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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:
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If the combined ages of the
annuitants are:
The number:
Not more than 110 ........................
410
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
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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,
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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):
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‘‘(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 surren-
der 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
individual—
‘‘(i) receives (directly or indirectly)
any amount as a loan under any contract
to which this subsection applies, or
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‘‘(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,
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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—
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‘‘(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
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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)—
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‘‘(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
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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.
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‘‘(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—
‘‘(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.
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‘‘(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;
‘‘(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.
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‘‘(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
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.—
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‘‘(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
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 individ-
ual insured under a contract described in sub-
paragraph (A), an amount equal to the cash
surrender value of the contract immediately be-
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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.
‘‘(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 individ-
ual 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
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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).
‘‘(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
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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
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-
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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,
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.
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‘‘(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-
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.
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‘‘(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 individ-
ual as a loan from such plan.
‘‘(2) EXCEPTION FOR CERTAIN LOANS.—
‘‘(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
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‘‘(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)).
‘‘(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
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(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.
‘‘(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,
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‘‘(B) made on or after the death of the
holder (or, where the holder is not an individ-
ual, 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
(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
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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)—
‘‘(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
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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)—
‘‘(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)—
‘‘(1) AFTER 1984.—With respect to compensa-
tion paid after 1984, the tier 2 portion shall be the
taxes imposed by sections 3201(b), 3211(a)(2), and
3221(b).
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‘‘(2) BEFORE 1985.—With respect to compensa-
tion 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
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
BENE-
FIT.—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
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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-
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
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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)
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
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‘‘(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
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.
‘‘(r) 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-
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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
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
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joint lives (or joint life expectancies) of
such employee and his designated bene-
ficiary,
‘‘(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-
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lations order (within the meaning of section
414(p)(1)).
‘‘(D) DISTRIBUTIONS TO UNEMPLOYED IN-
DIVIDUALS
FOR
HEALTH
INSURANCE
PRE-
MIUMS.—
‘‘(i) IN GENERAL.—Distributions from
an individual retirement plan to an individ-
ual 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
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with respect to the individual and the
individual’s spouse and dependents.
‘‘(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-
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tions are described in subparagraph (A), (C), or
(D) or to the extent paragraph (1) does not
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 individ-
ual 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-
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tion 401(a) which is exempt from tax under
section 501(a) or from a contract described in
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 disabil-
ity)—
‘‘(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
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paragraph (2)(A)(iv)) would have
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’.
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‘‘(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’
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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 IRAs is a qualified first-time homeowner dis-
tribution.
‘‘(r) 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.
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‘‘(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—
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‘‘(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 sum of money received
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,
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‘‘(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, 1999, in an asset
acquired before that date, shall be its adjusted basis as
of December 31, 1998, 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,
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‘‘(B) increased by the amount of cash and
basis of any property contributed to the entity,
and
‘‘(C) decreased by the portion of any liq-
uidating 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, 1999, or any interest in a business entity held as
of December 31, 1998, shall be the basis of such in-
terest as of December 31, 1998, 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.—
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‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A
partner’s basis in a partnership interest as of Janu-
ary 1, 1999, equals—
‘‘(A) the partner’s basis in the partnership
as of the end of the taxable year ending on De-
cember 31, 1998, 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
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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 1999 but only to the extent that such dis-
tribution, when added to all other distributions
of the entity to the individual after March 31,
1998, does not exceed the amount of taxable in-
come allocated by the entity to the individual
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‘‘(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’
includes—
‘‘(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 1998 exceeds 125 percent of
the individual’s distributive share of income for such
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period, the amount of such excess distribution shall
be treated as a cash distribution to the partner on
January 1, 1999, 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, 1998, 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—
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‘‘(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.
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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 en-
tity 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-
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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 distribut-
ing 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
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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.
‘‘(c) 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
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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.
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‘‘(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 aggregat-
ing 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.
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‘‘(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
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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
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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
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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-
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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-
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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
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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.
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‘‘(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.
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‘‘(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 Reve-
nue 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)).
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‘‘(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.
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‘‘(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 transactions 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
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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
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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
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‘‘(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
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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
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‘‘(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
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‘‘(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 individ-
ual 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-
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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
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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;
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‘‘(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
are 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.
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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.
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‘‘(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
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individual, on application therefor, would be entitled
to receive as disability compensation from the Veter-
ans’ 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-
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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—
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‘‘(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
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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.
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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.
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‘‘(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
exceed—
‘‘(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.
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‘‘(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
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‘‘(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
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‘‘(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
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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,
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‘‘(4) EXCEPTION
FOR
DISTRIBUTIONS
DE-
SCRIBED IN SECTION 148(a).—This subsection shall
not apply to any distribution described in section
148(a).
‘‘(f) TREATMENT OF MULTIPLE TRUSTS.—For pur-
poses of this subchapter, under regulations prescribed by
the Secretary, 2 or more trusts shall be treated as 1 trust
if—
‘‘(1) such trusts have substantially the same
grantor or grantors and substantially the same pri-
mary beneficiary or beneficiaries, and
‘‘(2) a principal purpose of such trusts is the
avoidance of the tax imposed by this chapter.
For purposes of the preceding sentence, a husband and
wife shall be treated as 1 person.
‘‘(g) CERTAIN
PAYMENTS
OF
ESTIMATED
TAX
TREATED AS PAID BY BENEFICIARY.—Under rules pre-
scribed by the Secretary, a trustee may elect to treat any
portion of a payment of estimated tax made by such trust
for any taxable year of the trust as a payment made by
a beneficiary of such trust. This rule shall also apply in
the case of a taxable year reasonably expected to be the
last taxable year of an estate.
‘‘(h) FOREIGN TRUSTS AND FOREIGN INCOME.—The
Secretary shall prescribe special rules for foreign trusts
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deemed distributed under section 151(b) and (c) to
any beneficiary.
‘‘(2) FOREIGN TRUSTS.—In the case of any for-
eign trust, the term ‘taxes imposed on the trust’ in-
cludes the amount, reduced as provided in the last
sentence of paragraph (1), of any income, war prof-
its, and excess profits taxes imposed by any foreign
country or possession of the United States on such
foreign trust which, as determined under paragraph
(1), are so properly allocable. Under rules or regula-
tions prescribed by the Secretary, in the case of any
foreign trust of which the settlor or another person
would be treated as owner of any portion of the
trust but for section 154(f), the term ‘taxes imposed
on the trust’ includes the allocable amount of any
income, war profits, and excess profits taxes imposed
by any foreign country or possession of the United
States on the settlor or such other person in respect
of trust income.
‘‘SEC. 151. ACCUMULATION DISTRIBUTION ALLOCATED TO
PRECEDING YEARS.
‘‘(a) AMOUNT ALLOCATED.—In the case of a trust
which is subject to sections 146 through 149, the amount
of the accumulation distribution of such trust for a taxable
year shall be deemed to be an amount within the meaning