263
grantor may be treated as the owner after the occurrence
of such event unless the power is relinquished.
‘‘SEC. 159. INCOME FOR BENEFIT OF GRANTOR.
‘‘(a) GENERAL RULE.—The grantor shall be treated
as the owner of any portion of a trust, whether or not
he is treated as such owner under section 156, whose in-
come without the approval or consent of any adverse party
is, or, in the discretion of the grantor or a nonadverse
party, or both, may be—
‘‘(1) distributed to the grantor or the grantor’s
spouse;
‘‘(2) held or accumulated for future distribution
to the grantor or the grantor’s spouse; or
‘‘(3) applied to the payment of premiums on
policies of insurance on the life of the grantor or the
grantor’s spouse (except policies of insurance irrev-
ocably payable for a purpose specified in section
101(c) (relating to definition of charitable contribu-
tions)).
This subsection shall not apply to a power the exercise
of which can only affect the beneficial enjoyment of the
income for a period commencing after the occurrence of
an event such that the grantor would not be treated as
the owner under section 153 if the power were a rever-
sionary interest; but the grantor may be treated as the
264
owner after the occurrence of the event unless the power
is relinquished.
‘‘(b) OBLIGATIONS OF SUPPORT.—Income of a trust
shall not be considered taxable to the grantor under sub-
section (a) or any other provision of this chapter merely
because such income in the discretion of another person,
the trustee, or the grantor acting as trustee or co-trustee,
may be applied or distributed for the support or mainte-
nance of a beneficiary (other than the grantor’s spouse)
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
265
‘‘(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.
266
‘‘(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
267
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.
268
‘‘(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
269
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—
270
‘‘(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 pre-
ceding 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-
271
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.
272
‘‘(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
273
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
274
‘‘(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,
276
poses 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 2001,
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
277
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-
278
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-
279
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 2001.
‘‘(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;
280
‘‘(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
281
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
282
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)—
283
‘‘(i) the earned income of an indi-
vidual shall be computed without regard to
any community property laws,
‘‘(ii) no amount received as a pension
or annuity shall be taken into account,
‘‘(iii) no income of nonresident alien
individuals not connected with United
States business shall be taken into ac-
count, and
‘‘(iv) no amount received for services
provided by an individual while the indi-
vidual is an inmate at a penal institution
shall be taken into account.
‘‘(b) TERMS DEFINED IN CHAPTER 1.—If a term
that is used but not defined in this chapter or in section
7701 is defined in chapter 2, the definition in chapter 2
shall apply except if manifestly incompatible with the in-
tent of the provision in which the term is used.
‘‘SEC. 172. RULES OF APPLICATION.
‘‘(a) DEFINITIONS.—Any definition included in this
chapter shall apply for all purposes of this chapter
unless—
‘‘(1) such definition is limited to the purposes
of a particular chapter, section, or subsection, or
284
‘‘(2) the definition clearly would not be applica-
ble in a particular context.
‘‘(b) INTERPRETATIONS CONSISTENT WITH INTER-
NAL REVENUE CODE OF 1986.—Terms not defined in this
chapter or elsewhere in this title, but defined in the Inter-
nal Revenue Code of 1986, shall be interpreted in a man-
ner consistent with the Internal Revenue Code of 1986,
except to the extent such interpretation would be incon-
sistent with the principles and purposes of this chapter.’’
(c) EXEMPTION FROM PROHIBITED TRANSACTION
TAX.—Section 4975(g) of the Code is amended by—
(1) striking ‘‘or’’ at the end of paragraph (2),
(2) deleting the period at the end of paragraph
(3) and inserting ‘‘; or’’,
(3) and inserting the following new paragraph
(4):
‘‘(4) to a Roth IRA in the case of a loan to or
equity investment in a controlled business entity as
permitted by section 30(f)).’’
285
TITLE III—SIMPLIFIED USA TAX
FOR BUSINESSES
SEC. 301. REPEAL OF CORPORATE INCOME TAX; NEW TAX
PAID BY CORPORATIONS AND OTHER BUSI-
NESSES.
(a) IN GENERAL.—Chapter 2 of the Internal Rev-
enue Code is renumbered chapter 3 and following new
chapter is inserted after chapter 1:
‘‘CHAPTER 2—SIMPLIFIED USA TAX FOR
BUSINESSES
‘‘Subchapter A. Imposition of tax.
‘‘Subchapter B. Basic rules for business tax.
‘‘Subchapter C. Capital contributions, mergers, acquisitions, and distributions.
‘‘Subchapter D. Accounting methods.
‘‘Subchapter E. Land and rental property.
‘‘Subchapter F. Insurance and financial products.
‘‘Subchapter G. Financial intermediation and financial institutions.
‘‘Subchapter H. Tax-exempt organizations.
‘‘Subchapter I. Cooperatives.
‘‘Subchapter J. Sourcing rules.
‘‘Subchapter K. Business conducted in a possession.
‘‘Subchapter L. Payroll tax credit.
‘‘Subchapter M. Import tax.
‘‘Subchapter N. Transition rules.
‘‘Subchapter O. Rules for administration, consolidated returns.
‘‘Subchapter P. Definitions and rules of applications.
‘‘Subchapter A—Imposition of Tax
‘‘Sec. 201. Tax imposed.
‘‘SEC. 201. TAX IMPOSED.
‘‘(a) TAXABLE BUSINESS ACTIVITY.—A tax is im-
posed on the sale of goods and services in the United
States by a business entity. The amount of the tax equals
the amount by which—
286
‘‘(1) the business tax exceeds,
‘‘(2) the payroll tax credit.
‘‘(b) BUSINESS TAX IMPOSED.—
‘‘(1) IN GENERAL.—The ‘business tax’ imposed
on a business entity that sells or leases property or
sells services in the United States equals the sum
of—
‘‘(A) 8 percent of the portion of the gross
profits of the business entity for the taxable
year that does not exceed $150,000, and
‘‘(B) 12 percent of such portion of the
gross profits of the business entity for the tax-
able year that exceeds $150,000.
‘‘(2) LIMITATION ON APPLICATION OF BENE-
FITS OF GRADUATED RATE SCHEDULE.—The Sec-
retary shall prescribe rules under which the gross
profits of business entities under common control
are aggregated for purposes of applying the benefit
of the lower rate described in subparagraph (A) of
paragraph (1). Such rules shall be similar to rules
applicable under sections 1551 and 1561 of the In-
ternal Revenue Code of 1986.
‘‘(c) PAYROLL TAX CREDIT.—The ‘payroll tax credit’
is a credit for the social security, railroad retirement and
hospital insurance taxes paid by an employer, as deter-
287
mined in accordance with subchapter L (sections 281
through 283).
‘‘(d) IMPORT TAX.—For rules relating to the import
tax imposed by this chapter, see subchapter M (sections
286 through 288).
‘‘Subchapter B—Basic Rules for Business Tax
‘‘Sec. 202. Gross profits.
‘‘Sec. 203. Taxable receipts.
‘‘Sec. 204. Deductible amounts.
‘‘Sec. 205. Cost of business purchases.
‘‘Sec. 206. Business entity and business activity.
‘‘Sec. 207. Loss carryover deduction.
‘‘SEC. 202. GROSS PROFITS.
‘‘ ‘Gross profits’ means for a taxable year of a busi-
ness entity the amount by which—
‘‘(1) the taxable receipts of the business entity
for the taxable year exceed,
‘‘(2) the deductible amounts for the business
entity for the taxable year.
‘‘SEC. 203. TAXABLE RECEIPTS.
‘‘(a) IN GENERAL.—‘Taxable receipts’ means all re-
ceipts from the sale of property, use of property, and per-
formance of services in the United States.
‘‘(b) GAMES
OF CHANCE.—Amounts received for
playing games of chance by business entities engaging in
the activity of providing such games shall be treated as
receipts from the sale of property or services.
288
‘‘(c) IN-KIND RECEIPTS.—The taxable receipts at-
tributable to the receipt of property, use of property or
services in whole or partial exchange for property, use of
property or services equal the fair market value of the
services or property received.
‘‘(d) TAXES.—Taxable receipts do not include any ex-
cise tax, sales tax, custom duty, or other separately stated
levy imposed by a Federal, State, or local government re-
ceived by a business entity in connection with the sale of
property or services or the use of property.
‘‘(e) FINANCIAL RECEIPTS.—
‘‘(1) IN GENERAL.—Except as provided in sub-
chapter G (relating to financial intermediation and
financial institutions), taxable receipts do not in-
clude financial receipts.
‘‘(2) FINANCIAL
RECEIPTS.—‘Financial re-
ceipts’ include—
‘‘(A) interest,
‘‘(B) dividends and other distributions by a
business entity,
‘‘(C) proceeds from the sale of stock, other
ownership interests in business entities, or
other financial instruments (as defined in sec-
tion 242(b)(3)),
‘‘(D) proceeds from life insurance policies,
289
‘‘(E) proceeds from annuities,
‘‘(F) proceeds from currency hedging or
exchanges, and
‘‘(G) proceeds from other financial trans-
actions.
‘‘(f) CROSS REFERENCES.—
‘‘(1) FINANCIAL
INTERMEDIATION.—See sub-
chapters F and G for rules relating to financial
intermediation.
‘‘(2) 
EXPORTS, 
SALES
IN
THE
UNITED
STATES.—See subchapter J for the exclusion from
gross receipts for export sales and for rules on sales
of property and services in the United States.
‘‘(3) LAND.—See subchapter E for rules relat-
ing to certain sales of land.
‘‘(4) INSURANCE PROCEEDS.—See section 237
for rules on the inclusion of certain insurance pro-
ceeds in taxable receipts.
‘‘SEC. 204. DEDUCTIBLE AMOUNTS.
‘‘(a) IN GENERAL.—‘Deductible amounts’ for a busi-
ness entity in a taxable year include—
‘‘(1) the cost of business purchases in the tax-
able year (as determined under section 205),
‘‘(2) such entity’s loss carryover deduction (as
determined under section 207) , and
290
‘‘(3) the transition basis deduction (as deter-
mined under section 290).
‘‘(b) FINANCIAL INTERMEDIATION.—See subchapters
F and G for special rules for business entities engaging
in financial intermediation.
‘‘SEC. 205. COST OF BUSINESS PURCHASES.
‘‘(a) BUSINESS PURCHASES.—
‘‘(1) IN GENERAL.—‘Business purchases’ means
the acquisition of—
‘‘(A) property,
‘‘(B) the use of property, or
‘‘(C) services
in the United States for use in a business activity.
‘‘(2) EXAMPLES.—Business purchases include
(without limitation) the—
‘‘(A) purchase or rental of real property,
‘‘(B) purchase or rental of capital equip-
ment,
‘‘(C) purchase of supplies and inventory,
‘‘(D) purchase of services from inde-
pendent contractors,
‘‘(E) purchase of financial intermediation
services (as determined in accordance with sec-
tion 236),
291
‘‘(F) purchase of a business loss policy (as
determined in accordance with section 237),
and
‘‘(G) imports for use in a business activity.
‘‘(3) EXCLUSIONS.—Business purchases do not
include—
‘‘(A) payments for use of money or capital,
such as interest or dividends (except to the ex-
tent that a portion so paid is a fee for financial
intermediation services),
‘‘(B) premiums for life insurance,
‘‘(C) the acquisition of savings assets or
other financial instruments (as defined in sec-
tion 242(b)(3)).
‘‘(D) property acquired outside the United
States (but such property shall be taken into
account as an import if imported),
‘‘(E) services performed outside the United
States (unless treated as imported into the
United States),
‘‘(F) compensation expenses for an indi-
vidual (other than amounts paid to an indi-
vidual in his capacity as a business entity), or
‘‘(G) taxes (except as provided in sub-
section (b)(2) relating to product taxes).
302
‘‘(4) SERVICES.—If an individual contributes
services to a business entity in which the individual
has an ownership interest or receives an ownership
interest, the business entity shall not be permitted to
deduct the value of the services received (or the
value of the equity interest provided to the services
provider).
‘‘SEC. 211. DISTRIBUTIONS OF PROPERTY.
‘‘(a) DISTRIBUTIONS OTHER THAN TO CONTROL-
LING BUSINESS.—If a business entity distributes all or a
portion of its assets to its owners (other than a controlling
business entity), the business entity will be treated as if
it sold the assets to its owners at fair market value. The
fair market value will be determined by the distributing
corporation and those determinations, unless unreason-
able, will be binding on the recipients.
‘‘(b) DISTRIBUTIONS
TO
A CONTROLLING BUSI-
NESS.—If a business entity distributes all or a portion of
its assets to a controlling business, the controlling busi-
ness will assume the distributing entity’s tax attributes
with respect to the assets and neither entity will have tax-
able receipts or a deduction as a result of the transaction.
‘‘(c) DISTRIBUTION
OF
PERSONAL
USE
PROP-
ERTY.—If personal use property is distributed to the indi-
vidual who contributed the personal use property to a busi-