I 
108TH CONGRESS 
1ST SESSION 
H. R. 269
To amend the Internal Revenue Code of 1986 to restructure and replace 
the income tax system of the United States to meet national priorities, 
and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
JANUARY 8, 2003
Mr. ENGLISH introduced the following bill; which was referred to the 
Committee on Ways and Means 
A BILL 
To amend the Internal Revenue Code of 1986 to restructure 
and replace the income tax system of the United States 
to meet national priorities, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; 
TABLE OF CONTENTS. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Simplified USA Tax Act of 2003’’. 
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act a reference 
is made to the Code or to a section or provision of the
Code, the reference shall be considered to be made to the 
Internal Revenue Code of 1986 or to a section or provision 
thereof. 
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; amendment of 1986 Code; table of contents. 
TITLE I—FINDINGS; NEED TO REPLACE THE INCOME TAX 
Sec. 101. Replacing the income tax of the United States. 
TITLE II—SIMPLIFIED USA TAX FOR INDIVIDUALS 
Sec. 201. Simplified USA Tax for individuals. 
Sec. 202. Reorganization of the Code. 
TITLE III—SIMPLIFIED USA TAX FOR BUSINESSES 
Sec. 301. Repeal of present corporate income tax; new tax paid by corporations 
and other businesses. 
Sec. 302. Repeal of chapter 6. 
TITLE IV—DEFERRED COMPENSATION PLANS 
Sec. 401. Provisions saved. 
Sec. 402. Clerical Amendments. 
Sec. 403. Clerical Amendments. 
TITLE V—REPEAL OF ESTATE AND GIFT TAXES 
Sec. 501. Repeal of gratuitous transfer taxes. 
Sec. 502. Effective Date. 
TITLE VI—TECHNICAL AND ADMINISTRATIVE CHANGES; 
EFFECTIVE DATES 
Sec. 601. USA Tax Code. 
Sec. 602. Revisions to the Code. 
Sec. 603. Application of subtitle F. 
Sec. 604. Clerical amendment.
TITLE I—FINDINGS; NEED TO 
REPLACE THE INCOME TAX 
SEC. 101. REPLACING THE INCOME TAX OF THE UNITED 
STATES. 
(a) FINDINGS.—The Congress finds that—
(1) the current Tax Code is irreparably flawed 
and must be replaced; 
(2) to enhance the liberty and protect the pri-
vacy of individuals, the Tax Code must be made sim-
pler and nonintrusive, and it must be applied 
evenhandedly to all; 
(3) to be fair and to provide for the prosperity 
of current and future generation, the Tax Code must 
give all individuals at all income levels an oppor-
tunity to save, invest and raise their standard of liv-
ing and that of their children; and 
(4) future economic growth requires a tax sys-
tem that facilitates successful competition in the 
global marketplace. 
(b) MAIN FEATURES OF SIMPLIFIED USA TAX SYS-
TEM.—
(1) REPLACEMENT
OF
OLD
TAX
SYSTEM.—
Chapter 1 of subtitle A (related to income taxes) of 
the Code is repealed and replaced for years begin-
ning after 2003. 
(2) Estate and gift tax repealed. 
(3) NEW TAX SYSTEM.—The Simplified USA 
Tax consists of—
(A) a simplified tax collected from individ-
uals, that for years after 2003 replaces the in-
come tax imposed on individuals by section 1 of 
the Code, and 
(B) a simplified tax collected from corpora-
tions and other businesses, that for years after 
2003 replaces the income tax imposed on cor-
porations by section 11 of the Code. 
(4) SIMPLIFIED USA TAX ON GROSS PROFITS.—
Corporations and other businesses pay tax on their 
annual gross profits from business conducted in the 
United States, except that—
(A) export revenues are excluded, and 
(B) imports are taxed. 
(5) SIMPLIFIED USA TAX ON INCOME.—Individ-
uals pay tax on their annual income from wages, 
dividends, interest, and other financial income (in-
cluding sales of property), except that—
(A) investment earnings on previously 
taxed income that is placed in a Roth IRA is 
exempt from further taxation,
(B) a portion of each family’s income is ex-
empt from tax, and 
(C) deductions are allowed for—
(i) education costs, 
(ii) religious, charitable, and other 
philanthropic donations,
(E) Under the Simplified USA Tax, the 
deferral of taxation on investments in human 
capital represents an investment by the Federal 
government in the nation’s capital stock and 
the Federal government shares in the return on 
its investment in the form of higher economic 
output and revenues in the future. 
(2) SINGLE TAX IN 2 PARTS.—The Simplified 
USA Tax is composed of a business tax and an indi-
vidual tax which are 2 parts of a single tax system 
that subjects all income produced and received to 
taxation once and only once. The 2 parts are as fol-
lows: 
(A) BUSINESS TAX AT THE SOURCE OF IN-
COME.—Tax is paid by corporations and other 
businesses which produce and sell goods and 
services that are—
(i) the source of nearly all the gross 
domestic product of the United States, and 
(ii) the ultimate source of income re-
ceived by individuals. 
(B) INDIVIDUAL
TAX
ON
INCOME
RE-
CEIVED.—Tax is paid by individuals when they 
receive wages and salaries as compensation for 
gross domestic product created by their work.
(3) SAVING AND INVESTMENT.—The Simplified 
USA Tax allows people to save and businesses to in-
vest as follows: 
(A) FAIR OPPORTUNITY FOR PEOPLE TO 
SAVE.—
(i) OPTIONAL ELIMINATION OF DOU-
BLE TAXATION.—When an individual earns 
income and is taxed on that income, the 
individual can save that income in a Roth 
IRA and not pay income taxes on the in-
vestment earnings. 
(ii) DEDUCTIBLE
AND
EXCLUDABLE 
SAVINGS.—The Simplified USA Tax con-
tinues provisions of present law that 
allow—
(I) lower income individuals and 
certain others to make deductible con-
tributions to individual retirement ac-
counts, and 
(II) encourage employer spon-
sored savings and retirement plans 
that defer taxation of income through 
use of 401(k) plans and other quali-
fied retirement plans.
(B) FAIR OPPORTUNITY FOR BUSINESSES 
TO INVEST.—
(i) NO PREPAYMENT OF TAX.—When 
a business invests in plant and equip-
ment—
(I) a deduction is allowed for the 
cost, and 
(II) tax is deferred. 
(ii) TAX ON EARNINGS AND RECOVERY 
OF COST.—When recovered out of business 
revenues, both the cost of the investment 
and the earnings on the investment are in-
cluded in gross profit subject to tax. 
(iii) EXPENSING.—The deduction for 
investment is the equivalent of allowing the 
cost of plant and equipment to be expensed 
instead of depreciated.
(4) FAIR OPPORTUNITY TO COMPETE IN THE 
GLOBAL MARKETPLACE.—The Simplified USA Tax 
serves the strategic interests of the United States in 
international markets as follows: 
(A) BORDER ADJUSTABLE TAX.—
(i) 
AMERICAN-MADE
EXPORTS.—
Goods and services produced in the United
States can be sold into world markets free 
of tax. 
(ii) FOREIGN-MADE IMPORTS.—Goods 
and services imported into the United 
States bear a fair and proportionate share 
of the tax burden in the United States. 
(iii) LEVELING THE INTERNATIONAL 
PLAYING FIELD.—Border adjustments for 
exports and imports are consistent with 
international standards and practice. 
(5) A SIMPLE AND UNDERSTANDABLE TAX.—
The Simplified USA Tax for individuals—
(A) is written in a simple, understandable 
form, 
(B) contains only a few exemptions, deduc-
tions, and credits, and can be reported on a tax 
return only a small fraction the size of Form 
1040.
(6) A NONINTRUSIVE, EVENHANDED TAX.—
(A) TAXPAYERS ARE IN CONTROL.—When 
the rules are few and clear, taxpayers can cal-
culate their own tax correctly and file their own 
returns without fear of mistake or of getting 
caught up in an argument with the IRS.
(B) LIMITED ROLE FOR IRS.—When the 
rules are few and clear, the IRS does not have 
the broad interpretive power that puts tax-
payers at risk of being treated unfairly and un-
evenly. 
(C) 
RESTORING
VOLUNTARY
COMPLI-
ANCE.—When the rules are few and clear, the 
IRS can concentrate on helping taxpayers vol-
untarily pay their correct share of tax revenues 
for public use and benefit under a tax system 
that is understood and respected. 
(7) MAINTAINING TAX PROGRESSIVITY FOR IN-
DIVIDUALS.—
(A) GRADUATED TAX.—Like the tax im-
posed by section 1 of the current Code, the 
Simplified USA Tax for individuals is a grad-
uated tax. 
(B) FAMILY
LIVING
ALLOWANCE.—The 
Simplified USA Tax recognizes that every fam-
ily’s budget includes necessities. The Simplified 
USA Tax provides a family living allowance 
that exempts from taxation the first dollars 
earned and spent to maintain a basic standard 
of living.
(8) BUSINESSES AND INDIVIDUAL SHARE THE 
TAX BURDEN.—
(A) BUSINESS
PORTION
OF
TAX
BUR-
DEN.—Corporations and other businesses pay 
about the same portion of the total tax as 
under the current Code. 
(B) INDIVIDUAL
PORTION
OF
TAX
BUR-
DEN.—Individuals pay about the same portion 
of the total tax as under the current Code. 
(9) EMPHASIZING
PERSONAL
INDEPENDENCE 
AND RESPONSIBILITY.—
(A) REINFORCING A CULTURE OF WORK 
AND THRIFT.—Instead of being solely a calcula-
tion of how much they must pay to the govern-
ment, the Simplified USA Tax converts the in-
come tax into an annual calculation of how 
much people produce and contribute to the 
economy. 
(B) GREATER
CONTROL
AND
RESPONSI-
BILITY.—Because people are not double taxed 
on their saving, they have—
(i) more control over their own income 
and taxes, 
(ii) a greater ability to plan and pro-
vide for their own future, and
(iii) a fair opportunity to do so. 
(10) MORE OPPORTUNITY FOR WAGE EARNERS 
AT LOWER INCOME LEVELS.—
(A) REFUNDABLE CREDIT FOR EMPLOYEE 
PAYROLL TAX.—The amount of the payroll tax 
paid or withheld under the Code from an em-
ployee’s wages (and paid into the Social Secu-
rity and Hospital Insurance Trust Funds) is—
(i) credited against the employee’s in-
come tax, and 
(ii) refunded to the employee to the 
extent in excess of the employee’s income 
tax. 
(B) NO EFFECT ON TRUST FUND OR BEN-
EFITS.—The income tax credit allowed for pay-
roll taxes deposited in the Social Security Trust 
Fund does not—
(i) reduce the amount in such fund, or 
(ii) reduce the payment of any per-
son’s benefits from the fund. 
TITLE II—SIMPLIFIED USA TAX 
FOR INDIVIDUALS 
SEC. 201. SIMPLIFIED USA TAX FOR INDIVIDUALS. 
(a) IN GENERAL.—Chapter 1 of the Code is amended 
to read as follows:
‘‘CHAPTER 1—SIMPLIFIED USA TAX FOR 
INDIVIDUALS
‘‘Subchapter A. Basic rules. 
‘‘Subchapter B. Roth IRA and other savings provisions. 
‘‘Subchapter C. Basis, business transactions, and nonrecognition transactions. 
‘‘Subchapter D. Rules for exclusions from gross income. 
‘‘Subchapter E. Rules relating to deductions. 
‘‘Subchapter F. Special business activities. 
‘‘Subchapter G. Accounting methods. 
‘‘Subchapter H. Nonresident aliens. 
‘‘Subchapter I. Trusts and estates. 
‘‘Subchapter J. Definitions and rules of application.
‘‘Subchapter A—Basic Rules
‘‘Sec. 1. Simplified USA tax for individuals. 
‘‘Sec. 2. Persons liable for the Simplified USA for individuals. 
‘‘Sec. 3. Gross income. 
‘‘Sec. 4. Exclusions from gross income. 
‘‘Sec. 5. Alimony and child support deductions. 
‘‘Sec. 6. Personal and dependency deduction. 
‘‘Sec. 7. Family Living Allowance. 
‘‘Sec. 8. USA deductions. 
‘‘Sec. 9. Homeowner deduction. 
‘‘Sec. 10. Education deduction. 
‘‘Sec. 11. Philanthropic transfer deduction. 
‘‘Sec. 13. Limitation on deductions. 
‘‘Sec. 15. Tax rates. 
‘‘Sec. 16. Kiddie tax. 
‘‘Sec. 17. Rules for filing status and rate tables. 
‘‘Sec. 20. USA tax credits. 
‘‘Sec. 21. Payroll tax credit. 
‘‘Sec. 22. Taxes-paid tax credit. 
‘‘Sec. 23. Indexing for inflation.
‘‘SEC. 1. SIMPLIFIED USA TAX FOR INDIVIDUALS. 
‘‘(a) IMPOSITION OF TAX.—An income tax is imposed 
on each individual described in section 2. The income tax 
shall equal the amount determined by applying the tax 
schedules in section 15 to the taxable income of the tax-
payer for the taxable year and reducing the tax so deter-
mined by the USA tax credits for the taxable year.
‘‘(b) TAXABLE INCOME.—‘Taxable income’ means 
adjusted gross income, reduced by—
‘‘(1) the personal and dependency deduction, 
‘‘(2) the Family Living Allowance, and 
‘‘(3) the USA deductions, including—
‘‘(A) the homeowner deduction, 
‘‘(B) the education deduction, and 
‘‘(C) the philanthropic transfer deduction. 
‘‘(c) ADJUSTED GROSS INCOME.—‘Adjusted gross in-
come’ means gross income, reduced by—
‘‘(1) the alimony and child support deductions, 
and 
‘‘(2) the qualified IRA deduction. 
‘‘(d) NAME.—The tax imposed by this chapter shall 
be known as the ‘Simplified USA Tax for Individuals’. 
‘‘SEC. 2. PERSONS LIABLE FOR THE SIMPLIFIED USA TAX 
FOR INDIVIDUALS. 
‘‘(a) INDIVIDUALS ONLY.—The Simplified USA Tax 
for Individuals shall apply only to individuals.
‘‘(b) CITIZENS AND RESIDENT ALIENS.—The Sim-
plified USA Tax for Individuals shall apply to all citizens 
of the United States and to all resident aliens of the 
United States. Except as specifically provided in this chap-
ter, the Simplified USA Tax for Individuals shall not 
apply to nonresident aliens.
‘‘(c) NONRESIDENT ALIENS.—For rules applicable to 
the compensation income of nonresident aliens, see sub-
chapter H (sections 131 and 132). For rules on the with-
holding of tax on nonresident aliens, see chapter 5 (sec-
tions 1441–1464). 
‘‘(d) TAXPAYER.—For purposes of this chapter, ‘tax-
payer’ means an individual, or, in the case of a joint re-
turn, the husband and the wife. 
‘‘SEC. 3. GROSS INCOME. 
‘‘(a) GENERAL DEFINITION.—Except as otherwise 
provided in this chapter, ‘gross income for the taxable 
year’ means all income from whatever source derived by 
a taxpayer during the taxable year, including (but not lim-
ited to) the following items: 
‘‘(1) Compensation for services, including (but 
not limited to)—
‘‘(A) salaries, 
‘‘(B) wages, 
‘‘(C) commissions, 
‘‘(D) tips, and 
‘‘(E) distributions from business entities 
(as defined in section 171). 
‘‘(2) Fringe benefits (except as specifically ex-
cluded by section 4(a)), including (but not limited 
to)—
‘‘(A) the cost of health, disability, life or 
other similar insurance paid by an employer if 
the taxpayer is indirectly or directly the bene-
ficiary of the policy or has the right to name 
the beneficiary of the policy, 
‘‘(B) employer-paid parking (unless the 
employee uses the automobile parked in the 
space regularly on employer business), 
‘‘(C) employer-paid educational benefits, 
‘‘(D) employer-paid housing (other than 
housing provided for the convenience of the em-
ployer), 
‘‘(E) employer-paid meals (other than 
meals provided for the convenience of the em-
ployer or reimbursement for the reasonable cost 
of meals incurred on overnight travel), 
‘‘(F) amounts contributed by an employer 
on behalf of an employee to a group legal serv-
ices plan, and 
‘‘(G) dependent care assistance received 
from an employer. 
‘‘(3) Distributions from business entities (as de-
fined in section 171) constituting—
‘‘(A) compensation for use of capital, in-
cluding interest, or
‘‘(B) shares of profits (including divi-
dends). 
‘‘(4) Interest not described in paragraph (3)(A). 
‘‘(5) Rents. 
‘‘(6) Royalties. 
‘‘(7) Alimony, child support, and separate 
maintenance payments. 
‘‘(8) Includible social security benefits. 
‘‘(9) Income from the discharge of indebted-
ness. 
‘‘(10) Gains on the sale or disposition of assets. 
‘‘(11) Amounts stolen or embezzled. 
‘‘(12) Distributions from retirement plans and 
annuities (other than USA Roth IRAs) to the extent 
not previously included as income, as determined in 
accordance with section 33. 
‘‘(13) Amounts received through health, acci-
dent or disability insurance to the extent that—
‘‘(A) the cost of such insurance was paid 
by an employer and not included in the employ-
ee’s taxable income and 
‘‘(B) such amounts exceed the actual med-
ical expenses incurred and not paid or treated 
as paid with amounts otherwise excluded from 
income.
‘‘(b) DEFINITIONS.—For purposes of subsection (a) 
and section 4—
‘‘(1) EMPLOYER.—‘Employer’ includes—
‘‘(A) in the case of a partner who provides 
services for a partnership, the partnership, 
‘‘(B) in the case of a proprietor, the pro-
prietorship, and 
‘‘(C) in the case of an independent con-
tractor, any business or individual that hires 
the independent contractor. 
‘‘(2) SOCIAL SECURITY BENEFITS.—
‘‘(A) IN GENERAL.—‘Social Security bene-
fits’ means any amount received by the tax-
payer by reason of entitlement to—
‘‘(i) a monthly benefit under title II of 
the Social Security Act, or 
‘‘(ii) a tier 1 railroad retirement ben-
efit. The amount received by a taxpayer 
shall be determined as if the Social Secu-
rity Act did not contain section 203(i) 
thereof. 
‘‘(B) TIER 1 RAILROAD RETIREMENT BEN-
EFIT.—‘Tier 1 railroad retirement benefit’ 
means—
‘‘(i) the amount of the annuity under 
the Railroad Retirement Act of 1974 equal 
to the amount of the benefit to which the 
taxpayer would have been entitled under 
the Social Security Act if all of the service 
after December 31, 1936, of the employee 
(on whose record the annuity is being 
paid) has been included in the term ‘em-
ployment’ as defined in the Social Security 
Act, and 
‘‘(ii) a monthly annuity amount under 
section 3(f)(3) of the Railroad Retirement 
Act of 1974. 
‘‘(C) 
WORKERS’ 
COMPENSATION
SUB-
STITUTES.—If by reason of section 224 of the 
Social Security Act or section 3(a)(1) of the 
Railroad Retirement Act of 1974, any social se-
curity benefit is reduced because of the receipt 
of a benefit under a workers’ compensation act,
the term ‘social security benefit’ includes that 
portion of such benefit which equals such reduc-
tion. 
‘‘(D) EFFECT OF EARLY PAYMENT.—If so-
cial security benefits checks are delivered before 
the end of the calendar month for which they
are issued and are not deposited until the 
month for which they are issued, they will be 
treated as received in the month for which they 
are issued. 
‘‘(3) INCLUDIBLE
SOCIAL
SECURITY
BENE-
FITS.—‘Includible social security benefits’ means the 
portion of social security benefits that would be in-
cluded in gross income under section 86(a) of the 
Internal Revenue Code of 1986, except that for pur-
poses of applying such section, the term ‘modified 
adjusted gross income’ means adjusted gross income 
(as defined in section 1(c)), determined without re-
gard to the inclusion of any social security benefits. 
‘‘(c) PROPERTY RECEIVED FOR SERVICES.—
‘‘(1) IN GENERAL.—If, in connection with the 
performance of services, property is transferred to 
any person other than the person for whom such 
services are performed, the excess of—
‘‘(A) the fair market value of such prop-
erty (determined without regard to any restric-
tion other than a restriction which by its terms 
will never lapse) at the first time the rights of 
the person having the beneficial interest in such 
property are transferable or are not subject to
a substantial risk of forfeiture, whichever oc-
curs earlier, over 
‘‘(B) the amount (if any) paid for such 
property, shall be included in the gross income 
of the person who performed such services in 
the first taxable year in which the rights of the 
person having the beneficial interest in such 
property are transferable or are not subject to 
a substantial risk of forfeiture, whichever is ap-
plicable. The preceding sentence shall not apply 
if such person sells or otherwise disposes of 
such property in an arm’s length transaction 
before his rights in such property become trans-
ferable or not subject to a substantial risk of 
forfeiture. 
‘‘(2) RULES
AND
REGULATIONS.—The Sec-
retary shall prescribe rules and regulations similar 
to those applicable under section 83 of the Internal 
Revenue Code of 1986 for purposes of implementing 
this subsection. 
‘‘SEC. 4. EXCLUSIONS FROM GROSS INCOME. 
‘‘(a) GENERAL RULE.—Gross income does not in-
clude: 
‘‘(1) RETURNS
OR
BENEFITS
FROM
PRE-
VIOUSLY TAXED INCOME.—
‘‘(A) Social security benefits (as defined in 
section 3(b)(2)), other than includible social se-
curity benefits (as defined in section 3(b)(3)). 
‘‘(B) Amounts received under accident or 
health benefit plans (except as provided in sec-
tion 3(a)(13)).
‘‘(C) Value of services provided pursuant 
to a group legal service plan (but only if the 
cost of such services was paid by the employee 
or paid by the employer and included in the 
gross income of the employee). 
‘‘(D) Amounts received under an insurance 
contract for certain living expenses in the case 
of an individual whose principal residence is 
damaged or destroyed or who is denied access 
because of the threat of such occurrence. 
‘‘(E) Amounts treated as recovery of basis 
under any other provision of chapter 1.
‘‘(2) COMPENSATION FOR SPECIAL KINDS OF 
SERVICE.—
‘‘(A) In the case of a minister of the gos-
pel—
‘‘(i) the rental value of a home fur-
nished to him, or
‘‘(ii) the rental allowance paid to him 
as part of his compensation, to the extent 
used by him to rent or provide a home. 
‘‘(B) Certain combat pay of members of 
the Armed Forces of the United States (as pro-
vided in section 92). 
‘‘(C) Certain reduced uniform services re-
tirement pay (as defined in section 122 of the 
Internal Revenue Code of 1986). 
‘‘(D) Qualified military benefits (as defined 
in section 93). 
‘‘(E) Moving allowances for active military 
personnel (as defined in section 217(g) of the 
Internal Revenue Code of 1986). 
‘‘(F) Certain foster care payments (as de-
fined in section 94). 
‘‘(3) GRATUITOUS, CHARITABLE, AND GOVERN-
MENTAL TRANSFERS.—
‘‘(A) Gifts. 
‘‘(B) Inheritances. 
‘‘(C) Supplemental security income, aid to 
families with dependent children, food stamps, 
section 8 low-income rental assistance, benefits 
under the low-income home energy assistance 
program, and benefits under other similar Fed-
eral and State assistance programs for low-in-
come individuals and families. 
‘‘(D) Benefits or assistance received from 
a charitable organization as the result of a dis-
aster or by reason of financial need. 
‘‘(4) TAX-EXEMPT
BOND
INTEREST.—Interest 
on State and local bonds (as provided in section 91); 
‘‘(5) COMPENSATION
FOR
INJURY
AND
SICK-
NESS.—
‘‘(A) Amounts received as compensation 
for personal injury or sickness (as provided in 
section 95). 
‘‘(B) Reimbursement and direct payments 
under Medicare and Medicaid. 
‘‘(6) BENEFITS PRIMARILY FOR THE CONVEN-
IENCE
OF
THE
EMPLOYER
AND
CERTAIN
FRINGE 
BENEFITS.—
‘‘(A) Meals or lodging furnished for the 
convenience of the employer (as provided in sec-
tion 96). 
‘‘(B) Value of a parking space if employee 
uses the car parked in the space regularly on 
company business. 
‘‘(C) A fringe benefit that is a no-addi-
tional-cost service (as defined in section 97(b)),
subject to rules prohibiting discrimination in 
favor of the highly compensated. 
‘‘(D) A qualified employee discount (as de-
fined in section 97(c)), subject to rules prohib-
iting discrimination in favor of the highly com-
pensated. 
‘‘(E) Any property or services provided to 
an employee to the extent that if the employee 
were treated as a business and the business 
paid for those services, the employee could de-
duct the cost of such property or services under 
the business tax. 
‘‘(F) A de minimis fringe benefit (as de-
fined in section 97(d)). 
‘‘(G) Transportation in a commuter high-
way vehicle if such transportation is in connec-
tion with travel between the employee’s resi-
dence and place of employment. 
‘‘(H) Any amount received directly or indi-
rectly by an individual from an employer for 
moving expenses if—
‘‘(i) the move is associated with a 
change in job locations for the same em-
ployer, and
‘‘(ii) the expenses of such move would 
have been deductible under the rules under 
section 217 of the Internal Revenue Code 
of 1986 if paid directly by the employee. 
‘‘(I) Employer provided coverage under an 
accident or health plan. 
‘‘(7) REPAYABLE RECEIPTS.—The proceeds of 
borrowing or any other amounts legally received that 
the taxpayer is legally obligated to return (except 
that the imputed interest rules of section 7872 may 
apply if there is inadequate stated interest). 
‘‘(8) CERTAIN INCOME EARNED ABROAD.—Cer-
tain income and housing costs of citizens and resi-
dents of the United States living outside the United 
States in accordance with the rules under section 
911 of the Internal Revenue Code of 1986.
‘‘(9) DISCHARGE
OF
INDEBTEDNESS.—The 
amount of indebtedness discharged unless the dis-
charge is for services, property, or other valuable 
right. 
‘‘(10) 
NONRECOGNITION
TRANSACTIONS.—
Amounts to which the nonrecognition transaction 
rules of section 77 apply. 
‘‘(11) PROCEEDS
FROM
SALE
OF
PRINCIPAL 
RESIDENCE.—Amounts excludable under section 76
(relating to certain proceeds from the sale of the 
taxpayer’s principal residence). 
‘‘(12) TAXABLE RECEIPTS OF A BUSINESS EN-
TITY.—Amounts that are treated as taxable receipts 
of a business entity under the Simplified USA Tax 
for businesses and are not distributed to the indi-
vidual taxpayer. 
‘‘(13) QUALIFIED
RETIREMENT
CONTRIBU-
TIONS.—Employer contributions to retirement plans 
that are exempt from taxation under chapter 3, in-
cluding contributions pursuant to a cash or deferred 
payment plan described in section 401(k). 
‘‘(b) CROSS REFERENCES.—
‘‘(1) ROTH IRAS.—For rules excluding from in-
come earnings on, and distributions from, Roth 
IRAs, see sections 30 and 408A. 
‘‘(2) OTHER RETIREMENT PLANS.—For rules 
excluding or deferring from income earnings on 
other retirement plans, see chapter 3. 
‘‘SEC. 5. ALIMONY AND CHILD SUPPORT DEDUCTIONS. 
‘‘(a) GENERAL RULE.—A taxpayer shall be allowed 
an alimony and child support deductions for an amount 
equal to the alimony, child support, or separate mainte-
nance payments paid during the taxpayer’s taxable year.
‘‘(b) DEFINITION
OF ALIMONY, CHILD SUPPORT, 
AND SEPARATE MAINTENANCE PAYMENTS.—‘Alimony, 
child support, and separate maintenance payments’ means 
any alimony, child support, or separate maintenance pay-
ment which is includible in gross income of the recipient 
under section 3. 
‘‘SEC. 6. PERSONAL AND DEPENDENCY DEDUCTION. 
‘‘(a) AMOUNT OF EXEMPTION.—The personal and 
dependency deduction for an individual shall equal the 
number of exemptions multiplied by $2,700. 
‘‘(b) NUMBER OF EXEMPTIONS.—
‘‘(1) TAXPAYER.—One exemption shall be al-
lowed for the taxpayer unless the taxpayer files a 
joint return with a spouse, in which case 1 exemp-
tion shall be allowed for the husband and 1 for the 
wife. 
‘‘(2) ELIGIBLE
DEPENDENT.—An exemption 
shall be allowed for each eligible dependent. 
‘‘(c) DEPENDENT.—
‘‘(1) DEFINITION.—‘Dependent’ means any of 
the following individuals over half of whose support, 
for the calendar year was received from the taxpayer 
or is treated as received from the taxpayer: 
‘‘(A) A son or daughter of the taxpayer, or 
a descendant of either.
rules relating to multiple support agreements, and 
support tests in cases of children of divorced par-
ents. 
‘‘(d) ELIGIBLE DEPENDENT.—
‘‘(1) IN GENERAL.—‘Eligible dependent’ means 
a dependent—
‘‘(A) whose gross income for the calendar 
year in which the taxable year of the taxpayer 
begins is less than the exemption amount, or 
‘‘(B) who is a child of the taxpayer and 
who—
‘‘(i) has not attained the age of 19 at 
the close of the calendar year in which the 
taxable year of the taxpayer begins, or
‘‘(ii) is a student who has not attained 
the age of 24 at the close of such calendar 
year. 
‘‘(2) EXCLUSIONS.—A dependent who files a 
joint return with a spouse for the calendar year is 
not an eligible dependent. 
‘‘(3) RULES RELATING TO DEFINITIONS.—The 
Secretary shall prescribe rules similar to those in-
cluded in or applicable under the Internal Revenue 
Code of 1986 relating to this subsection, including
rules defining ‘child’ and ‘student’ and rules relating 
to the income of handicapped dependents. 
‘‘(e) INFLATION ADJUSTMENT.—The dollar amount 
contained in subsection (a) shall be adjusted for inflation 
beginning with calendar year 2004 in accordance with the 
procedures of section 23. 
‘‘SEC. 7. FAMILY LIVING ALLOWANCE. 
‘‘(a) AMOUNT OF ALLOWANCE.—The Family Living 
Allowance for a taxpayer shall be determined in accord-
ance with the following schedule:
‘‘Form of Return: 
Family Living Allowance: 
Taxpayers filing joint return .........
$8,140. 
Surviving spouse ............................
$8,140. 
Head of household .........................
$5,940. 
Individual who is not married or a 
head of household.
$4,840. 
Married filing separate return .......
$4,070.
‘‘(b) LIMITATION IN THE CASE OF CERTAIN DE-
PENDENTS.—In the case of an individual for whom an-
other taxpayer can claim an exemption under section 6, 
the Family Living Allowance for such individual shall not 
exceed the greater of $700 or such individual’s earned in-
come (as defined in section 171(a)(6)). 
‘‘(c) ADJUSTMENTS
FOR INFLATION.—The dollar 
amounts contained in subsections (a) and (b) shall be ad-
justed for inflation beginning with calendar year 2004 in 
accordance with the procedures of section 23.
‘‘SEC. 8. USA DEDUCTIONS. 
‘‘In computing taxable income, an individual shall be 
entitled to the following deductions: 
‘‘(1) The homeowner deduction described in 
section 9. 
‘‘(2) The education deduction described in sec-
tion 10. 
‘‘(3) The philanthropic transfer deduction de-
scribed in section 11. 
‘‘SEC. 9. HOMEOWNER DEDUCTION. 
‘‘(a) IN GENERAL.—The homeowner deduction shall 
equal the amount of interest paid by the taxpayer during 
the taxable year on acquisition indebtedness with respect 
to any qualified residence of the taxpayer. 
‘‘(b) DEFINITIONS.—
‘‘(1) ACQUISITION
INDEBTEDNESS.—‘Acquisi-
tion indebtedness’ means any indebtedness that is 
secured by a qualified residence and that—
‘‘(A) was incurred in acquiring, con-
structing, or substantially improving the quali-
fied residence, or 
‘‘(B) was incurred to refinance any indebt-
edness that is described in subparagraph (A) or 
this subparagraph (B) but only to the extent 
that the refinancing does not exceed the 
amount refinanced.
The aggregate amount treated as acquisition indebt-
edness shall not exceed $1,000,000 ($500,000 in the 
case of a married individual filing separately). 
‘‘(2) QUALIFIED RESIDENCE.—‘Qualified resi-
dence’ means the principal residence of the taxpayer 
and 1 other residence of the taxpayer that is des-
ignated by the taxpayer and which—
‘‘(A) is used by the taxpayer as a residence 
for more than 14 days during such year for 
which such unit is rented, and 
‘‘(B) is not rented for more than 14 days 
during such year. 
‘‘(c) COOPERATIVE HOUSING CORPORATION TEN-
ANT.—Any indebtedness secured by stock held by a tax-
payer as a tenant-stockholder in a cooperative housing cor-
poration shall be treated as secured by the house or apart-
ment which the taxpayer is entitled to occupy as a tenant-
stockholder. If such stock cannot be used to secure indebt-
edness, the indebtedness will be treated as so secured if 
the taxpayer establishes that such indebtedness was in-
curred to acquire stock. 
‘‘SEC. 10. EDUCATION DEDUCTION. 
‘‘(a) IN GENERAL.—The education deduction shall 
equal the sum of the qualified educational expenses for 
each eligible student.
‘‘(b) QUALIFIED EDUCATION EXPENSES.—
‘‘(1) IN
GENERAL.—‘Qualified education ex-
penses’ means with respect to an eligible student the 
lesser of—
‘‘(A) $4,000, or 
‘‘(B) the qualified higher education ex-
penses of the eligible student paid by the tax-
payer during the taxable year. 
‘‘(2) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN GENERAL.—‘Qualified higher edu-
cation expenses’ means tuition and fees re-
quired for the enrollment of an eligible student 
at an eligible education institution. Such term
shall not include expenses with respect to any 
course or other education involving sports, 
games, or hobbies other than as part of a de-
gree program.
‘‘(B) ELIGIBLE
EDUCATIONAL
INSTITU-
TION.—‘Eligible 
educational 
institution’ 
means—
‘‘(i) an institution which is described 
in section 481 of the Higher Education 
Act of 1965 (as in effect on May 15, 
1998), and which is eligible to participate
in a program under title IV of such Act, 
and 
‘‘(ii) in the case of a student who has 
attained the age of 18 before the beginning 
of the taxable year, and not graduated 
from high school before the beginning of 
the taxable year, an accredited school pro-
viding remedial education. 
‘‘(3) ELIGIBLE
STUDENT.—‘Eligible student’ 
means—
‘‘(A) the taxpayer, but only if no other tax-
payer treats the taxpayer as a dependent for 
which an exemption is allowed in computing the 
dependency deduction under section 6,
‘‘(B) the taxpayer’s spouse if a joint return 
is filed, and 
‘‘(C) any dependent of the taxpayer for 
whom the taxpayer is allowed an exemption in 
computing the dependency deduction under sec-
tion 6. 
‘‘(c) LIMITATION.—The maximum education deduc-
tion in a taxable year is $12,000 ($6,000 in the case of 
married individuals filing separate returns). 
‘‘(d) 
INFLATION
ADJUSTMENTS.—The 
dollar 
amounts contained in subsections (b)(1)(A) and (c) shall
be adjusted for inflation beginning with calendar year 
2004 in accordance with section 23. 
‘‘SEC. 11. PHILANTHROPIC TRANSFER DEDUCTION. 
‘‘(a) IN GENERAL.—The philanthropic transfer de-
duction shall equal the amount of charitable contributions 
made by the taxpayer in the taxable year, subject to the 
limitations in subsection (b). A deduction shall be allow-
able as a deduction only if verified under regulations pre-
scribed by the Secretary. 
‘‘(b) LIMITATION ON AMOUNT.—
‘‘(1) GENERAL
RULE.—A deduction for con-
tributions to regular charities in any taxable year 
shall be allowed only to the extent that such con-
tributions do not exceed 50 percent of the taxpayer’s 
adjusted gross income. Other charitable contribu-
tions shall be allowed only to the extent that such 
contributions do not exceed the lesser of—
‘‘(A) 30 percent of the taxpayer’s adjusted 
gross income, or 
‘‘(B) the excess, if any, of 50 percent of 
the taxpayer’s adjusted gross income over the 
amount of charitable contributions to regular 
charities. 
‘‘(2) CARRYOVER.—If the amount of charitable 
contributions made in a taxable year exceeds the
amount which can be deducted in such year, the ex-
cess shall be carried over for a period of up to 5 
years in accordance with rules to be prescribed by 
the Secretary. 
‘‘(3) REGULAR CHARITY.—For purposes of this 
subsection, ‘regular charity’ means an organization 
described in section 101, that is not a private foun-
dation (other than a private operating foundation) 
(as such terms are defined in section 102). 
‘‘(c) CHARITABLE CONTRIBUTION.—‘Charitable con-
tribution’ means a contribution or gift to or for the use 
of a governmental or charitable recipient (as defined in 
section 101). 
‘‘(d) CONTRIBUTIONS OF PROPERTY.—
‘‘(1) GENERAL RULE.—In the case of a chari-
table contribution of property, the amount of the 
contribution shall equal the lesser of the fair market 
value of the property or the taxpayer’s basis in the 
property. 
‘‘(2) FAIR
MARKET
VALUE
DEDUCTIONS
IN 
CERTAIN
CASES.—Notwithstanding paragraph (1), 
in the case of a charitable contribution (other than 
a contribution to a private foundation that is not a 
private operating foundation) of—
‘‘(A) real property,
‘‘(B) tangible property if the use by the 
donee is related to its purpose or function con-
stituting the basis for its exemption from the 
business tax or in the case of a governmental 
unit, to any governmental unit, and 
‘‘(C) stocks, bonds, or other securities held 
for more than one year, 
the amount of the charitable contribution shall equal 
the fair market value of the property. 
‘‘(3) CONTRIBUTIONS
OF
STOCK
FOR
WHICH 
MARKET QUOTATIONS ARE READILY AVAILABLE.—
‘‘(A) IN GENERAL.—In the case of con-
tributions of qualified appreciated stock, para-
graph (2) shall apply without regard to whether 
the stock is contributed to a private foundation. 
‘‘(B) QUALIFIED APPRECIATED STOCK.—
‘Qualified appreciated stock’ means any stock 
of a corporation for which (as of the date of the 
contribution) market quotations are readily 
available on an established securities market, 
except that in the case of a donor to a private 
foundation, the term does not include stock to 
the extent that the amount so contributed, 
when increased by prior contributions by the 
donor of stock in the same corporation, exceeds
10 percent in value of the outstanding stock of 
such corporation. 
‘‘(e) OTHER RULES.—The Secretary shall prescribe 
rules limiting the availability of the philanthropic transfer 
deduction in certain cases, including rules for—
‘‘(1) contributions of property placed in trust, 
‘‘(2) contributions of partial interests in prop-
erty, 
‘‘(3) contributions subject to liabilities that are 
assumed, 
‘‘(4) out-of-pocket expenditures on behalf of a 
charity to influence legislation,
‘‘(5) substantiation of contributions in excess of 
$250, 
‘‘(6) contributions designated for lobbying activ-
ity, 
‘‘(7) amounts paid to maintain certain students 
as members of taxpayer’s household, 
‘‘(8) qualified conservation contributions, and 
‘‘(9) deductions for travel expenses on behalf of 
a charity where there is a significant element of per-
sonal pleasure. 
‘‘SEC. 13. LIMITATION ON DEDUCTIONS. 
‘‘(a) IN GENERAL.—A taxpayer’s deductions shall 
not reduce the taxpayer’s taxable income below zero. Ex-
cept as provided in section 11(b) (relating to the limitation 
on the philanthropic transfer deduction), a taxpayer shall 
not be entitled to carry over any unused deductions. 
‘‘(b) DEDUCTIONS.—For purposes of this section, 
‘deductions’ means—
‘‘(1) the alimony and child support deductions, 
‘‘(2) the personal and dependency deduction, 
‘‘(3) the Family Living Allowance, 
‘‘(4) the USA deductions, and 
‘‘(5) the qualified IRA deduction.
‘‘SEC. 15. TAX RATES. 
‘‘(a) MARRIED INDIVIDUALS FILING JOINT RETURNS 
AND SURVIVING SPOUSES.—The tax schedule for every 
married individual who files a joint return with a spouse 
and for every surviving spouse (as defined in section 
17(a)) is—
‘‘If taxable income is: 
The tax is: 
Not over $40,000 ..........................
15% of taxable income. 
Over 
$40,000, 
but 
not 
over 
$80,000.
$6,000, plus 25% of the excess over 
$40,000. 
Over $80,000 .................................
$16,000, plus 30% of the excess over 
$80,000.
‘‘(b) HEADS OF HOUSEHOLDS.—The tax schedule for 
every head of household (as defined in section 17(b)) is—
‘‘If taxable income is: 
The tax is: 
Not over $35,000 ..........................
15% of taxable income. 
Over 
$35,000, 
but 
not 
over 
$70,000.
$5,250, plus 25% of the excess over 
$35,000. 
Over $70,000 .................................
$14,000, plus 30% of the excess over 
$70,000.
‘‘(c) UNMARRIED INDIVIDUALS.—The tax schedule 
for an unmarried individual who is not a head of a house-
hold or a surviving spouse is—
‘‘If taxable income is: 
The tax is: 
Not over $24,000 ..........................
15% of taxable income. 
Over 
$24,000, 
but 
not 
over 
$48,000.
$3,600, plus 25% of the excess over 
$24,000. 
Over $48,000 .................................
$9,600, plus 30% of the excess over 
$48,000.
‘‘(d) MARRIED INDIVIDUALS FILING SEPARATE RE-
TURNS.—The tax schedule for a married individual filing 
a separate return is—
‘‘If taxable income is: 
The tax is: 
Not over $20,000 ..........................
15% of taxable income. 
Over 
$20,000, 
but 
not 
over 
$40,000.
$3,000, plus 25% of the excess over 
$20,000. 
Over $40,000 .................................
$8,000, plus 30% of the excess over 
$40,000.
‘‘(e) ADJUSTMENTS
FOR
INFLATION.—Beginning 
with calendar year 2004, the tax schedules in subsections 
(a) through (d) shall be adjusted so that inflation will not 
result in tax increases in accordance with the procedures 
under section 23. 
‘‘(f) DEFINITIONS.—See section 17 for rules on filing 
status. 
‘‘SEC. 16. KIDDIE TAX. 
‘‘(a) GENERAL RULE.—If a child has a living parent 
and net unearned income and the child has not attained 
the age of 14 before the close of the taxable year—
‘‘(1) the net unearned income of the child shall 
be included in the taxable income of the eligible par-
ent for purposes of determining the parent’s tax li-
ability, or 
‘‘(2) the tax calculated under the tax rate 
schedules for the child as a separate taxpayer shall 
not be less than the sum of—
‘‘(A) the tax which would have been deter-
mined under the rate schedule if the taxable in-
come of the child were reduced by the net un-
earned income of the child, plus 
‘‘(B) such child’s share of the allocable pa-
rental tax. 
‘‘(b) CHILD’S SHARE
OF ALLOCABLE PARENTAL 
TAX.—
‘‘(1) ALLOCABLE
PARENTAL
TAX.—‘Allocable 
parental tax’ means the excess of—
‘‘(A) the tax that would have been deter-
mined under the rate schedules on the eligible 
parent’s taxable income if such income included 
the net unearned income of all of the eligible 
parent’s children to which this section applies, 
over 
‘‘(B) the tax actually determined under the 
rate schedules without regard to this section. 
‘‘(2) CHILD’S SHARE.—A child’s share of the 
allocable parental tax is equal to the amount that
bears the same ratio to the total allocable parental 
tax as the child’s net unearned income bears to the 
aggregate net unearned income of all children to 
whom this section applies for whom the eligible par-
ent is the eligible parent. 
‘‘(c) ELIGIBLE PARENT.—‘Eligible parent’ means—
‘‘(1) both parents of the child if the parents file 
a joint return, 
‘‘(2) the surviving parent of a child if the child 
has only 1 surviving parent,
‘‘(3) the custodial parent if the child’s parents 
are not married, or 
‘‘(4) the parent with the greater taxable income 
if the parents are married and filing separate re-
turns. 
‘‘(d) NET UNEARNED INCOME.—‘Net unearned in-
come’ means the excess, if any, of—
‘‘(1) the adjusted gross income of the child, 
over 
‘‘(2) the sum of—
‘‘(A) the earned income (as defined in sec-
tion 171(a)(6)) of the child, and 
‘‘(B) an amount equal to the Family Liv-
ing Allowance for a dependent child.
‘‘SEC. 17. RULES FOR FILING STATUS AND RATE TABLES. 
‘‘(a) DEFINITION OF SURVIVING SPOUSE.—
‘‘(1) IN GENERAL.—‘Surviving spouse’ means 
an individual—
‘‘(A) whose spouse died during either of 
his 2 calendar years immediately preceding the 
calendar year, and 
‘‘(B) who maintains as his home a house-
hold which constitutes for the taxable year the
principal place of abode (as a member of such 
household) of a dependent—
‘‘(i) who (within the meaning of sec-
tion 6) is a son, stepson, daughter, or step-
daughter of the taxpayer, and 
‘‘(ii) who the taxpayer is entitled to 
treat as an exemption for purposes of com-
puting the personal dependency deduction 
for the taxable year under section 6. 
For purposes of this paragraph, an individual shall 
be considered as maintaining a household only if 
over half of the cost of maintaining the household 
during the taxable year is furnished by such indi-
vidual. 
‘‘(2) 
LIMITATIONS.—Notwithstanding 
para-
graph (1), for purposes of section 15, an individual 
shall not be considered to be a surviving spouse—
‘‘(A) if the individual has remarried at any 
time before the close of the taxable year, or 
‘‘(B) unless, for the individual’s taxable 
year during which his spouse died, a joint re-
turn could have been made under the provisions 
of section 6013 (without regard to subsection 
(a)(3) thereof). 
‘‘(3) SPECIAL RULE WHERE DECEASED SPOUSE 
WAS IN MISSING STATUS.—If an individual was in a 
missing status (within the meaning of section
6013(f)(3)) as a result of service in a combat zone 
and if such individual remains in such status until 
the date referred to in subparagraph (A) or (B), 
then, for purposes of paragraph (1)(A), the date on 
which such individual died shall be treated as the 
earlier of the date determined under subparagraph 
(A) or the date determined under subparagraph (B): 
‘‘(A) the date on which the determination 
is made under section 556 of title 37 of the 
United States Code or under section 5566 of 
title 5 of such Code (whichever is applicable) 
that such individual died while in such missing 
status, or 
‘‘(B) the date which is 2 years after the 
date designated under section 92 (relating to
exemption for combat zones) as the date of ter-
mination of combatant activities in that zone. 
‘‘(b) DEFINITION OF HEAD OF HOUSEHOLD.—
‘‘(1) IN GENERAL.—An individual shall be con-
sidered a head of a household if, and only if, such 
individual is not married at the close of his taxable 
year, is not a surviving spouse (as defined in sub-
section (a)), and either—
‘‘(A) maintains as his home a household 
which constitutes for more than one-half of 
such taxable year the principal place of abode, 
as a member of such household, of—
‘‘(i) a son, stepson, daughter, or step-
daughter of the taxpayer, or a descendant 
of a son or daughter of the taxpayer, but 
if such son, stepson, daughter, step-
daughter, or descendant is married at the 
close of the taxpayer’s taxable year, only if 
the taxpayer is entitled to claim such per-
son as an exemption for the taxable year 
for purposes of computing the dependency 
deduction under section 6 (or would be so 
entitled but for the release of a claim to 
such exemption by the custodial parent),
‘‘(ii) any other person who is a de-
pendent of the taxpayer, if the taxpayer is 
entitled to claim such person as an exemp-
tion in determining the personal depend-
ency deduction for the taxable year, or 
‘‘(B) maintains a household which con-
stitutes for such taxable year the principal place 
of abode of the father or mother of the tax-
payer, if the taxpayer is entitled to a personal 
dependency deduction for the taxable year for 
such father or mother.
For purposes of this paragraph, an individual shall 
be considered as maintaining a household only if 
over half of the cost of maintaining the household 
during the taxable year is furnished by such indi-
vidual. 
‘‘(2) DETERMINATION
OF
STATUS.—For pur-
poses of this subsection—
‘‘(A) a legally adopted child of a person 
shall be considered a child of such person by 
blood; 
‘‘(B) an individual who is legally separated 
from his spouse under a decree of divorce or of 
separate maintenance shall not be considered as 
married;
‘‘(C) a taxpayer shall be considered as not 
married at the close of his taxable year if at 
any time during the taxable year his spouse is 
a nonresident alien; and 
‘‘(D) a taxpayer shall be considered as 
married at the close of his taxable year if his 
spouse (other than a spouse described in sub-
paragraph (C)) died during the taxable year. 
‘‘(3) 
LIMITATIONS.—Notwithstanding 
para-
graph (1), for purposes of this chapter, a taxpayer 
shall not be considered to be a head of a house-
hold—
‘‘(A) if at any time during the taxable year 
he is a nonresident alien; or 
‘‘(B) by reason of an individual who would 
not be a dependent for the taxable year but 
for—
‘‘(i) subparagraph (H) of section 
6(c)(1), or 
‘‘(ii) multiple support rules prescribed 
by the Secretary. 
‘‘(c) 
CERTAIN
MARRIED
INDIVIDUALS
LIVING 
APART.—For purposes of this part, an individual shall be 
treated as not married at the close of the taxable year
if such individual is so treated under the provisions of sec-
tion 7703(b). 
‘‘(d) NONRESIDENT ALIENS.—In the case of a non-
resident alien individual, the taxes imposed by section 1 
shall not apply.
‘‘SEC. 20. USA TAX CREDITS. 
‘‘(a) IN GENERAL.—The USA tax credits are and 
shall be applied in the following order: 
‘‘(1) The foreign tax credit as prescribed by the 
Secretary under rules similar to the rules of subpart 
A of part III of subchapter N of chapter 1 of the 
Internal Revenue Code of 1986, but only with re-
spect to foreign taxes on amounts that are included 
in the gross income of the taxpayer. 
‘‘(2) The payroll tax credit under section 21. 
‘‘(3) The taxes-paid tax credit under section 22. 
‘‘(b) REFUNDABLE CREDITS.—If a taxpayer’s USA 
tax credits (other than the foreign tax credit) for a taxable 
year exceed the taxpayer’s tax liability for the taxable year 
(after application of the foreign tax credit but before appli-
cation of the other USA tax credits), the taxpayer shall 
be entitled to a refund for such excess. The taxpayer may 
elect in lieu of a refund to apply such excess as a tax paid 
for the following taxable year.
‘‘SEC. 21. PAYROLL TAX CREDIT. 
‘‘(a) IN GENERAL.—A taxpayer shall be allowed a 
payroll tax credit in an amount equal to the sum of—
‘‘(1) the employee’s share of the basic FICA 
tax, 
‘‘(2) the employee’s share of the basic Tier 1 
railroad retirement tax, and 
‘‘(3) one-half of the basic SECA tax payable 
with respect to the taxpayer’s compensation or earn-
ings during the taxable year. 
‘‘(b) DEFINITIONS.—
‘‘(1) EMPLOYEE’S SHARE OF THE BASIC FICA 
TAX.—‘Employee’s share of the basic FICA tax’ 
means the old-age, survivors and disability insurance 
tax imposed by section 3101(a) and the portion of 
the hospital insurance tax imposed by section 
3101(b) that is attributable to the wage base on 
which the section 3101(a) tax is imposed. 
‘‘(2) EMPLOYEE’S SHARE OF THE BASIC TIER 1 
RAILROAD RETIREMENT TAX.—Employee’s share of 
the basic Tier 1 railroad retirement tax’ means—
‘‘(A) the portion of the tax imposed by sec-
tion 3201 with respect to compensation below 
the applicable base (as defined in section 
3231(e)(2)); and
‘‘(B) the portion of the tax imposed by sec-
tion 3211(a)(1) on railroad employee represent-
atives attributable to the tax imposed by section 
3101(a) and the portion of the hospital insur-
ance tax imposed by section 3101(b) that is at-
tributable to the wage base on which the section 
3101(a) tax is imposed.
‘‘(3) BASIC
SECA
TAX.—‘Basic SECA tax’ 
means the old-age, survivors and disability insurance 
tax imposed by section 1401(a) on self-employment 
income and the portion of the hospital insurance tax 
imposed by section 1401(b) on self-employment in-
come that is attributable to the amount of self-em-
ployment income (as determined under section 
1402(b)) on which the section 1401(a) tax is im-
posed. 
‘‘(c) NO CREDIT FOR REFUNDABLE TAX.—No credit 
shall be allowed with respect to any FICA tax or railroad 
retirement tax for which a taxpayer is entitled to a refund 
because of overpayment of tax on the applicable wage 
base. 
‘‘SEC. 22. TAXES-PAID TAX CREDIT. 
‘‘The taxes-paid tax credit shall equal the sum of: 
‘‘(1) WAGE WITHHOLDING.—The amount with-
held as tax under chapter 24.
‘‘(2) SPECIAL REFUNDS OF SOCIAL SECURITY 
TAX WHEN WAGES EARNED FROM MORE THAN 1 EM-
PLOYER.—The amount allowable under section 
6413(c) as a special refund of taxes imposed on 
wages. 
‘‘(3) OVERPAYMENTS
OF
PRIOR-YEAR
TAX.—
Any overpayment of a prior tax obligation that the 
taxpayer or the Secretary applies to the tax for the 
taxable year. 
‘‘(4) ESTIMATED TAXES.—Any estimated taxes 
paid by the taxpayer with respect to the taxpayer’s 
tax liability for the taxable year which are treated as 
payment on account of income tax for purposes of 
section 6315 (relating to estimated taxes). 
‘‘SEC. 23. INDEXING FOR INFLATION. 
‘‘(a) PUBLICATION OF TABLES AND NUMBERS.—Not 
later than December 15 of 2003, and each subsequent cal-
endar year, the Secretary shall prescribe tables and dollar 
amounts which shall apply in the immediately following 
calendar year in lieu of the tables and dollar amounts that 
are required to be adjusted for inflation in accordance with 
this section. 
‘‘(b) METHOD OF ADJUSTMENT.—
‘‘(1) IN GENERAL.—The dollar amounts which 
are required to be adjusted pursuant to this section
for a calendar year shall be the dollar amounts as 
stated in this chapter multiplied by the cost of living 
adjustment for such calendar year, rounded as pro-
vided in subsection (d). 
‘‘(2) TAX RATE TABLES.—In the case of a tax 
rate table, the dollar amounts to be adjusted in ac-
cordance with paragraph (1) are the minimum and 
maximum dollar amounts for each rate bracket for 
which a tax is imposed. The amounts setting forth 
the bottom tax for each bracket shall be adjusted to 
the extent necessary to reflect the adjustments in 
the rate brackets. 
‘‘(c) COST-OF-LIVING ADJUSTMENT.—
‘‘(1) IN GENERAL.—The cost-of-living adjust-
ment for any calendar year is the percentage (if any) 
by which—
‘‘(A) the CPI for the preceding calendar 
year, exceeds 
‘‘(B) the CPI for the calendar year 2002. 
‘‘(2) CPI FOR ANY CALENDAR YEAR.—For pur-
poses of paragraph (1), the CPI for any calendar 
year is the average of the Consumer Price Index as 
of the close of the 12-month period ending on Au-
gust 31 of such calendar year.
‘‘(3) CONSUMER PRICE INDEX.—For purposes 
of paragraph (2), ‘Consumer Price Index’ means the 
last Consumer Price Index for all-urban consumers 
published by the Department of Labor. For pur-
poses of the preceding sentence, the revision of the 
Consumer Price Index which is most consistent with 
the Consumer Price Index for calendar year 2003 
shall be used.
‘‘(d) ROUNDING.—
‘‘(1) IN GENERAL.—If any increase determined 
under subsection (b) is not a multiple of $50, such 
increase shall be rounded to the next lowest multiple 
of $50. 
‘‘(2) MULTIPLES OF $25.—Paragraph (1) shall 
be applied by substituting ‘$25’ for ‘$50’ in the case 
of—
‘‘(A) amounts for married individuals filing 
separately, and 
‘‘(B) any other dollar amount that is to be 
adjusted for inflation if that dollar amount is 
less than $1,000. 
‘‘Subchapter B—Roth IRA and Other Savings 
Provisions
‘‘Sec. 30. Roth IRAs. 
‘‘Sec. 31. Deductible IRAs. 
‘‘Sec. 32. Effect of repeal of special savings provisions.
‘‘SEC. 30. ROTH IRAS. 
‘‘(a) GENERAL RULE.—Except as provided in this 
section, a Roth IRA shall be treated for purposes of this 
title in the same manner as an individual retirement plan. 
‘‘(b) ROTH IRA.—‘Roth IRA’ means an individual 
retirement plan (as defined in section 7701(a)(37)) which 
is designated (in such manner as the Secretary may pre-
scribe) at the time of establishment of the plan as a Roth 
IRA. Such designation shall be made in such manner as 
the Secretary may prescribe. 
‘‘(c) TREATMENT OF CONTRIBUTIONS.—
‘‘(1) NO DEDUCTION ALLOWED.—No deduction 
shall be allowed for a contribution to a Roth IRA. 
‘‘(2) CONTRIBUTION
LIMIT.—The aggregate 
amount of contributions for any taxable year to all 
Roth IRAs maintained for the benefit of an indi-
vidual (or, in the case of individuals filing a joint re-
turn, either spouse) shall not exceed the taxpayer’s 
adjusted gross income for the taxable year. 
‘‘(3) ROLLOVER FROM IRA.—
‘‘(A) 
ROLLOVER
CONTRIBUTIONS.—No 
rollover contribution may be made to a Roth 
IRA unless it is a qualified rollover contribu-
tion. 
‘‘(B) LIMITS.—A taxpayer shall not be al-
lowed to make a qualified rollover contribution
to a Roth IRA from an individual retirement 
plan other than a Roth IRA during any taxable 
year if—
‘‘(i) the taxpayer’s adjusted gross in-
come for such taxable year exceeds 
$100,000, or 
‘‘(ii) the taxpayer is a married indi-
vidual filing a separate return. 
‘‘(C) MARITAL STATUS.—Section 31(g)(4) 
shall apply for purposes of this paragraph. 
‘‘(4) CONTRIBUTIONS PERMITTED AFTER AGE 
701⁄2.—Contributions to a Roth IRA may be made 
even after the individual for whom the account is 
maintained has attained age 701⁄2. 
‘‘(5) MANDATORY
DISTRIBUTION
RULES
NOT 
TO APPLY BEFORE DEATH.—Notwithstanding sub-
sections (a)(6) and (b)(3) of section 408 (relating to 
required distributions), the following provisions shall 
not apply to any Roth IRA: 
‘‘(A) Section 401(a)(9)(A). 
‘‘(B) The incidental death benefit require-
ments of section 401(a). 
‘‘(6) TIME
WHEN
CONTRIBUTIONS
MADE.—A 
taxpayer shall be deemed to have made a contribu-
tion to a Roth IRA during a year if the contribution
‘‘(3) NONQUALIFIED
DISTRIBUTIONS.—In ap-
plying section 33 to any distribution from a Roth 
IRA described in paragraph (2), such distribution 
shall be treated as made from contributions to the 
Roth IRA to the extent that such distribution, when 
added to all previous distributions from the Roth
IRA, does not exceed the aggregate amount of con-
tributions to the Roth IRA. Only distributions at-
tributable to earnings on accounts (as opposed to 
distributions of contributions) shall be included in 
gross income. 
‘‘(4) ROLLOVERS FROM AN IRA OTHER THAN A 
ROTH IRA.—
‘‘(A) IN GENERAL.—Notwithstanding sec-
tion 408(d)(3), in the case of any distribution 
to which this paragraph applies there shall be 
included in gross income any amount which 
would be includible were it not part of a quali-
fied rollover contribution. 
‘‘(B) DISTRIBUTIONS
TO
WHICH
PARA-
GRAPH APPLIES.—This paragraph shall apply 
to a distribution from an individual retirement 
plan (other than a Roth IRA) maintained for 
the benefit of an individual which is contributed 
to a Roth IRA maintained for the benefit of
such individual in a qualified rollover contribu-
tion. 
‘‘(C) CONVERSIONS.—The conversion of an 
individual retirement plan (other than a Roth 
IRA) to a Roth IRA shall be treated for pur-
poses of this paragraph as a distribution to 
which this paragraph applies. 
‘‘(D) CONVERSION OF EXCESS CONTRIBU-
TIONS.—If, no later than the due date for filing
the return of tax for any taxable year (without 
regard to extensions), an individual transfers, 
from an individual retirement plan (other than 
a Roth IRA), contributions for such taxable 
year (and any earnings allocable thereto) to a 
Roth IRA, no such amount shall be includible 
in gross income to the extent no deduction was 
allowed with respect to such amount. 
‘‘(E) ADDITIONAL
REPORTING
REQUIRE-
MENTS.—Trustees of Roth IRAs, trustees of in-
dividual retirement plans, or both, whichever is 
appropriate, shall include such additional infor-
mation in reports required under section 408(i) 
as the Secretary may require to ensure that 
amounts required to be included in gross in-
come under subparagraph (A) are so included.
‘‘(5) COORDINATION WITH INDIVIDUAL RETIRE-
MENT ACCOUNTS.—Section 408(d)(2) shall be ap-
plied separately with respect to Roth IRAs and other 
individual retirement plans. 
‘‘(6) QUALIFIED SPECIAL PURPOSE DISTRIBU-
TION.—‘Qualified 
special 
purpose 
distribution’ 
means—
‘‘(i) DISTRIBUTIONS UPON DEATH.—
Distributions made to a beneficiary (or to 
the estate of the individual) on or after the 
death of the individual. 
‘‘(ii) 
DISTRIBUTIONS
UPON
DIS-
ABILITY.—Distributions attributable to the 
individual’s being disabled. 
‘‘(iii) DISTRIBUTIONS
TO
PAY
MED-
ICAL
EXPENSES.—Distributions made to 
the individual for amounts paid during the 
year for medical care, but only to the ex-
tent that the amounts paid for medical 
care exceed 7.5% of the adjusted gross in-
come of the taxpayer (determined without 
regard to whether the employee itemizes 
deductions for such taxable year). 
‘‘(iv) QDROS.—Any distribution to 
an alternate payee pursuant to a qualified
domestic relations order (within the mean-
ing of section 414(p)(1)). 
‘‘(v) DISTRIBUTIONS TO UNEMPLOYED 
INDIVIDUALS
FOR
HEALTH
INSURANCE 
PREMIUMS.—Distributions 
to 
an 
indi-
vidual—
‘‘(I) if such individual has re-
ceived unemployment compensation 
for 12 consecutive weeks under any 
Federal or State unemployment com-
pensation law by reason of such sepa-
ration (or in the case of a self-em-
ployed individual, to the extent pro-
vided in regulations, if the individual 
would have received unemployment 
compensation but for the fact the in-
dividual was self-employed), 
‘‘(II) if such distributions are 
made during any taxable year during 
which such unemployment compensa-
tion is paid or the succeeding taxable 
year, 
‘‘(III) to the extent such distribu-
tions do not exceed the amount paid 
during the taxable year for insurance
for the diagnosis, cure, mitigation, 
treatment, or prevention of disease, or 
for the purpose of affecting any struc-
ture or function of the body (or for 
transportation primarily for and es-
sential to such medical care) (includ-
ing amounts paid as premiums under 
part B of title XVIII of the Social Se-
curity Act, relating to supplementary 
medical insurance for the aged) or for 
any qualified long-term care insurance 
contract 
(as 
defined 
in 
section 
7702B(b)) with respect to the indi-
vidual and the individual’s spouse and 
dependents, and 
‘‘(IV) such distributions are not 
made after the individual has been 
employed for at least 60 days after 
the separation from employment to 
which clause (I) applies. 
‘‘(vi) DISTRIBUTIONS TO PAY HIGHER 
EDUCATION
EXPENSES.—Distributions to 
the extent such distributions do not exceed 
the qualified higher education expenses (as 
defined in section 10(a)(2)) of—
‘‘(I) the taxpayer, 
‘‘(II) the taxpayer’s spouse, or 
‘‘(III) any child or grandchild of 
the taxpayer or the taxpayer’s spouse.
‘‘(vii) 
DISTRIBUTIONS
FOR
FIRST 
HOME
PURCHASES.—Distributions which 
are qualified first-time homebuyer distribu-
tions (as defined in paragraph (6)).
‘‘(7) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.—
‘‘(A) IN
GENERAL.—‘Qualified first-time 
homebuyer distribution’ means any payment or 
distribution received by an individual to the ex-
tent such payment or distribution is used by the 
individual before the close of the 120th day 
after the day on which such payment or dis-
tribution is received to pay qualified acquisition 
costs with respect to a principal residence of a 
first-time homebuyer who is such individual, the 
spouse of such individual, or any child, grand-
child, or ancestor of such individual or the indi-
vidual’s spouse. 
‘‘(B) LIFETIME
DOLLAR
LIMITATION.—
The aggregate amount of payments or distribu-
tions received by an individual which may be
treated as qualified first-time homebuyer dis-
tributions for any taxable year shall not exceed 
the excess (if any) of—
‘‘(i) $10,000, over
‘‘(ii) the aggregate amounts treated as 
qualified first-time homebuyer distributions 
with respect to such individual for all prior 
taxable years. 
‘‘(C) QUALIFIED
ACQUISITION
COSTS.—
‘Qualified acquisition costs’ means the costs of 
acquiring, constructing, or reconstructing a res-
idence. Such term includes any usual or reason-
able settlement, financing, or other closing 
costs. 
‘‘(D) FIRST-TIME
HOMEBUYER; 
OTHER 
DEFINITIONS.—For purposes of this para-
graph—
‘‘(i) 
FIRST-TIME
HOMEBUYER.—
‘First-time homebuyer’ means any indi-
vidual if such individual (and if married, 
such individual’s spouse) had no present 
ownership interest in a principal residence 
during the 2-year period ending on the 
date of acquisition of the principal resi-
dence to which this paragraph applies, and
‘‘(ii) DATE
OF
ACQUISITION.—‘Date 
of acquisition’ means the date—
‘‘(I) on which a binding contract 
to acquire the principal residence to 
which subparagraph (A) applies is en-
tered into, or 
‘‘(II) on which construction or re-
construction of such a principal resi-
dence is commenced. 
‘‘(E) SPECIAL RULE WHERE DELAY IN AC-
QUISITION.—The Secretary shall prescribe rules 
under which a distribution will not be penalized 
if made in anticipation of being a qualified 
first-time homeowner distribution but construc-
tion delays or other unanticipated factors delay 
the closing. 
‘‘(e) QUALIFIED ROLLOVER CONTRIBUTION.—For 
purposes of this section, the term qualified rollover con-
tribution means a rollover contribution to a Roth IRA 
from another such account, or from an individual retire-
ment plan, but only if such rollover contribution meets the 
requirements of section 408(d)(3). For purposes of section 
408(d)(3)(B), there shall be disregarded any qualified roll-
over contribution from an individual retirement plan 
(other than a Roth IRA) to a Roth IRA.
‘‘(f) PERMITTED INVESTMENTS.—
‘‘(1) INVESTMENT PERMITTED.—A Roth IRA 
shall not cease to be an individual retirement ac-
count pursuant to section 408(e)(2) solely because 
funds from such account are used to make a debt 
or equity investment in a controlled business entity.
‘‘(2) LOANS TO A CONTROLLED BUSINESS ENTI-
TY.—
‘‘(A) EXCESS
RETURN.—If funds in a 
Roth IRA are loaned to a controlled business 
entity, any return on such loans in excess of a 
fair return shall be treated as gross income of 
the beneficiary that is then deposited in the 
Roth IRA. 
‘‘(B) LOAN.—For purposes of this section, 
an amount shall be treated as loaned to a con-
trolled business entity only if—
‘‘(i) the amount is treated in the 
books and records of the business entity as 
a loan, 
‘‘(ii) the transaction is reflected in a 
written note or other evidence of indebted-
ness, and 
‘‘(iii) the business entity is required to 
pay interest at least once per year and at
the time such loan is made it is reasonable 
to expect that such interest will be paid on 
a timely basis. 
‘‘(C) FAIR RETURN.—For purposes of this 
subsection, a ‘fair return’ with respect to a loan 
is interest at a rate not in excess of 3 percent-
age points plus the minimum rate of interest 
that would have to be charged with respect to 
such loan to prevent it from being a below-mar-
ket loan for purposes of section 7872 (deter-
mined as if section 7872 applied to such loan). 
‘‘(3) EQUITY INVESTMENT IN A CONTROLLED 
BUSINESS ENTITY.—If funds in a Roth IRA are con-
tributed to the capital of, applied to acquire stock or 
other equity interest in, or otherwise transferred to, 
a controlled business entity in a transaction that is 
not considered a loan for purposes of this sub-
section, any return on such equity shall be treated 
as gross income of the beneficiary that is then de-
posited in the Roth IRA. The preceding sentence 
shall not apply to—
‘‘(A) the proceeds of the sale of such eq-
uity interest to a third party, or 
‘‘(B) the proceeds received by the Roth 
IRA as the result of a complete redemption of
the beneficiary’s interest in the business entity 
(including any interests held through a Roth 
IRA).
‘‘(4) CONTROLLED
BUSINESS
ENTITY.—‘Con-
trolled business entity’ means any business entity in 
which the beneficiary of the Roth IRA holds at least 
a 5 percent interest in the profits and losses (after 
taking into account the investment through the Roth 
IRA) and in which an investment would cause the 
Roth IRA to cease to be an individual retirement 
account by reason of section 408(e)(2) but for this 
subsection. 
‘‘(5) APPLICATION OF SECTION 4975.—Section 
4975 shall not apply to a loan or equity investment 
by a Roth IRA in a controlled business entity. 
‘‘(6) TAX AND PENALTY AVOIDANCE.—The Sec-
retary shall prescribe regulations that prohibit the 
provisions of this subsection to be used to cir-
cumvent the application of subsection (d)(2) (relat-
ing to taxable distributions). The regulations shall 
not prohibit bona fide investments in controlled busi-
ness entities. The regulations shall address loans to 
and investments in a controlled business entity that 
are used to fund distributions or dividends from the
business entity to the account beneficiary or a mem-
ber of the beneficiary’s family. 
‘‘SEC. 31. DEDUCTIBLE IRAS. 
‘‘(a) ALLOWANCE OF DEDUCTION.—The ‘qualified 
IRA deduction’ shall be an amount equal to the qualified 
retirement contributions of the individual for the taxable 
year, except as limited by subsection (b). 
‘‘(b) MAXIMUM AMOUNT OF DEDUCTION.—
‘‘(1) IN GENERAL.—The amount allowable as a 
deduction under subsection (a) to any individual for 
any taxable year shall not exceed the lesser of—
‘‘(A) $2,000, or 
‘‘(B) an amount equal to the compensation 
includible in the individual’s gross income for 
such taxable year. 
‘‘(2) SPECIAL RULE FOR EMPLOYER CONTRIBU-
TIONS UNDER SIMPLIFIED EMPLOYEE PENSIONS.—
This section shall not apply with respect to an em-
ployer contribution to a simplified employee pension. 
‘‘(3) 
GRANDFATHERED
PLANS.—Notwith-
standing paragraph (1), the amount allowable as a 
deduction under subsection (a) with respect to any 
contributions on behalf of an employee to a plan de-
scribed in section 501(c)(18) of the Internal Rev-
enue Code of 1986 shall not exceed the lesser of—
‘‘(A) $7,000, or 
‘‘(B) an amount equal to 25 percent of the 
compensation (as defined in section 415(c)(3)) 
includible in the individual’s gross income for 
such taxable year. 
‘‘(4) SPECIAL RULE FOR SIMPLE RETIREMENT 
ACCOUNTS.—This section shall not apply with re-
spect to any amount contributed to a simple retire-
ment account established under section 408(p). 
‘‘(c) SPECIAL RULES FOR CERTAIN MARRIED INDI-
VIDUALS.—
‘‘(1) IN GENERAL.—In the case of an individual 
to whom this paragraph applies for the taxable year, 
the limitation of paragraph (1) of subsection (b) 
shall be equal to the lesser of—
‘‘(A) the dollar amount in effect under 
subsection (b)(1)(A) for the taxable year, or 
‘‘(B) the sum of—
‘‘(i) the compensation includible in 
such individual’s gross income for the tax-
able year, plus 
‘‘(ii) the compensation includible in 
the gross income of such individual’s 
spouse for the taxable year reduced by—
‘‘(I) the amount allowed as a de-
duction under subsection (a) to such 
spouse for such taxable year, and 
‘‘(II) the amount of any contribu-
tion on behalf of such spouse to a 
Roth IRA under section 30 for such 
taxable year.
‘‘(2) INDIVIDUALS
TO
WHOM
PARAGRAPH
(1) 
APPLIES.—Paragraph (1) shall apply to any indi-
vidual if—
‘‘(A) such individual files a joint return for 
the taxable year, and 
‘‘(B) the amount of compensation (if any) 
includible in such individual’s gross income for 
the taxable year is less than the compensation 
includible in the gross income of such individ-
ual’s spouse for the taxable year. 
‘‘(d) OTHER LIMITATIONS AND RESTRICTIONS.—
‘‘(1) BENEFICIARY
MUST
BE
UNDER
AGE 
701⁄2.—No deduction shall be allowed under this sec-
tion with respect to any qualified retirement con-
tribution for the benefit of an individual if such indi-
vidual has attained age 701⁄2 before the close of such 
individual’s taxable year for which the contribution 
was made.
‘‘(2) RECONTRIBUTED
AMOUNTS.—No deduc-
tion shall be allowed under this section with respect 
to a rollover contribution described in section 402(c), 
403(a)(4), 403(b)(8), or 408(d)(3). 
‘‘(3) AMOUNTS CONTRIBUTED UNDER ENDOW-
MENT
CONTRACT.—In the case of an endowment 
contract described in section 408(b), no deduction
shall be allowed under this section for that portion 
of the amounts paid under the contract for the tax-
able year which is properly allocable, under regula-
tions prescribed by the Secretary, to the cost of life 
insurance. 
‘‘(4) DENIAL
OF
DEDUCTION
FOR
AMOUNT 
CONTRIBUTED
TO
INHERITED
ANNUITIES
OR
AC-
COUNTS.—No deduction shall be allowed under this 
section with respect to any amount paid to an inher-
ited individual retirement account or individual re-
tirement annuity (within the meaning of section 
408(d)(3)(C)(ii)). 
‘‘(e) QUALIFIED RETIREMENT CONTRIBUTION.—For 
purposes of this section, the term ‘qualified retirement 
contribution’ means—
‘‘(1) any amount paid in cash for the taxable 
year by or on behalf of an individual to an individual 
retirement plan for such individual’s benefit, and
‘‘(2) any amount contributed on behalf of any 
individual to a plan described in section 501(c)(18) 
of the Internal Revenue Code of 1986. 
‘‘(f) OTHER DEFINITIONS AND SPECIAL RULES.—
‘‘(1) COMPENSATION.—For purposes of this 
section, the term ‘compensation’ includes earned in-
come (as defined in section 401(c)(2)). The term 
‘compensation’ does not include any amount received 
as a pension or annuity and does not include any 
amount received as deferred compensation. The term 
‘compensation’ shall include any alimony, child sup-
port and separate maintenance payments includible 
in the individual’s gross income with respect to a di-
vorce or separation instrument. For purposes of this 
paragraph, section 401(c)(2) shall be applied as if 
the term trade or business for purposes of section 
1402 included service described in subsection (c)(6). 
‘‘(2) MARRIED
INDIVIDUALS.—The maximum 
deduction under subsection (b) shall be computed 
separately for each individual, and this section shall 
be applied without regard to any community prop-
erty laws. 
‘‘(3) TIME
WHEN
CONTRIBUTIONS
DEEMED 
MADE.—For purposes of this section, a taxpayer 
shall be deemed to have made a contribution to an
individual retirement plan during a year if the con-
tribution is made on account of such year and is 
made not later than April 15 of the following year.
‘‘(4) REPORTS.—The Secretary shall prescribe 
regulations which prescribe the time and the manner 
in which reports to the Secretary and plan partici-
pants shall be made by the plan administrator of a 
qualified employer or government plan receiving 
qualified voluntary employee contributions. 
‘‘(5) EMPLOYER PAYMENTS.—For purposes of 
this title, any amount paid by an employer to an in-
dividual retirement plan shall be treated as payment 
of compensation to the employee (other than a self-
employed individual who is an employee within the 
meaning of section 401(c)(1)) includible in his gross 
income in the taxable year for which the amount was 
contributed, whether or not a deduction for such 
payment is allowable under this section to the em-
ployee. 
‘‘(6) EXCESS
CONTRIBUTIONS
TREATED
AS 
CONTRIBUTION
MADE
DURING
SUBSEQUENT
YEAR 
FOR WHICH THERE IS AN UNUSED LIMITATION.—
‘‘(A) IN GENERAL.—If for the taxable year 
the maximum amount allowable as a deduction 
under this section for contributions to an indi-
vidual retirement plan exceeds the amount con-
tributed, then the taxpayer shall be treated as 
having made an additional contribution for the 
taxable year in an amount equal to the lesser 
of—
‘‘(i) the amount of such excess, or 
‘‘(ii) the amount of the excess con-
tributions for such taxable year (deter-
mined under section 4973(b)(2) without 
regard to subparagraph (C) thereof). 
‘‘(B) AMOUNT
CONTRIBUTED.—For pur-
poses of this paragraph, the amount contrib-
uted—
‘‘(i) shall be determined without re-
gard to this paragraph, and 
‘‘(ii) shall not include any rollover 
contribution. 
‘‘(C) SPECIAL RULE WHERE EXCESS DE-
DUCTION WAS ALLOWED FOR CLOSED YEAR.—
Proper reduction shall be made in the amount 
allowable as a deduction by reason of this para-
graph for any amount allowed as a deduction 
under this section for a prior taxable year for 
which the period for assessing deficiency has ex-
pired if the amount so allowed exceeds the
amount which should have been allowed for 
such prior taxable year. 
‘‘(7) ELECTION
NOT
TO
DEDUCT
CONTRIBU-
TIONS.—For election not to deduct contributions to 
individual 
retirement 
plans, 
see 
section 
408(o)(2)(B)(ii).
‘‘(g) LIMITATION ON DEDUCTION FOR ACTIVE PAR-
TICIPANTS IN CERTAIN PENSION PLANS.—
‘‘(1) IN GENERAL.—If (for any part of any plan 
year ending with or within a taxable year) an indi-
vidual is an active participant, each of the dollar 
limitations contained in subsections (b)(1)(A) and 
(c)(1)(A) for such taxable year shall be reduced (but 
not below zero) by the amount determined under 
paragraph (2). 
‘‘(2) AMOUNT OF REDUCTION.—
‘‘(A) IN
GENERAL.—The amount deter-
mined under this paragraph with respect to any 
dollar limitation shall be the amount which 
bears the same ratio to such limitation as—
‘‘(i) the excess of—
‘‘(I) 
the 
taxpayer’s 
adjusted 
gross income for such taxable year, 
over
‘‘(II) 
the 
applicable 
dollar 
amount, bears to 
‘‘(ii) $10,000 ($20,000 in the case of 
a joint return for a taxable year beginning 
after December 31, 2011). 
‘‘(B) NO REDUCTION BELOW $200 UNTIL 
COMPLETE
PHASE-OUT.—No dollar limitation 
shall be reduced below $200 under paragraph 
(1) unless (without regard to this subpara-
graph) such limitation is reduced to zero. 
‘‘(C) ROUNDING.—Any amount determined 
under this paragraph which is not a multiple of 
$10 shall be rounded to the next lowest $10. 
‘‘(3) ADJUSTED
GROSS
INCOME; APPLICABLE 
DOLLAR
AMOUNT.—For purposes of this sub-
section—
‘‘(A) ADJUSTED
GROSS
INCOME.—Ad-
justed gross income of any taxpayer shall be de-
termined without regard to the qualified IRA 
deduction. 
‘‘(B) APPLICABLE DOLLAR AMOUNT.—The 
term ‘applicable dollar amount’ means the fol-
lowing: 
‘‘(i) In the case of a taxpayer filing a 
joint return:
‘‘For taxable years beginning 
in: 
‘‘The applicable dollar amount 
is: 
2004 ...............................................
$51,000
2005 ...............................................
$52,000
2006 ...............................................
$53,000
2007 ...............................................
$54,000
2008 ...............................................
$60,000
2009 ...............................................
$65,000
2010 ...............................................
$70,000
2011 ...............................................
$75,000
2012 and thereafter .......................
$80,000.
‘‘(ii) In the case of any other taxpayer 
(other than a married individual filing a 
separate return):
‘‘For taxable years beginning 
in: 
‘‘The applicable dollar amount 
is: 
2004 ...............................................
$31,000
2005 ...............................................
$32,000
2006 ...............................................
$33,000
2007 ...............................................
$34,000
2008 ...............................................
$40,000
2009 ...............................................
$45,000
2010 and thereafter .......................
$50,000.
‘‘(iii) In the case of a married indi-
vidual filing a separate return, zero. 
‘‘(4) SPECIAL RULE FOR MARRIED INDIVIDUALS 
FILING SEPARATELY AND LIVING APART.—A hus-
band and wife who—
‘‘(A) file separate returns for any taxable 
year, and 
‘‘(B) live apart at all times during such 
taxable year, shall not be treated as married in-
dividuals for purposes of this subsection.
‘‘(5) ACTIVE
PARTICIPANT.—For purposes of 
this subsection, the term ‘active participant’ means, 
with respect to any plan year, an individual—
‘‘(A) who is an active participant in—
‘‘(i) a plan described in section 401(a) 
which includes a trust exempt from tax,
‘‘(ii) an annuity plan described in sec-
tion 403(a), 
‘‘(iii) a plan established for its em-
ployees by the United States, by a State or 
political subdivision thereof, or by an agen-
cy or instrumentality of any of the fore-
going, 
‘‘(iv) an annuity contract described in 
section 403(b), 
‘‘(v) a simplified employee pension 
(within the meaning of section 408(k)), or 
‘‘(vi) any simple retirement account 
(within the meaning of section 408(p)), or 
‘‘(B) who makes deductible contributions 
to a trust described in section 501(c)(18). 
The determination of whether an individual is an ac-
tive participant shall be made without regard to 
whether or not such individual’s rights under a plan, 
trust, or contract are nonforfeitable. An eligible de-
ferred compensation plan (within the meaning of 
section 457(b) of the Internal Revenue Code of 
1986) shall not be treated as a plan described in 
subparagraph (A)(iii). 
‘‘(6) CERTAIN INDIVIDUALS NOT TREATED AS 
ACTIVE PARTICIPANTS.—For purposes of this sub-
section, any individual described in any of the fol-
lowing subparagraphs shall not be treated as an ac-
tive participant for any taxable year solely because 
of any participation so described: 
‘‘(A) MEMBERS
OF
RESERVE
COMPO-
NENTS.—Participation in a plan described in 
subparagraph (A)(iii) of paragraph (5) by rea-
son of service as a member of a reserve compo-
nent of the Armed Forces (as defined in section 
10101 of title 10, unless such individual has 
served in excess of 90 days on active duty 
(other than active duty for training) during the 
year. 
‘‘(B) VOLUNTEER FIREFIGHTERS.—A vol-
unteer firefighter—
‘‘(i) who is a participant in a plan de-
scribed in subparagraph (A)(iii) of para-
graph (5) based on his activity as a volun-
teer firefighter, and
‘‘(ii) whose accrued benefit as of the 
beginning of the taxable year is not more 
than an annual benefit of $1,800 (when 
expressed as a single life annuity com-
mencing at age 65). 
‘‘(7) SPECIAL RULE FOR CERTAIN SPOUSES.—
In the case of an individual who is an active partici-
pant at no time during any plan year ending with
or within the taxable year but whose spouse is an 
active participant for any part of any such plan 
year—
‘‘(A) the applicable dollar amount under 
paragraph (3)(B)(i) with respect to the tax-
payer shall be $150,000, and 
‘‘(B) the amount applicable under para-
graph (2)(A)(ii) shall be $10,000. 
‘‘(h) CROSS REFERENCE.—For failure to provide re-
quired reports, see section 6652(g). 
‘‘SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVI-
SIONS. 
‘‘(a) EDUCATION IRA’S.—
‘‘(1) IN GENERAL.—An account that qualifies 
as an education IRA under the Internal Revenue 
Code of 1986 as in effect immediately before adop-
tion of the Simplified USA Tax Act shall be treated
as a Roth IRA for purposes of this chapter (includ-
ing rules allowing for tax-free rollover). 
‘‘(2) NO NEW CONTRIBUTIONS.—Neither para-
graph (1) nor section 530 of the Internal Revenue 
Code of 1986 shall apply to an education IRA to 
which contributions are made after December 31, 
2003. 
‘‘(3) SPECIAL RULE.—For purposes of applying 
section 30 to an account that was an educational 
IRA, the designated beneficiary of such account 
shall be treated as described in a subclause of clause 
(vi) of section 30(d)(5). 
‘‘(b) MEDICAL SAVINGS ACCOUNTS.—
‘‘(1) EQUIVALENT
OF
DEDUCTIBLE
IRA.—A 
medical savings account shall be treated as an indi-
vidual retirement plan other than a Roth IRA for 
purposes of this chapter and chapter 3. 
‘‘(2) SPECIAL ROLLOVER RULES.—
‘‘(A) NO INCOME LIMIT.—The income lim-
its of section 30(c)(3)(B) shall not apply to the 
rollover of a medical savings account into a 
Roth IRA. 
‘‘(B) MEDICAL DISTRIBUTIONS.—For pur-
poses of applying section 30 to the amount of 
any medical savings account rolled over to a
Roth IRA, subclause (iii) of section 30(d)(5) 
shall apply without regard to the limitation 
based on adjusted gross income. 
‘‘(3) MEDICAL
SAVINGS
ACCOUNT.—‘Medical 
savings account’ means an account established under 
section 220 of the Internal Revenue Code of 1986. 
‘‘(c) QUALIFIED STATE TUITION PROGRAMS.—
‘‘(1) EDUCATION
SAVINGS
ACCOUNT
PRO-
GRAMS.—No account shall fail to qualify as a Roth 
IRA merely because in addition to the beneficiary of 
the account, there is a ‘designated beneficiary’ whose 
education expenses the beneficiary expects to pay or 
have paid with the proceeds of the account. The pay-
ment of such expenses with the proceeds of an ac-
count shall be treated as a distribution from the ac-
count. 
‘‘(2) PREPAID TUITION CERTIFICATES.—
‘‘(A) CONTRIBUTION
TO
ACCOUNTS.—An 
individual may contribute prepaid tuition cer-
tificates to a Roth IRA before January 1, 2007, 
without recognizing gross income on the con-
tribution of such certificates. For purposes of 
section 30, the amount contributed shall equal 
the cost of the certificates.
‘‘(B) PURCHASE
OF
PREPAID
TUITION 
CERTIFICATES.—A Roth IRA account may pur-
chase prepaid tuition certificates without vio-
lating section 408. 
‘‘(C) PREPAID TUITION CERTIFICATES.—
‘Prepaid tuition certificates’ means credits or 
certificates that entitle a designated beneficiary 
of such certificates to the waiver or payment of
qualified higher education expenses of the des-
ignated beneficiary.
‘‘(3) ROLLOVER OF ACCOUNTS.—An account to 
which section 529 of the Internal Revenue Code of 
1986 (before adoption of the Simplified USA Tax 
Act) shall be treated as a Roth IRA for purposes of 
rules relating to qualified rollovers (except that in 
the case of any such rollover, any contributions 
made to the section 529 account after July 1, 2003, 
shall be treated as contributions to the Roth IRA in 
the year of the rollover for purposes of section 
30(c)(2)). 
‘‘(4) TRANSITION.—
‘‘(A) TRANSITION
PERIOD.—Subsections 
(a) and (c) of section 529 of the Internal Rev-
enue Code of 1986 shall apply until January 1, 
2007.
‘‘(B) TRANSITION.—The Secretary shall 
prescribe rules to facilitate use of the Roth IRA 
rules to exempt earnings on accounts and cer-
tificates previously exempted under section 529 
of the Internal Revenue Code of 1986. 
‘‘(5) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of this subsection, the defi-
nition ‘qualified higher education expenses’ in sec-
tion 529(e)(3) of the Internal Revenue Code of 1986 
shall apply. 
‘‘SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT 
AND LIFE INSURANCE CONTRACTS. 
‘‘(a) GENERAL RULE FOR ANNUITIES.—Except as 
otherwise provided in this chapter, gross income includes 
any amount received as an annuity (whether for a period 
certain or during one or more lives) under an annuity, en-
dowment, or life insurance contract. 
‘‘(b) EXCLUSION RATIO.—
‘‘(1) IN GENERAL.—Gross income does not in-
clude that part of any amount received as an annu-
ity under an annuity, endowment, or life insurance 
contract which bears the same ratio to such amount 
as the investment in the contract (as of the annuity 
starting date) bears to the expected return under the 
contract (as of such date).
‘‘(2) EXCLUSION LIMITED TO INVESTMENT.—
The portion of any amount received as an annuity 
which is excluded from gross income under para-
graph (1) shall not exceed the unrecovered invest-
ment in the contract immediately before the receipt 
of such amount. 
‘‘(3) DEDUCTION WHERE ANNUITY PAYMENTS 
CEASE BEFORE ENTIRE INVESTMENT RECOVERED.—
‘‘(A) IN GENERAL.—If—
‘‘(i) after the annuity starting date, 
payments as an annuity under the contract 
cease by reason of the death of an annu-
itant, and 
‘‘(ii) as of the date of such cessation, 
there is unrecovered investment in the con-
tract, 
the amount of such unrecovered investment (in 
excess of any amount specified in subsection 
(e)(5) which was not included in gross income) 
shall be allowed as a deduction from adjusted 
gross income in determining taxable income of 
the annuitant for his last taxable year. 
‘‘(B) PAYMENTS TO OTHER PERSONS.—In 
the case of any contract which provides for pay-
ments meeting the requirements of subpara-
graphs (B) and (C) of subsection (c)(2), the de-
duction under subparagraph (A) shall be al-
lowed to the person entitled to such payments 
for the taxable year in which such payments are 
received. 
‘‘(c) DEFINITIONS.—
‘‘(1) INVESTMENT
IN
THE
CONTRACT.—For 
purposes of subsection (b), the investment in the 
contract as of the annuity starting date is—
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract (in-
cluding any amounts earned on the contract 
which were included in gross income and rein-
vested in the contract), minus 
‘‘(B) the aggregate amount received under 
the contract before such date, to the extent that 
such amount was excludable from gross income 
under this subtitle or prior income tax laws. 
‘‘(2) OTHER
TERMS
USED
IN
SUBSECTION 
(b).—Calculations under subsections (a) and (b) 
shall be made in accordance with regulations pre-
scribed by the Secretary, which regulations shall 
generally be consistent with the section 72 of the In-
ternal Revenue Code of 1986.
‘‘(d) SPECIAL RULES FOR QUALIFIED EMPLOYER 
RETIREMENT PLANS.—
‘‘(1) SIMPLIFIED METHOD OF TAXING ANNUITY 
PAYMENTS.—
‘‘(A) IN
GENERAL.—In the case of any 
amount received as an annuity under a quali-
fied employer retirement plan—
‘‘(i) subsection (b) shall not apply, 
and 
‘‘(ii) the investment in the contract 
shall be recovered as provided in this para-
graph. 
‘‘(B) METHOD
OF
RECOVERING
INVEST-
MENT IN CONTRACT.—
‘‘(i) 
IN
GENERAL.—Gross 
income 
shall not include so much of any monthly 
annuity payment under a qualified em-
ployer retirement plan as does not exceed 
the amount obtained by dividing—
‘‘(I) the investment in the con-
tract (as of the annuity starting date), 
by 
‘‘(II) the number of anticipated 
payments determined under the table 
contained in clause (iii) (or, in the
case of a contract to which subsection 
(c)(3)(B) applies, the number of 
monthly annuity payments under such 
contract). 
‘‘(ii) CERTAIN RULES MADE APPLICA-
BLE.—Rules similar to the rules of para-
graphs (2) and (3) of subsection (b) shall 
apply for purposes of this paragraph. 
‘‘(iii) NUMBER OF ANTICIPATED PAY-
MENTS.—If the annuity is payable over the 
life of a single individual, the number of 
anticipated payments shall be determined 
as follows:
If the age of the annuitant on 
the annuity starting date 
is: 
The number: 
Not more than 55 ..........................
360
More than 55 but not more than 
60.
310
More than 60 but not more than 
65.
260
More than 65 but not more than 
70.
210
More than 70 .................................
160
‘‘(iv) NUMBER OF ANTICIPATED PAY-
MENTS WHERE MORE THAN ONE LIFE.—If 
the annuity is payable over the lives of 
more than 1 individual, the number of an-
ticipated payments shall be determined as 
follows:
If the combined ages of the 
annuitants are: 
The number: 
Not more than 110 ........................
410
If the combined ages of the 
annuitants are: 
The number: 
More than 110 but not more than 
120.
360
More than 120 but not more than 
130.
310
More than 130 but not more than 
140.
260
More than 140 ...............................
210
‘‘(C) SPECIAL
RULE
WHERE
LUMP
SUM 
PAID
IN
CONNECTION
WITH
COMMENCEMENT 
OF ANNUITY PAYMENTS.—If, in connection with 
the commencement of annuity payments under 
any qualified employer retirement plan, the tax-
payer receives a lump sum payment—
‘‘(i) such payment shall be taxable 
under subsection (e) as if received before 
the annuity starting date, and 
‘‘(ii) the investment in the contract 
for purposes of this paragraph shall be de-
termined as if such payment had been so 
received. 
‘‘(D) EXCEPTION.—This paragraph shall 
not apply in any case where the primary annu-
itant has attained age 75 on the annuity start-
ing date unless there are fewer than 5 years of 
guaranteed payments under the annuity. 
‘‘(E) ADJUSTMENT WHERE ANNUITY PAY-
MENTS
NOT
ON
A
MONTHLY
BASIS.—In any
case where the annuity payments are not made
on a monthly basis, appropriate adjustments in 
the application of this paragraph shall be made 
to take into account the period on the basis of 
which such payments are made. 
‘‘(F) QUALIFIED EMPLOYER RETIREMENT 
PLAN.—For purposes of this paragraph, the
term ‘qualified employer retirement plan’ means 
any plan or contract described in paragraph 
(1), (2), or (3) of section 4974(c). 
‘‘(2) TREATMENT
OF
EMPLOYEE
CONTRIBU-
TIONS
UNDER
DEFINED
CONTRIBUTION
PLANS.—
For purposes of this section, employee contributions 
(and any income allocable thereto) under a defined 
contribution plan may be treated as a separate con-
tract. 
‘‘(e) AMOUNTS NOT RECEIVED AS ANNUITIES.—
‘‘(1) APPLICATION OF SUBSECTION.—
‘‘(A) IN GENERAL.—This subsection shall 
apply to any amount which—
‘‘(i) is received under an annuity, en-
dowment, or life insurance contract, and 
‘‘(ii) is not received as an annuity, 
if no provision of this subtitle (other than this 
subsection) applies with respect to such 
amount.
‘‘(B) DIVIDENDS.—For purposes of this 
section, any amount received which is in the na-
ture of a dividend or similar distribution shall 
be treated as an amount not received as an an-
nuity.
‘‘(2) GENERAL RULE.—Any amount to which 
this subsection applies—
‘‘(A) if received on or after the annuity 
starting date, shall be included in gross income, 
or 
‘‘(B) if received before the annuity starting 
date—
‘‘(i) shall be included in gross income 
to the extent allocable to income on the 
contract, and 
‘‘(ii) shall not be included in gross in-
come to the extent allocable to the invest-
ment in the contract. 
‘‘(3) ALLOCATION
OF
AMOUNTS
TO
INCOME 
AND
INVESTMENT.—For purposes of paragraph 
(2)(B): 
‘‘(A) Any amount to which this subsection 
applies shall be treated as allocable to income 
on the contract to the extent that such amount 
does not exceed the excess (if any) of—
‘‘(i) the cash value of the contract 
(determined without regard to any sur-
render charge) immediately before the 
amount is received, over 
‘‘(ii) the investment in the contract at 
such time. 
‘‘(B) Any amount to which this subsection 
applies shall be treated as allocable to invest-
ment in the contract to the extent that such 
amount is not allocated to income under sub-
paragraph (A). 
‘‘(4) SPECIAL
RULES
FOR
APPLICATION
OF 
PARAGRAPH
(2)(B).—For purposes of paragraph 
(2)(B): 
‘‘(A) 
LOANS
TREATED
AS
DISTRIBU-
TIONS.—If, during any taxable year, an indi-
vidual—
‘‘(i) receives (directly or indirectly) 
any amount as a loan under any contract 
to which this subsection applies, or 
‘‘(ii) assigns or pledges (or agrees to 
assign or pledge) any portion of the value 
of any such contract, 
such amount or portion shall be treated as re-
ceived under the contract as an amount not re-
ceived as an annuity. The preceding sentence 
shall not apply for purposes of determining in-
vestment in the contract, except that the invest-
ment in the contract shall be increased by any 
amount included in gross income by reason of 
the amount treated as received under the pre-
ceding sentence. 
‘‘(B) TREATMENT
OF
TRANSFERS
WITH-
OUT ADEQUATE CONSIDERATION.—
‘‘(i) IN
GENERAL.—If an individual 
who holds an annuity contract transfers it 
without full and adequate consideration, 
such individual shall be treated as receiv-
ing an amount equal to the excess of—
‘‘(I) the cash surrender value of 
such contract at the time of transfer, 
over 
‘‘(II) the investment in such con-
tract at such time, 
under the contract as an amount not re-
ceived as an annuity. 
‘‘(ii) 
EXCEPTION
FOR
CERTAIN 
TRANSFERS
BETWEEN
SPOUSES
OR 
FORMER
SPOUSES.—Clause (i) shall not 
apply to any transfer to which section
77(c) (relating to transfers of property be-
tween spouses or incident to divorce) ap-
plies. 
‘‘(iii) ADJUSTMENT
TO
INVESTMENT 
IN CONTRACT OF TRANSFEREE.—If under 
clause (i) an amount is included in the 
gross income of the transferor of an annu-
ity contract, the investment in the contract 
of the transferee in such contract shall be 
increased by the amount so included. 
‘‘(5) RETENTION OF EXISTING RULES IN CER-
TAIN CASES.—Paragraph (5) of section 72(e) of the 
Internal Revenue Code of 1986 shall apply to con-
tracts described in subparagraph (B) of such para-
graph to the extent provided therein. 
‘‘(6) INVESTMENT
IN
THE
CONTRACT.—For 
purposes of this subsection, the investment in the 
contract as of any date is—
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract before 
such date, minus 
‘‘(B) the aggregate amount received under 
the contract before such date, to the extent that 
such amount was excludable from gross income 
under this subtitle or prior income tax laws.
‘‘(7) APPLICATION
OF
PARAGRAPH
(2)(B)
TO 
QUALIFIED PLANS.—
‘‘(A) IN GENERAL.—Notwithstanding any 
other provision of this subsection, in the case of 
any amount received before the annuity starting 
date from a trust or contract described in para-
graph (5)(D), paragraph (2)(B) shall apply to 
such amounts. 
‘‘(B) 
ALLOCATION
OF
AMOUNT
RE-
CEIVED.—For purposes of paragraph (2)(B), 
the amount allocated to the investment in the 
contract shall be the portion of the amount de-
scribed in subparagraph (A) which bears the 
same ratio to such amount as the investment in 
the contract bears to the account balance. The 
determination under the preceding sentence 
shall be made as of the time of the distribution 
or at such other time as the Secretary may pre-
scribe. 
‘‘(C) 
TREATMENT
OF
FORFEITABLE 
RIGHTS.—If an employee does not have a non-
forfeitable right to any amount under any trust 
or contract to which subparagraph (A) applies, 
such amount shall not be treated as part of the 
account balance.
‘‘(D) INVESTMENT IN THE CONTRACT BE-
FORE 1987.—In the case of a plan which on
May 5, 1986, permitted withdrawal of any em-
ployee contributions before separation from 
service, subparagraph (A) shall apply only to 
the extent that amounts received before the an-
nuity starting date (when increased by amounts 
previously received under the contract after De-
cember 31, 1986) exceed the investment in the 
contract as of December 31, 1986.
‘‘(8) TREATMENT OF MODIFIED ENDOWMENT 
CONTRACTS.—
‘‘(A) IN GENERAL.—Notwithstanding para-
graph (5)(C), in the case of any modified en-
dowment contract (as defined in section 
7702A)—
‘‘(i) paragraphs (2)(B) and (4)(A) 
shall apply, and 
‘‘(ii) in applying paragraph (4)(A), 
‘any person’ shall be substituted for ‘an in-
dividual’. 
‘‘(B) TREATMENT
OF
CERTAIN
BURIAL 
CONTRACTS.—Notwithstanding 
subparagraph 
(A), paragraph (4)(A) shall not apply to any as-
signment (or pledge) of a modified endowment
contract if such assignment (or pledge) is solely 
to cover the payment of expenses referred to in 
section 7702(e)(2)(C)(iii) and if the maximum 
death benefit under such contract does not ex-
ceed $25,000. 
‘‘(9) ANTI-ABUSE RULES.—
‘‘(A) IN GENERAL.—For purposes of deter-
mining the amount includible in gross income 
under this subsection—
‘‘(i) all modified endowment contracts 
issued by the same company to the same 
policyholder during any calendar year shall 
be treated as 1 modified endowment con-
tract, and 
‘‘(ii) all annuity contracts issued by 
the same company to the same policyholder 
during any calendar year shall be treated 
as 1 annuity contract. 
The preceding sentence shall not apply to any 
contract described in paragraph (5)(D). 
‘‘(B) REGULATORY AUTHORITY.—The Sec-
retary may by regulations prescribe such addi-
tional rules as may be necessary or appropriate 
to prevent avoidance of the purposes of this
subsection through serial purchases of contracts 
or otherwise. 
‘‘(f) SPECIAL RULES FOR COMPUTING EMPLOYEES’ 
CONTRIBUTIONS.—In computing, for purposes of sub-
section (c)(1)(A), the aggregate amount of premiums or 
other consideration paid for the contract, and for purposes 
of subsection (e)(6), the aggregate premiums or other con-
sideration paid, amounts contributed by the employer shall 
be included, but only to the extent that—
‘‘(1) such amounts were includible in the gross 
income of the employee under this subtitle or prior 
income tax laws; or 
‘‘(2) if such amounts had been paid directly to 
the employee at the time they were contributed, they 
would not have been includible in the gross income 
of the employee under the law applicable at the time 
of such contribution. 
‘‘(g) RULES FOR TRANSFEREE WHERE TRANSFER 
WAS FOR VALUE.—Where any contract (or any interest 
therein) is transferred (by assignment or otherwise) for 
a valuable consideration, to the extent that the contract 
(or interest therein) does not, in the hands of the trans-
feree, have a basis which is determined by reference to 
the basis in the hands of the transferor, then—
100
‘‘(1) for purposes of this section, only the ac-
tual value of such consideration, plus the amount of 
the premiums and other consideration paid by the 
transferee after the transfer, shall be taken into ac-
count in computing the aggregate amount of the 
premiums or other consideration paid for the con-
tract; 
‘‘(2) for purposes of subsection (c)(1)(B), there 
shall be taken into account only the aggregate 
amount received under the contract by the trans-
feree before the annuity starting date, to the extent 
that such amount was excludable from gross income 
under this subtitle or prior income tax laws; and 
‘‘(3) the annuity starting date is January 1, 
1954, or the first day of the first period for which 
the transferee received an amount under the con-
tract as an annuity, whichever is the later.
‘‘(h) OPTION TO RECEIVE ANNUITY IN LIEU OF 
LUMP SUM.—If—
‘‘(1) a contract provides for payment of a lump 
sum in full discharge of an obligation under the con-
tract, subject to an option to receive an annuity in 
lieu of such lump sum;
101
‘‘(2) the option is exercised within 60 days after 
the day on which such lump sum first became pay-
able; and
‘‘(3) part or all of such lump sum would (but 
for this subsection) be includible in gross income by 
reason of subsection (e)(1), 
then, for purposes of this subtitle, no part of such lump 
sum shall be considered as includible in gross income at 
the time such lump sum first became payable. 
‘‘(i) INTEREST.—Notwithstanding any other provi-
sion of this section, if any amount is held under an agree-
ment to pay interest thereon, the interest payments shall 
be included in gross income. 
‘‘(j) FACE-AMOUNT CERTIFICATES.—For purposes of 
this section, the term ‘endowment contract’ includes a 
face-amount certificate, as defined in section 2(a)(15) of 
the Investment Company Act of 1940 (15 U.S.C., sec. 
80a–2), issued after December 31, 1954. 
‘‘(k) SPECIAL RULES APPLICABLE TO EMPLOYEE 
ANNUITIES
AND
DISTRIBUTIONS
UNDER
EMPLOYEE 
PLANS.—
‘‘(1) COMPUTATION
OF
CONSIDERATION
PAID 
BY THE EMPLOYEE.—In computing—
‘‘(A) the aggregate amount of premiums or 
other consideration paid for the contract for
102
purposes of subsection (c)(1)(A) (relating to the 
investment in the contract), and
‘‘(B) the aggregate premiums or other con-
sideration paid for purposes of subsection (e)(6) 
(relating to certain amounts not received as an 
annuity), 
any amount allowed as a deduction with respect to 
the contract under section 404 which was paid while 
the employee was an employee within the meaning of 
section 401(c)(1) shall be treated as consideration 
contributed by the employer, and there shall not be 
taken into account any portion of the premiums or 
other consideration for the contract paid while the 
employee was an owner-employee which is properly 
allocable (as determined under regulations pre-
scribed by the Secretary) to the cost of life, accident, 
health, or other insurance. 
‘‘(2) LIFE INSURANCE CONTRACTS.—
‘‘(A) This paragraph shall apply to any life 
insurance contract—
‘‘(i) purchased as a part of a plan de-
scribed in section 403(a), or 
‘‘(ii) purchased by a trust described in 
section 401(a) which is exempt from tax if 
the proceeds of such contract are payable
103
directly or indirectly to a participant in 
such trust or to a beneficiary of such par-
ticipant. 
‘‘(B) Any contribution to a plan described 
in subparagraph (A)(i) or a trust described in 
subparagraph (A)(ii) which is allowed as a de-
duction under section 404, and any income of 
a trust described in subparagraph (A)(ii), which 
is determined in accordance with regulations 
prescribed by the Secretary to have been ap-
plied to purchase the life insurance protection 
under a contract described in subparagraph 
(A), is includible in the gross income of the par-
ticipant for the taxable year when so applied. 
‘‘(C) In the case of the death of an indi-
vidual insured under a contract described in 
subparagraph (A), an amount equal to the cash 
surrender value of the contract immediately be-
fore the death of the insured shall be treated as 
a payment under such plan or a distribution by 
such trust, and the excess of the amount pay-
able by reason of the death of the insured over 
such cash surrender value shall not be includ-
ible in gross income under this section and shall 
be treated as provided in section 101.
104
‘‘(3) PENALTIES
APPLICABLE
TO
CERTAIN 
AMOUNTS RECEIVED BY 5-PERCENT OWNERS.—
‘‘(A) This paragraph applies to amounts 
which are received from a qualified trust de-
scribed in section 401(a) or under a plan de-
scribed in section 403(a) at any time by an in-
dividual who is, or has been, a 5-percent owner, 
or by a successor of such an individual, but only 
to the extent such amounts are determined, 
under regulations prescribed by the Secretary, 
to exceed the benefits provided for such indi-
vidual under the plan formula. 
‘‘(B) If a person receives an amount to 
which this paragraph applies, his tax under this 
chapter for the taxable year in which such 
amount is received shall be increased by an 
amount equal to 10 percent of the portion of 
the amount so received which is includible in 
his gross income for such taxable year. 
‘‘(C) For purposes of this paragraph, the 
term ‘5-percent owner’ means any individual 
who, at any time during the 5 plan years pre-
ceding the plan year ending in the taxable year 
in which the amount is received, is a 5-percent 
owner (as defined in section 416(i)(1)(B).
105
‘‘(4) OWNER-EMPLOYEE
DEFINED.—For pur-
poses of this subsection, the term ‘owner-employee’ 
has the meaning assigned to it by section 401(c)(3) 
and includes an individual for whose benefit an indi-
vidual retirement account or annuity described in 
section 408(a) or (b) is maintained. For purposes of 
the preceding sentence, the term ‘owner-employee’ 
shall include an employee within the meaning of sec-
tion 401(c)(1). 
‘‘(5) MEANING OF DISABLED.—For purposes of 
this section, an individual shall be considered to be 
disabled if he is unable to engage in any substantial 
gainful activity by reason of any medically deter-
minable physical or mental impairment which can be 
expected to result in death or to be of long-continued 
and indefinite duration. An individual shall not be 
considered to be disabled unless he furnishes proof
of the existence thereof in such form and manner 
as the Secretary may require. 
‘‘(6) DETERMINATION OF INVESTMENT IN THE 
CONTRACT IN THE CASE OF QUALIFIED DOMESTIC 
RELATIONS ORDERS.—Under regulations prescribed 
by the Secretary, in the case of a distribution or 
payment made to an alternate payee who is the 
spouse or former spouse of the participant pursuant
106
to a qualified domestic relations order (as defined in 
section 414(p)), the investment in the contract as of 
the date prescribed in such regulations shall be allo-
cated on a pro rata basis between the present value 
of such distribution or payment and the present 
value of all other benefits payable with respect to the 
participant to which such order relates. 
‘‘(l) ANNUITIES UNDER RETIRED SERVICEMAN’S 
FAMILY
PROTECTION
PLAN
OR
SURVIVOR
BENEFIT 
PLAN.—Subsection (b) shall not apply in the case of 
amounts received after December 31, 1965, as an annuity 
under chapter 73 of title 10 of the United States Code, 
but all such amounts shall be excluded from gross income 
until there has been so excluded (under section 122(b)(1) 
of the Internal Revenue Code of 1986, section 93, or this 
section, including amounts excluded before January 1, 
1966) an amount equal to the consideration for the con-
tract (as defined by section 122(b)(2) of the Internal Rev-
enue Code of 1986). Thereafter all amounts so received 
shall be included in gross income. 
‘‘(m) SPECIAL RULES FOR DISTRIBUTIONS FROM 
QUALIFIED PLANS
TO WHICH EMPLOYEE MADE DE-
DUCTIBLE CONTRIBUTIONS.—
‘‘(1) TREATMENT
OF
CONTRIBUTIONS.—For 
purposes of this section and sections 402 and 403,
107
notwithstanding section 414(h), any deductible em-
ployee contribution made to a qualified employer 
plan or government plan shall be treated as an 
amount contributed by the employer which is not in-
cludible in the gross income of the employee. 
‘‘(2) AMOUNTS CONSTRUCTIVELY RECEIVED.—
‘‘(A) IN GENERAL.—For purposes of this 
subsection, rules similar to the rules provided 
by subsection (n) (other than the exception con-
tained in paragraph (2) thereof) shall apply. 
‘‘(B) PURCHASE OF LIFE INSURANCE.—To 
the extent any amount of accumulated deduct-
ible employee contributions of an employee are 
applied to the purchase of life insurance con-
tracts, such amount shall be treated as distrib-
uted to the employee in the year so applied. 
‘‘(3) SPECIAL RULE FOR TREATMENT OF ROLL-
OVER AMOUNTS.—For purposes of sections 402(c), 
403(a)(4), and 408(d)(3), the Secretary shall pre-
scribe regulations providing for such allocations of 
amounts attributable to accumulated deductible em-
ployee contributions, and for such other rules, as 
may be necessary to insure that such accumulated 
deductible employee contributions do not become eli-
108
gible for additional tax benefits (or freed from limi-
tations) through the use of rollovers. 
‘‘(4) ORDERING RULES.—Unless the plan speci-
fies otherwise, any distribution from such plan shall 
not be treated as being made from the accumulated 
deductible employee contributions, until all other 
amounts to the credit of the employee have been dis-
tributed. 
‘‘(n) LOANS TREATED AS DISTRIBUTIONS.—For pur-
poses of this section—
‘‘(1) TREATMENT AS DISTRIBUTIONS.—
‘‘(A) LOANS.—If during any taxable year a 
participant or beneficiary receives (directly or 
indirectly) any amount as a loan from a quali-
fied employer plan, such amount shall be treat-
ed as having been received by such individual as 
a distribution under such plan. 
‘‘(B) ASSIGNMENTS OR PLEDGES.—If dur-
ing any taxable year a participant or beneficiary 
assigns (or agrees to assign) or pledges (or 
agrees to pledge) any portion of his interest in 
a qualified employer plan, such portion shall be 
treated as having been received by such indi-
vidual as a loan from such plan. 
‘‘(2) EXCEPTION FOR CERTAIN LOANS.—
109
‘‘(A) GENERAL
RULE.—Paragraph (1) 
shall not apply to any loan to the extent that 
such loan (when added to the outstanding bal-
ance of all other loans from such plan whether 
made on, before, or after August 13, 1982), 
does not exceed the lesser of—
‘‘(i) $50,000, reduced by the excess (if 
any) of—
‘‘(I) the highest outstanding bal-
ance of loans from the plan during the 
1-year period ending on the day be-
fore the date on which such loan was 
made, over 
‘‘(II) the outstanding balance of 
loans from the plan on the date on 
which such loan was made, or 
‘‘(ii) the greater of (I) one-half of the 
present value of the nonforfeitable accrued 
benefit of the employee under the plan, or 
(II) $10,000. 
for purposes of clause (ii), the present value of 
the nonforfeitable accrued benefit shall be de-
termined without regard to any accumulated 
deductible employee contributions (as defined in 
subsection (m)(5)(B)).
110
‘‘(B) REQUIREMENT THAT LOAN BE RE-
PAYABLE WITHIN 5 YEARS.—
‘‘(i) IN GENERAL.—Subparagraph (A) 
shall not apply to any loan unless such 
loan, by its terms, is required to be repaid 
within 5 years. 
‘‘(ii) EXCEPTION FOR HOME LOANS.—
Clause (i) shall not apply to any loan used 
to acquire any dwelling unit which within 
a reasonable time is to be used (deter-
mined at the time the loan is made) as the 
principal residence of the participant. 
‘‘(C) REQUIREMENT OF LEVEL AMORTIZA-
TION.—Except as provided in regulations, this 
paragraph shall not apply to any loan unless 
substantially level amortization of such loan
(with payments not less frequently than quar-
terly) is required over the term of the loan. 
‘‘(D) RELATED EMPLOYERS AND RELATED 
PLANS.—For purposes of this paragraph—
‘‘(i) the rules of subsections (b), (c), 
and (m) of section 414 shall apply, and 
‘‘(ii) all plans of an employer (deter-
mined after the application of such sub-
sections) shall be treated as 1 plan.
111
‘‘(o) 10-PERCENT PENALTY FOR PREMATURE DIS-
TRIBUTIONS FROM ANNUITY CONTRACTS.—
‘‘(1) IMPOSITION
OF
PENALTY.—If any tax-
payer receives any amount under an annuity con-
tract, the taxpayer’s tax under this chapter for the 
taxable year in which such amount is received shall 
be increased by an amount equal to 10 percent of 
the portion of such amount which is includible in 
gross income. 
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN 
DISTRIBUTIONS.—Paragraph (1) shall not apply to 
any distribution—
‘‘(A) made on or after the date on which 
the taxpayer attains age 591⁄2, 
‘‘(B) made on or after the death of the 
holder (or, where the holder is not an indi-
vidual, the death of the primary annuitant), 
‘‘(C) attributable to the taxpayer’s becom-
ing disabled within the meaning of subsection 
(k)(5), 
‘‘(D) which is a part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life 
expectancy) of the taxpayer or the joint lives
112
(or joint life expectancies) of such taxpayer and 
his designated beneficiary, 
‘‘(E) from a plan, contract, account, trust, 
or annuity described in section 72(e)(5)(D) of 
the Internal Revenue Code of 1986, 
‘‘(F) allocable to investment in the con-
tract before August 14, 1982, 
‘‘(G) under a qualified funding asset, 
‘‘(H) to which subsection (r) applies (with-
out regard to paragraph (2) thereof), 
‘‘(I) under an immediate annuity contract, 
or 
‘‘(J) which is purchased by an employer 
upon the termination of a plan described in sec-
tion 401(a) or 403(a) and which is held by the 
employer until such time as the employee sepa-
rates from service. 
‘‘(3) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.—If—
‘‘(A) paragraph (1) does not apply to a 
distribution by reason of paragraph (2)(D), and 
‘‘(B) the series of payments under such 
paragraph are subsequently modified (other 
than by reason of death or disability)—
113
‘‘(i) before the close of the 5-year pe-
riod beginning on the date of the first pay-
ment and after the taxpayer attains age 
591⁄2, or 
‘‘(ii) before the taxpayer attains age 
591⁄2, 
the taxpayer’s tax for the 1st taxable year in which 
such modification occurs shall be increased by an 
amount, determined under regulations, equal to the 
tax which (but for paragraph (2)(D)) would have 
been imposed, plus interest for the deferral period 
(within the meaning of subsection (r)(4)(B)). 
‘‘(p) CERTAIN RAILROAD RETIREMENT BENEFITS 
TREATED AS RECEIVED UNDER EMPLOYER PLANS.—
‘‘(1) IN GENERAL.—Notwithstanding any other 
provision of law, any benefit provided under the 
Railroad Retirement Act of 1974 (other than a tier 
1 railroad retirement benefit) shall be treated for 
purposes of this title as a benefit provided under an 
employer plan which meets the requirements of sec-
tion 401(a). 
‘‘(2) TIER
TAXES
TREATED
AS
CONTRIBU-
TIONS.—For purposes of paragraph (1)— 
‘‘(A) IN GENERAL.—
114
‘‘(i) the tier 2 portion of the tax im-
posed by section 3201 (relating to tax on 
employees) shall be treated as an employee 
contribution, 
‘‘(ii) the tier 2 portion of the tax im-
posed by section 3211 (relating to tax on 
employee representatives) shall be treated 
as an employee contribution, and 
‘‘(iii) the tier 2 portion of the tax im-
posed by section 3221 (relating to tax on 
employers) shall be treated as an employer 
contribution. 
‘‘(B) TIER 2 PORTION.—For purposes of 
subparagraph (A)—
‘‘(i) AFTER
1984.—With respect to 
compensation paid after 1984, the tier 2 
portion shall be the taxes imposed by sec-
tions 3201(b), 3211(a)(2), and 3221(b). 
‘‘(ii) BEFORE 1985.—With respect to 
compensation paid before 1985, see section 
72(r) of Internal Revenue Code of 1986 
for the definition of tier 2 portion. 
‘‘(C) CONTRIBUTIONS NOT ALLOCABLE TO 
SUPPLEMENTAL ANNUITY OR WINDFALL BENE-
FITS.—For purposes of paragraph (1), no
115
amount treated as an employee contribution 
under this paragraph shall be allocated to—
‘‘(i) any supplemental annuity paid 
under section 2(b) of the Railroad Retire-
ment Act of 1974, or 
‘‘(ii) any benefit paid under section 
3(h), 4(e), or 4(h) of such Act. 
‘‘(3) TIER
RAILROAD
RETIREMENT
BEN-
EFIT.—For purposes of paragraph (1), the term 
‘tier 1 railroad retirement benefit’ has the meaning 
given such term by section 3(b)(2)(B). 
‘‘(q) REQUIRED DISTRIBUTIONS WHERE HOLDER 
DIES BEFORE ENTIRE INTEREST IS DISTRIBUTED.—
‘‘(1) IN
GENERAL.—A contract shall not be 
treated as an annuity contract for purposes of this 
chapter unless it provides that—
‘‘(A) if any holder of such contract dies on 
or after the annuity starting date and before
the entire interest in such contract has been 
distributed, the remaining portion of such inter-
est will be distributed at least as rapidly as 
under the method of distributions being used as 
of the date of his death, and 
‘‘(B) if any holder of such contract dies be-
fore the annuity starting date, the entire inter-
116
est in such contract will be distributed within 5 
years after the death of such holder. 
‘‘(2) EXCEPTION FOR CERTAIN AMOUNTS PAY-
ABLE OVER LIFE OF BENEFICIARY.—If—
‘‘(A) any portion of the holder’s interest is 
payable to (or for the benefit of) a designated 
beneficiary, 
‘‘(B) such portion will be distributed (in 
accordance with regulations) over the life of 
such designated beneficiary (or over a period 
not extending beyond the life expectancy of 
such beneficiary), and 
‘‘(C) such distributions begin not later 
than 1 year after the date of the holder’s death 
or such later date as the Secretary may by reg-
ulations prescribe, 
then for purposes of paragraph (1), the portion re-
ferred to in subparagraph (A) shall be treated as 
distributed on the day on which such distributions 
begin. 
‘‘(3) SPECIAL RULE WHERE SURVIVING SPOUSE 
BENEFICIARY.—If the designated beneficiary re-
ferred to in paragraph (2)(A) is the surviving spouse 
of the holder of the contract, paragraphs (1) and (2)
117
shall be applied by treating such spouse as the hold-
er of such contract.
‘‘(4) DESIGNATED
BENEFICIARY.—For pur-
poses of this subsection, the term ‘designated bene-
ficiary’ means any individual designated a bene-
ficiary by the holder of the contract. 
‘‘(5) EXCEPTION FOR CERTAIN ANNUITY CON-
TRACTS.—This subsection shall not apply to any an-
nuity contract—
‘‘(A) which is provided—
‘‘(i) under a plan described in section 
401(a) which includes a trust exempt from 
tax under section 501, or 
‘‘(ii) under a plan described in section 
403(a), 
‘‘(B) which is described in section 403(b), 
‘‘(C) which is an individual retirement an-
nuity or provided under an individual retire-
ment account or annuity, or 
‘‘(D) which is a qualified funding asset. 
‘‘(6) SPECIAL RULE WHERE HOLDER IS COR-
PORATION OR OTHER NON-INDIVIDUAL.—
‘‘(A) IN GENERAL.—For purposes of this 
subsection, if the holder of the contract is not
118
an individual, the primary annuitant shall be 
treated as the holder of the contract.
‘‘(B) PRIMARY ANNUITANT.—For purposes 
of subparagraph (A), the term ‘primary annu-
itant’ means the individual, the events in the 
life of whom are of primary importance in af-
fecting the timing or amount of the payout 
under the contract. 
‘‘(7) TREATMENT OF CHANGES IN PRIMARY AN-
NUITANT WHERE HOLDER OF CONTRACT IS NOT AN 
INDIVIDUAL.—For purposes of this subsection, in 
the case of a holder of an annuity contract which 
is not an individual, if there is a change in a pri-
mary annuitant (as defined in paragraph (6)(B)), 
such change shall be treated as the death of the 
holder. 
‘‘(s) 10-PERCENT ADDITIONAL TAX ON EARLY DIS-
TRIBUTIONS FROM QUALIFIED RETIREMENT PLANS.—
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any 
taxpayer receives any amount from a qualified re-
tirement plan (as defined in section 4974(c)), the 
taxpayer’s tax under this chapter for the taxable 
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the
119
portion of such amount which is includible in gross 
income. 
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN 
DISTRIBUTIONS.—Except as provided in paragraphs 
(3) and (4), paragraph (1) shall not apply to any of 
the following distributions: 
‘‘(A) IN
GENERAL.—Distributions which 
are—
‘‘(i) made on or after the date on 
which the employee attains age 591⁄2, 
‘‘(ii) made to a beneficiary (or to the 
estate of the employee) on or after the 
death of the employee, 
‘‘(iii) attributable to the employee’s 
being disabled within the meaning of sub-
section 72(m)(7) of the Internal Revenue 
Code of 1986, 
‘‘(iv) part of a series of substantially 
equal periodic payments (not less fre-
quently than annually) made for the life 
(or life expectancy) of the employee or the
joint lives (or joint life expectancies) of 
such employee and his designated bene-
ficiary,
120
‘‘(v) made to an employee after sepa-
ration from service after attainment of age 
55, 
‘‘(vi) dividends paid with respect to 
stock of a corporation which are described 
in section 404(k), or 
‘‘(vii) made from a Roth IRA (other 
than a distribution described in section 
30(d)(2)). 
‘‘(B) MEDICAL
EXPENSES.—Distributions 
made to the employee (other than distributions 
described in subparagraph (A), (C), or (D)) to 
the extent such distributions do not exceed the 
amount allowable as a deduction under section 
31 to the employee for amounts paid during the 
taxable year for medical care (determined with-
out regard to whether the employee itemizes de-
ductions for such taxable year). 
‘‘(C) PAYMENTS
TO
ALTERNATE
PAYEES 
PURSUANT
TO
QUALIFIED
DOMESTIC
RELA-
TIONS ORDERS.—Any distribution to an alter-
nate payee pursuant to a qualified domestic re-
lations order (within the meaning of section 
414(p)(1)).
121
‘‘(D) DISTRIBUTIONS TO UNEMPLOYED IN-
DIVIDUALS
FOR
HEALTH
INSURANCE
PRE-
MIUMS.—
‘‘(i) IN GENERAL.—Distributions from 
an individual retirement plan to an indi-
vidual after separation from employment—
‘‘(I) if such individual has re-
ceived unemployment compensation 
for 12 consecutive weeks under any 
Federal or State unemployment com-
pensation law by reason of such sepa-
ration, 
‘‘(II) if such distributions are 
made during any taxable year during 
which such unemployment compensa-
tion is paid or the succeeding taxable 
year, and 
‘‘(III) to the extent such distribu-
tions do not exceed the amount paid 
during the taxable year for insurance 
described in section 213(d)(1)(D) of 
the Internal Revenue Code of 1986 
with respect to the individual and the 
individual’s spouse and dependents.
122
‘‘(ii) DISTRIBUTIONS
AFTER
REEM-
PLOYMENT.—Clause (i) shall not apply to 
any distribution made after the individual 
has been employed for at least 60 days 
after the separation from employment to 
which clause (i) applies. 
‘‘(iii) 
SELF-EMPLOYED
INDIVID-
UALS.—To the extent provided in regula-
tions, a self-employed individual shall be 
treated as meeting the requirements of 
clause (i)(I) if, under Federal or State law, 
the individual would have received unem-
ployment compensation but for the fact the 
individual was self-employed. 
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL 
RETIREMENT PLANS FOR HIGHER EDUCATION 
EXPENSES.—Distributions 
to 
an 
individual 
from an individual retirement plan to the extent 
such distributions do not exceed the qualified 
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable year. 
Distributions shall not be taken into account 
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C), or 
(D) or to the extent paragraph (1) does not
123
apply to such distributions by reason of sub-
paragraph (B). 
‘‘(F) 
DISTRIBUTIONS
FROM
CERTAIN 
PLANS
FOR
FIRST
HOME
PURCHASES.—Dis-
tributions to an individual from an individual 
retirement plan which are qualified first-time 
homebuyer distributions (as defined in para-
graph (8)). Distributions shall not be taken into 
account under the preceding sentence if such 
distributions are described in subparagraph (A), 
(C), (D), or (E) or to the extent paragraph (1) 
does not apply to such distributions by reason 
of subparagraph (B). 
‘‘(3) LIMITATIONS.—
‘‘(A) CERTAIN EXCEPTIONS NOT TO APPLY 
TO
INDIVIDUAL
RETIREMENT
PLANS.—Sub-
paragraphs (A)(v), and (C) of paragraph (2) 
shall not apply to distributions from an indi-
vidual retirement plan. 
‘‘(B) PERIODIC PAYMENTS UNDER QUALI-
FIED
PLANS
MUST
BEGIN
AFTER
SEPARA-
TION.—Paragraph (2)(A)(iv) shall not apply to 
any amount paid from a trust described in sec-
tion 401(a) which is exempt from tax under 
section 501(a) or from a contract described in
124
section 72(e)(5)(D)(ii) of the Internal Revenue 
Code of 1986 unless the series of payments be-
gins after the employee separates from service.
‘‘(4) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) paragraph (1) does not apply to 
a distribution by reason of paragraph 
(2)(A)(iv), and 
‘‘(ii) the series of payments under 
such paragraph are subsequently modified 
(other than by reason of death or dis-
ability)—
‘‘(I) before the close of the 5-year 
period beginning with the date of the 
first payment and after the employee 
attains age 591⁄2, or 
‘‘(II) before the employee attains 
age 591⁄2, the taxpayer’s tax for the 
1st taxable year in which such modi-
fication occurs shall be increased by 
an amount, determined under regula-
tions, equal to the tax which (but for
paragraph (2)(A)(iv)) would have
125
been imposed, plus interest for the de-
ferral period. 
‘‘(B) DEFERRAL
PERIOD.—For purposes 
of this paragraph, the term ‘deferral period’ 
means the period beginning with the taxable 
year in which (without regard to paragraph 
(2)(A)(iv)) the distribution would have been in-
cludible in gross income and ending with the 
taxable year in which the modification described 
in subparagraph (A) occurs. 
‘‘(5) EMPLOYEE.—For purposes of this sub-
section, the term ‘employee’ includes any partici-
pant, and in the case of an individual retirement 
plan, the individual for whose benefit such plan was 
established. 
‘‘(6) SPECIAL RULES FOR SIMPLE RETIREMENT 
ACCOUNTS.—In the case of any amount received 
from a simple retirement account (within the mean-
ing of section 408(p) during the 2-year period begin-
ning on the date such individual first participated in 
any qualified salary reduction arrangement main-
tained by the individual’s employer under section 
408(p)(2), paragraph (1) shall be applied by sub-
stituting ‘25 percent’ for ‘10 percent’.
126
‘‘(7) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)—
‘‘(A) IN
GENERAL.—The term ‘qualified 
higher education expenses’ means qualified 
higher education expenses (as defined in section 
10(b)(2)) for education furnished to—
‘‘(i) the taxpayer, 
‘‘(ii) the taxpayer’s spouse, or 
‘‘(iii) any child or grandchild of the 
taxpayer or the taxpayer’s spouse, at an el-
igible educational institution (as defined in 
section 10(b)(2)(B)). 
‘‘(B) COORDINATION WITH OTHER PROVI-
SIONS.—For purposes of this subsection, sec-
tion 30 and section 32, qualified higher edu-
cation expenses in any taxable year shall be 
treated as first paid with distributions under 
section 32, next with distributions to which sec-
tion 30(d)(5)(v) (relating to early withdrawals 
from Roth IRAs to pay higher education ex-
penses) applies, and finally from withdrawals to 
which this subsection applies. 
‘‘(8) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.—For purposes of this subsection, the 
term ‘qualified first-time homebuyer distribution’
127
has the meaning given to it in section 30(d)(6) and 
the limits contained in such section shall apply on a 
combined basis to this subsection and section 30. 
Qualified acquisition costs (as defined in section 
30(d)(6)) taken into account for purposes of section 
30(d)(5)(vi) shall not also be taken into account sep-
arately for purposes of this subsection. A taxpayer 
may elect to treat distributions from an account 
other than Roth IRAs to which this subsection ap-
plies as a qualified first-time homeowner distribution 
before determining whether a distribution from a 
Roth IRA is a qualified first-time homeowner dis-
tribution. 
‘‘(s) 10-PERCENT ADDITIONAL TAX FOR TAXABLE 
DISTRIBUTIONS FROM MODIFIED ENDOWMENT CON-
TRACTS.—
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any 
taxpayer receives any amount under a modified en-
dowment contract (as defined in section 7702A), the 
taxpayer’s tax under this chapter for the taxable 
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the 
portion of such amount which is includible in gross 
income.
128
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN 
DISTRIBUTIONS.—Paragraph (1) shall not apply to 
any distribution—
‘‘(A) made on or after the date on which 
the taxpayer attains age 591⁄2, 
‘‘(B) which is attributable to the tax-
payer’s becoming disabled (within the meaning 
of subsection (m)(7)), or 
‘‘(C) which is part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life 
expectancy) of the taxpayer or the joint lives 
(or joint life expectancies) of such taxpayer and 
his beneficiary. 
‘‘Subchapter C—Basis, Business Transactions 
and Nonrecognition Transactions
‘‘Sec. 71. Gain or loss on the sale of an asset. 
‘‘Sec. 72. Basis. 
‘‘Sec. 73. Basis in business entities. 
‘‘Sec. 74. Gratuitous transfers. 
‘‘Sec. 75. Transactions involving business entities. 
‘‘Sec. 76. Rollover on residence sale. 
‘‘Sec. 77. Other nonrecognition transactions. 
‘‘Sec. 78. Wash sales and straddles.
‘‘SEC. 71. GAIN OR LOSS ON THE SALE OF AN ASSET. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this chapter, the amount of gross income to be recognized 
on the sale, exchange, or other disposition of property 
equals the excess of—
129
‘‘(1) the amount realized from the disposition, 
over 
‘‘(2) the taxpayer’s adjusted basis in the prop-
erty.
‘‘(b) AMOUNT REALIZED.—The amount realized from 
the disposition of property shall be the sum of money re-
ceived plus the fair market value of the property (other 
than money) received. See section 122(c) for the treatment 
of installment sales.
‘‘(c) NONRECOGNITION TRANSACTION.—Subsection 
(a) shall not apply to nonrecognition transactions de-
scribed in this chapter. 
‘‘(d) CONTRACTS MARKED TO MARKET.—
‘‘(1) IN
GENERAL.—Under regulations pre-
scribed by the Secretary, a markable contract held 
by the taxpayer at the end of the year shall be treat-
ed as sold and reacquired for its fair market value 
on the last business day of the taxable year. The 
regulations shall adopt principles and definitions 
similar to those that applied under section 1256 of 
the Internal Revenue Code of 1986. 
‘‘(2) MARKABLE CONTRACT.—For purposes of 
this subsection, ‘markable contract’ means—
‘‘(A) any regulated futures contract, 
‘‘(B) any foreign currency contract,
130
‘‘(C) any nonequity option, 
‘‘(D) any dealer equity option 
as such terms were defined for purposes of section 
1256 of the Internal Revenue Code of 1986. 
‘‘SEC. 72. BASIS. 
‘‘(a) BASIS, SALE, OR EXCHANGE.—Except to the ex-
tent inconsistent with provisions of this chapter, adjusted 
basis and the existence of a sale or exchange shall be de-
termined in accordance with principles applicable under 
the Internal Revenue Code of 1986. 
‘‘(b) DEFINITION OF BASIS.—For purposes of this 
chapter, ‘basis’ means the adjusted basis of property. The 
adjusted basis of property is generally its cost, as adjusted 
for actions or transactions that increase or decrease the 
basis of property. Except as provided in section 73 (relat-
ing to business entities and basis in business entities), the 
taxpayer’s adjusted basis on January 1, 2004, in an asset 
acquired before that date, shall be its adjusted basis as 
of December 31, 2003, as determined under the Internal 
Revenue Code of 1986. 
‘‘SEC. 73. BASIS IN BUSINESS ENTITIES. 
‘‘(a) RULES FOR ALL BUSINESS ENTITIES.—
‘‘(1) IN GENERAL.—A taxpayer’s basis in an in-
terest in a business entity shall equal—
‘‘(A) the cost of acquiring the interest,
131
‘‘(B) increased by the amount of cash and 
basis of any property contributed to the entity, 
and 
‘‘(C) decreased by the portion of any liqui-
dating distributions from the entity that are 
treated as returns of capital in accordance with 
rules prescribed by the Secretary. 
‘‘(2) INITIAL BASIS.—Except as otherwise pro-
vided in this section, a taxpayer’s basis on January 
1, 2004, or any interest in a business entity held as 
of December 31, 2003, shall be the basis of such in-
terest as of December 31, 2003, as determined 
under the Internal Revenue Code of 1986. 
‘‘(3) CROSS REFERENCES.—See section 75 for 
rules relating to the effect of certain business trans-
actions on a taxpayer’s basis. 
‘‘(4) SPECIAL
RULE
FOR
CONTRIBUTION
OF 
PERSONAL USE PROPERTY.—If a taxpayer contrib-
utes personal-use property (as defined in section 
210(b)(3)(B)), the taxpayer’s basis in the property 
shall not be increased by an amount in excess of the 
fair market value of the property contributed. 
‘‘(b) SPECIAL RULES
FOR PARTNERSHIP INTER-
ESTS.—
132
‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A 
partner’s basis in a partnership interest as of Janu-
ary 1, 2004, equals—
‘‘(A) the partner’s basis in the partnership 
as of the end of the taxable year ending on De-
cember 31, 2003, minus 
‘‘(B) the amount of the partner’s share of 
the indebtedness of the partnership taken into 
account in determining such basis. 
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the taxpayer 
has a negative basis in the partnership and such 
negative basis shall increase the gain on the sale or 
disposition of the partnership interest (except to the 
extent such negative basis has been adjusted by rea-
son of capital contributions). 
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a partner’s basis in a 
partnership interest shall be determined in accord-
ance with the general principles of this chapter ap-
plicable to an individual’s basis in an interest in a 
business entity. A partner’s basis in a partnership 
shall not be adjusted by reason of any—
‘‘(A) distribution from the partnership (ex-
cept to the extent such distribution is treated as
133
distribution of basis in accordance with the gen-
eral principles of this chapter applicable to an 
individual’s basis in an interest in a business 
entity), 
‘‘(B) income, earnings, or loss of the part-
nership, or
‘‘(C) any change in the partner’s share of 
the partnership’s indebtedness. 
‘‘(4) SPECIAL RULE FOR TRANSITION DISTRIBU-
TIONS.—
‘‘(A) EFFECT OF TRANSITION DISTRIBU-
TION.—A transition distribution from partner-
ship to a partner shall—
‘‘(i) reduce the partner’s basis in the 
partnership, and 
‘‘(ii) not be included in gross income. 
‘‘(B) DEFINITION.—A ‘transition distribu-
tion’ is a distribution by a business entity to an 
individual made during the first three months 
of 2004 but only to the extent that such dis-
tribution, when added to all other distributions 
of the entity to the individual after March 31, 
2003, does not exceed the amount of taxable in-
come allocated by the entity to the individual
134
during the taxable year of the entity ending on 
December 31, 2003. 
‘‘(5) PARTNERSHIP.—For purposes of this sec-
tion, ‘partnership’ includes a limited liability com-
pany that was taxable as a partnership under the 
Internal Revenue Code of 1986.
‘‘(c) SPECIAL RULES FOR SHARES OF S CORPORA-
TIONS.—Rules similar to those contained in subsection (b) 
shall apply with respect to the basis of stock of a corpora-
tion that was treated as an S corporation under the Inter-
nal Revenue Code of 1986.
‘‘(d) SPECIAL RULES FOR PROPRIETORSHIPS.—
‘‘(1) OLD
PROPRIETORSHIP.—A proprietor’s 
basis in any business activity conducted before Janu-
ary 1, 2004, which is treated as a business activity 
as of such date equals—
‘‘(A) the proprietor’s adjusted basis in the 
assets of such business entity as of the end of 
the taxable year ending on December 31, 2003, 
minus 
‘‘(B) the balance of any indebtedness the 
interest on which the proprietor had treated as 
business interest under section 163(h)(2)(A) of 
the Internal Revenue Code of 1986.
135
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the propri-
etor has a negative basis in the proprietorship and 
such negative basis shall increase the gain on the 
sale or disposition of the entity (except to the extent 
such negative basis has been adjusted by reason of 
capital contributions). 
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a proprietor’s basis in 
a proprietorship shall be determined in accordance 
with the general principles of this chapter applicable 
to an individual’s basis in an interest in a business 
entity. 
‘‘(4) 
PROPRIETORSHIP.—‘Proprietorship’ 
in-
cludes—
‘‘(A) any family business that is not a 
partnership, and 
‘‘(B) any business activity conducted by a 
taxpayer other than as an employee if such ac-
tivity constitutes a business entity. 
‘‘(e) ANTI-AVOIDANCE RULE.—
‘‘(1) IN GENERAL.—If a pass-through entity’s 
distributions to an individual in its taxable year or 
taxable years ending in 2003 exceeds 125 percent of 
the individual’s distributive share of income for such
136
period, the amount of such excess distribution shall 
be treated as a cash distribution to the partner on 
January 1, 2004, and shall not reduce the partner’s 
basis in his partnership interest. 
‘‘(2) PASS THROUGH ENTITY.—‘Pass through 
entity’ means a partnership, proprietorship, or S 
corporation. 
‘‘SEC. 74. GRATUITOUS TRANSFERS. 
‘‘(a) IN GENERAL.—If after December 31, 2003, a 
taxpayer receives any property by gift, inheritance, or 
other gratuitous transfer, the taxpayer’s basis in the prop-
erty shall be the lesser of—
‘‘(1) the fair market value of the property at 
the time of transfer, or 
‘‘(2) the transferee’s basis in the property at 
the time of transfer. 
‘‘(b) PROOF REQUIRED.—A taxpayer’s basis in an 
asset received by gift, inheritance, or other gratuitous 
transfer shall be presumed to be zero unless the taxpayer 
can demonstrate to the satisfaction of the Secretary the 
basis claimed by the taxpayer. 
‘‘SEC. 75. DISTRIBUTIONS FROM BUSINESS ENTITIES. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this section or in regulations issued by the Secretary in 
accordance with this section—
137
‘‘(1) CASH
DISTRIBUTIONS.—Distributions of 
cash by a business entity with respect to its equity 
ownership shall be treated as dividends and included 
in gross income. 
‘‘(2) DISTRIBUTIONS OF PROPERTY.—If a busi-
ness entity distributes property (other than stock or 
other equity ownership described in paragraph (3) in 
connection with a merger, acquisition or reorganiza-
tion), the fair market value of the property received 
shall be treated as a dividend and included in gross 
income. 
‘‘(3) DISTRIBUTIONS OF STOCK OR OTHER EQ-
UITY OWNERSHIP.—If a taxpayer receives with re-
spect to its ownership interest in a business entity 
stock or other ownership interests in such business 
entity (as reorganized) or in another business entity 
that is controlled by such business entity or is ac-
quiring or merging with such business entity, no 
gain or loss shall be recognized on the distribution. 
‘‘(b) BASIS IN BUSINESS DIVISIONS.—In the case of 
a spin-off, split-off, or split-up of a business entity in 
which a taxpayer has basis, the taxpayer’s basis in the 
original business entity shall be allocated among the new 
and surviving entities in accordance with the relative fair 
market values of the taxpayer’s interests in those entities.
138
If interests in the entities are publicly traded, fair market 
values shall be based on public trading prices. In other 
cases, the Secretary shall accept any reasonable allocation 
made by the taxpayer if the taxpayer notifies the Secretary 
of the allocation in an attachment to its tax return for 
the taxable year of the transaction. 
‘‘(c) DISTRIBUTIONS CONSTITUTING RETURN
OF 
BASIS.—
‘‘(1) COMPLETE LIQUIDATIONS.—
‘‘(A) IN GENERAL.—In the case of a dis-
tribution in complete liquidation of a business 
entity, a taxpayer shall be treated as receiving 
cash and assets of the entity in exchange for 
the taxpayer’s equity in the business entity. In 
such case, the taxpayer shall recognize gain to 
the extent that the sum of the cash and fair 
market value of assets received exceeds the tax-
payer’s basis in its interest in the business enti-
ty or shall recognize loss to the extent that the 
basis exceeds the fair market value of cash and 
assets received. 
‘‘(B) DISTRIBUTION
OF
EQUITY
INTER-
ESTS.—In the case of a complete liquidation in 
which at least 90 percent of the value of assets 
and cash distributed to an equity holder is eq-
139
uity interests in other business entities con-
trolled by the distributing entity—
‘‘(i) subparagraph (A) shall not apply, 
‘‘(ii) paragraph (3) of subsection (a) 
shall apply, 
‘‘(iii) the cash and fair market value 
of assets other than equity interests in 
controlled entities shall be applied to re-
duce the taxpayer’s basis in the distrib-
uting entity and gain will be recognized 
only to the extent that the cash and such 
fair market value exceeds the taxpayer’s 
basis in the distributing entity, and 
‘‘(iv) the taxpayer’s remaining basis 
shall be allocated among the distributed 
equity interests in controlled entities in ac-
cordance with the relative fair market val-
ues of such interests. 
‘‘(C) DISTRIBUTION
OF
BUSINESS
PROP-
ERTY.—Under regulations prescribed by the 
Secretary, rules similar to those that applied to 
partnerships under the Internal Revenue Code 
of 1986 shall apply in lieu of subparagraph (A) 
to distributions that include property used in a 
trade or business if such property is contributed
140
to a new business entity within 180 days of the 
distribution. 
‘‘(2) TRANSITION RULES.—See subsections (b) 
and (d) of section 73 for transition rules relating to 
partnerships and proprietorships. 
‘‘(d) DEFINITIONS AND SPECIAL RULES.—
‘‘(1) CERTAIN RULES OF APPLICATION.—
‘‘(A) PRINCIPLES APPLICABLE TO INTER-
NAL REVENUE CODE.—This section shall be ap-
plied without regard to—
‘‘(i) continuity of business interest, 
‘‘(ii) continuity of ownership interest, 
‘‘(iii) requirements of section 355 of 
the Internal Revenue Code of 1986 for 
spin-offs, split-offs and split-ups, 
‘‘(iv) business purposes for a cor-
porate reorganization or restructuring (ex-
cept if the transaction is potentially abu-
sive), and
‘‘(v) except as provided in paragraph 
(3), rules treating dividends as returns of 
capital because of the absence of earnings 
and profits. 
‘‘(B) CONSTRUCTIVE RECEIPT.—If a tax-
payer is given the choice of receiving cash or an
141
equity interest in a business entity, the tax-
payer will be treated for purposes of this sec-
tion as if he received the cash and purchased 
the equity interest. 
‘‘(C) DEBT
VERSUS
EQUITY.—The prin-
ciples distinguishing debt and equity that ap-
plied prior to the adopt of the Simplified USA 
Tax generally shall apply for purposes of apply-
ing this section. An investment in a business 
entity shall not be considered debt unless—
‘‘(i) it is reflected in the books and 
records of the business entity as debt, and 
‘‘(ii) there is written evidence of the 
investment that treats such investment as 
indebtedness. 
‘‘(2) CONTROL.—For purposes of this section, 
‘control’ of a business entity means—
‘‘(A) ownership of more than 50% of the 
voting power held by equity holders of such en-
tity, or 
‘‘(B) ownership of rights to more than 
50% of the periodic distributions that the busi-
ness entity may make to its equity holders and 
50% of the distributions if the business entity 
were liquidated.
142
‘‘(3) REGULATIONS.—
‘‘(A) SIGNIFICANT DOWNSIZING AND PAR-
TIAL LIQUIDATIONS.—The Secretary is author-
ized to issue regulations under which distribu-
tions resulting from a significant downsizing of 
a business entity will be treated in part as re-
turn of equity holders’ capital.
‘‘(B) ASSUMPTION AND RELEASE OF LI-
ABILITY.—The Secretary shall prescribe regula-
tions 
addressing 
the 
consequences 
of 
a 
distributee’s assumption of the liabilities of the 
distributor. 
‘‘SEC. 76. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL 
RESIDENCE. 
‘‘(a) EXCLUSION.—Gross income shall not include 
gain from the sale or exchange of property if, during the 
5-year period ending on the date of the sale or exchange, 
such property has been owned and used by the taxpayer 
as the taxpayer’s principal residence for periods aggre-
gating 2 years or more. 
‘‘(b) LIMITATIONS.—
‘‘(1) IN GENERAL.—The amount of gain ex-
cluded from gross income under subsection (a) with 
respect to any sale or exchange shall not exceed 
$250,000.
143
‘‘(2) $500,000 LIMITATION FOR CERTAIN JOINT 
RETURNS.—Paragraph (1) shall be applied by sub-
stituting ‘$500,000’ for ‘$250,000’ if—
‘‘(A) a husband and wife make a joint re-
turn for the taxable year of the sale or ex-
change of the property, 
‘‘(B) either spouse meets the ownership re-
quirements of subsection (a) with respect to 
such property, 
‘‘(C) both spouses meet the use require-
ments of subsection (a) with respect to such 
property, and 
‘‘(D) neither spouse is ineligible for the 
benefits of subsection (a) with respect to such 
property by reason of paragraph (3). 
‘‘(3) APPLICATION
TO
ONLY
SALE
OR
EX-
CHANGE EVERY 2 YEARS.—
‘‘(A) IN
GENERAL.—Subsection (a) shall 
not apply to any sale or exchange by the tax-
payer if, during the 2-year period ending on the 
date of such sale or exchange, there was any 
other sale or exchange by the taxpayer to which 
subsection (a) applied. 
‘‘(B) PRE-MAY 7, 1997, SALES NOT TAKEN 
INTO
ACCOUNT.—Subparagraph (A) shall be
144
applied without regard to any sale or exchange 
before May 7, 1997. 
‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET 
CERTAIN REQUIREMENTS.—
‘‘(1) IN GENERAL.—In the case of a sale or ex-
change to which this subsection applies, the owner-
ship and use requirements of subsection (a) shall not 
apply and subsection (b)(3) shall not apply; but the 
amount of gain excluded from gross income under 
subsection (a) with respect to such sale or exchange 
shall not exceed—
‘‘(A) the amount which bears the same 
ratio to the amount which would be so excluded 
under this section if such requirements had 
been met, as 
‘‘(B) the shorter of—
‘‘(i) the aggregate periods, during the 
5-year period ending on the date of such 
sale or exchange, such property has been 
owned and used by the taxpayer as the 
taxpayer’s principal residence, or 
‘‘(ii) the period after the date of the 
most recent prior sale or exchange by the 
taxpayer to which subsection (a) applied
145
and before the date of such sale or ex-
change, 
bears to 2 years. 
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION APPLIES.—This subsection shall apply to 
any sale or exchange if—
‘‘(A) subsection (a) would not (but for this 
subsection) apply to such sale or exchange by 
reason of—
‘‘(i) a failure to meet the ownership 
and use requirements of subsection (a), or 
‘‘(ii) subsection (b)(3), and 
‘‘(B) such sale or exchange is by reason of 
a change in place of employment, health, or, to 
the extent provided in regulations, unforeseen 
circumstances. 
‘‘(d) SPECIAL RULES.—
‘‘(1) JOINT RETURNS.—If a husband and wife 
make a joint return for the taxable year of the sale 
or exchange of the property, subsections (a) and (c) 
shall apply if either spouse meets the ownership and 
use requirements of subsection (a) with respect to 
such property.
‘‘(2) PROPERTY OF DECEASED SPOUSE.—For 
purposes of this section, in the case of an unmarried
146
individual whose spouse is deceased on the date of 
the sale or exchange of property, the period such un-
married individual owned and used such property 
shall include the period such deceased spouse owned 
and used such property before death.
‘‘(3) PROPERTY OWNED BY SPOUSE OR FORMER 
SPOUSE.—For purposes of this section—
‘‘(A) PROPERTY TRANSFERRED TO INDI-
VIDUAL FROM SPOUSE OR FORMER SPOUSE.—
In the case of an individual holding property 
transferred to such individual by such individ-
ual’s spouse or former spouse in a transaction 
incident to divorce, the period such individual 
owns such property shall include the period the 
transferor owned the property. 
‘‘(B) PROPERTY USED BY FORMER SPOUSE 
PURSUANT TO DIVORCE DECREE, ETC.—Solely 
for purposes of this section, an individual shall 
be treated as using property as such individ-
ual’s principal residence during any period of 
ownership while such individual’s spouse or 
former spouse is granted use of the property 
under a divorce or separation instrument. 
‘‘(4) TENANT-STOCKHOLDER IN COOPERATIVE 
HOUSING CORPORATION.—For purposes of this sec-
147
tion, if the taxpayer holds stock as a tenant-stock-
holder in a cooperative housing corporation—
‘‘(A) the holding requirements of sub-
section (a) shall be applied to the holding of 
such stock, and 
‘‘(B) the use requirements of subsection 
(a) shall be applied to the house or apartment 
which the taxpayer was entitled to occupy as 
such stockholder. 
‘‘(5) INVOLUNTARY
CONVERSIONS.—For pur-
poses of this section, the destruction, theft, seizure, 
requisition, or condemnation of property shall be 
treated as the sale of such property. 
‘‘(6) DETERMINATION OF USE DURING PERIODS 
OF OUT-OF-RESIDENCE CARE.—In the case of a tax-
payer who—
‘‘(A) becomes physically or mentally in-
capable of self-care, and 
‘‘(B) owns property and uses such property 
as the taxpayer’s principal residence during the 
5-year period described in subsection (a) for pe-
riods aggregating at least 1 year, 
then the taxpayer shall be treated as using such 
property as the taxpayer’s principal residence during 
any time during such 5-year period in which the tax-
148
payer owns the property and resides in any facility 
(including a nursing home) licensed by a State or 
political subdivision to care for an individual in the 
taxpayer’s condition. 
‘‘(7) SALES OF REMAINDER INTERESTS.—For 
purposes of this section—
‘‘(A) IN GENERAL.—At the election of the 
taxpayer, this section shall not fail to apply to 
the sale or exchange of an interest in a prin-
cipal residence by reason of such interest being 
a remainder interest in such residence, but this 
section shall not apply to any other interest in 
such residence which is sold or exchanged sepa-
rately. 
‘‘(B) EXCEPTION FOR SALES TO RELATED 
PARTIES.—Subparagraph (A) shall not apply to 
any sale to, or exchange with, a related party 
(as defined in section 171). 
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—
This section shall not apply to any sale or exchange by 
an individual if rules relating to expatriation to avoid tax 
apply to such individual. 
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—
This section shall not apply to any sale or exchange with
149
respect to which the taxpayer elects not to have this sec-
tion apply. 
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER 
SECTION 1034.—For purposes of this section, in the case 
of property the acquisition of which by the taxpayer re-
sulted under section 1034 of the Internal Revenue Code 
of 1986 (as in effect on the day before the date of the 
enactment of the Taxpayer Relief Act of 1997) in the non-
recognition of any part of the gain realized on the sale 
or exchange of another residence, in determining the pe-
riod for which the taxpayer has owned and used such 
property as the taxpayer’s principal residence, there shall 
be included the aggregate periods for which such other 
residence (and each prior residence taken into account in 
determining the holding period of such property) had been 
so owned and used. 
‘‘SEC. 77. OTHER NONRECOGNITION TRANSACTIONS. 
‘‘(a) INVOLUNTARY CONVERSIONS.—Under regula-
tions prescribed by the Secretary, the involuntary conver-
sion of property held by an individual shall not result in 
gross income to the individual to the extent that the indi-
vidual receives property in exchange for the involuntarily 
converted property. To the extent that income is not rec-
ognized under this subsection, the taxpayer’s basis in the 
converted property shall carry over to the new property.
150
‘‘(b) CERTAIN REACQUISITIONS
OF REAL PROP-
ERTY.—Under regulations prescribed by the Secretary, 
gross income shall not be recognized in the case of certain 
reacquisitions of real property. The regulations shall adopt
principles similar to those under section 1038 of the Inter-
nal Revenue Code of 1986. 
‘‘(c) TRANSFERS OF PROPERTY BETWEEN SPOUSES 
OR INCIDENT TO DIVORCE.—
‘‘(1) GENERAL RULE.—Gross income shall not 
be recognized on the transfer of property from an 
individual to (or in trust for the benefit of)—
‘‘(A) a spouse, or 
‘‘(B) a former spouse, but only if the 
transfer is incident to divorce. 
‘‘(2) TRANSFER
TREATED
AS
A
GIFT.—Any 
transfer described in paragraph (1) shall be treated 
as a gift. 
‘‘(d) CERTAIN EXCHANGES
OF INSURANCE POLI-
CIES.—Under regulations prescribed by the Secretary, 
gross income shall not be recognized on the exchange of 
insurance policies or another life insurance policy or an 
annuity contract or the exchange of annuity contracts. 
The regulations shall adopt principles similar to those 
under section 1035 of the Internal Revenue Code of 1986.
151
‘‘(e) CERTAIN EXCHANGES OF UNITED STATES OB-
LIGATIONS.—When so provided by regulations promul-
gated by the Secretary in connection with the issue of obli-
gations of the United States, no gain or loss shall be rec-
ognized on the surrender to the United States of obliga-
tions of the United States issued under chapter 31 of title 
31 in exchange solely for other obligations issued under 
such chapter. 
‘‘SEC. 78. WASH SALES AND STRADDLES. 
‘‘(a) LOSSES FROM WASH SALES OF STOCK OR SE-
CURITIES.—Under regulations prescribed by the Sec-
retary, no loss shall be recognized on the wash sale of 
stock or securities. The regulations shall adopt principles 
similar to those under section 1091 of the Internal Rev-
enue Code of 1986. 
‘‘(b) STRADDLES.—Under regulations prescribed by 
the Secretary, the loss that can be taken into account from 
1 or more straddle positions shall be limited. The regula-
tions shall adopt principles similar to those under section 
1038 of the Internal Revenue Code of 1986. 
‘‘SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANS-
ACTIONS. 
‘‘(a) NO LOSS ON PERSONAL USE PROPERTY.—No 
loss shall be recognized on the sale or exchange of personal 
use property (as defined in section 210(b)(3)(B)).
152
‘‘(b) LIMITATION ON NET CAPITAL LOSS.—
‘‘(1) IN GENERAL.—Losses from sales or ex-
changes of capital assets in a taxable year shall be 
allowed only to the extent of the gains from such 
sales or exchanges, plus $3,000 ($1,500 in the case 
of a married individual filing a separate return). 
‘‘(2) CAPITAL LOSS CARRYOVERS.—Under regu-
lations prescribed by the Secretary, any loss not al-
lowed by reason of paragraph (1) shall be carried 
over to the following taxable year and treated as a 
capital loss incurred in such year. There shall be no 
limit on the number of years that a capital loss can 
be carried forward. 
‘‘(3) CAPITAL ASSETS.—Under regulations pre-
scribed by the Secretary, the principles of the Inter-
nal Revenue Code of 1986 (including, without limi-
tation, sections 1234 (relating to options), 1234A 
(relating to gains or losses from certain termi-
nations), 1253 (relating to franchises and trade-
marks) and 1258 (gain from certain financial trans-
actions) shall apply for purposes of determining 
what is a capital asset and whether an event is to 
be treated as a sale or exchange of capital assets, ex-
cept to the extent inconsistent with principles of this 
chapter.
153
‘‘(4) RECAPTURE.—If a taxpayer claimed de-
preciation, amortization or other cost recovery de-
ductions under the Internal Revenue Code of 1986 
with respect to property which is subsequently sold 
or exchanged in a transaction that is not treated as 
transaction of a business entity, the amount of gain 
on the exchange of such property which is treated as 
gain from the sale or exchange of a capital asset 
shall be reduced (but not below zero) by the amount 
of such deductions claimed with respect to the prop-
erty. 
‘‘Subchapter D—Rules for Exclusions from 
Gross Income
‘‘Sec. 91. Interest on tax-exempt bonds. 
‘‘Sec. 92. Combat pay. 
‘‘Sec. 93. Qualified military benefits. 
‘‘Sec. 94. Qualified foster care payments. 
‘‘Sec. 95. Compensation for injury and sickness. 
‘‘Sec. 96. Meals or lodging for convenience of employer. 
‘‘Sec. 97. Certain fringe benefits.
‘‘SEC. 91. INTEREST ON TAX-EXEMPT BONDS. 
‘‘(a) EXCLUSION.—Except as provided in subsection 
(b), gross income does not include interest on any State 
or local bond. 
‘‘(b) EXCEPTIONS.—Subsection (a) shall not apply 
to—
‘‘(1) PRIVATE ACTIVITY BOND WHICH IS NOT A 
QUALIFIED BOND.—Any private activity bond which
154
is not a qualified bond (within the meaning of para-
graph (3) of subsection (c)). 
‘‘(2) ARBITRAGE BOND.—Any arbitrage bond.
‘‘(3) BOND NOT IN REGISTERED FORM, ETC.—
Any bond unless such bond meets the applicable re-
quirements set forth in regulations. 
‘‘(c) DEFINITIONS—For purposes of this section—
‘‘(1) STATE OR LOCAL BOND.—‘State or local 
bond’ means an obligation of a State or political 
subdivision thereof. 
‘‘(2) STATE.—‘State’ includes the District of 
Columbia and any possession of the United States. 
‘‘(3) 
QUALIFIED
BOND.—‘Qualified 
bond’ 
means any private activity bond if—
‘‘(A) IN GENERAL.—Such bond is—
‘‘(i) an exempt facility bond, 
‘‘(ii) a qualified mortgage bond, 
‘‘(iii) a qualified veterans’ mortgage 
bond, 
‘‘(iv) a qualified small issue bond, 
‘‘(v) a qualified student loan bond, 
‘‘(vi) a qualified 253(c)(3) bond. 
‘‘(B) VOLUME CAP.—Such bond is issued 
as part of an issue which meets the applicable
155
volume cap requirements set forth in regula-
tions.
‘‘(C) OTHER REQUIREMENTS.—Such bond 
meets the applicable requirements set forth in 
regulations. 
‘‘(d) REGULATIONS.—
‘‘(1) STATUTORY
REGULATIONS.—The Sec-
retary shall publish as regulations governing the ap-
plication of this section the text of part IV of sub-
chapter B of chapter 1 of the Internal Revenue Code 
of 1986 (sections 141 through 149) with only such 
changes as are required to conform cross references. 
‘‘(2) OTHER
REGULATIONS.—The Secretary 
shall have the authority to promulgate such other 
regulations as he deems necessary or proper to im-
plement this section, except that no such regulations 
shall conflict with the regulations mandated by para-
graph (1) except as provided in this subtitle. 
‘‘SEC. 92. COMBAT PAY. 
‘‘(a) ENLISTED PERSONNEL.—Gross income does not 
include compensation received for active service as a mem-
ber below the grade of commissioned officer in the Armed 
Forces of the United States for any month during any 
part of which such member—
‘‘(1) served in a combat zone, or
156
‘‘(2) was hospitalized as a result of wounds, dis-
ease, or injury incurred while serving in a combat 
zone; but this paragraph shall not apply for any 
month beginning more than 2 years after the date 
of the termination of combatant activities in such 
zone. 
‘‘(b) COMMISSIONED OFFICERS.—Gross income does 
not include so much of the compensation as does not ex-
ceed $500 received for active service as a commissioned 
officer in the Armed Forces of the United States for any 
month during any part of which such officer—
‘‘(1) served in a combat zone, or 
‘‘(2) was hospitalized as a result of wounds, dis-
ease, or injury incurred while serving in a combat 
zone; but this paragraph shall not apply for any 
month beginning more than 2 years after the date 
of the termination of combatant activities in such 
zone. 
‘‘(c) DEFINITIONS.—For purposes of this section—
‘‘(1) ‘Commissioned officer’ does not include a 
commissioned warrant officer. 
‘‘(2) ‘Combat zone’ means any area which the 
President of the United States by Executive Order 
designates, for purposes of this section or cor-
responding provisions of prior income tax laws, an
157
area in which Armed Forces of the United States 
are or have (after June 24, 1950) engaged in com-
bat. 
‘‘(3) Service is performed in a combat zone only 
if performed on or after the date designated by the 
President by Executive Order as the date of the 
commencing of combatant activities in such zone, 
and on or before the date designated by the Presi-
dent by Executive Order as the date of the termi-
nation of combatant activities in such zone; except 
that June 25, 1950, shall be considered the date of 
the commencing of combatant activities in the com-
bat zone designated in Executive Order 10195. 
‘‘(4) The term ‘compensation’ does not include 
pensions and retirement pay. 
‘‘SEC. 93. QUALIFIED MILITARY BENEFIT. 
‘‘(a) IN
GENERAL.—‘Qualified military benefit’ 
means any allowance or in-kind benefit (other than per-
sonal use of a vehicle) which—
‘‘(1) is received by any member or former mem-
ber of the uniformed service of the United States or 
any dependent of such member by reason of such 
member’s status or service as a member of such uni-
formed services, and
158
‘‘(2) was excludable from gross income on Sep-
tember 9, 1986, under any provision of law, regula-
tion, or administrative practice which was in effect 
on such date (other than a provision of this title). 
‘‘(b) NO OTHER BENEFIT TO BE EXCLUDABLE AS 
PROVIDED BY THIS TITLE.—Notwithstanding any other 
provision of law, no benefit shall be treated as a qualified 
military benefit unless such benefit—
‘‘(1) is a benefit described in subsection (a), or 
‘‘(2) is excludable from gross income 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. 
‘‘(c) LIMITATIONS ON MODIFICATIONS.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), no modification or adjustment of any 
qualified military benefit after September 9, 1986, 
shall be taken into account. 
‘‘(2) EXCEPTION FOR CERTAIN ADJUSTMENTS 
TO CASH BENEFITS.—Paragraph (1) shall not apply 
to any adjustment to any qualified military benefit 
payable in cash which—
‘‘(A) is pursuant to a provision of law or 
regulation (as in effect on September 9, 1986), 
and
159
‘‘(B) is determined by reference to any 
fluctuation in cost, price, currency, or other 
similar index. 
‘‘SEC. 94. QUALIFIED FOSTER CARE PAYMENTS. 
‘‘(a) QUALIFIED
FOSTER
CARE
PAYMENT
DE-
FINED.—
‘‘(1) IN GENERAL.—‘Qualified foster care pay-
ment’ means any amount—
‘‘(A) which is paid by a state or political 
subdivision thereof or by a placement agency 
which is described in section 253(c)(3) and ex-
empt from tax under section 253(a), and 
‘‘(B) which is—
‘‘(i) paid to the foster care provider 
for caring for a qualified foster individual 
in the foster care provider’s home, or 
‘‘(ii) a difficulty of care payment. 
‘‘(2) QUALIFIED FOSTER INDIVIDUAL.—‘Quali-
fied foster individual’ means any individual who is 
living in a foster family home in which such indi-
vidual was placed by—
‘‘(A) an agency of a State or a political 
subdivision thereof, or 
‘‘(B) in the case of an individual who has 
not attained age 19, an organization which is li-
160
censed by a State (or political subdivision there-
of) as a placement agency and which is de-
scribed in section 253(c)(3) and exempt from 
tax under section 253(a). 
‘‘(3) LIMITATION BASED ON NUMBER OF INDI-
VIDUALS OVER THE AGE OF 18.—In the case of any 
foster home in which there is a qualified foster care 
individual who has attained age 19, foster care pay-
ments (other than difficulty of care payments) for 
any period to which such payments relate shall not 
be excludable from gross income under subsection 
(a) to the extent such payments are made for more 
than 5 such qualified foster individuals. 
‘‘(b) DIFFICULTY OF CARE PAYMENTS.—For pur-
poses of this section—
‘‘(1) DIFFICULTY OF CARE PAYMENTS.—‘Dif-
ficulty of care payments’ means payments to individ-
uals 
which 
are 
not 
described 
in 
subsection 
(a)(1)(B)(i), and which—
‘‘(A) are compensation for providing the 
additional care of a qualified foster individual 
which is—
‘‘(i) required by reason of a physical, 
mental, or emotional handicap of such in-
dividual with respect to which the State
161
has determined that there is a need for ad-
ditional compensation, and
‘‘(ii) provided in the home of the fos-
ter care provider, and 
‘‘(B) are designated by the payor as com-
pensation described in subparagraph (A). 
‘‘(2) LIMITATION BASED ON NUMBER OF INDI-
VIDUALS.—In the case of any foster home, difficulty 
of care payments for any period to which such pay-
ments relate shall not be excludable from gross in-
come under subsection (a) to the extent such pay-
ments are made for more than—
‘‘(A) 10 qualified foster individuals who 
have not attained age 19, and 
‘‘(B) 5 qualified foster individuals not de-
scribed in subparagraph (A). 
‘‘SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS. 
‘‘(a) IN GENERAL.—Gross income does not include—
‘‘(1) amounts received under workers’ com-
pensation acts as compensation for personal injuries 
or sickness; 
‘‘(2) the amount of any damages received 
(whether by suit or agreement and whether as lump 
sums or as periodic payments) on account of per-
sonal injuries or sickness;
162
‘‘(3) amounts received through accident or 
health insurance for medical care; 
‘‘(4) amounts received through accident or 
health insurance for personal injuries or sickness 
(other than for medical care), but only to the extent 
such amounts (A) are not attributable to contribu-
tions by the employer which were not includible in 
the gross income of the employee, and are (B) not 
paid by the employer; 
‘‘(5) amounts received as pension, annuity, or 
similar allowance for personal injuries or sickness re-
sulting from active service in the armed forces of 
any country or in the Coast and Geodetic Survey or 
the Public Health Service, or as a disability annuity 
payable under the provisions of section 808 of the 
Foreign Service Act of 1980; and 
‘‘(6) amounts received by an individual as dis-
ability income attributable to injuries incurred as a 
direct result of a violent attack which the Secretary 
of State determines to be a terrorist attack and 
which occurred while such individual was an em-
ployee of the United States engaged in the perform-
ance of his official duties outside the United States.
163
Paragraph (2) shall not apply to any punitive dam-
ages in connection with a case not involving physical 
injury or physical sickness. 
‘‘(b) TERMINATION OF APPLICATION OF SUBSECTION 
(a)(4) IN CERTAIN CASES.—
‘‘(1) IN GENERAL.—Subsection (a)(4) shall not 
apply in the case of an individual who is not de-
scribed in paragraph (2). 
‘‘(2) INDIVIDUALS
TO
WHOM
SUBSECTION 
(a)(4) CONTINUES TO APPLY.—An individual is de-
scribed in this paragraph if—
‘‘(A) on or before September 24, 1975, he 
was entitled to receive any amount described in 
subsection (a)(4), 
‘‘(B) on September 24, 1975, he was a 
member of any organization (or reserve compo-
nent thereof) referred to in subsection (a)(4) or 
under a binding written commitment to become 
such a member, 
‘‘(C) he receives an amount described in 
subsection (a)(4) by reason of a combat-related 
injury, or 
‘‘(D) on application therefore, he would be 
entitled to receive disability compensation from 
the Veterans’ Administration.
164
‘‘(3) SPECIAL RULES FOR COMBAT-RELATED IN-
JURIES.—For purposes of this subsection, the term 
‘combat-related injury’ means personal injury or 
sickness—
‘‘(A) which is incurred—
‘‘(i) as a direct result of armed con-
flict, 
‘‘(ii) while engaged in extrahazardous 
service, or 
‘‘(iii) under conditions simulating war; 
or 
‘‘(B) which is caused by an instrumentality 
of war. 
In the case of an individual who is not described in 
subparagraph (A) or (B) of paragraph (2), except as 
provided in paragraph (4), the only amounts taken 
into account under subsection (a)(4) shall be the 
amounts which he receives by reason of a combat-
related injury. 
‘‘(4) AMOUNT
EXCLUDED
TO
BE
NOT
LESS 
THAN
VETERANS’ DISABILITY
COMPENSATION.—In 
the case of any individual described in paragraph 
(2), the amounts excludable under subsection (a)(4) 
for any period with respect to any individual shall 
not be less than the maximum amount which such
165
individual, on application therefor, would be entitled 
to receive as disability compensation from the Vet-
erans’ Administration. 
‘‘SEC. 96. MEALS OR LODGING FURNISHED FOR THE CON-
VENIENCE OF THE EMPLOYER. 
‘‘(a) MEALS
AND LODGING FURNISHED
TO EM-
PLOYEE, HIS SPOUSE, AND HIS DEPENDENTS, PURSU-
ANT TO EMPLOYMENT.—There shall be excluded from 
gross income of an employee the value of any meals or 
lodging furnished to him, his spouse, or any of his depend-
ents by or on behalf of his employer for the convenience 
of the employer, but only if—
‘‘(1) in the case of meals, the meals are fur-
nished on the business premises of the employer, or 
‘‘(2) in the case of lodging, the employee is re-
quired to accept such lodging on the business prem-
ises of his employer as a condition of his employ-
ment. 
‘‘(b) SPECIAL RULES.—For the purposes of sub-
section (a)—
‘‘(1) PROVISIONS OF EMPLOYMENT CONTRACT 
OR STATE STATUTE NOT TO BE DETERMINATIVE.—
In determining whether meals or lodging are fur-
nished for the convenience of the employer, the pro-
visions of an employment contract or of a State stat-
166
ute fixing terms of employment shall not be deter-
minative of whether the meals or lodging are in-
tended as compensation. 
‘‘(2) CERTAIN FACTORS NOT TAKEN INTO AC-
COUNT WITH RESPECT TO MEALS.—In determining 
whether meals are furnished for the convenience of 
the employer, the fact that a charge is made for 
such meals, and the fact that the employee may ac-
cept or decline such meals, shall not be taken into 
account. 
‘‘(3) CERTAIN FIXED CHARGES FOR MEALS.—
‘‘(A) IN GENERAL.—If—
‘‘(i) an employee is required to pay on 
a periodic basis a fixed charge for his 
meals, and 
‘‘(ii) such meals are furnished by the 
employer for the convenience of the em-
ployer, 
there shall be excluded from the employee’s 
gross income an amount equal to such fixed 
charge. 
‘‘(B) APPLICATION
OF
SUBPARAGRAPH 
(A).—Subparagraph (A) shall apply—
167
‘‘(i) whether the employee pays the 
fixed charge out of his stated compensation 
or out of his own funds, and 
‘‘(ii) only if the employee is required 
to make the payment whether he accepts 
or declines the meals. 
‘‘(c) EMPLOYEES LIVING IN CERTAIN CAMPS.—
‘‘(1) IN GENERAL.—In the case of an individual 
who is furnished lodging in a camp located in a for-
eign country by or on behalf of his employer, such 
camp shall be considered to be part of the business 
premises of the employer. 
‘‘(2) CAMP.—For purposes of this section, a 
camp constitutes lodging which is—
‘‘(A) provided by or on behalf of the em-
ployer for the convenience of the employer be-
cause the place at which such individual renders 
services is in a remote area where satisfactory 
housing is not available on the open market, 
‘‘(B) located, as near as practicable, in the 
vicinity of the place at which such individual 
renders services, and 
‘‘(C) furnished in a common area (or en-
clave) which is not available to the public and
168
which normally accommodates 10 or more em-
ployees. 
‘‘(d) LODGING
FURNISHED
BY
CERTAIN
EDU-
CATIONAL INSTITUTIONS TO EMPLOYEES.—
‘‘(1) IN GENERAL.—In the case of an employee 
of an educational institution, gross income shall not 
include the value of qualified campus lodging fur-
nished to such employee during the taxable year. 
‘‘(2) EXCEPTION
IN
CASES
OF
INADEQUATE 
RENT.—Paragraph (1) shall not apply to the extent 
of the excess of—
‘‘(A) the lesser of—
‘‘(i) 5 percent of the appraised value 
of the qualified campus lodging, or 
‘‘(ii) the average of the rentals paid 
by individuals (other than employees or 
students of the educational institution) 
during such calendar year for lodging pro-
vided by the educational institution which 
is comparable to the qualified campus lodg-
ing provided to the employee, over 
‘‘(B) the rent paid by the employee for the 
qualified campus lodging during such calendar 
year.
169
The appraised value under subparagraph (A)(i) shall 
be determined as of the close of the calendar year 
in which the taxable year begins, or, in the case of 
a rental period not greater than 1 year, at any time 
during the calendar year in which such period be-
gins. 
‘‘(3) QUALIFIED CAMPUS LODGING.—For pur-
poses of this subsection, the term ‘qualified campus 
lodging’ means lodging to which subsection (a) does 
not apply and which is—
‘‘(A) located on, or in the proximity of, a 
campus of the educational institution, and 
‘‘(B) furnished to the employee, his spouse, 
and any of his dependents by or on behalf of 
such institution for use as a residence. 
‘‘(4) EDUCATIONAL
INSTITUTION.—For pur-
poses of this paragraph, the term ‘educational insti-
tution’ means an eligible educational institution as 
defined in section 10(b)(2)(B). 
‘‘SEC. 97. CERTAIN FRINGE BENEFITS. 
‘‘(a) PURPOSE.—This section includes definitions and 
rules applicable to the exclusion from gross income for cer-
tain fringe benefits.
170
‘‘(b) NO-ADDITIONAL-COST SERVICE DEFINED.—
‘No-additional-cost service’ means any service provided by 
an employer to an employee for use by such employee if—
‘‘(1) such service is offered for sale to cus-
tomers in the ordinary course of the line of business 
of the employer in which the employee is performing 
services, and 
‘‘(2) the employer incurs no substantial addi-
tional cost (including forgone revenue) in providing 
such service to the employee (determined without re-
gard to any amount paid by the employee for such 
service). 
‘‘(c) QUALIFIED EMPLOYEE DISCOUNT DEFINED.—
‘‘(1) QUALIFIED
EMPLOYEE
DISCOUNT.—The 
term ‘qualified employee discount’ means any em-
ployee discount with respect to qualified property or 
services to the extent such discount does not ex-
ceed—
‘‘(A) in the case of property, the gross 
profit percentage of the price at which the prop-
erty is being offered by the employer to cus-
tomers, or 
‘‘(B) in the case of services, 20 percent of 
the price at which the services are being offered 
by the employer to customers.
171
‘‘(2) GROSS PROFIT PERCENTAGE.—
‘‘(A) IN GENERAL.—‘Gross profit percent-
age’ means the percent which—
‘‘(i) the excess of the aggregate sales 
price of property sold by the employer to 
customers over the aggregate cost of such 
property to the employer, is of 
‘‘(ii) the aggregate sales price of such 
property. 
‘‘(B) DETERMINATION OF GROSS PROFIT 
PERCENTAGE.—Gross profit percentage shall be 
determined on the basis of—
‘‘(i) all property offered to customers 
in the ordinary course of the line of busi-
ness of the employer in which the employee 
is performing services (or a reasonable 
classification of property selected by the 
employer), and 
‘‘(ii) the employer’s experience during a 
representative period. 
‘‘(3) EMPLOYEE
DISCOUNT
DEFINED.—‘Em-
ployee discount’ means the amount by which—
‘‘(A) the price at which the property or 
services are provided by the employer to an em-
ployee for use by such employee, is less than
172
‘‘(B) the price at which such property or 
services are being offered by the employer to 
customers. 
‘‘(4) QUALIFIED
PROPERTY
OR
SERVICES.—
‘Qualified property or services’ means any property 
(other than real property and other than personal 
property of a kind held for investment) or services 
which are offered for sale to customers in the ordi-
nary course of the line of business of the employer 
in which the employee is performing services. 
‘‘(c) DE MINIMIS FRINGE DEFINED.—
‘‘(1) IN GENERAL.—‘De minimis fringe’ means 
any property or service the value of which is (after 
taking into account the frequency with which similar 
fringes are provided by the employer to the employ-
er’s employees) so small as to make accounting for 
it unreasonable or administratively impracticable. 
‘‘(2) TREATMENT OF CERTAIN EATING FACILI-
TIES.—The operation by an employer of any eating 
facility for employees shall be treated as a de mini-
mis fringe if—
‘‘(A) such facility is located on or near the 
business premises of the employer, and
173
‘‘(B) revenue derived from such facility 
normally equals or exceeds the direct operating 
costs of such facility. 
The preceding sentence shall apply with respect to 
any highly compensated employee only if access to 
the facility is available on substantially the same 
terms to each member of a group of employees 
which is defined under a reasonable classification set 
up by the employer which does not discriminate in 
favor of highly compensated employees. 
‘‘(3) ON-PREMISES GYMS AND OTHER ATHLETIC 
FACILITIES.—
‘‘(A) IN
GENERAL.—De minimis fringe 
benefits include the provision of on-premises 
athletic facility by an employer to its employees. 
‘‘(B) ON-PREMISES ATHLETIC FACILITY.—
For purposes of this paragraph, ‘on-premises 
athletic facility’ means any gym or other ath-
letic facility—
‘‘(i) which is located on the premises 
of the employer, 
‘‘(ii) which is operated by the em-
ployer, and
174
‘‘(iii) substantially all the use of which 
is by employees of the employer, their 
spouses, and their dependent children. 
‘‘(d) CERTAIN
EDUCATIONAL
TRAINING
BENE-
FITS.—Amounts paid or expenses incurred by the em-
ployer for education or training provided to the employee 
shall be excluded from gross income under section 4 if 
(and only if) such amounts or expenses are ordinary and 
necessary business expenses and are not for an advanced 
degree or to qualify an employee for a new line of work. 
‘‘(e) REGULATIONS.—The Secretary shall prescribe 
regulations under this section, including regulations that 
continue certain rules contained in section 132 to the In-
ternal Revenue Code of 1986 related to the fringe benefits 
described in this section. 
‘‘Subchapter E—Rules Relating to Deductions
‘‘Sec. 101. Charitable, etc. organizations. 
‘‘Sec. 102. Private foundations.
‘‘SEC. 101. CHARITABLE, ETC. ORGANIZATIONS. 
‘‘(a) PURPOSE.—This section provides definitions for 
purposes of determining the philanthropic transfer deduc-
tion and for other purposes of this chapter and chapter 
2. 
‘‘(b) REGULAR CHARITY.—
‘‘(1) IN GENERAL.—
175
‘‘(A) REGULAR CHARITY.—‘Regular char-
ity’ means—
‘‘(i) a church or a convention or asso-
ciation of churches, 
‘‘(ii) 
an 
educational 
organization 
which normally maintains a regular faculty 
and curriculum and normally has a regu-
larly enrolled body of pupils or students in 
attendance at the place where its edu-
cational activities are regularly carried on, 
‘‘(iii) an organization the principal 
purpose or functions of which are the pro-
viding of medical or hospital care or med-
ical education or medical research, if the 
organization is a hospital, or if the organi-
zation is a medical research organization 
directly engaged in the continuous active 
conduct of medical research in conjunction 
with a hospital, 
‘‘(iv) an organization which normally 
receives a substantial part of its support 
(exclusive of income received in the exer-
cise or performance by such organization 
of its charitable, educational, or other pur-
pose or function constituting the basis for
176
its exemption under section 253(a)) from 
the United States or any State or political 
subdivision thereof or from direct or indi-
rect contributions from the general public, 
and which is organized and operated exclu-
sively to receive, hold, invest, and admin-
ister property and to make expenditures to 
or for the benefit of a college or university 
which is an organization referred to in 
clause (ii) of this subparagraph and which 
is an agency or instrumentality of a State 
or political subdivision thereof, or which is 
owned or operated by a State or political 
subdivision thereof or by an agency or in-
strumentality of one or more States or po-
litical subdivisions, 
‘‘(v) a governmental unit referred to 
in subsection (c)(1), 
‘‘(vi) an organization referred to in 
subsection (c)(2) which normally receives a 
substantial part of its support (exclusive of 
income received in the exercise or perform-
ance by such organization of its charitable, 
educational, or other purpose or function 
constituting the basis for its exemption
177
under section 253(a)) from a governmental 
unit referred to in subsection (c)(1) or 
from direct or indirect contributions from 
the general public, 
‘‘(vii) a private foundation described 
in subparagraph (C), or 
‘‘(viii) an organization described in 
section 102(a) (2) or (3). 
‘‘(B) SPECIAL
RULE
FOR
MEDICAL
RE-
SEARCH ORGANIZATIONS.—For purposes of de-
termining whether a contribution is to a regular 
charity, a medical research organization shall 
not be treated as described in clause (iii) of 
paragraph (2) unless during the calendar year 
in which the contribution is made such organi-
zation is committed to spend such contributions 
for such research before January 1 of the fifth 
calendar year which begins after the date such 
contribution is made, 
‘‘(C) CERTAIN PRIVATE FOUNDATIONS.—
The private foundations referred to in subpara-
graph (A)(vii) and subsection (e)(1)(B) are—
‘‘(i) a private operating foundation (as 
defined in section 4942(j)(3)),
178
‘‘(ii) any other private foundation (as 
defined in section 102(a)) which, not later 
than the 15th day of the third month after 
the close of the foundation’s taxable year 
in which contributions are received, makes 
qualifying distributions (as defined in sec-
tion 4942(g), without regard to paragraph 
(3) thereof), which are treated, after the 
application of section 4942(g)(3), as dis-
tributions out of corpus (in accordance 
with section 4942(h)) in an amount equal 
to 100 percent of such contributions, and 
with respect to which the taxpayer obtains 
adequate records or other sufficient evi-
dence from the foundation showing that 
the foundation made such qualifying dis-
tributions, and 
‘‘(iii) a private foundation all of the 
contributions to which are pooled in a com-
mon fund and which would be described in 
section 102(a)(3) but for the right of any 
substantial contributor (hereafter in this 
clause called ‘donor’) or his spouse to des-
ignate annually the recipients, from among 
organizations described in paragraph (1) of
179
section 102(a), of the income attributable 
to the donor’s contribution to the fund and 
to direct (by deed or by will) the payment, 
to an organization described in such para-
graph (1), of the corpus in the common 
fund attributable to the donor’s contribu-
tion; but this clause shall apply only if all 
of the income of the common fund is re-
quired to be (and is) distributed to one or 
more organizations described in such para-
graph (1) not later than the 15th day of 
the third month after the close of the tax-
able year in which the income is realized 
by the fund and only if all of the corpus 
attributable to any donor’s contribution to 
the fund is required to be (and is) distrib-
uted to one or more of such organizations 
not later than one year after his death or 
after the death of his surviving spouse if 
she has the right to designate the recipi-
ents of such corpus. 
‘‘(2) REFERENCES.—Any reference in other law 
or in legal documents to an organization described 
in a clause of section 170(b)(1)(A) of the Internal 
Revenue Code of 1986 shall constitute a reference to
180
an organization described in the same clause of sec-
tion 101(b)(1)(A). 
‘‘(c) CHARITY.—For purposes of determining the de-
ductibility of a philanthropic transfer, ‘charitable contribu-
tion’ means a contribution or gift for the use of—
‘‘(1) A State, a possession of the United States, 
or any political subdivision of any of the foregoing, 
or the United States or the District of Columbia, 
but only if the contribution or gift is made for exclu-
sively public purposes. 
‘‘(2) A corporation, trust, or community chest, 
fund, or foundation—
‘‘(A) created or organized in the United 
States or in any possession thereof, or under 
the law of the United States, any State, the 
District of Columbia, or any possession of the 
United States, 
‘‘(B) organized and operated exclusively 
for religious, charitable, scientific, literary, or 
educational purposes (but only if no part of its 
activities involve the provision of athletic facili-
ties or equipment) or for the prevention of cru-
elty to children or animals,
181
‘‘(C) no part of the net earnings of which 
inures to the benefit of any private shareholder 
or individual, and 
‘‘(D) which qualifies for exemption from 
the business tax under section 253(c) and is not 
disqualified for tax exemption by reason of at-
tempting to influence legislation, and which 
does not participate in, or intervene in (includ-
ing the publishing or distributing of state-
ments), any political campaign on behalf of (or 
in opposition to) any candidate for public office. 
‘‘(3) [intentionally deleted] 
‘‘(4) In the case of a contribution or gift by an 
individual, a domestic fraternal society, order, or as-
sociation, operating under the lodge system, but only 
if such contribution or gift is to be used exclusively 
for religious, charitable, scientific, literary, or edu-
cational purposes, or for the prevention of cruelty to 
children or animals. 
‘‘(5) A cemetery company owned and operated 
exclusively for the benefit of its members, or any 
corporation chartered solely for burial purposes as a 
cemetery corporation and not permitted by its char-
ter to engage in any business not necessarily inci-
dent to that purpose, if such company or corporation
182
is not operated for profit and no part of the net 
earnings of such company or corporation inures to 
the benefit of any private shareholder or individual. 
‘‘(d) RULES FOR SUBSECTION (c).—
‘‘(1) LIMITATIONS.—A contribution or gift by a 
corporation to a trust, chest, fund, or foundation 
shall be deductible by reason of subsection (c)(2)(B) 
only if it is to be used within the United States or 
any of its possessions exclusively for purposes speci-
fied in subparagraph (B). 
‘‘(2) REFERENCES.—Any reference in other law 
or in legal documents to an organization described 
in a paragraph of section 170(c) of the Internal Rev-
enue Code of 1986 shall constitute a reference to an 
organization described in the same paragraph num-
ber of section 101(c) if an organization is described 
in such paragraph. 
‘‘(e) QUALIFIED CONSERVATION CONTRIBUTION.—
‘‘(1) IN GENERAL.—‘Qualified conservation con-
tribution’ means a contribution—
‘‘(A) of a qualified real property interest, 
‘‘(B) to a qualified organization, 
‘‘(C) exclusively for conservation purposes.
183
‘‘(2) QUALIFIED REAL PROPERTY INTEREST.—
‘Qualified real property interest’ means any of the 
following interests in real property: 
‘‘(A) the entire interest of the donor other 
than a qualified mineral interest, 
‘‘(B) a remainder interest, and 
‘‘(C) a restriction (granted in perpetuity) 
on the use which may be made of the real prop-
erty. 
‘‘(3) QUALIFIED ORGANIZATION.—For purposes 
of paragraph (1), the term ‘qualified organization’ 
means an organization which—
‘‘(A) is described in clause (v) or (vi) of 
subsection (b)(1)(A), or 
‘‘(B) is described in section 253(c)(3) 
and—
‘‘(i) meets the requirements of section 
102(a)(2), or 
‘‘(ii) meets the requirements of sec-
tion 102(a)(3) and is controlled by an or-
ganization described in subparagraph (A) 
or in clause (i) of this subparagraph. 
‘‘(4) CONSERVATION PURPOSE DEFINED.—
184
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the term ‘conservation purpose’ 
means—
‘‘(i) the preservation of land areas for 
outdoor recreation by, or the education of, 
the general public, 
‘‘(ii) the protection of a relatively nat-
ural habitat of fish, wildlife, or plants, or 
similar ecosystem, 
‘‘(iii) the preservation of open space 
(including farmland and forest land) where 
such preservation is—
‘‘(I) for the scenic enjoyment of 
the general public, or 
‘‘(II) pursuant to a clearly delin-
eated Federal, State, or local govern-
mental conservation policy, and will 
yield a significant public benefit, or 
‘‘(iv) the preservation of an histori-
cally important land area or a certified his-
toric structure. 
‘‘(B) CERTIFIED HISTORIC STRUCTURE.—
For purposes of subparagraph (A)(iv), the term 
‘certified historic structure’ means any building, 
structure, or land area which—
185
‘‘(i) is listed in the National Register, 
or 
‘‘(ii) is located in a registered historic 
district and is certified by the Secretary of 
the Interior to the Secretary as being of 
historic significance to the district. 
A building, structure, or land area satisfies the 
preceding sentence if it satisfies such sentence 
either at the time of the transfer or on the due 
date (including extensions) for filing the trans-
feror’s return under this chapter for the taxable 
year in which the transfer is made. 
‘‘(5) EXCLUSIVELY
FOR
CONSERVATION
PUR-
POSES.—For purposes of this subsection—
‘‘(A) CONSERVATION
PURPOSE
MUST
BE 
PROTECTED.—A contribution shall not be treat-
ed as exclusively for conservation purposes un-
less the conservation purpose is protected in 
perpetuity. 
‘‘(B) NO SURFACE MINING PERMITTED.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), in the case of a con-
tribution of any interest where there is a 
retention of a qualified mineral interest, 
subparagraph (A) shall not be treated as
186
met if at any time there may be extraction 
or removal of minerals by any surface min-
ing method. 
‘‘(ii) SPECIAL RULE.—With respect to 
any contribution of property in which the 
ownership of the surface estate and min-
eral interests were separated before June 
13, 1976, and remain so separated, sub-
paragraph (A) shall be treated as met if 
the probability of surface mining occurring 
on such property is so remote as to be neg-
ligible. 
‘‘(6) QUALIFIED
MINERAL
INTEREST.—For 
purposes of this subsection, the term ‘qualified min-
eral interest’ means—
‘‘(A) subsurface oil, gas, or other minerals, 
and 
‘‘(B) the right to access to such minerals. 
‘‘(f) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL 
EXPENSES.—No deduction shall be allowed under section 
211 for traveling expenses (including amounts expended 
for meals and lodging) while away from home, whether 
paid directly or by reimbursement, unless there is no sig-
nificant element of personal pleasure, recreation, or vaca-
tion in such travel.
187
‘‘(g) TREATMENT OF CERTAIN AMOUNTS PAID TO OR 
FOR THE BENEFIT OF INSTITUTIONS OF HIGHER EDU-
CATION.—For purposes of section 11, if as the result of 
a contribution to or for the benefit of an educational orga-
nization—
‘‘(1) 
which 
is 
described 
in 
subsection 
(b)(1)(A)(ii), and 
‘‘(2) which is an institution of higher education 
(as defined in section 3304(f)) 
the taxpayer receives (directly or indirectly) as a result 
of paying such amount the right to purchase tickets for 
seating at an athletic event in an athletic stadium of such 
institution, 80 percent of such contribution shall be treat-
ed as a charitable contribution (but only if such amount 
would be allowable as a deduction but for the fact that 
the taxpayer received the right to purchase tickets). If any 
portion of a payment is for the purchase of such tickets, 
such portion and the remaining portion (if any) of such 
payment shall be treated as separate amounts for purposes 
of this subsection. 
‘‘Subchapter F—Special Business Activities
‘‘Sec. 111. Rules for rental of real estate.
‘‘SEC. 111. RULES FOR RENTAL OF REAL ESTATE. 
‘‘(a) IN GENERAL.—Except as provided in subsection 
(b)—
188
‘‘(1) the activity of rental of real estate is a 
business activity to which the Simplified USA Tax 
for businesses under chapter 2 applies, 
‘‘(2) a taxpayer shall not be entitled to any de-
ductions under this chapter with respect to rental 
property, and 
‘‘(3) a taxpayer shall recognize gross income 
only with respect to distributions from the rental ac-
tivity. 
‘‘(b) INSUBSTANTIAL RENTAL ACTIVITY.—
‘‘(1) NOT RENTAL PROPERTY.—If an individual 
or individuals own property, such individual or indi-
viduals and their families use the property on more 
than 14 days during the taxable year for nonbusi-
ness purposes, the property is rented for no more 
than 14 days during the taxable year, and the total 
rental received by the individuals with respect to 
such property does not exceed $10,000, the property 
shall not be considered rental property or used in 
the activity of rental of real estate during the tax-
able year for purposes of subsection (a) and the 
Simplified USA Tax for businesses under chapter 2. 
‘‘(2) RENTS
FROM
NONRENTAL
PROPERTY.—
Any rent from property described in paragraph (1)
189
shall be included in gross income for purposes of the 
Simplified USA Income Tax. 
‘‘(c) USE FOR A NONBUSINESS PURPOSE.—For pur-
poses of this section, ‘use for a nonbusiness purpose’ 
means use other than—
‘‘(1) use for which fair rent is paid, 
‘‘(2) use in connection with the preparation of 
the property for rental, or 
‘‘(3) use that serves a clear business purpose. 
Use during any part of a day shall constitute use for that 
day. 
‘‘Subchapter G—Accounting Methods and 
Periods
‘‘Sec. 121. Taxable year. 
‘‘Sec. 122. Cash method of accounting; installment sales.
‘‘SEC. 121. TAXABLE YEAR. 
‘‘(a) IN GENERAL.—The taxable year for all individ-
uals subject to tax under this chapter shall be the calendar 
year except as provided in subsection (b). 
‘‘(b) SHORT TAXABLE YEARS.—
‘‘(1) BIRTH.—An individual’s taxable year in 
the year of his birth shall begin on the date of his 
birth. 
‘‘(2) DEATH.—An individual’s taxable year in 
the year of his death shall end on the date of his 
death.
190
‘‘SEC. 122. CASH METHOD OF ACCOUNTING; INSTALLMENT 
SALES. 
‘‘(a) IN GENERAL.—All individuals shall determine 
their income and deductions using the cash receipts and 
disbursement method. 
‘‘(b) OID RULES.—
‘‘(1) IN
GENERAL.—Original issue discount 
shall not be included in gross income until received. 
‘‘(2) PREVIOUSLY RECOGNIZED OID.—Original 
issue discount included in income under the Internal 
Revenue Code of 1986 shall increase the adjusted 
basis of the instrument to which the original issue 
discount related and shall not again be included in 
income when received. 
‘‘(c) INSTALLMENT SALES.—
‘‘(1) IN GENERAL.—Taxpayers shall take into 
account income from installment sales when re-
ceived. 
‘‘(2) REGULATIONS.—The Secretary shall pro-
mulgate regulations implementing paragraph (1). 
Such regulations shall generally follow the principles 
of sections 453, 453A and 453B of the Internal Rev-
enue Code of 1986, except to the extent such prin-
ciples are inconsistent with other provisions of this 
chapter.
191
‘‘(d) CONSTRUCTIVE
RECEIPT.—Income shall be 
treated as received when constructively received. 
‘‘(e) EFFECT OF CHANGE OF ACCOUNTING METH-
OD.—Rules similar to those under section 226 shall apply 
to ensure that a taxpayer does not deduct the same ex-
pense twice or include the same item in income twice. 
‘‘Subchapter H—Nonresident Aliens
‘‘Sec. 131. Tax on nonresident alien individuals. 
‘‘Sec. 132. Tax treatment of certain community income of nonresident aliens.
‘‘SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS. 
‘‘(a) NONBUSINESS INCOME.—
‘‘(1) INCOME OTHER THAN CERTAIN GAINS.—
There is hereby imposed for each taxable year a tax 
of 30 percent of the amount received from sources 
within the United States by a nonresident alien indi-
vidual as—
‘‘(A) interest (other than portfolio interest 
(as defined in subsection (b)(2)), deposit inter-
est (as defined in subsection (b)(3)) and origi-
nal issue discount, dividends, rents, salaries, 
wages, premiums, annuities, compensations, re-
munerations, emoluments, and other fixed or 
determinable annual periodical gains, profits 
and income,
192
‘‘(B) gains from the disposal of timber, 
coal, or iron ore with a retained economic inter-
est, 
‘‘(C) in the case of the sale of an original 
discount obligation or payment on an original 
issue discount obligation, the interest accrued 
while the individual was a nonresident alien, 
and 
‘‘(D) includible social security benefits (as 
defined in section 3(b)(2)). 
‘‘(2) CAPITAL GAINS OF CERTAIN ALIENS.—In 
the case of a nonresident alien individual present in 
the United States for a period or periods aggre-
gating 183 days or more during the taxable year, 
there is hereby imposed a tax of 30 percent of the 
amount by which the gains, derived from sources 
within the United States, from the sale or exchange 
at any time during such year exceeds his losses, allo-
cable to sources within the United States, from the 
sale or exchange at any time during such year of 
capital assets. 
‘‘(3) TAX DOES NOT APPLY TO BUSINESS IN-
COME.—The taxes imposed by this section shall not 
apply to the income of any business entity, except to
193
the extent such income is distributed as compensa-
tion, dividends, or interest. 
‘‘(b) SPECIAL RULES AND DEFINITIONS.—
‘‘(1) CERTAIN ANNUITIES.—The taxes imposed 
by subsection (a) shall not apply to any amount re-
ceived as an annuity under a qualified annuity plan 
described in section 403(a)(1), or from a qualified 
trust described in section 401(a) and exempt under 
section 253(a) if—
‘‘(A) all of the personal services by reason 
of which the annuity is payable were either—
‘‘(i) personal services performed out-
side the United States by an individual 
who, at the time of performance of such 
personal services, was a nonresident alien, 
or 
‘‘(ii) personal services by a non-
resident alien temporarily present in the 
United States for a period or periods not 
exceeding 90 days during a taxable year, 
whose compensation for such services did 
not exceed $3,000, and who performed 
such services for—
‘‘(I) a nonresident alien indi-
vidual, foreign partnership, or foreign
194
corporation, not engaged in a trade or 
business within the United States, or 
‘‘(II) for an office or place of 
business maintained in a foreign coun-
try or in a possession of the United 
States by an individual who is a cit-
izen or resident of the United States 
or by a domestic partnership or a do-
mestic corporation, and 
‘‘(B) at the time the first amount is paid 
as annuity under the annuity plan or by the 
trust, 90 percent or more of the employees for 
whom contributions or benefits are provided 
under such plan are citizens or residents of the 
United States. 
‘‘(2) PORTFOLIO INTEREST.—
‘‘(A) IN
GENERAL.—‘Portfolio interest’ 
means—
‘‘(i) interest on obligations in reg-
istered form if the United States person 
who would otherwise be required to with-
hold tax on such interest under section 
1441(a) receives a statement that the ben-
eficial owner of the obligation is not a 
United States person, and
195
‘‘(ii) interest on obligations in nonreg-
istered form if appropriate precautions are 
taken to ensure that such obligations will 
be sold only to persons who are not United 
States persons and such interest is paid 
outside the United States. 
‘‘(B) EXCEPTIONS.—Under rules to be 
prescribed by the Secretary, portfolio interest 
does not include—
‘‘(i) interest received by a 10-percent 
equity owner, or 
‘‘(ii) contingent interest. 
‘‘(3) DEPOSIT
INTEREST.—‘Deposit interest’ 
means interest on deposits which are—
‘‘(A) deposits with persons carrying on a 
banking business (including savings and loans), 
and 
‘‘(B) amounts held by an insurance com-
pany under an agreement to pay interest there-
on. 
‘‘(4) OTHER EXCEPTIONS.—The taxes imposed 
by subsection (a) shall not apply to—
‘‘(A) a percentage of any dividend paid by 
a business entity, 80 percent of whose gross re-
ceipts are not taken into account under chapter