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after the occurrence of the event unless the power is relin-
quished.
‘‘(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)
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
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‘‘(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
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.
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‘‘(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-
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
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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-
paragraph (C), there shall not be taken into
account—
‘‘(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.
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‘‘(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.
‘‘(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
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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—
‘‘(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—
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‘‘(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 undistrib-
uted net income (at the close of such immediately preced-
ing 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-
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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—
‘‘(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.
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‘‘(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-
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
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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.
‘‘(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
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‘‘(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
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,
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‘‘(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,
‘‘(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 relat-
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ed persons shall be treated as 1 trust. For purposes
of the preceding sentence, persons are related if—
‘‘(A) the relationship between such persons
is described in section 171(a)(5), or
‘‘(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 1998,
the dollar amount referred to in paragraph (1) shall
be adjusted for inflation in accordance with section
23.
‘‘(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
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as the trust’s basis in such property immediately before
the payment.
‘‘(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-
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ceived after a distribution by the decedent’s es-
tate of such right.
‘‘(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 J—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-
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posed by section 201 and, to the extent required by
the context, the provisions of chapter 2.
‘‘(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 1998.
‘‘(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;
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‘‘(F) A fiduciary of a trust and a bene-
ficiary of such trust;
‘‘(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
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of a partnership or limited liability com-
pany;
‘‘(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
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the whole or half blood), spouse, ancestors, and
lineal descendants; and
‘‘(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.
‘‘(6) 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 individ-
ual 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 individ-
ual 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
unless—
‘‘(1) such definition is limited to the purposes
of a particular chapter, section, or subsection, or
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‘‘(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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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 Reve-
nue Code is renumbered chapter 3 and following new
chapter is inserted after chapter 1:
‘‘CHAPTER 2—SIMPLIFIED USA TAX FOR
BUSINESSES
‘‘Subchapter A. Imposition of tax.
‘‘Subchapter B. Basic rules for business tax.
‘‘Subchapter C. Capital contributions, mergers, acquisitions, and distributions.
‘‘Subchapter D. Accounting methods.
‘‘Subchapter E. Land and rental property.
‘‘Subchapter F. Insurance and financial products.
‘‘Subchapter G. Financial intermediation and financial institutions.
‘‘Subchapter H. Tax-exempt organizations.
‘‘Subchapter I. Cooperatives.
‘‘Subchapter J. Sourcing rules.
‘‘Subchapter K. Business conducted in a possession.
‘‘Subchapter L. Payroll tax credit.
‘‘Subchapter M. Import tax.
‘‘Subchapter N. Transition rules.
‘‘Subchapter O. Rules for administration, consolidated returns.
‘‘Subchapter P. Definitions and rules of applications.
‘‘Subchapter A—Imposition of Tax
‘‘Sec. 201. Tax imposed.
‘‘SEC. 201. TAX IMPOSED.
‘‘(a) TAXABLE BUSINESS ACTIVITY.—A tax is im-
posed on the sale of goods and services in the United
States by a business entity. The amount of the tax equals
the amount by which—
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‘‘(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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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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‘‘(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.—Excepts 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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‘‘(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 independ-
ent 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 individ-
ual (other than amounts paid to an individual
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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‘‘(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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‘‘(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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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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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 individ-
ual 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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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, 1999, that can be
carried over to the taxable year.
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‘‘(3) REDUCTION OF LOSS CARRYOVERS AS A
RESULT OF THE DEDUCTION.—A business entity’s
loss carryovers shall be reduced each year by the
amount of the loss carryover deduction for the year.
Loss carryovers shall be reduced in the order that
they arose.
‘‘(c) LOSS FOR TAXABLE YEAR.—A business entity’s
loss (if any) for the taxable year equals the excess (if any)
of—
‘‘(1) the sum of—
‘‘(A) the cost of business purchases for the
taxable year, and
‘‘(B) the transition basis adjustment for
the taxable year, over
‘‘(2) taxable receipts for the taxable year.
‘‘(d) SPECIAL RULES.—
‘‘(1) CONSOLIDATED RETURNS.—In the case of
a consolidated return, the loss for a taxable year
shall be determined on a consolidated group basis.
In the case of a deconsolidation, the loss carryovers
from the consolidated group shall be allocated in ac-
cordance with rules to be prescribed by the Sec-
retary.
‘‘(2) LOSS
CARRYOVERS
OF
ACQUIRED
BUSI-
NESS ENTITY.—
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‘‘(A) IN GENERAL.—If a business entity
acquires another business entity in a trans-
action that is considered the acquisition of a
business entity and the two entities file a con-
solidated return or if two business entities
merge, the loss carryovers will survive and can
be applied against the taxable receipts attrib-
utable to the business activities carried on (or
in the case of a merger formerly carried on) by
either entity.
‘‘(B) ASSET ACQUISITION.—If a business
entity acquires all or substantially all of the as-
sets of another entity in a transaction that is
considered an asset acquisition rather than the
acquisition of a business entity, the acquirer
will be treated as if it acquired the loss
carryovers of the selling entity. For purposes of
this rule, the assets of a business entity include
ownership interests in other business entities.
‘‘(C) SUBSTANTIALLY ALL.—For purposes
of this paragraph ‘substantially all’ means more
than 80 percent of the fair market value of a
business entity’s net assets. Under rules pre-
scribed by the Secretary, the parties to a trans-
action may elect to treat acquisitions in excess
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of 70 percent of the fair market value of a busi-
ness entity’s net assets as acquisitions of ‘sub-
stantially all’ of a business entity’s net assets.
‘‘Subchapter C—Capital Contributions,
Mergers, Acquisitions, and Distributions
‘‘Sec. 210. Contributions to a business entity.
‘‘Sec. 211. Distributions of property.
‘‘Sec. 212. Asset acquisitions.
‘‘Sec. 213. Mergers and stock acquisitions.
‘‘Sec. 214. Spin-offs, split-off, etc.
‘‘Sec. 215. Allocation of certain tax attributes.
‘‘SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.
‘‘(a) BY BUSINESS ENTITY.—
‘‘(1) CASH.—If a business entity contributes
cash to a business entity of which it is or becomes
a partial or full owner, the amount contributed is
not a deductible amount to the contributor or a tax-
able receipt to the recipient.
‘‘(2) PROPERTY OR SERVICES.—If a business
entity contributes property or services to a business
entity of which it is or becomes a partial or full
owner, the transaction will not result in taxable re-
ceipts to the contributor or a deduction for a busi-
ness purchase for the recipient and will not con-
stitute a sale resulting in taxable receipts to the con-
tributor.
‘‘(b) BY INDIVIDUAL.—
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‘‘(1) CASH.—If an individual contributes cash
to a business entity, the cash received is not a tax-
able receipt.
‘‘(2) NEW PROPERTY.—If an individual contrib-
utes to a business entity property that the individual
purchased for the business entity but which was not
used by any person after its purchase, the property
shall be considered purchased by such business en-
tity from the person from which the individual pur-
chased the property.
‘‘(3) PERSONAL USE PROPERTY.—
‘‘(A) IN GENERAL.—If an individual con-
tributes personal use property to a business en-
tity in which the individual has an ownership
interest or for which the individual receives an
ownership interest, the business entity shall not
be permitted to deduct the value of the property
received as a business expense. The business
entity will have a tax basis in the contributed
property equal to the contributor’s basis.
‘‘(B) PERSONAL
USE
PROPERTY.—‘Per-
sonal use property’ means any property used by
an individual at any time other than in a busi-
ness activity.
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‘‘(4) SERVICES.—If an individual contributes
services to a business entity in which the individual
has an ownership interest or receives an ownership
interest, the business entity shall not be permitted to
deduct the value of the services received (or the
value of the equity interest provided to the services
provider).
‘‘SEC. 211. DISTRIBUTIONS OF PROPERTY.
‘‘(a) DISTRIBUTIONS OTHER THAN TO CONTROL-
LING BUSINESS.—If a business entity distributes all or a
portion of its assets to its owners (other than a controlling
business entity), the business entity will be treated as if
it sold the assets to its owners at fair market value. The
fair market value will be determined by the distributing
corporation and those determinations, unless unreason-
able, will be binding on the recipients.
‘‘(b) DISTRIBUTIONS
TO
A CONTROLLING BUSI-
NESS.—If a business entity distributes all or a portion of
its assets to a controlling business, the controlling busi-
ness will assume the distributing entity’s tax attributes
with respect to the assets and neither entity will have tax-
able receipts or a deduction as a result of the transaction.
‘‘(c) DISTRIBUTION
OF
PERSONAL
USE
PROP-
ERTY.—If personal use property is distributed to the indi-
vidual who contributed the personal use property to a busi-
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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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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 13 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,
2000.
‘‘(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.
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‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe such regulations as he deems necessary for
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, 1998, 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, 1998,
and a subsequent taxable year beginning on January
1, 1999, and ending on the day immediately preced-
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ing the beginning of the business entity’s next fiscal
year.
‘‘(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 1998, 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 1998, 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 1998 shall end on December 31,
1998.
‘‘(C) ANTI-ABUSE
RULE.—Subparagraph
(A) shall not apply to any taxpayer that enters
into business transactions in 1998 following the
scheduled end of its fiscal year with business
entities that are not subject to the business tax
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at the time of such transactions if such trans-
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
contract—
‘‘(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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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 determin-
ing taxable receipts for a prior taxable year, the amount
of such adjustment shall be treated as a reduction or in-
crease, as the case may be, in taxable receipts for the tax-
able year in which the adjustment is made or incurred.
‘‘(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.
‘‘(b) NOTICE REQUIREMENT.—No reduction shall be
allowed under subsection (a) unless the seller notifies the
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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-
puting taxable income under the income tax in effect prior
to the effect date of the business tax.
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‘‘(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 in-
curred 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, in-
ventory 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.
‘‘(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
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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,
‘‘(4) indefinite future use in a business activity,
or
‘‘(5) use in compensating employees.
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‘‘(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
business purchase, the cost of the land will be treated as
a business purchase when the improvements on the land
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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).
‘‘(c) RENTAL
PROPERTY
BECOMES
NONRENTAL
PROPERTY.—If property which is considered rental prop-
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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-
ation services (except to the extent that such fees are for
services treated as performed outside the United States
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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.
‘‘(3) EXCLUSIONS.—Explicit fees for financial
intermediation services do not include prepaid inter-
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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-
endar year the difference between the cost
of funds for banks and the rates of interest
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(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
of interest on demand loans outstanding
during the following calendar year.
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‘‘(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, 1998, 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,
‘‘(2) the beneficiary of which is the business en-
tity or another business entity doing business with
the owner of the policy,
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‘‘(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.
‘‘(b) PROCEEDS OF NONDEDUCTIBLE POLICIES.—In-
surance proceeds from policies described in subsection (a)
do not constitute taxable receipts.
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‘‘(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
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
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allocated to it with respect to the immediately
preceding calendar year.
‘‘(2) MAXIMUM FEES ALLOCATED.—The maxi-
mum 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-
sons who pay money to the financial intermedi-
ation business (even though amounts allocated
to the former do not constitute implicit fees).
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‘‘(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.
‘‘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
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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,
‘‘(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—
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‘‘(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.
‘‘(3) MARKET-MAKING OR DEALER SERVICES.—
‘Market-making or dealer services’ means services
provided by a person who—
‘‘(A) regularly purchases financial instru-
ments from or sells financial instruments to
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customers in the ordinary course of a trade or
business,
‘‘(B) regularly offers to enter into, assume,
offset, assign, or otherwise terminate positions
in financial instruments with customers in the
ordinary course of a trade or business.
‘‘SEC. 242. GENERAL RULE FOR TAXATION.
‘‘(a) IN GENERAL.—In the case of a financial inter-
mediation business, gross profits shall be computed by—
‘‘(1) substituting financial receipts for taxable
receipts, and
‘‘(2) including financial expenses as business
purchases.
‘‘(b) DEFINITIONS.—
‘‘(1) FINANCIAL
RECEIPTS.—‘Financial re-
ceipts’ means all receipts other than amounts re-
ceived as contributions to capital.
‘‘(2) FINANCIAL
EXPENSES.—‘Financial ex-
penses’ include—
‘‘(A) payments for principal and interest
that is properly allocable to the provision of fi-
nancial intermediation services,
‘‘(B) the cost of and payments under fi-
nancial instruments (other than financial in-
struments in the person subject to the tax im-
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posed under this chapter and any person relat-
ed to such person),
‘‘(C) claims and cash surrender values paid
in connection with insurance or reinsurance
services, and
‘‘(D) amounts paid for reinsurance.
‘‘(3) FINANCIAL INSTRUMENT.—‘Financial in-
strument’ means any—
‘‘(A) share of stock in a corporation,
‘‘(B) equity ownership in any widely held
or publicly traded partnership, trust, or other
business entity,
‘‘(C) note, bond, debenture, or other evi-
dence of indebtedness,
‘‘(D) interest rate, currency, or equity no-
tional principal contract,
‘‘(E) evidence or interest in, or a derivative
financial instrument in, any financial instru-
ment described in subparagraph (A), (B), (C),
or (D), or any currency, including any option,
forward contract, short position, and any simi-
lar financial instrument in such a financial in-
strument or currency, and
‘‘(F) a position which—
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‘‘(i) is not a financial instrument de-
scribed in subparagraph (A), (B), (C), (D)
or (E),
‘‘(ii) is a hedge with respect to such
a financial instrument, and
‘‘(iii) is clearly identified in the deal-
er’s records as being described in this sub-
paragraph before the close of the day on
which it was acquired or entered into.
‘‘(c) INTERNATIONAL MATTERS.—For purposes of
this section in the case of a financial intermediation busi-
ness with activity in and outside the United States—
‘‘(1) INCLUSION REGARDLESS OF SOURCE.—
‘‘(A) Financial receipts shall be determined
without regard to whether they are received for
property or service provided in or outside the
United States, except that financial receipts do
not include amounts that—
‘‘(i) are not taxable receipts (as deter-
mined without regard to this section), but
‘‘(ii) would have been taxable receipts
(as determined without regard to this sec-
tion) if they had been received for services
or property in the United States.
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‘‘(B) Financial expenses shall be deter-
mined without regard to whether they are re-
ceived for property or services acquired in or
outside the United States.
‘‘(2) ALLOCATION.—Under regulations pre-
scribed by the Secretary, gross profits (as deter-
mined without regard to this paragraph) shall be re-
duced by the amount of financial intermediation
gross profit attributable to financial intermediation
activity provided outside the United States.
‘‘(3) GROSS PROFIT ATTRIBUTABLE TO FINAN-
CIAL INTERMEDIATION ACTIVITY.—‘Gross profits at-
tributable to financial intermediation activity’ means
the excess of—
‘‘(A) gross profits as determined under
this section (but without regard to paragraph
(2)), over
‘‘(B) gross profits as determined without
regard to this subchapter.
‘‘SEC. 243. SPECIAL RULES FOR BANKS.
‘‘(a) IN GENERAL.—In the case of a bank, gross prof-
its shall be determined in accordance with section 242, ex-
cept that—
‘‘(1) FINANCIAL RECEIPTS.—Financial receipts
shall include only—
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‘‘(A) taxable receipts (as determined with-
out regard to this subchapter),
‘‘(B) interest on loans made or acquired by
the bank,
‘‘(C) gain on the sale of loans,
‘‘(D) discount points received, and
‘‘(E) any explicit fees for financial or fidu-
ciary services not included in subparagraphs
(A) through (E).
‘‘(2) FINANCIAL
EXPENSES.—Financial ex-
penses shall include only—
‘‘(A) interest paid to depositors and on
other funds borrowed by the bank, and
‘‘(B) reasonable additions to reserves for
bad debts.
‘‘(3) FORECLOSURE PROPERTY.—Gross profits
shall properly take into account proceeds from the
operation or sale of foreclosure property.
‘‘(b) BANK.—
‘‘(1) IN GENERAL.—‘Bank’ means a bank or
trust company incorporated and doing business
under the laws of the United States, the District of
Columbia, or any State, a substantial part of the
business of which consists of receiving deposits and
making loans and discounts, or of exercising fidu-
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ciary powers similar to those exercised by national
banks under the authority of the Comptroller of the
Currency, and which is subject by law to supervision
and examination by State or Federal authority hav-
ing supervision over banking institutions or credit
unions. Such term includes domestic building and
loan associations and credit unions.
‘‘(2) OTHER ACTIVITIES.—If a bank is engaged
in significant amounts of activities other than those
described in paragraph (1), the bank shall be consid-
ered as a separate business entity with respect to
such other activity.
‘‘SEC. 244. INSURANCE COMPANIES.
‘‘(a) IN GENERAL.—In the case of companies provid-
ing insurance services, gross profits shall be determined
in accordance with section 242, except—
‘‘(1) subsection (c) of section 242 (relating to
international operations) shall not apply, and
‘‘(2) the rules of subchapter J (sourcing rules)
shall apply to determine financial receipts and finan-
cial expenses.
‘‘(b) RESULT INCONSISTENT WITH STATUTORY IN-
TENT.—If an insurance company determines that the ap-
plication of subsection (a) produces results inconsistent
with the territorial approach of the business tax, it may
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apply to the Secretary for permission to apply section
242(c) in lieu of subsection (a).
‘‘SEC. 245. FINANCIAL PASS-THROUGH ENTITIES.
‘‘(a) IN GENERAL.—In the case of a financial
pass-thru entity, gross profits shall be determined in
accordance with section 242, except—
‘‘(1) financial receipts shall include contribu-
tions to capital,
‘‘(2) financial expenses shall include—
‘‘(A) distributions to persons holding inter-
ests in the pass-thru entity,
‘‘(B) investments in related entities (in-
cluding wholly owned entities) engaging in real
estate investment.
‘‘(b) PASS-THRU ENTITY.—
‘‘(1) IN GENERAL.—‘Pass-thru entity’ means a
business entity that is intended to serve as a con-
duit. The Secretary shall prescribe regulations defin-
ing pass-thru entity. Such term shall include—
‘‘(A) entities that would qualify as regu-
lated investment companies under the Internal
Revenue Code of 1986,
‘‘(B) entities that would qualify as real es-
tate investment trusts under the Internal Reve-
nue Code of 1986,
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‘‘(C) 
entities 
that 
would 
qualify 
as
REMICs under the Internal Revenue Code of
1986, and
‘‘(D) partnerships whose purposes are to
invest the funds of the partners in financial in-
struments, distribute or reinvest the income
from such investments, and distribute or rein-
vest the proceeds from the sale of such instru-
ments.
‘‘(2) ENGAGEMENT
IN
BUSINESS
ACTIVITY.—
An entity will not qualify as a pass-thru entity if it
engages in more than an insubstantial amount of
rental or other business activity (other than invest-
ing in and selling financial instruments). The pre-
ceding sentence will not apply if the business entity
treats the business activity as engaged in by a sepa-
rate business entity (separately subject to tax under
this chapter).
‘‘SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSI-
NESSES.
‘‘(a) IN GENERAL.—If a business entity that is not
regularly in the business of providing financial intermedi-
ation services to unrelated parties engages in significant
financial intermediation activity, its gross profits shall be
increased by its gross profits from financial intermediation
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activity (determined as if such activity were activity of a
pass-thru entity that paid all costs of such financial inter-
mediation activity including—
‘‘(1) compensation for persons engaging in such
activity,
‘‘(2) equipment involved in such activity, and
‘‘(3) office space for persons involved in such
activity).
‘‘(b) PROXY.—A business entity to which subsection
(a) applies will be treated as satisfying the requirements
of that subsection if it increases its gross receipts by the
portion of employee compensation properly allocable to the
provision of financial intermediation services.
‘‘(c) SIGNIFICANT FINANCIAL INTERMEDIATION.—A
business will be considered as engaging in substantial fi-
nancial intermediation if—
‘‘(1) more than 5 percent of the compensation
paid by the business to its employees is for employ-
ees whose primary activity is the management of the
business’s investments in financial instruments, or
‘‘(2) at all times during the taxable year and
the immediately preceding full taxable year, more
than 10 percent of its assets are financial instru-
ments other than—
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‘‘(A) equity interests in business entities in
which it holds more than 50 percent in value of
the outstanding equity,
‘‘(B) equity interests in joint ventures in
which the company is actively participating,
‘‘(C) purchase money loans to its cus-
tomers, and
‘‘(D) business loans and equity invest-
ments that serve a direct business purpose.
‘‘Subchapter H—Tax-Exempt Organizations
‘‘Sec. 251.
Exemption for governmental entities.
‘‘Sec. 252. Taxable activity of governmental entities.
‘‘Sec. 253. Tax-exempt organizations.
‘‘Sec. 254. Special rules for (c)(3) organizations.
‘‘Sec. 255. Tax on unrelated business activity.
‘‘Sec. 256. Unrelated business activity.
‘‘SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES.
‘‘(a) STATES.—Except as provided in section 252, a
state, political subdivision thereof and the District of Co-
lumbia shall be exempt from taxation under this chapter
on any gross profits derived from the exercise of any es-
sential governmental function.
‘‘(b) POSSESSIONS.—The government of any posses-
sion of the United States shall be exempt from taxation
under this chapter on any gross profits earned by the pos-
session.
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‘‘SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTI-
TIES.
‘‘(a) CERTAIN ACTIVITIES TAXABLE.—A govern-
mental entity shall be considered a business and subject
to tax on any business activity of a type frequently pro-
vided by business entities subject to tax under this chap-
ter.
‘‘(b) CERTAIN ACTIVITIES TREATED AS ESSENTIAL
GOVERNMENT
FUNCTIONS.—Subsection (a) shall not
apply to the following activities, which shall be treated as
essential government functions:
‘‘(1) Provision of mass transportation services.
‘‘(2) Provision of public utility services.
‘‘SEC. 253. TAX-EXEMPT ORGANIZATIONS.
‘‘(a) EXEMPTION FROM TAXATION.—An organiza-
tion described in subsection (c) or (d) shall be exempt
from taxation under this chapter.
‘‘(b) TAX ON UNRELATED BUSINESS ACTIVITY.—An
organization exempt from taxation under subsection (a)
shall be subject to tax to the extent provided in sections
255 and 256, but shall be considered a tax-exempt organi-
zation for purposes of any law that refers to tax-exempt
organizations.
‘‘(c) LIST OF EXEMPT ORGANIZATIONS.—The follow-
ing organizations are referred to in subsection (a):
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‘‘(1) 
INSTRUMENTALITY
OF
THE
UNITED
STATES.—Any corporation organized under Act of
Congress which is an instrumentality of the United
States but only if such corporation—
‘‘(A) is exempt from Federal income
taxes—
‘‘(i) under such Act as amended and
supplemented before July 18, 1984, or
‘‘(ii) under this title without regard to
any provision of law which is not contained
in this title and which is not contained in
a revenue Act, or
‘‘(B) is described in subsection (h).
‘‘(2) TITLE
HOLDING
COMPANIES.—Corpora-
tions organized for the exclusive purpose of holding
title to property, collecting income therefrom, and
turning over the entire amount thereof, less ex-
penses, to an organization which itself is exempt
under this section. Rules similar to the rules of sub-
paragraph (G) of paragraph (25) shall apply for
purposes of this paragraph.
‘‘(3) CHARITABLE, EDUCATIONAL
AND
RELI-
GIOUS
ORGANIZATIONS.—Corporations, and any
community chest, fund, or foundation, organized and
operated exclusively for religious, charitable, sci-
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entific, testing for public safety, literary, or edu-
cational purposes, or to foster national or inter-
national amateur sports competition (but only if no
part of its activities involve the provision of athletic
facilities or equipment), or for the prevention of cru-
elty to children or animals, no part of the net earn-
ings of which inures to the benefit of any private
shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or oth-
erwise attempting, to influence legislation (except as
otherwise provided in subsection (g)), and which
does not participate in, or intervene in (including the
publishing or distributing of statements), any politi-
cal campaign on behalf of (or in opposition to) any
candidate for public office.
‘‘(4) SOCIAL WELFARE ORGANIZATIONS, ETC.—
‘‘(A) Civic leagues or organizations not or-
ganized for profit but operated exclusively for
the promotion of social welfare, or local associa-
tions of employees, the membership of which is
limited to the employees of a designated person
or persons in a particular municipality, and the
net earnings of which are devoted exclusively to
charitable, educational, or recreational pur-
poses.
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‘‘(B) Subparagraph (A) shall not apply to
an entity unless no part of the net earnings of
such entity inures to the benefit of any private
shareholder or individual
‘‘(5) LABOR
AND
AGRICULTURAL
ORGANIZA-
TIONS.—Labor, agricultural, or horticultural organi-
zations.
‘‘(6) TRADE ASSOCIATIONS.—Business leagues,
chambers of commerce, real-estate boards, boards of
trade, or professional football leagues (whether or
not administering a pension fund for football play-
ers) not organized for profit and no part of the net
earnings of which inures to the benefit of any pri-
vate shareholder or individual.
‘‘(7) SOCIAL
CLUBS.—Clubs organized for
pleasure, recreation, and other nonprofitable pur-
poses, substantially all of the activities of which are
for such purposes and no part of the net earnings
of which inures to the benefit of any private share-
holder.
‘‘(8) CERTAIN FRATERNAL SOCIETIES.—Frater-
nal beneficiary societies, orders, or associations—
‘‘(A) operating under the lodge system or
for the exclusive benefit of the members of a
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fraternity itself operating under the lodge sys-
tem, and
‘‘(B) providing for the payment of life,
sick, accident, or other benefits to the members
of such society, order, or association or their
dependents.
‘‘(9) VEBA’S.—Voluntary employees’ bene-
ficiary associations providing for the payment of life,
sick, accident, or other benefits to the members of
such association or their dependents or designated
beneficiaries, if no part of the net earnings of such
association inures (other than through such pay-
ments) to the benefit of any private shareholder or
individual.
‘‘(10) OTHER
FRATERNAL
ORGANIZATIONS.—
Domestic fraternal societies, orders, or associations,
operating under the lodge system—
‘‘(A) the net earnings of which are devoted
exclusively to religious, charitable, scientific, lit-
erary, educational, and fraternal purposes, and
‘‘(B) which do not provide for the payment
of life, sick, accident, or other benefits.
‘‘(11) 
LOCAL
TEACHERS’ 
RETIREMENT
FUNDS.—Teachers’ retirement fund associations of a
purely local character, if—
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‘‘(A) no part of their net earnings inures
(other than through payment of retirement ben-
efits) to the benefit of any private shareholder
or individual, and
‘‘(B) the income consists solely of amounts
received from public taxation, amounts received
from assessments on the teaching salaries of
members, and income in respect of investments.
‘‘(12) CERTAIN COOPERATIVES.—
‘‘(A) Benevolent life insurance associations
of a purely local character, mutual ditch or irri-
gation companies, mutual or cooperative tele-
phone companies, or like organizations; but only
if 85 percent or more of the income consists
of amounts collected from members for the sole
purpose of meeting losses and expenses.
‘‘(B) In the case of a mutual or coopera-
tive telephone company, subparagraph (A) shall
be applied without taking into account any in-
come received or accrued—
‘‘(i) from a nonmember telephone
company for the performance of commu-
nication services which involve members of
the mutual or cooperative telephone com-
pany,
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‘‘(ii) from qualified pole rentals,
‘‘(iii) from the sale of display listings
in a directory furnished to the members of
the mutual or cooperative telephone com-
pany, or
‘‘(iv) from the prepayment of a loan
under section 306A, 306B, or 311 of the
Rural Electrification Act of 1936 (as in ef-
fect on January 1, 1987).
‘‘(C) In the case of a mutual or cooperative
electric company, subparagraph (A) shall be ap-
plied without taking into account any income
received or accrued—
‘‘(i) from qualified pole rentals, or
‘‘(ii) from the prepayment of a loan
under section 306A, 306B, or 311 of the
Rural Electrification Act of 1936 (as in ef-
fect on January 1, 1987).
‘‘(D) For purposes of this paragraph, the
term ‘qualified pole rental’ means any rental of
a pole (or other structure used to support
wires) if such pole (or other structure)—
‘‘(i) is used by the telephone or elec-
tric company to support one or more wires
which are used by such company in provid-
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ing telephone or electric services to its
members, and
‘‘(ii) is used pursuant to the rental to
support one or more wires (in addition to
the wires described in clause (i)) for use in
connection with the transmission by wire
of electricity or of telephone or other com-
munications.
For purposes of the preceding sentence, the
term ‘rental’ includes any sale of the right to
use the pole (or other structure).
‘‘(13) 
NONPROFIT
CEMETERIES.—Cemetery
companies owned and operated exclusively for the
benefit of their members or which are not operated
for profit; and any corporation chartered solely for
the purpose of the disposal of bodies by burial or
cremation which is not permitted by its charter to
engage in any business not necessarily incident to
that purpose and no part of the net earnings of
which inures to the benefit of any private share-
holder or individual.
‘‘(14) GRANDFATHERED
MUTUAL
FINANCIAL
INSTITUTIONS.—
‘‘(A) Credit unions without capital stock
organized and operated for mutual purposes
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and without profit, but only if organized before
July 1, 1998.
‘‘(B) Certain corporations or associations
organized before September 1, 1957, and de-
scribed in subparagraphs (B) or (C) of section
501(c)(14) of the Internal Revenue Code of
1986.
‘‘(15) GRANDFATHERED
SMALL
INSURANCE
COMPANIES.—Insurance companies organized before
July 1, 1998, and described in section 501(c)(15) of
the Internal Revenue Code of 1986.
‘‘(16) CROP
FINANCING
ASSOCIATIONS.—Cor-
porations organized by an association subject to part
IV of this subchapter or members thereof, for the
purpose of financing the ordinary crop operations of
such members or other producers, and operated in
conjunction with such association. Exemption shall
not be denied any such corporation because it has
capital stock, if the dividend rate of such stock is
fixed at not to exceed the legal rate of interest in the
State of incorporation or 8 percent per annum,
whichever is greater, on the value of the consider-
ation for which the stock was issued, and if substan-
tially all such stock (other than nonvoting preferred
stock, the owners of which are not entitled or per-
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mitted to participate, directly or indirectly, in the
profits of the corporation, on dissolution or other-
wise, beyond the fixed dividends) is owned by such
association, or members thereof; nor shall exemption
be denied any such corporation because there is ac-
cumulated and maintained by it a reserve required
by State law or a reasonable reserve for any nec-
essary purpose.
‘‘(17) SUPPLEMENTAL EMPLOYMENT BENEFIT
TRUST.—
‘‘(A) A trust or trusts forming part of a
plan providing for the payment of supplemental
unemployment compensation benefits, if—
‘‘(i) under the plan, it is impossible,
at any time prior to the satisfaction of all
liabilities, with respect to employees under
the plan, for any part of the corpus or in-
come to be (within the taxable year or
thereafter) used for, or diverted to, any
purpose other than the providing of supple-
mental unemployment compensation bene-
fits,
‘‘(ii) such benefits are payable to em-
ployees under a classification which is set
forth in the plan and which is found by the
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Secretary not to be discriminatory in favor
of employees who are highly compensated
employees (within the meaning of section
414(q)), and
‘‘(iii) such benefits do not discrimi-
nate in favor of employees who are highly
compensated employees (within the mean-
ing of section 414(q). A plan shall not be
considered discriminatory within the mean-
ing of this clause merely because the bene-
fits received under the plan bear a uniform
relationship to the total compensation, or
the basic or regular rate of compensation,
of the employees covered by the plan.
‘‘(B) Rules similar to those contained in
subparagraphs (B) through (E) of section
501(c)(7) of the Internal Revenue Code of 1986
shall apply to subparagraph (A).
‘‘(18) GRANDFATHERED TRUSTS.—A trust or
trusts created before June 25, 1959, and described
in section 501(c)(18) of the Internal Revenue Code
of 1986.
‘‘(19) CERTAIN VETERANS’ ORGANIZATIONS.—
A post or organization of past or present members
of the Armed Forces of the United States, or an
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auxiliary unit or society of, or a trust or foundation
for, any such post or organization—
‘‘(A) organized in the United States or any
of its possessions,
‘‘(B) at least 75 percent of the members of
which are past or present members of the
Armed Forces of the United States and sub-
stantially all of the other members of which are
individuals who are cadets or are spouses, wid-
ows, or widowers of past or present members of
the Armed Forces of the United States or of
cadets, and
‘‘(C) no part of the net earnings of which
inures to the benefit of any private shareholder
or individual.
‘‘(20) LEGAL SERVICE PLAN TRUSTS.—An or-
ganization or trust created or organized in the
United States, the exclusive function of which is to
form part of a qualified group legal services plan or
plans.
‘‘(21) BLACK LUNG ACT TRUSTS.—A trust
or trusts established in writing, created or organized
in the United States, and contributed to by any per-
son (except an insurance company) if—
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‘‘(A) the purpose of such trust or trusts is
exclusively—
‘‘(i) to satisfy, in whole or in part, the
liability of such person for, or with respect
to, claims for compensation for disability
or death due to pneumoconiosis under
Black Lung Acts,
‘‘(ii) to pay premiums for insurance
exclusively covering such liability,
‘‘(iii) to pay administrative and other
incidental expenses of such trust in connec-
tion with the operation of the trust and the
processing of claims against such person
under Black Lung Acts, and
‘‘(iv) to pay accident or health bene-
fits for retired miners and their spouses
and dependents (including administrative
and other incidental expenses of such trust
in connection therewith) or premiums for
insurance exclusively covering such bene-
fits; and
‘‘(B) such trusts meets requirements simi-
lar to those contained in section 501(c)(21) of
the Internal Revenue Code of 1986.
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‘‘(22) MULTIEMPLOYER ERISA TRUST.—A trust
created or organized in the United States and estab-
lished in writing by the plan sponsors of multiem-
ployer plans if—
‘‘(A) the purpose of such trust is
exclusively—
‘‘(i) to pay any amount described in
section 4223(c) or (h) of the Employee Re-
tirement Income Security Act of 1974, and
‘‘(ii) to pay reasonable and necessary
administrative expenses in connection with
the establishment and operation of the
trust and the processing of claims against
the trust,
‘‘(B) no part of the assets of the trust may
be used for, or diverted to, any purpose other
than—
‘‘(i) the purposes described in sub-
paragraph (A), or
‘‘(ii) prudent investment in securities,
obligations, or time or demand deposits,
‘‘(C) such trust meets the requirements of
paragraphs (2), (3), and (4) of section 4223(b),
4223(h), or, if applicable, section 4223(c) of the
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Employee Retirement Income Security Act of
1974, and
‘‘(D) the trust instrument provides that,
on dissolution of the trust, assets of the trust
may not be paid other than to plans which have
participated in the plan or, in the case of a
trust established under section 4223(h) of such
Act, to plans with respect to which employers
have participated in the fund.
‘‘(23) GRANDFATHERED VETERANS’ INSURANCE
ORGANIZATION.—Any association organized before
1880 more than 75 percent of the members of which
are present or past members of the Armed Forces
and a principal purpose of which is to provide insur-
ance and other benefits to veterans or their depend-
ents.
‘‘(24) ERISA TRUST.—A trust described in sec-
tion 4049 of the Employee Retirement Income Secu-
rity Act of 1974 (as in effect on the date of the en-
actment of the Single-Employer Pension Plan
Amendments Act of 1986).
‘‘(25) REAL TITLE HOLDING CORPORATION OR
TRUST.—
‘‘(A) Any corporation or trust which—
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‘‘(i) has no more than 35 shareholders
or beneficiaries,
‘‘(ii) has only 1 class of stock or bene-
ficial interest, and
‘‘(iii) is organized for the exclusive
purposes of—
‘‘(I) acquiring real property and
holding title to, and collecting income
from, such property, and
‘‘(II) remitting the entire amount
of income from such property (less ex-
penses) to 1 or more organizations de-
scribed in subparagraph (C) which are
shareholders of such corporation or
beneficiaries of such trust.
‘‘For purposes of clause (iii), the term ‘real
property’ shall not include any interest as a
tenant in common (or similar interest) and
shall not include any indirect interest.
‘‘(B) A corporation or trust shall be de-
scribed in subparagraph (A) without regard to
whether the corporation or trust is organized by
1 or more organizations described in subpara-
graph (C).
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‘‘(C) An organization is described in this
subparagraph if such organization is—
‘‘(i) a qualified pension, profit shar-
ing, or stock bonus plan that meets the re-
quirements of section 401(a),
‘‘(ii) a governmental plan (within the
meaning of section 414(d)),
‘‘(iii) the United States, any State or
political subdivision thereof, or any agency
or instrumentality of any of the foregoing,
or
‘‘(iv) any organization described in
paragraph (3).
‘‘(D) A corporation or trust shall in no
event be treated as described in subparagraph
(A) unless such corporation or trust permits its
shareholders or beneficiaries—
‘‘(i) to dismiss the corporation’s or
trust’s investment adviser, following rea-
sonable notice, upon a vote of the share-
holders or beneficiaries holding a majority
of interest in the corporation or trust, and
‘‘(ii) to terminate their interest in the
corporation or trust by either, or both, of
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the following alternatives, as determined by
the corporation or trust:
‘‘(I) by selling or exchanging
their stock in the corporation or inter-
est in the trust (subject to any Fed-
eral or State securities law) to any or-
ganization described in subparagraph
(C) so long as the sale or exchange
does not increase the number of
shareholders or beneficiaries in such
corporation or trust above 35, or
‘‘(II) by having their stock or in-
terest redeemed by the corporation or
trust after the shareholder or bene-
ficiary has provided 90 days notice to
such corporation or trust.
‘‘(E)(i) For purposes of this paragraph—
‘‘(I) a corporation which is a qualified
subsidiary shall not be treated as a sepa-
rate corporation, and
‘‘(II) all assets, liabilities, and items
of income, deduction, and credit of a quali-
fied subsidiary shall be treated as assets,
liabilities, and such items (as the case may
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be) of the corporation or trust described in
subparagraph (A).
‘‘(ii) For purposes of this subparagraph,
the term ‘qualified subsidiary’ means any cor-
poration if, at all times during the period such
corporation was in existence, 100 percent of the
stock of such corporation is held by the cor-
poration or trust described in subparagraph
(A).
‘‘(iii) For purposes of this subtitle, if any
corporation which was a qualified subsidiary
ceases to meet the requirements of clause (ii),
such corporation shall be treated as a new cor-
poration acquiring all of its assets (and assum-
ing all of its liabilities) immediately before such
cessation from the corporation or trust de-
scribed in subparagraph (A) in exchange for its
stock.
‘‘(F) For purposes of subparagraph (A),
the term ‘real property’ includes any personal
property which is leased under, or in connection
with, a lease of real property, but only if the
rent attributable to such personal property for
the taxable year does not exceed 15 percent of
the total rent for the taxable year attributable
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to both the real and personal property leased
under, or in connection with, such lease.
‘‘(G) (i) An organization shall not be treat-
ed as failing to be described in this paragraph
merely by reason of the receipt of any otherwise
disqualifying income which is incidentally de-
rived from the holding of real property.
‘‘(ii) Clause (i) shall not apply if the
amount of gross income described in such
clause exceeds 10 percent of the organization’s
gross income for the taxable year unless the or-
ganization establishes to the satisfaction of the
Secretary that the receipt of gross income de-
scribed in clause (i) in excess of such limitation
was inadvertent and reasonable steps are being
taken to correct the circumstances giving rise to
such income.
‘‘(26) STATE ESTABLISHED MEDICAL CARE IN-
SURER.—Any membership organization if—
‘‘(A) such organization is established by a
State exclusively to provide coverage for medical
care on a not-for-profit basis to individuals de-
scribed in subparagraph (B) through—
‘‘(i) insurance issued by the organiza-
tion, or
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‘‘(ii) a health maintenance organiza-
tion under an arrangement with the orga-
nization,
‘‘(B) the only individuals receiving such
coverage 
through 
the 
organization 
are
individuals—
‘‘(i) who are residents of such State,
and
‘‘(ii) who, by reason of the existence
or history of a medical condition—
‘‘(I) are unable to acquire medi-
cal care coverage for such condition
through insurance or from a health
maintenance organization, or
‘‘(II) are able to acquire such
coverage only at a rate which is sub-
stantially in excess of the rate for
such coverage through the member-
ship organization,
‘‘(C) the composition of the membership in
such organization is specified by such State,
and
‘‘(D) no part of the net earnings of the or-
ganization inures to the benefit of any private
shareholder or individual. A spouse and any
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qualifying child) of an individual described in
subparagraph (B) (without regard to this sen-
tence) shall be treated as described in subpara-
graph (B).
‘‘(27) GRANDFATHERED WORKERS COMPENSA-
TION
ORGANIZATION.—Any membership organiza-
tion established before June 1, 1996, by a State ex-
clusively to reimburse its members for losses arising
under workmen’s compensation acts, and described
in section 501(c)(27) of the Internal Revenue Code
of 1986.
‘‘(d) RELIGIOUS AND APOSTOLIC ORGANIZATIONS.—
The following organizations are referred to in subsection
(a): Religious or apostolic associations or corporations, if
such associations or corporations have a common treasury
or community treasury, even if such associations or cor-
porations engage in business for the common benefit of
the members, but only if such activity is treated as unre-
lated business activity.
‘‘(e) COOPERATIVE HOSPITAL SERVICE ORGANIZA-
TIONS.—For purposes of this chapter, an organization
shall be treated as an organization organized and operated
exclusively for charitable purposes, if—
‘‘(1) such organization is organized and oper-
ated solely—
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‘‘(A) to perform, on a centralized basis,
one or more of the following services which, if
performed on its own behalf by a hospital which
is an organization described in subsection (c)(3)
and exempt from taxation under subsection (a),
would constitute activities in exercising or per-
forming the purpose or function constituting
the basis for its exemption: data processing,
purchasing (including the purchasing of insur-
ance on a group basis), warehousing, billing
and collection, food, clinical, industrial engi-
neering, laboratory, printing, communications,
record center, and personnel (including selec-
tion, testing, training, and education of person-
nel) services; and
‘‘(B) to perform such services solely for
two or more hospitals each of which is—
‘‘(i) an organization described in sub-
section (c)(3) which is exempt from tax-
ation under subsection (a),
‘‘(ii) a constituent part of an organi-
zation described in subsection (c)(3) which
is exempt from taxation under subsection
(a) and which, if organized and operated
as a separate entity, would constitute an
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organization described in subsection (c)(3),
or
‘‘(iii) owned and operated by the
United States, a State, the District of Co-
lumbia, or a possession of the United
States, or a political subdivision or an
agency or instrumentality of any of the
foregoing;
‘‘(2) such organization is organized and oper-
ated on a cooperative basis and allocates or pays,
within 81⁄2 months after the close of its taxable year,
all net earnings to patrons on the basis of services
performed for them; and
‘‘(3) if such organization has capital stock, all
of such stock outstanding is owned by its patrons.
‘‘For purposes of this title, any organization which, by rea-
son of the preceding sentence, is an organization described
in subsection (c)(3) and exempt from taxation under sub-
section (a), shall be treated as a hospital and as an organi-
zation referred to in section 101(b)(1)(A)(iii).
‘‘(f) COOPERATIVE SERVICE ORGANIZATIONS OF OP-
ERATING EDUCATIONAL ORGANIZATIONS.—For purposes
of this chapter, if an organization is—
‘‘(1) organized and operated solely to hold,
commingle, and collectively invest and reinvest (in-
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cluding arranging for and supervising the perform-
ance by independent contractors of investment serv-
ices related thereto) in stocks and securities, the
moneys contributed thereto by each of the members
of such organization, and to collect income there-
from and turn over the entire amount thereof, less
expenses, to such members,
‘‘(2) organized and controlled by one or more
such members, and
‘‘(3) comprised solely of members that are orga-
nizations described in clause (ii) or (iv) of section
101(b)(1)(A)—
‘‘(A) which are exempt from taxation
under subsection (a), or
‘‘(B) the gross profits of which are ex-
cluded from taxation under section 251(a),
then such organization shall be treated as an organization
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
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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
subsection—
‘‘(A) LOBBYING EXPENDITURES.—‘Lobby-
ing 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
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).
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‘‘(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.
‘‘(4) 
DISQUALIFIED
ORGANIZATIONS.—This
subsection does not apply to—
‘‘(A) a church,
‘‘(B) an integrated auxiliary of a church or
of a convention or association of churches, or
‘‘(C) a member of an affiliated group of or-
ganizations (within the meaning of section
4911(f)(2)) if one or more members of such
group is described in subparagraph (A) or (B).
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‘‘(5) YEARS FOR WHICH ELECTION IS EFFEC-
TIVE.—An election by an organization under this
subsection shall be effective for all taxable years of
such organization which—
‘‘(A) end after the date the election is
made, and
‘‘(B) begin before the date the election is
revoked by such organization (under regulations
prescribed by the Secretary).
‘‘(6) NO
EFFECT
ON
CERTAIN
ORGANIZA-
TIONS.—With respect to any organization for a tax-
able year for which—
‘‘(A) such organization is described in
paragraph (5), or
‘‘(B) an election under this subsection is
not in effect for such organization, nothing in
this subsection or in section 4911 shall be con-
strued to affect the interpretation of the phrase,
‘no substantial part of the activities of which is
carrying on propaganda, or otherwise attempt-
ing, to influence legislation,’ under subsection
(c)(3).
‘‘(h) GOVERNMENT CORPORATIONS EXEMPT UNDER
SUBSECTION (c)(1).—For purposes of subsection (c)(1),
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the following organizations are described in this sub-
section:
‘‘(1) The Central Liquidity Facility established
under title III of the Federal Credit Union Act (12
U.S.C. 1795 et seq.).
‘‘(2) The Resolution Trust Corporation estab-
lished under section 21A of the Federal Home Loan
Bank Act.
‘‘(3) The Resolution Funding Corporation es-
tablished under section 21B of the Federal Home
Loan Bank Act.
‘‘(i) CERTAIN EDUCATIONAL ORGANIZATIONS.—An
organization shall not be eligible for exemption as an edu-
cational organization under subsection (c)(3) if a substan-
tial amount of its activities and funds are devoted to—
‘‘(1) conducting seminars and other similar pro-
grams,
‘‘(2) conducting research to educate Congress
or the general public about public policy issues,
‘‘(3) producing books and pamphlets, or
‘‘(4) a combination of the foregoing.
‘‘SEC. 254. SPECIAL RULES FOR (c)(3) ORGANIZATIONS.
‘‘(a) NEW ORGANIZATIONS MUST NOTIFY SEC-
RETARY.—Except as provided in subsection (c), an organi-
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zation shall not be treated as an organization described
in section 253(c)(3)—
‘‘(1) unless that it has given notice to the Sec-
retary, in such manner as the Secretary may pre-
scribe, that it is applying for recognition of such sta-
tus, or
‘‘(2) for any period before giving of such notice,
if such notice is given after the time prescribed by
the Secretary by regulations for giving notice under
this subsection.
‘‘(b) PRESUMPTION THAT ORGANIZATIONS ARE PRI-
VATE FOUNDATIONS.—Except as provided in subsection
(c), any organization described in section 253(c)(3) and
which does not notify the Secretary, at such time and in
such manner as the Secretary may by regulations pre-
scribe, that it is not a private foundation (as defined in
section 102) shall be presumed to be a private foundation.
‘‘(c) EXCEPTIONS.—Subsections (a) and (b) shall not
apply to—
‘‘(1) organizations organized before October 10,
1969;
‘‘(2) organizations which obtained recognition
of tax-exempt status under section 501(c)(3) of the
Internal Revenue Code of 1986 (in the case of sub-
section (a) only);
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‘‘(3) organizations which were determined not
to be private foundations under the Internal Reve-
nue Code of 1986;
‘‘(4) churches, their integrated auxiliaries, and
conventions and associations of churches;
‘‘(5) any organization that is not a private
foundation and the gross receipts of which in each
taxable year are not more than $25,000, or
‘‘(6) such other classes of organizations which
the Secretary may exempt.
‘‘SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY.
‘‘(a) IN GENERAL.—Each organization described in
subsection (b) shall be subject to the Simplified USA Tax
for businesses under section 201 on its gross profits from
its unrelated business activity.
‘‘(b) ORGANIZATIONS SUBJECT TO TAX.—This sec-
tion shall apply to—
‘‘(1) organizations exempt from the business
tax under section 253(a), other than instrumental-
ities of the United States described in section
253(c)(1).
‘‘(2) colleges and universities which are instru-
mentalities of any government and corporations
owned by one or more such colleges or universities.
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‘‘SEC. 256. UNRELATED BUSINESS ACTIVITY.
‘‘(a) IN GENERAL.—‘Unrelated business activity’
means any trade or business the conduct of which is not
substantially related (aside from the need of such organi-
zation for income or funds or the use it makes of the prof-
its derived) to the exercise or performance by such organi-
zation of its charitable, educational, or other purpose or
function constituting the basis for its exemption under
section 253, except that such term does not include any
trade or business—
‘‘(1) in which substantially all the work in car-
rying on such trade or business is performed for the
organization without compensation; or
‘‘(2) which is carried on, in the case of an orga-
nization described in section 253(c)(3) or in the case
of a college or university described in section 255(b),
by the organization primarily for the convenience of
its members, students, patients, officers, or employ-
ees, which is the selling by the organization of items
of work-related clothes and equipment and items
normally sold through vending machines, through
food dispensing facilities, or by snack bars, for the
convenience of its members at their usual places of
employment; or
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‘‘(3) which is the selling of merchandise, sub-
stantially all of which has been received by the orga-
nization as gifts or contributions.
‘‘(b) ADVERTISING, ETC., ACTIVITIES.—For pur-
poses of this section, ‘trade or business’ includes any activ-
ity which is carried on for the production of income from
the sale of goods or the performance of services. For pur-
poses of the preceding sentence, an activity does not lose
identity as a trade or business merely because it is carried
on within a larger aggregate of similar activities or within
a larger complex of other endeavors which may, or may
not, be related to the exempt purposes of the organization.
Where an activity carried on for profit constitutes an un-
related trade or business, no part of such trade or business
shall be excluded from such classification merely because
it does not result in profit.
‘‘(c) TRADE OR BUSINESS.—
‘‘(1) CERTAIN BUSINESS ACTIVITIES.—An ac-
tivity shall not be considered a ‘trade or business’
solely because the activity is a business activity
(such as certain passive rental activity) that would
be subject to the business tax if conducted by a busi-
ness entity other than a tax-exempt organization.
‘‘(2) REGULATIONS.—The Secretary shall pre-
scribe regulations defining a ‘trade or business.’
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Such regulations shall be consistent with the provi-
sions under sections 511 through 513 of the Internal
Revenue Code of 1986, except to the extent such
provisions are inconsistent with other principles of
the business tax. The regulations shall include exclu-
sions from the definition of ‘trade or business’ simi-
lar to those contained in section 513 of the Internal
Revenue Code for—
‘‘(A) certain bingo games,
‘‘(B) certain hospital services, and
‘‘(C) certain public entertainment activity
at fairs and expositions by an organization
which regularly conducts, as one of its substan-
tial exempt purposes, an agricultural or edu-
cational fair or exhibition.
‘‘(3) TRADE
SHOWS.—The conduct of trade
shows and conventions shall not be excluded from
the definition of trade or business.
‘‘Subchapter I—Cooperatives
Sec. 260. Patronage dividends of cooperatives.
‘‘SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES.
‘‘(a) PATRONAGE DIVIDENDS PAID BY SUPPLY CO-
OPERATIVES.—A qualified patronage dividend paid by a
supply cooperative to a patron shall be treated as if it is
a refund of a portion of the amounts paid by the patron
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for goods, services, or use of capital. In general, if the
supply cooperative included the amount received from the
patron in taxable receipts, the dividend shall reduce tax-
able receipts in the year incurred. If the recipient of the
dividend is a business entity which deducted the cost of
business purchases to which the dividend related, the re-
cipient will reduce its cost of business purchases by the
amount of the dividend in the year the dividend is paid
or incurred.
‘‘(b) PATRONAGE DIVIDENDS PAID BY MARKETING
COOPERATIVES.—A qualified patronage dividend paid to
a patron by a marketing cooperative shall be treated as
an upward price adjustment in the amount received by the
patron for its goods marketed by the cooperative. In gen-
eral, the cooperative will increase its cost of business pur-
chases by the amount of the qualified patronage dividend
and the recipient will increase its taxable receipts by the
amount of the qualified patronage dividend.
‘‘(c) DIVIDEND TREATMENT.—Only the portion of a
patronage dividend that is not a qualified patronage divi-
dend shall be treated as a dividend under this chapter and
chapter 2.
‘‘(d) DEFINITIONS.—
‘‘(1) QUALIFIED
PATRONAGE
DIVIDEND.—A
‘qualified patronage dividend’ is that part of a pa-
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tronage dividend that is attributable to the patron’s
allocable share of patronage earnings of a marketing
cooperative or a supply cooperative.
‘‘(2) SUPPLY COOPERATIVE.—A ‘supply cooper-
ative’ is a cooperative that sells goods or service to
patrons and provided patronage dividends with re-
spect to the quantity of purchases of the patrons.
‘‘(3) MARKETING COOPERATIVE.—A ‘marketing
cooperative’ is a cooperative that sells goods pro-
duced by its members and provides patronage divi-
dends to the members based on the quantities of
goods sold or provided for sale.
‘‘(e) SPECIAL RULES.—
‘‘(1) NOTICES OF ALLOCATION AND PER-UNIT
RETAIN
CERTIFICATES.—Except as provided in
paragraph (2), a notice of allocation, per-unit retain
certificate, or other similar document shall not be
treated as a patronage dividend until it is redeemed
in cash or property.
‘‘(2) OPPORTUNITY
TO
RECEIVE
CASH.—If a
patron is given an opportunity to receive a patron-
age dividend in cash, but instead chooses to accept
a per-unit retain certificate or a qualified notice of
allocation, the patron will be treated as receiving
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cash and simultaneously contributing to the capital
of the cooperative.
‘‘(3) APPLICATION LIMITED TO QUALIFIED CO-
OPERATIVES.—Under rules to be prescribed by the
Secretary, this section shall apply only to coopera-
tives to which one of the following provisions of the
Internal Revenue Code of 1986 would have applied:
‘‘(A) Section 501(c)(12) (relating to coop-
erative telephone companies and similar organi-
zations).
‘‘(B) Section 501(c)(14) (relating to cer-
tain cooperative banks).
‘‘(C) Section 521 (relating to farm co-
operatives).
‘‘(D) Section 1381 (relating to coopera-
tives generally).
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe regulations for the application of this section.
The regulations shall generally be consistent with
subchapter T of chapter 1 of the Internal Revenue
Code of 1986 except to the extent that such rules
are inconsistent with provisions of this chapter.
‘‘Subchapter J—Sourcing Rules
‘‘Sec. 265. Exports of property or services.
‘‘Sec. 266. Imports of property or services.
‘‘Sec. 267. Import or export of services.
‘‘Sec. 268. International transportation services.
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‘‘Sec. 269. International communications.
‘‘Sec. 270. Insurance.
‘‘SEC. 265. EXPORTS OF PROPERTY OR SERVICES.
‘‘(a) GENERAL RULE.—Taxable receipts do not in-
clude amounts received by the exporter thereof for prop-
erty or services exported from the United States for use
or consumption outside the United States.
‘‘(b) EXPORT THROUGH NONBUSINESS ENTITY.—
For purposes of subsection (a), if property or services are
sold to a governmental entity or a tax-exempt organization
for export and are exported other than in an activity of
such entity which is subject to the business tax, then the
seller of such property or services is deemed to be the ex-
porter thereof.
‘‘(c) EXPORT OF SERVICES.—See section 267 for
rules for determining whether services are exported or im-
ported.
‘‘SEC. 266. IMPORTS OF PROPERTY OR SERVICES.
‘‘(a) IN GENERAL.—The import of property or serv-
ices for consumption in the United States shall constitute
a business purchase if such property or service is to be
used in a business activity in the United States. Property
being held for sale or retail by a business entity that is
in the business of selling goods shall be considered held
for ‘use in a business activity’.
‘‘(b) AMOUNT OF BUSINESS PURCHASE.—
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‘‘(1) IN GENERAL.—The cost of business pur-
chases with respect to the import of property or
services for use or consumption in the United States
is the customs value, price or other amount used for
purposes of determining the import tax under sec-
tion 286 or section 287.
‘‘(2) IMPORT TAX.—The cost of business pur-
chases does not include any import tax paid. No de-
duction shall be allowed with respect to property or
service imported by a business entity unless the im-
port tax is paid with respect to such import.
‘‘SEC. 267. IMPORT OR EXPORT OF SERVICES.
‘‘(a) IN GENERAL.—Except as otherwise provided in
this subchapter or in rules prescribed under subchapter
G (relating to financial intermediation business), services
shall not be treated as imported or exported from the loca-
tion in which they are performed.
‘‘(b) IMPORT OF SERVICES.—A business entity shall
be treated as importing a service if—
‘‘(1) the entire benefit of the service will be re-
alized in the United States, and
‘‘(2) the benefit will be realized in connection
with the United States business activities of the
business entity.
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‘‘(c) EXPORT
OF SERVICES.—A business will be
treating as exporting a service if—
‘‘(1) the entire benefit of the service will be re-
alized outside of the United States, and
‘‘(2) the benefit will be realized solely in con-
nection with the activities of the purchaser occurring
outside the United States.
‘‘(d) SERVICES ACQUIRED FROM SERVICE PROVIDER
THAT
PROVIDES
SERVICES
IN
AND
OUTSIDE
THE
UNITED STATES.—
‘‘(1) IN
GENERAL.—If a business entity ac-
quires services from a service provider that provides
services both in and outside the United States and
the service provider shows on the invoice where the
services are provided—
‘‘(A) the business entity shall treat the
services as provided where stated on the invoice,
and
‘‘(B) the service provider shall treat as tax-
able receipts any services listed as provided in
the United States.
‘‘(2) NO INVOICE.—If a business entity acquires
services from a service provider that provides serv-
ices both in and outside the United States and the
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service provider does not show on an invoice where
such services are provided—
‘‘(A) the business entity shall treat the
services as if provided in the location to which
payment is sent, and
‘‘(B) the service provider shall treat as tax-
able receipts any payments received in the
United States.
‘‘(e) SPECIAL RULES PREVAIL.—See sections 268
and 269 for special rule relating to transportation and
communication services.
‘‘SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES.
‘‘(a) TRANSPORTATION OF PROPERTY.—
‘‘(1) TAXABLE RECEIPTS.—
‘‘(A) EXPORTS.—Taxable receipts do not
include receipts from the transportation of
property exported from the United States.
‘‘(B) IMPORTS.—Taxable receipts include
receipts from transportation of property im-
ported into the United States only if such costs
are not taken into account in determining the
import tax.
‘‘(C) PRESUMPTIONS.—The Secretary shall
prescribe regulations describing situations in
which a transporter of property must presume
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that no import tax has been paid on the cost of
its services.
‘‘(2) BUSINESS PURCHASES.—
‘‘(A) EXPORTS.—Business purchases do
not include amounts paid or incurred for the
cost of transportation of property exported from
the United States.
‘‘(B) IMPORTS.—Amounts paid or incurred
for transportation of goods imported into the
United States, shall constitute a cost of busi-
ness purchase only to the extent that they are
taken into account in determining the customs
value for purposes of section 286(a) (relating
to the import tax).
‘‘(b) TRANSPORTATION OF PASSENGERS.—
‘‘(1) TAXABLE RECEIPTS.—Taxable receipts—
‘‘(A) include receipts from the transpor-
tation of passengers from the United States to
a destination outside the United States, but
‘‘(B) do not include receipts from the
transportation of passengers from outside the
United States to a destination in the United
States.
‘‘(2) 
BUSINESS
PURCHASES.—Business
purchases—
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‘‘(A) include amounts paid or incurred in
a business activity for the transportation of
passengers from the United States to a destina-
tion outside the United States, but
‘‘(B) do not include amounts paid or in-
curred for transportation of passengers from
outside the United States to a destination in
the United States.
‘‘(3) SIMPLIFYING RULES.—The Secretary may
provide rules that simplify this subsection, including
rules under which—
‘‘(A) half of receipts attributable to trans-
portation to or from the United States are
treated as taxable receipts,
‘‘(B) half of the cost for business trips to
and from the United States are treated as busi-
ness purchases, and
‘‘(C) all transportation expenses of a busi-
ness entity that has no regular business outside
the United States are treated as business pur-
chases.
‘‘SEC. 269. INTERNATIONAL COMMUNICATIONS.
‘‘(a) IN GENERAL.—For purposes of section 266,
communications services shall be treated as provided at
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the point of origin of the communications and shall not
be treated as imported or exported.
‘‘(b) COMMUNICATIONS SERVICES.—Communications
services include—
‘‘(1) telephone communications services,
‘‘(2) courier services (except in the case of
transportation of property that is imported or ex-
ported),
‘‘(3) satellite transmission services,
‘‘(4) telegraph services,
‘‘(5) facsimile transmission services, and
‘‘(6) other similar services.
‘‘SEC. 270. INSURANCE.
‘‘(a) IN GENERAL.—Insurance services will be treat-
ed as provided at the location of the insurance company
providing the services. Except as the Secretary may pre-
scribe by regulations, insurance companies will be treated
as providing services at the location to which insurance
payments are made.
‘‘(b) INSURED RISKS IN THE UNITED STATES.—If
insurance services are provided outside the United States
and the insured risk is located in the United States—
‘‘(1) the insurance service shall be treated as
imported,
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‘‘(2) the insurance premiums shall be subject to
the import tax, and
‘‘(3) payments of insurance benefits shall not be
treated as imported.
‘‘(c) 
INSURED
RISK
OUTSIDE
THE
UNITED
STATES.—If insurance services are provided inside the
United States and the insured risk is located outside the
United States—
‘‘(1) insurance services shall be treated as ex-
ported,
‘‘(2) payments of insurance benefits shall be
treated as payments for services outside the United
States, and shall not be deducted as business pur-
chases.
‘‘(d) INSURANCE
SERVICES.—Insurance services
means the provision of insurance and services related to
insurance other than insurance that is treated as a savings
asset.
‘‘SEC. 271. BANKING SERVICES.
‘‘The Secretary shall prescribe regulations on the lo-
cation of banking services and the extent to which such
services are to be treated as imported or exported.
‘‘Subchapter K—Business Conducted in a
Possession
‘‘Sec. 276. Treatment of possessions.
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‘‘SEC. 276. TREATMENT OF POSSESSIONS.
‘‘(a) IN GENERAL.—For purposes of the business tax
imposed by this chapter, the U.S. possessions shall not
be treated as part of the United States.
‘‘(b) EFFECT ON PAYROLL TAX CREDIT.—A busi-
ness entity may not claim a payroll tax credit with respect
to any payroll taxes paid with respect to income of resi-
dents of the U.S. possessions.
‘‘(c) POSSESSION.—For purposes of this subchapter,
‘U.S. possession’ or ‘possession’ means a possession of the
United States and includes the Commonwealth of Puerto
Rico and the Virgin Islands.
‘‘Subchapter L—Payroll Tax Credit
‘‘Sec. 281. Amount of credit.
‘‘Sec. 282. Current-year payroll tax credit.
‘‘Sec. 283. Credit carryover.
‘‘SEC. 281. AMOUNT OF CREDIT.
‘‘(a) AMOUNT OF CREDIT.—The payroll tax credit for
a business entity for a taxable year is the lesser of—
‘‘(1) the sum of—
‘‘(A) the current-year payroll tax credit,
and
‘‘(B) the credit carryovers to the taxable
year, or
‘‘(2) the business entity’s business tax for the
taxable year (determined without regard to the pay-
roll tax credit).
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‘‘(b) CONSOLIDATED RETURNS.—In the case of busi-
ness entities filing consolidated returns, the amount of the
credit shall be determined using the combined payroll tax
credits and credit carryovers of the business entities and
the combined business tax of the business entities.
‘‘SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT.
‘‘(a) IN GENERAL.—The ‘current-year payroll tax
credit’ is an amount equal to the sum of—
‘‘(1) the employer’s share of the FICA tax im-
posed on wages of its employees during the taxable
year,
‘‘(2) the employer’s share of the tier 1 railroad
retirement tax for its employees during the taxable
year,
‘‘(3) one-half of the allocable portion of the
SECA tax imposed on individuals (other than inde-
pendent contractors and other business entities) who
provide services to the business entity.
‘‘(b) DEFINITIONS.—
‘‘(1) EMPLOYER’S SHARE OF THE FICA TAX.—
‘Employer’s share of the FICA tax’ means the old-
age, survivors, disability and hospital insurance
taxes imposed by section 3111.
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‘‘(2) EMPLOYER’S SHARE OF THE TIER 1 RAIL-
ROAD RETIREMENT TAX.—‘‘Employer’s share of the
tier 1 railroad retirement tax’ means—
‘‘(A) the tier 1 railroad retirement tax im-
posed by section 3221(a), and
‘‘(B) the portion of the tax imposed by sec-
tion 3211(a)(1) on employee representatives at-
tributable to the tax imposed by section 3111.
‘‘(3) ONE-HALF OF THE ALLOCABLE PORTION
OF THE SECA TAX.—
‘‘(A) SECA TAX.—‘SECA tax’ means the
self-employment tax imposed by section 1401.
‘‘(B) PARTNERSHIPS.—Until such time as
the SECA tax and the Federal Insurance Con-
tributions Acts are amended to treat partners
of partnerships as employees, if a partner des-
ignates a partnership as a principal source of
employment income for the taxable year, one-
half of the partnership’s allocable portion of the
SECA tax of such partner equals the FICA tax
that the employer would have been required to
pay under section 3111 with respect to such
partner if the partner’s self-employment income
as reported by the partnership were wages sub-
ject to the FICA tax. A partner and partner-
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ship can agree to treat no portion of a partner’s
SECA tax as allocable to the partnership.
‘‘(C) PROPRIETORSHIP.—In the case of an
individual who is a proprietor or sole owner and
provider of service to a business entity, the indi-
vidual shall allocate the portion of one-half of
his SECA tax not allocated pursuant to sub-
paragraph (B) to his business entities in ac-
cordance with rules prescribed by the Secretary.
‘‘(c) SPECIAL RULE.—Under rules prescribed by the
Secretary, an individual subject to the self-employment tax
shall pay half of the self-employment tax on an amount
of self employment income not less than the amount of
the individual’s self-employment income taken into ac-
count by partnerships under subparagraph (B) of sub-
section (b)(3).
‘‘SEC. 283. CREDIT CARRYOVER.
‘‘(a) CARRYOVER.—A current-year credit that is not
applied in the taxable year in which earned shall constitute
a credit carryover until applied but for no more than 15
taxable years.
‘‘(b) Order of Use.—For purposes of determining
which credits are applied under section 281, if the total
credit allowable in a taxable year is less than the sum of
the current-year payroll credit and the carryover credits,
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the current-year payroll credit shall be considered applied
first and then credit carryovers shall be considered applied
in the order earned.
‘‘Subchapter M—Import Tax
‘‘Sec. 286. Imposition of tax on property.
‘‘Sec. 287. Imposition of tax on import of services.
‘‘Sec. 288. General rules for the import tax.
‘‘Sec. 286. Imposition of tax on property.
‘‘(a) GENERAL RULE.—There is hereby imposed a
tax equal to 11 percent of the customs value of all prop-
erty entered into the United States for consumption, use
or warehousing.
‘‘(b) LIABILITY FOR TAX.—The tax imposed on the
import of property by subsection (a) shall be paid by the
person entering the property into the United States for
consumption, use or warehousing. Such tax shall be due
and payable at the time of import.
‘‘(c) IMPORTS
OF PREVIOUSLY EXPORTED PROP-
ERTY.—In the case of any article that is classified under
a heading or subheading of subchapter I or II of chapter
98 of the Tariff Schedules of the United States, the tax
under this section shall be imposed only on that portion
of the customs value of such article that is dutiable under
such heading or subheading.
‘‘(d) IMPORTS FOR PERSONAL CONSUMPTION.—The
import tax imposed by this section shall not apply to any
article entered into the United States duty free under sub-
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chapters I through VII of chapter 98 of the Tariff Sched-
ules of the United States.
‘‘SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES.
‘‘(a) GENERAL RULE.—There is hereby imposed a
tax equal to 11 percent of the cost of all services treated
as imported into the United States during the taxable year
of the service recipient.
‘‘(b) LIABILITY FOR THE TAX.—The tax on the im-
port of services imposed by subsection (a) shall be paid
by the person who receives the imported services. The tax
shall be payable as if it were an addition to the business
tax imposed by section 201.
‘‘(c) IMPORTED SERVICES.—For purposes of this sec-
tion, services shall be treated as imported if they are treat-
ed as imported under section 267 (general rules on import
of services) or section 270 (related to insurance).
‘‘(d) SPECIAL RULE FOR INSURANCE.—The seller of
insurance that is treated as imported under section 270
shall be liable for the collection of the tax imposed by sub-
section (a) on the insurance and for paying such tax to
the Secretary. The first sentence of subsection (b) (relat-
ing to the person liable for the tax) shall apply to insur-
ance only to the extent that the seller of the insurance
services does not collect such tax.
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‘‘SEC. 288. GENERAL RULES FOR THE IMPORT TAX.
‘‘(a) IMPORT TAX.—‘Import tax’ means the tax im-
posed by section 286 on the import of property and the
tax imposed by section 287 on the import of services.
‘‘(b) NO PAYROLL TAX CREDIT.—The payroll tax
credit shall not be allowed against the import tax.
‘‘Subchapter N—Transition Rules
‘‘Sec. 290. Amortization of transition basis.
‘‘Sec. 291. Sales of transition basis property.
‘‘Sec. 292. Safe harbor leases.
‘‘Sec. 293. Carryovers.
‘‘Sec. 294. Section 481 adjustments.
‘‘SEC. 290. AMORTIZATION OF TRANSITION BASIS.
‘‘(a) TRANSITION BASIS DEDUCTION.—The ‘transi-
tion basis deduction’ for a taxable year is the sum of the
amortization allowance determined under this section for
the taxable year.
‘‘(b) AMORTIZATION RULES.—The amortization al-
lowance for each category of amortizable basis shall be de-
termined by amortizing the amortizable basis of such cat-
egory ratably over the amortization period for the category
beginning January 1, 1999.
‘‘(c) AMORTIZATION PERIOD.—The amortization pe-
riods shall be determined in accordance with the following
table:
In the case of:
The amortization period is:
Category I basis ....................................................
15 years
Category II basis ...................................................
30 years
Category III basis .................................................
40 years
Unrecovered inventory costs ..................................
5 years
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‘‘(d) CATEGORIES.—
‘‘(1) CATEGORY I BASIS.—‘Category I basis’ is
the sum of the unrecovered bases as of January 1,
1999, of all depreciable property placed in service
prior to January 1, 1999, and the unamortized por-
tion of amortizable costs incurred before January 1,
1999, if—
‘‘(A) cost recovery or amortization began
before January 1, 1999, and
‘‘(B) the remaining recovery period or am-
ortization period as of January 1, 1999, is less
than 15 years.
‘‘(2) CATEGORY II BASIS.—‘Category II basis’
is the sum of the unrecovered bases as of January
1, 1999, of all depreciable property placed in service
prior to January 1, 1999, and the unamortized por-
tion of amortizable costs incurred before January 1,
1999, if—
‘‘(A) cost recovery or amortization began
before January 1, 1999, and
‘‘(B) the remaining recovery period or am-
ortization period as of January 1, 1999, is than
15 years or more.
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‘‘(3) CATEGORY III BASIS.—‘Category III basis’
is the sum of the adjusted basis of each asset satis-
fying the following requirements:
‘‘(A) The asset was placed in service prior
to January 1, 1999,
‘‘(B) The asset was used in a business ac-
tivity in 1999,
‘‘(C) The cost of the asset was capitalized
and not depreciable or otherwise recoverable
under the Internal Revenue Code of 1986, and
‘‘(D) The cost of the asset would have con-
stituted deductible expenses under the business
tax if such cost had been incurred after 1998.
‘‘(4) UNRECOVERED INVENTORY COSTS.—‘Un-
recovered inventory costs’ means the cost of goods
sold (as determined under the Internal Revenue
Code of 1986) if a business entity sold all of its in-
ventory (including inventory being produced) on the
effective date of the business tax.
‘‘(e) RULES OF APPLICATION.—
‘‘(1) REMAINING RECOVERY PERIOD.—
‘‘(A) TIME OF MEASURE.—The remaining
recovery period shall be determined as of De-
cember 31, 1998, and shall include each taxable
year ending after such date in which a deduc-
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tion would have been allowed under the Internal
Revenue Code of 1986.
‘‘(B) ACCOUNTING METHOD.—The remain-
ing recovery period shall be determined using
the cost recovery method and rules applicable
for determining taxable income under the Inter-
nal Revenue Code of 1986.
‘‘(2) DEPLETABLE ASSETS.—Under rules pre-
scribed by the Secretary, this section shall apply to
the remaining cost basis of depletable property and
to other property for which a cost recovery method
other than one based on time is used.
‘‘SEC. 291. SALES OF TRANSITION BASIS PROPERTY.
‘‘(a) IN GENERAL.—Except as provided in subsection
(b), for purposes of determining the tax consequences of
a sale, retirement, casualty or conversion to personal use
of an asset whose basis or cost is taken into account under
section 90, the amount to be amortized shall be treated
as fully deducted upon the adoption of the business tax.
‘‘(b) SUBSTANTIAL SALES.—
‘‘(1) IN GENERAL.—In the case of a substantial
sale of assets to which the amortization rules of sec-
tion 90 apply, the purchaser and seller may jointly
elect to have the purchaser assume the amortization
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deductions attributable to such assets, in which
case—
‘‘(A) the seller’s taxable receipts from such
sale shall be reduced by the amount of
unamortized basis or cost assumed by the pur-
chaser,
‘‘(B) the purchaser may treat as a cost of
a business purchase only the portion of the pur-
chase price in excess of the amount of
unamortized basis or cost assumed,
‘‘(C) the unamortized basis or cost as-
sumed shall continue to be amortized in the
manner amortized by the seller.
‘‘(2) SUBSTANTIAL SALE.—A sale of assets by
a business entity to another business entity is a sub-
stantial sale if—
‘‘(A) more than 20 percent (in fair market
value or in original cost) of the assets of the
seller are sold,
‘‘(B) the total consideration for the sale
exceeds $1 million or 20 percent of the taxable
receipts of the seller for the taxable year pre-
ceding the year of the sale, or
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‘‘(C) the sale satisfies other criteria estab-
lished by the Secretary to prevent distortions in
gross profits resulting from asset sales.
‘‘SEC. 292. SAFE HARBOR LEASES.
‘‘(a) IN GENERAL.—In the case of a safe harbor
lease, rental payments deemed to occur under the lease
and interest payments deemed to be made under the leases
shall constitute costs of business purchases, and rental in-
come and interest income deemed to be earned under the
lease shall constitute taxable receipts. The transition basis
deduction rules shall apply to the lessor’s adjusted basis
in assets subject to a safe harbor lease.
‘‘(b) SAFE HARBOR LEASE.—‘Safe harbor lease’
means a sale and leaseback transaction entered into pur-
suant to section 168(f)(8) of the Internal Revenue Code,
as added by the Economic Recovery Tax Act of 1981,
when such provision was in effect but only if such trans-
action would not be treated as a sale and leaseback for
tax purposes but for that provision.
‘‘SEC. 293. CARRYOVERS.
‘‘(a) NO LOSS CARRYOVERS.—No deduction shall be
allowed under the business tax for net operating loss
carryovers, capital loss carryovers, or any other loss
carryovers from the income tax under the Internal Reve-
nue Code of 1986.
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‘‘(b) NO CREDIT CARRYOVERS.—No credits shall be
allowed under the business tax for business credit
carryovers, minimum tax credit carryovers, or any other
credit carryovers from the income tax under the Internal
Revenue Code of 1986.
‘‘SEC. 294. SECTION 481 ADJUSTMENTS.
‘‘(a) POSITIVE NET SECTION 481 ADJUSTMENT
AMOUNT.—If, as of January 1, 1999, a business entity
has a positive net section 481 adjustment amount, the
amount shall be applied to reduce the transition basis in
accounts (for purposes of section 290) in the following
order:
‘‘(1) First, to reduce the category I basis (but
not below zero),
‘‘(2) Second, to reduce the category II basis
(but not below zero),
‘‘(3) Third, to reduce the unrecovered inventory
costs.
‘‘(b) NEGATIVE NET SECTION 481 ADJUSTMENT
AMOUNT.—If, as of January 1, 1999, a business entity
has a negative net section 481 adjustment amount, the
amount shall be applied to increase category I basis for
purposes of section 290.
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‘‘(c) SECTION 481 ADJUSTMENT.—A business enti-
ty’s net section 481 adjustment is determined by
subtracting—
‘‘(1) the sum of all additional deductions to
which a business entity would be entitled by reason
of section 481 of the Internal Revenue Code of 1986
for periods beginning on or after the effective date
of the business tax with respect to changes in ac-
counting methods made before such effective date,
from
‘‘(2) the sum of all additional income which a
business entity would recognize by reason of section
481 of the Internal Revenue Code of 1986 for peri-
ods beginning on or after the effective date of the
business tax with respect to changes in accounting
methods made before such effective date,
in each case assuming that the income tax under the In-
ternal Revenue Code of 1986 remained in effect.
‘‘Subchapter O—Rules for Administration,
Consolidated Returns
‘‘Sec. 301. Returns, due dates, etc.
‘‘Sec. 302. Consolidated returns.
‘‘SEC. 301. RETURNS, DUE DATES, ETC.
‘‘(a) IN GENERAL.—Until subtitle F is amended to
reflect the adoption of this chapter, the rules of subtitle
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F relating to C corporations shall apply to business enti-
ties with respect to—
‘‘(1) returns and records;
‘‘(2) time and place for paying tax;
‘‘(3) assessment of taxes;
‘‘(4) collections and liens;
‘‘(5) abatements, credits, and refunds;
‘‘(6) interest on underpayments and overpay-
ments;
‘‘(7) additions to tax and penalties;
‘‘(8) closing agreements and compromises;
‘‘(9) crimes;
‘‘(10) judicial proceedings;
‘‘(11) discovery of liability and enforcement;
and
‘‘(12) estimated taxes.
‘‘(b) INDIVIDUALS ENGAGING IN BUSINESS ACTIVI-
TIES.—Under rules prescribed by the Secretary, individ-
uals engaging in business activities on their own or with
their spouses shall be permitted to file their business tax
returns with their individual tax returns and shall be sub-
ject to estimated tax rules for individual income tax re-
turns.
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‘‘SEC. 302. CONSOLIDATED RETURNS.
‘‘(a) IN GENERAL.—Business entities may file con-
solidated returns of business tax if they would have been
permitted to file consolidated returns under section 1501
of the Internal Revenue Code and such section were ap-
plied by treating each business entity as a corporation and
its owners or partners as shareholders.
‘‘(b) FINANCIAL
INSTITUTIONS.—Financial inter-
mediation businesses may be included in consolidated re-
turns, but each financial intermediation business must
compute its gross profits separately.
‘‘(c) INTERCOMPANY TRANSACTIONS.—In computing
the gross profits of a consolidated group, intercompany
transactions can be taken into account, or at the election
of the filer, be disregarded (except in the case of trans-
actions with financial intermediation businesses).
‘‘Subchapter P—Definitions and Rules of
Application
‘‘Sec. 310. Definitions.
‘‘Sec. 311. Rules of application.
‘‘SEC. 310. DEFINITIONS.
‘‘(a) IN GENERAL.—When used in this chapter,
where not otherwise distinctly expressed or manifestly in-
compatible with the intent thereof—
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‘‘(1) USA INCOME
TAX.—‘USA Income Tax’
and ‘Simplified USA Tax’ for individuals mean the
tax imposed by chapter 1.
‘‘(2) 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.
‘‘(3) UNITED STATES.—‘United States’ means
the States and the District of Columbia.
‘‘(b) TERMS DEFINED IN CHAPTER 2.—If a term
that is used but not defined in this chapter or in section
7701 is defined in chapter 1, the definition in chapter 1
shall apply except if manifestly incompatible with the in-
tent of the provision in which the term is used.
‘‘SEC. 311. RULES OF APPLICATION.
‘‘(a) DEFINITIONS.—Any definition included in this
chapter shall apply for all purposes of this chapter
unless—
‘‘(1) such definition is limited to the purposes
of a particular chapter, section, or subsection, or
‘‘(2) the definition clearly would not be applica-
ble in a particular context.
‘‘(b) INTERPRETATIONS CONSIST WITH INTERNAL
REVENUE CODE OF 1986.—Terms not defined in this
chapter or elsewhere in this title, but defined in the Inter-
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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.’’
(b) The amendments made by this section shall be
effective on January 1, 1999, except to the extent other-
wise specifically provided in the text of such amendments.
SEC. 302. REPEAL OF CHAPTER 6.
Chapter 6 of the Code (relating to consolidated re-
turns) is repealed as of January 1, 1999.
TITLE IV—DEFERRED
COMPENSATION PLANS
SEC. 401. PROVISIONS SAVED.
(a) IN GENERAL.—Excepts as otherwise provided in
this title, the sections contained in subchapter D of chap-
ter 1 of the Code (relating to deferred compensation, etc.)
are hereby saved as chapter 3.
(b) LIMITATIONS
ON CHAPTER 3.—The following
new section is inserted before section 401 of the Code (as
saved by subsection (a)):
‘‘SEC. 400. EFFECT OF CHAPTER 3.
‘‘(a) IN GENERAL.—The provisions of chapter 3 (sec-
tions 401 through 420) are included in this subtitle for
purposes of cross-reference and for purposes of determin-
ing whether plans are exempt from the business tax and