I 
107TH CONGRESS 
2D SESSION 
H. R. 5505
To simplify certain provisions of the Internal Revenue Code of 1986 and 
to establish a uniform pass-thru regime. 
IN THE HOUSE OF REPRESENTATIVES 
OCTOBER 1, 2002
Mr. HOUGHTON introduced the following bill; which was referred to the 
Committee on Ways and Means 
A BILL 
To simplify certain provisions of the Internal Revenue Code 
of 1986 and to establish a uniform pass-thru regime.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE; ETC. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Individual and Small Business Tax Simplification Act of 
2002’’. 
(b) REFERENCES TO INTERNAL REVENUE CODE OF 
1986.—Except as otherwise expressly provided, whenever 
in this Act an amendment or repeal is expressed in terms 
of an amendment to, or repeal of, a section or other provi-
sion, the reference shall be considered to be made to a 
section or other provision of the Internal Revenue Code 
of 1986. 
(c) TABLE OF CONTENTS.—
Sec. 1. Short title; etc. 
TITLE I—INDIVIDUAL INCOME TAX SIMPLIFICATION 
Subtitle A—General Provisions 
Sec. 101. Alternative minimum tax reform. 
Sec. 102. Head of household filing status replaced with special personal exemp-
tion. 
Sec. 103. Simplification of tax on social security benefits. 
Sec. 104. Simplification of capital gains tax. 
Sec. 105. Repeal of 2-percent floor on miscellaneous itemized deductions. 
Sec. 106. Simplification of deduction for points on home mortgage. 
Sec. 107. Taxation of minor children. 
Sec. 108. Simplification of dependent care tax benefits. 
Sec. 109. Acceleration of phaseout of overall limitation on itemized deductions. 
Sec. 110. Acceleration of repeal of phaseout of personal exemptions. 
Subtitle B—Uniform Definition of Child 
Sec. 121. Uniform definition of child. 
Sec. 122. Treatment of government benefits in determining support and cost of 
maintaining household. 
Sec. 123. Effective date. 
Subtitle C—Education Tax Incentives 
Sec. 131. Hope and Lifetime Learning credits combined. 
Sec. 132. Uniform definition of qualifying higher education expenses. 
TITLE II—SMALL BUSINESS TAX SIMPLIFICATION 
Sec. 201. Unified pass-thru entity regime. 
Sec. 202. Increase in expensing under section 179. 
Sec. 203. Rollover of property held for productive use or investment. 
Sec. 204. Repeal of collapsible corporations. 
Sec. 205. References to general partners. 
Sec. 206. References to limited partners. 
Sec. 207. Partnership income attributable to capital excluded from net earnings 
from self-employment. 
Sec. 208. Repeal of ability to elect large partnership reporting rules.
TITLE I—INDIVIDUAL INCOME 
TAX SIMPLIFICATION 
Subtitle A—General Provisions 
SEC. 101. ALTERNATIVE MINIMUM TAX REFORM. 
(a) INCREASE IN ALTERNATIVE MINIMUM TAX EX-
EMPTION AMOUNT.—
(1) Subparagraph (A) of section 55(d)(1) (re-
lating to exemption amount for taxpayers other than 
corporations) is amended by striking ‘‘$45,000’’ and 
all that follows through ‘‘2004)’’ and inserting 
‘‘$75,000’’. 
(2) Subparagraph (B) of section 55(d)(1) is 
amended by striking ‘‘$33,750’’ and all that follows 
through ‘‘2004)’’ and inserting ‘‘$56,000’’. 
(b) ADJUSTMENT FOR INFLATION.—Subsection (d) 
of section 55 is amended by adding at the end the fol-
lowing new paragraph: 
‘‘(4) INFLATION ADJUSTMENT.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning in a calendar year after 
2003, each of the dollar amounts contained in 
subparagraphs (A) and (B) of paragraph (1) 
shall be increased by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f )(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar 
year 2002’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof. 
‘‘(B) ROUNDING.—Any increase deter-
mined under subparagraph (A) shall be rounded 
to the nearest multiple of $100.’’. 
(c) REPEAL OF LIMIT ON DEDUCTION FOR STATE 
AND
LOCAL
TAXES.—Subparagraph (A) of section 
56(b)(1) is amended to read as follows: 
‘‘(A) IN GENERAL.—No deduction shall be 
allowed for any miscellaneous itemized deduc-
tion (as defined in section 67(b)).’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002.
SEC. 102. HEAD OF HOUSEHOLD FILING STATUS REPLACED 
WITH SPECIAL PERSONAL EXEMPTION. 
(a) INCREASED PERSONAL EXEMPTION FOR SINGLE 
PARENTS, ETC.—Section 151 is amended by redesig-
nating subsections (d) and (e) as subsection (e) and (f) 
and by inserting after subsection (c) the following new 
subsection:
‘‘(d) ADDITIONAL EXEMPTION
FOR SINGLE PAR-
ENTS, ETC.—
‘‘(1) IN GENERAL.—An exemption of $3,700 in 
the case of an individual who—
‘‘(A) is not married at the close of the tax-
able year, 
‘‘(B) is not a surviving spouse, and 
‘‘(C)(i) maintains as his home a household 
which constitutes for more than one-half of 
such taxable year the principal place of abode, 
as a member of such household, of—
‘‘(I) a qualifying child (as defined in 
subsection (c)), or 
‘‘(II) any other person who is a de-
pendent of the taxpayer, if the taxpayer is 
entitled to a deduction for the taxable year 
for such person under subsection (c), or 
‘‘(ii) maintains a household which con-
stitutes for such taxable year the principal place 
of abode of the father or mother of the tax-
payer, if the taxpayer is entitled to a deduction 
for the taxable year for such father or mother 
under subsection (c). 
For purposes of this paragraph, an individual shall 
be considered as maintaining a household only if
over half of the cost of maintaining the household 
during the taxable year is furnished by such indi-
vidual. 
‘‘(2) MARITAL STATUS.—Marital status shall be 
determined in accordance with section 7703; except 
that an individual shall be treated as not married for 
purposes of this subsection if at any during such 
year the spouse of such individual is a nonresident 
alien. 
‘‘(3) LIMITATIONS.—Paragraph (1) shall not 
apply to any individual—
‘‘(A) if at any time during the taxable year 
he is a nonresident alien, or 
‘‘(B) by reason of an individual who would 
not be a dependent for the taxable year but 
for—
‘‘(i) paragraph (9) of section 152(a), 
or 
‘‘(ii) subsection (c) of section 152. 
‘‘(4) INFLATION ADJUSTMENT.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning in a calendar year after 
2003, the dollar amount contained in paragraph 
(1) shall be increased by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f )(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar 
year 2002’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof. 
‘‘(B) ROUNDING.—Any increase deter-
mined under subparagraph (A) shall be rounded 
to the nearest multiple of $50.’’. 
(b) REPEAL OF HEAD OF HOUSEHOLD FILING STA-
TUS.—Subsection (b) of section 1 (relating to heads of 
household) is repealed. 
(c) CONFORMING AMENDMENTS.—
(1) Section 1(c) is amended—
(A) in the heading by striking ‘‘SPOUSES 
AND HEADS OF HOUSEHOLDS).—’’ and insert-
ing ‘‘SPOUSES).—’’, and 
(B) by striking ‘‘or the head of a house-
hold as defined in section 2(b)’’. 
(2) Section 2 is amended by striking subsection 
(b) and by redesignating subsections (c), (d), and (e) 
as subsections (b), (c), and (d), respectively. 
(3) Section 25B(b) is amended by striking the 
portion of the table related to head of a household. 
(4) Section 63(c)(2) is amended—
(A) by striking subparagraph (B), and 
(B) by redesignating subparagraphs (C) 
and (D) as subparagraphs (B) and (C), respec-
tively. 
(5) Section 151(c)(6)(B)(iii) is amended by 
striking ‘‘or a head of a household (as such terms 
are defined in section 2)’’ and inserting ‘‘(as defined 
in section 2)’’. 
(6) Section 151(c)(6)(C) is amended by striking 
‘‘, section 2(b)(1)(A),’’. 
(7) Section 151(e)(3)(C) is amended—
(A) by striking clause (ii), 
(B) in clause (iii), by striking ‘‘or head of 
a household’’, and 
(C) by redesignating clauses (iii) and (iv) 
as clauses (ii) and (iii), respectively. 
(8) Section 3402(r)(2)(A) is amended by strik-
ing ‘‘section 63(c)(2)(C)’’ and inserting ‘‘section 
63(c)(2)(B)’’. 
(9) Section 6012(a)(1)(A) is amended—
(A) in clause (i), by striking ‘‘is not a head 
of a household (as defined section 2(b)),’’, 
(B) by striking clause (ii), 
(C) by redesignating clauses (iii) and (iv) 
as clauses (ii) and (iii), respectively, and
(D) in the last sentence, by striking 
‘‘Clause (iv)’’ and inserting ‘‘Clause (iii)’’ and 
by striking ‘‘151(c)’’ and inserting ‘‘151(d)’’. 
(10) Section 6012(a)(1)(B) is amended—
(A) by striking ‘‘clause (i), (ii), or (iii)’’ 
and inserting ‘‘clause (i) or (ii)’’, and 
(B) by striking ‘‘clause (iv)’’ and inserting 
‘‘clause (iii)’’. 
(11)(A) Paragraph (6) of section 1(f) is amend-
ed 
by 
striking 
‘‘151(d)(4)(A)’’ 
and 
inserting 
‘‘151(e)(4)(A)’’. 
(B) Subparagraph (C) of section 642(b)(2), as 
amended by section 105, is amended—
(i) by striking ‘‘151(d)’’ and inserting 
‘‘151(e)’’, and 
(ii) by striking ‘‘151(d)(3)(C)(iii)’’ and in-
serting ‘‘151(e)(3)(C)(ii)’’. 
(C) Paragraph (1) of section 3402(f) is amend-
ed 
by 
striking 
‘‘151(d)(2)’’ 
and 
inserting 
‘‘151(e)(2)’’. 
(D) Subparagraph (B) of section 3402(r)(2) is 
amended 
by 
striking 
‘‘151(d)’’ 
and 
inserting 
‘‘151(e)’’. 
(E) Clause (ii) of section 6012(a)(1)(D) is 
amended—
(i) by striking ‘‘151(d)’’ and inserting 
‘‘151(e)’’, and 
(ii) by striking ‘‘151(d)(2)’’ and inserting 
‘‘151(e)(2)’’. 
(F) The next to the last sentence of section 
6013(b)(3)(A) is amended by striking ‘‘151(d)’’ and 
inserting ‘‘151(e)’’. 
(d) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 103. SIMPLIFICATION OF TAX ON SOCIAL SECURITY 
BENEFITS. 
(a) REPEAL OF 1993 INCREASE.—
(1) IN GENERAL.—Subsection (a) of section 86 
(relating to social security and tier 1 railroad retire-
ment benefits) is amended to read as follows: 
‘‘(a) IN GENERAL.—Gross income for the taxable 
year of any taxpayer described in subsection (b) (notwith-
standing section 207 of the Social Security Act) includes 
social security benefits in an amount equal to the lesser 
of—
‘‘(1) one-half of the social security benefits re-
ceived during the taxable year, or 
‘‘(2) one-half of the excess described in sub-
section (b)(1).’’
(2) CONFORMING AMENDMENTS.—
(A) Subsection (c) of section 86 is amend-
ed to read as follows: 
‘‘(c) BASE AMOUNT.—For purposes of this section, 
the term ‘base amount’ means—
‘‘(1) except as otherwise provided in this sub-
section, $25,000, 
‘‘(2) $32,000 in the case of a joint return, and 
‘‘(3) zero in the case of a taxpayer who—
‘‘(A) is married as of the close of the tax-
able year (within the meaning of section 7703) 
but does not file a joint return for such year, 
and 
‘‘(B) does not live apart from his spouse at 
all times during the taxable year.’’
(B) Paragraph (3) of section 871(a) is 
amended by striking ‘‘85 percent’’ in subpara-
graph (A) and inserting ‘‘50 percent’’. 
(C)(i) 
Subparagraph 
(A) 
of 
section 
121(e)(1) of the Social Security Amendments of 
1983 (Public Law 98–21) is amended—
(I) by striking ‘‘(A) There’’ and in-
serting ‘‘There’’; 
(II) by striking ‘‘(i)’’ immediately fol-
lowing ‘‘amounts equivalent to’’; and
(III) by striking ‘‘, less (ii)’’ and all 
that follows and inserting a period. 
(ii) Paragraph (1) of section 121(e) of 
such Act is amended by striking subparagraph 
(B). 
(iii) Paragraph (3) of section 121(e) of 
such Act is amended by striking subparagraph 
(B) and by redesignating subparagraph (C) as 
subparagraph (B). 
(iv) Paragraph (2) of section 121(e) of 
such Act is amended in the first sentence by 
striking ‘‘paragraph (1)(A)’’ and inserting 
‘‘paragraph (1)’’. 
(b) USE OF ADJUSTED GROSS INCOME WITHOUT 
MODIFICATIONS.—
(1) IN GENERAL.—Subsection (b) of section 86 
is amended to read as follows: 
‘‘(b) TAXPAYERS TO WHOM SUBSECTION (a) AP-
PLIES.—A taxpayer is described in this subsection if—
‘‘(1) the sum of—
‘‘(A) the adjusted gross income of the tax-
payer for the taxable year (determined without 
regard to this section), plus 
‘‘(B) one-half of the social security benefits 
received during the taxable year, exceeds
‘‘(2) the base amount.’’
(2) CONFORMING AMENDMENTS.—
(A) Subparagraph (A) of section 219(g)(3) 
is amended—
(i) by striking ‘‘sections 86 and 469’’ 
in clause (i) and inserting ‘‘section 469’’, 
and 
(ii) by inserting ‘‘86,’’ before ‘‘135’’ in 
clause (ii). 
(B) Paragraph (4) of section 135(c) is 
amended—
(i) by inserting ‘‘86,’’ before ‘‘137’’ in 
clause (i), and 
(ii) by striking ‘‘sections 86, 469,’’ in 
clause (ii) and inserting ‘‘sections 469’’. 
(C) Paragraph (3) of section 137(b) is 
amended—
(i) by inserting ‘‘86,’’ before ‘‘221’’ in 
clause (i), and 
(ii) by striking ‘‘86,’’ in clause (ii). 
(D) Subparagraph (C) of section 221(b)(2) 
is amended—
(i) by inserting ‘‘86,’’ before ‘‘222’’ in 
clause (i), and 
(ii) by striking ‘‘86,’’ in clause (ii).
(E) Subparagraph (C) of section 222(b)(2) 
is amended—
(i) by inserting ‘‘86,’’ before ‘‘911’’ in 
clause (i), and 
(ii) by striking ‘‘86,’’ in clause (ii). 
(c) EFFECTIVE DATES.—
(1) IN GENERAL.—Except as provided in para-
graphs (2) and (3), the amendments made by this 
section shall apply to taxable years beginning after 
December 31, 2002. 
(2) SUBSECTION (a)(2)(B).—The amendment 
made by subsection (a)(2)(B) shall apply to benefits 
paid after December 31, 2002. 
(3) SUBSECTION (a)(2)(C).—The amendments 
made by subsection (a)(2)(C) shall apply to tax li-
abilities for taxable years beginning after December 
31, 2002. 
(d) MAINTENANCE OF TRANSFERS TO HOSPITAL IN-
SURANCE TRUST FUND.—There are hereby appropriated 
to the Hospital Insurance Trust Fund established under 
section 1817 of the Social Security Act amounts equal to 
the reduction in revenues to the Treasury by reason of 
the enactment of this Act. Amounts appropriated by the 
preceding sentence shall be transferred from the general 
fund at such times and in such manner so as to replicate
to the extent possible the transfers which would have oc-
curred to such Trust Fund had this Act not been enacted. 
SEC. 104. SIMPLIFICATION OF CAPITAL GAINS TAX. 
(a) IN GENERAL.—Part I of subchapter P of chapter 
1 (relating to treatment of capital gains) is amended by 
adding at the end the following new section: 
‘‘SEC. 1203. CAPITAL GAINS DEDUCTION. 
‘‘If for any taxable year a taxpayer other than a cor-
poration has a net capital gain, 50 percent of such gain 
shall be a deduction from gross income.’’. 
(b) DEDUCTION ALLOWABLE WHETHER
OR NOT 
TAXPAYER ITEMIZES OTHER DEDUCTIONS.—
(1) Subsection (b) of section 63 is amended by 
striking ‘‘and’’ at the end of paragraph (1), by strik-
ing the period at the end of paragraph (2) and in-
serting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(3) the deduction allowed by section 1203.’’. 
(2) Subsection (d) of section 63 is amended by 
striking ‘‘and’’ at the end of paragraph (1), by strik-
ing the period at the end of paragraph (2) and in-
serting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(3) the deduction allowed by section 1203.’’. 
(c) MINIMUM TAX TREATMENT.—
(1) Paragraph (1) of section 56(b) is amended 
by adding at the end the following new subpara-
graph: 
‘‘(G) CAPITAL GAIN DEDUCTION NOT AP-
PLICABLE.—Section 1203 shall not apply.’’. 
(2) Subsection (b) of section 55 is amended by 
striking paragraph (3) and inserting the following 
new paragraphs: 
‘‘(3) MAXIMUM TAX ON NET CAPITAL GAIN.—
The amount of tax determined under the first sen-
tence of paragraph (1)(A)(i) shall not exceed the 
sum of—
‘‘(A) the amount determined under such 
first sentence computed at the rates and in the 
same manner as if this paragraph had not been 
enacted on the taxable excess reduced by the 
net capital gain, plus 
‘‘(B) a tax on the net capital gain deter-
mined by using the regular tax capital gains tax 
rates. 
‘‘(4) REGULAR TAX ON NET CAPITAL GAIN.—
For purposes of paragraph (3), the tax on the net 
capital gain determined by using the regular tax 
capital gains tax rates is the excess of—
‘‘(A) the tax that would be computed 
under section 1 if net capital gain were deter-
mined with the adjustments under this part, 
over 
‘‘(B) the tax that would be so computed 
under section 1 if the taxable income were re-
duced by 50 percent of the net capital gain as 
so determined.’’. 
(d) TECHNICAL AND CONFORMING AMENDMENTS.—
(1) Section 1 is amended by striking subsection 
(h). 
(2) Paragraph (7) of section 57(a) is amended 
by striking the last sentence. 
(3) Subparagraph (E) of section 163(d)(4) is 
amended to read as follows: 
‘‘(E) COORDINATION WITH CAPITAL GAINS 
DEDUCTION.—The net capital gain taken into 
account under section 1203 for any taxable 
year shall be reduced (but not below zero) by 
the amount which the taxpayer takes into ac-
count as investment income under subpara-
graph (B)(iii) for such year.’’. 
(4) Paragraph (1) of section 170(e) is amended 
by striking ‘‘the amount of gain’’ in the material fol-
lowing subparagraph (B)(ii) and inserting ‘‘50 per-
cent (100 percent in the case of a corporation) of 
the amount of gain’’. 
(5) Subparagraph (B) of section 172(d)(2) is 
amended to read as follows: 
‘‘(B) the exclusion under section 1202 and 
the deduction under section 1203 shall not be 
allowed.’’. 
(6) The last sentence of section 453A(c)(3) is 
amended by striking all that follows ‘‘long-term cap-
ital gain,’’ and inserting ‘‘the maximum rate on net 
capital gain under section 1201 or the deduction 
under section 1203 (whichever is appropriate) shall 
be taken into account.’’. 
(7)(A) Section 641(c)(2)(A) is amended by 
striking ‘‘Except as provided in section 1(h), the’’ 
and inserting ‘‘The’’. 
(B) Section 641(c)(2)(C) is amended by insert-
ing after clause (iii) the following new clause: 
‘‘(iv) The deduction under section 
1203.’’. 
(8) Paragraph (4) of section 642(c) is amended 
to read as follows: 
‘‘(4) ADJUSTMENTS.—To the extent that the 
amount otherwise allowable as a deduction under 
this subsection consists of gain from the sale or ex-
change of capital assets held for more than 1 year, 
proper adjustment shall be made for any exclusion 
allowable under section 1202 and any deduction al-
lowable under section 1203 to the estate or trust. In 
the case of a trust, the deduction allowed by this 
subsection shall be subject to section 681 (relating 
to unrelated business income).’’. 
(9) Section 642 is amended by adding at the 
end the following new subsection: 
‘‘(j) CAPITAL GAINS DEDUCTION.—The deduction 
under section 1203 to an estate or trust shall be computed 
by excluding the portion (if any) of the gains for the tax-
able year which is includible by the income beneficiaries 
under sections 652 and 662 (relating to inclusions of 
amounts in gross income of beneficiaries of trusts) as gain 
derived from the sale or exchange of capital assets.’’. 
(10) The last sentence of section 643(a)(3) is 
amended to read as follows: ‘‘The exclusion under 
section 1202 and the deduction under section 1203 
shall not be taken into account.’’. 
(11) Subparagraph (C) of section 643(a)(6) is 
amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and 
by inserting before the period ‘‘, and (ii) the deduc-
tion under section 1203 (relating to capital gains de-
duction) shall not be taken into account’’.
(12) Paragraph (4) of section 691(c) is amend-
ed by striking ‘‘1(h),’’ and by inserting ‘‘1203,’’ 
after ‘‘1202,’’. 
(13) The second sentence of paragraph (2) of 
section 871(a) is amended by striking ‘‘section 
1202’’ and inserting ‘‘sections 1202 and 1203’’. 
(14)(A) Paragraph (2) of section 904(b) is 
amended by striking subparagraphs (A) and (C), by 
redesignating subparagraph (B) as subparagraph 
(A), and by inserting after subparagraph (A) (as so 
redesignated) the following new subparagraph: 
‘‘(B) OTHER TAXPAYERS.—In the case of 
a taxpayer other than a corporation, taxable in-
come from sources outside the United States 
shall include gain from the sale or exchange of 
capital assets only to the extent of foreign 
source capital gain net income.’’. 
(B) Subparagraph (A) of section 904(b)(2), as 
so redesignated, is amended—
(i) by striking all that precedes clause (i) 
and inserting the following: 
‘‘(A) CORPORATIONS.—In the case of a 
corporation—’’, and 
(ii) by striking in clause (i) ‘‘in lieu of ap-
plying subparagraph (A),’’.
(C) Paragraph (3) of section 904(b) is amended 
by striking subparagraphs (D) and (E) and inserting 
the following new subparagraph: 
‘‘(D) RATE DIFFERENTIAL PORTION.—The 
rate differential portion of foreign source net 
capital gain, net capital gain, or the excess of 
net capital gain from sources within the United 
States over net capital gain, as the case may 
be, is the same proportion of such amount as 
the excess of the highest rate of tax specified in 
section 11(b) over the alternative rate of tax 
under section 1201(a) bears to the highest rate 
of tax specified in section 11(b).’’. 
(15) Paragraph (1) of section 1402(i) is amend-
ed by inserting ‘‘, and the deduction provided by sec-
tion 1203 shall not apply’’ before the period at the 
end thereof. 
(16) Paragraph (1) of section 1445(e) is 
amended by striking ‘‘20 percent’’ and inserting 
‘‘one-half of the maximum rate of tax in effect under 
section 1’’. 
(17)(A) 
The 
second 
sentence 
of 
section 
7518(g)(6)(A) is amended—
(i) by striking ‘‘during a taxable year to 
which section 1(h) or 1201(a) applies’’, and
(ii) by striking ‘‘20 percent’’ and inserting 
‘‘one-half of the maximum rate of tax in effect 
under section 1’’. 
(B) 
The 
second 
sentence 
of 
section 
607(h)(6)(A) of the Merchant Marine Act, 1936, is 
amended—
(i) by striking ‘‘during a taxable year to 
which section 1(h) or 1201(a) of such Code ap-
plies’’, and 
(ii) by striking ‘‘20 percent’’ and inserting 
‘‘one-half of the maximum rate of tax in effect 
under section 1 of such Code’’. 
(e) CLERICAL AMENDMENT.—The table of sections 
for part I of subchapter P of chapter 1 is amended by 
adding at the end the following new item:
‘‘Sec. 1203. Capital gains deduction.’’.
(f) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by 
this section shall apply to taxable years beginning 
after December 31, 2002. 
(2) WITHHOLDING.—The amendments made by 
subsection (d)(16) shall apply only to amounts paid 
after December 31, 2002. 
(3) COORDINATION
WITH
PRIOR
TRANSITION 
RULE.—Any amount treated as long-term capital
gain by reason of paragraph (3) of section 1122(h) 
of the Tax Reform Act of 1986 shall not be taken 
into account for purposes of applying section 1203 
of the Internal Revenue Code of 1986 (as added by 
this section). 
SEC. 105. REPEAL OF 2-PERCENT FLOOR ON MISCELLA-
NEOUS ITEMIZED DEDUCTIONS. 
(a) TERMINATION.—Section 67 (relating to 2-percent 
floor on miscellaneous itemized deductions) is hereby re-
pealed. 
(b) CONFORMING AMENDMENTS.—
(1) Subparagraph (A) of section 56(b)(1), as 
amended by section 101, is hereby repealed. 
(2) Clause (i) of section 642(b)(2)(C) is amend-
ed to read as follows: 
‘‘(i) IN
GENERAL.—A qualified dis-
ability trust shall be allowed a deduction 
equal to the exemption amount under sec-
tion 151(d), determined by treating such 
trust as an individual described in section 
151(d)(3)(C)(iii).’’
(3) Paragraph (3) of section 772(c) is amended 
to read as follows: 
‘‘(3) INCOME OR LOSS FROM OTHER ACTIVI-
TIES.—For purposes of this chapter, any partner’s
distributive share of any income or loss described in 
subsection (a)(2) shall be treated as an item of in-
come or expense (as the case may be) with respect 
to property held for investment.’’
(4) Paragraph (3) of section 773(b) is hereby 
repealed. 
(5) Clause (iii) of section 6654(d)(1)(C) is 
amended to read as follows: 
‘‘(iii) DETERMINATION OF ADJUSTED 
GROSS INCOME IN CASE OF ESTATES AND 
TRUSTS.—For purposes of this section, the 
adjusted gross income of an estate or trust 
shall be computed in the same manner as 
in the case of an individual, except that—
‘‘(I) the deductions for costs 
which are paid or incurred in connec-
tion with the administration of the es-
tate or trust and which would not 
have been incurred if the property 
were not held in such trust or estate, 
and 
‘‘(II) the deductions allowable 
under sections 642(b), 651, and 661,
shall be treated as allowable in arriv-
ing at adjusted gross income. Under
regulations, appropriate adjustments 
shall be made in the application of 
part I of subchapter J of this chapter 
to take into account the provisions of 
this section.’’
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 106. SIMPLIFICATION OF DEDUCTION FOR POINTS ON 
HOME MORTGAGE. 
(a) IN GENERAL.—Subsection (g) of section 461 (re-
lating to prepaid interest) is amended by adding at the 
end the following new paragraph: 
‘‘(3) 
EXCEPTION
FOR
CERTAIN 
REFINANCINGS.—
‘‘(A) IN GENERAL.—This subsection shall 
not apply to points paid in respect of indebted-
ness secured by such residence resulting from 
the refinancing of indebtedness meeting the re-
quirements of the preceding sentence (or this 
sentence). 
‘‘(B) 
LIMITATION.—Subparagraph 
(A) 
shall apply only to the extent the amount of the 
indebtedness resulting from such refinancing 
does not exceed the sum of—
‘‘(i) the amount of the refinanced in-
debtedness, plus 
‘‘(ii) the lesser of $10,000 or the 
points paid in respect of the indebtedness 
resulting from the refinancing to the ex-
tent that the indebtedness resulting from 
the refinancing does not exceed the refi-
nanced indebtedness.’’. 
(b) CONFORMING AMENDMENT.—The heading of 
paragraph (2) of section 461(g) is amended by inserting 
‘‘BASED ON BUSINESS PRACTICE’’ after ‘‘EXCEPTION’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
December 31, 2002. 
SEC. 107. TAXATION OF MINOR CHILDREN. 
(a) APPLICATION OF TRUST RATE SCHEDULE TO 
NET UNEARNED INCOME OF MINOR CHILDREN.—Sub-
section (g) of section 1 (relating to certain unearned in-
come of minor children taxed as if parent’s income) is 
amended—
(1) by striking paragraphs (1), (3) and (5), 
(2) by redesignating paragraphs (4), (6), and 
(7) as paragraphs (3), (4), and (5), respectively, and 
(3) by inserting before paragraph (2) the fol-
lowing new paragraph: