be denied 
because a substantial part of the activities of such 
organization consists of carrying on propaganda, or 
otherwise attempting, to influence legislation, but 
only if such organization normally— 
‘‘(A) makes lobbying expenditures in ex-
cess of the lobbying ceiling amount for such or-
ganization for each taxable year, or 
‘‘(B) makes grass roots expenditures in ex-
cess of the grass roots ceiling amount for such 
organization for each taxable year. 
‘‘(2) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) LOBBYING
EXPENDITURES.—‘Lob-
bying expenditures’ means expenditures for the 
purpose of influencing legislation (as defined in 
section 4911(d)). 
‘‘(B) LOBBYING
CEILING
AMOUNT.—The 
lobbying ceiling amount for any organization 
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for any taxable year is 150 percent of the lob-
bying nontaxable amount for such organization 
for such taxable year, determined under section 
4911. 
‘‘(C) GRASS
ROOTS
EXPENDITURES.— 
‘Grass roots expenditures’ means expenditures 
for the purpose of influencing legislation (as de-
fined in section 4911(d) without regard to para-
graph (1)(B) thereof). 
‘‘(D) GRASS
ROOTS
CEILING
AMOUNT.— 
The grass roots ceiling amount for any organi-
zation for any taxable year is 150 percent of 
the grass roots nontaxable amount for such or-
ganization for such taxable year, determined 
under section 4911. 
‘‘(3) ORGANIZATIONS
TO
WHICH
THIS
SUB-
SECTION APPLIES.—This subsection shall apply to 
any organization which has elected (in such manner 
and at such time as the Secretary may prescribe) to 
have the provisions of this subsection apply to such 
organization and which, for the taxable year which 
includes the date the election is made, is described 
in subsection (c)(3) and is not described in para-
graph (4) and is not a private foundation. 
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