HR 134 IH
106th CONGRESS
1st Session
H. R. 134
To amend the Internal Revenue Code of 1986 to restructure and replace
the income tax system of the United States to meet national priorities, and for
other purposes.
IN THE HOUSE OF REPRESENTATIVES
January 6, 1999
Mr. ENGLISH introduced the following bill; which was referred to the
Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to restructure and replace
the income tax system of the United States to meet national priorities, and for
other purposes.
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.
(a) SHORT TITLE- This Act may be cited as the `Simplified USA Tax Act of
1999'.
(b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided,
whenever in this Act a reference is made to the Code or to a section or
provision of the Code, the reference shall be considered to be made to the
Internal Revenue Code of 1986 or to a section or provision thereof.
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I--FINDINGS; NEED TO REPLACE THE INCOME TAX
Sec. 101. Replacing the income tax of the United States.
TITLE II--SIMPLIFIED USA TAX FOR INDIVIDUALS
Sec. 201. Simplified USA Tax for individuals.
Sec. 202. Reorganization of the Code.
TITLE III--SIMPLIFIED USA TAX FOR BUSINESSES
Sec. 301. Repeal of present corporate income tax; new tax paid by
corporations and other businesses.
Sec. 302. Repeal of chapter 6.
TITLE IV--DEFERRED COMPENSATION PLANS
Sec. 401. Provisions saved.
Sec. 402. Clerical Amendments.
Sec. 403. Clerical Amendments.
TITLE V--REPEAL OF ESTATE AND GIFT TAXES
Sec. 501. Repeal of gratuitous transfer taxes.
Sec. 502. Effective Date.
TITLE VI--TECHNICAL AND ADMINISTRATIVE CHANGES; EFFECTIVE DATES
Sec. 602. Revisions to the Code.
Sec. 603. Application of subtitle F.
Sec. 604. Clerical amendment.
TITLE I--FINDINGS; NEED TO REPLACE THE INCOME TAX
SEC. 101. REPLACING THE INCOME TAX OF THE UNITED STATES.
(a) FINDINGS- The Congress finds that--
(1) the current Tax Code is irreparably flawed and must be
replaced;
(2) to enhance the liberty and protect the privacy of individuals, the
Tax Code must be made simpler and nonintrusive, and it must be applied
evenhandedly to all;
(3) to be fair and to provide for the prosperity of current and future
generation, the Tax Code must give all individuals at all income levels an
opportunity to save, invest and raise their standard of living and that of
their children; and
(4) future economic growth requires a tax system that facilitates
successful competition in the global marketplace.
(b) Main Features of Simplified USA Tax System-
(1) REPLACEMENT OF OLD TAX SYSTEM- Chapter 1 of subtitle A (related to
income taxes) of the Code is repealed and replaced for years beginning after
1999.
(2) Estate and gift tax repealed.
(3) NEW TAX SYSTEM- The Simplified USA Tax consists of--
(A) a simplified tax collected from individuals, that for years after
1999 replaces the income tax imposed on individuals by section 1 of the
Code, and
(B) a simplified tax collected from corporations and other businesses,
that for years after 1999 replaces the income tax imposed on corporations
by section 11 of the Code.
(3) SIMPLIFIED USA TAX ON GROSS PROFITS- Corporations and other
businesses pay tax on their annual gross profits from business conducted in
the United States, except that--
(A) export revenues are excluded, and
(4) SIMPLIFIED USA TAX ON INCOME- Individuals pay tax on their annual
income from wages, dividends, interest, and other financial income
(including sales of property), except that--
(A) investment earnings on previously taxed income that is placed in a
Roth IRA is exempt from further taxation,
(B) a portion of each family's income is exempt from tax, and
(C) deductions are allowed for--
(ii) religious, charitable, and other philanthropic
donations,
(iii) home mortgage interest payments, and
(iv) contributions to qualified IRAs.
(5) CREDIT FOR FICA PAYROLL TAXES PAID- The amount of tax due is reduced
by the payroll tax that is--
(A) in the case of an employee, withheld from wages, or
(B) in the case of a corporation or other business, paid by the
employer.
(c) Concepts and Structure of New Tax System-
(1) GUIDING PRINCIPLES OF THE SIMPLIFIED USA TAX SYSTEM- The Simplified
USA Tax is based on the following principles:
(A) National wealth and well-being depend on the work, skill, and
savings and investment of people.
(B) Businesses are people and their capital working together.
(C) Capital makes people more productive.
(D) Everyone benefits from a growing stock of national savings which
in turn allows for a growing stock of physical and human capital.
(E) Under the Simplified USA Tax, the deferral of taxation on
investments in human capital represents an investment by the Federal
government in the nation's capital stock and the Federal government shares
in the return on its investment in the form of higher economic output and
revenues in the future.
(2) SINGLE TAX IN 2 PARTS- The Simplified USA Tax is composed of a
business tax and an individual tax which are 2 parts of a single tax system
that subjects all income produced and received to taxation once and only
once. The 2 parts are as follows:
(A) BUSINESS TAX AT THE SOURCE OF INCOME- Tax is paid by corporations
and other businesses which produce and sell goods and services that
are--
(i) the source of nearly all the gross domestic product of the
United States, and
(ii) the ultimate source of income received by
individuals.
(B) INDIVIDUAL TAX ON INCOME RECEIVED- Tax is paid by individuals when
they receive wages and salaries as compensation for gross domestic product
created by their work.
(3) SAVING AND INVESTMENT- The Simplified USA Tax allows people to save
and businesses to invest as follows:
(A) Fair opportunity for people to save-
(i) OPTIONAL ELIMINATION OF DOUBLE TAXATION- When an individual
earns income and is taxed on that income, the individual can save that
income in a Roth IRA and not pay income taxes on the investment
earnings.
(ii) DEDUCTIBLE AND EXCLUDABLE SAVINGS- The Simplified USA Tax
continues provisions of present law that allow--
(I) lower income individuals and certain other to make deductible
contributions to individual retirement accounts, and
(II) encourage employer sponsored savings and retirement plans
that defer taxation of income through use of 401(k) plans and other
qualified retirement plans.
(B) Fair opportunity for businesses to invest-
(i) NO PREPAYMENT OF TAX- When a business invests in plant and
equipment--
(I) a deduction is allowed for the cost, and
(ii) TAX ON EARNINGS AND RECOVERY OF COST- When recovered out of
business revenues, both the cost of the investment and the earnings on
the investment are included in gross profit subject to tax.
(iii) EXPENSING- The deduction for investment is the equivalent of
allowing the cost of plant and equipment to be expensed instead of
depreciated.
(4) FAIR OPPORTUNITY TO COMPETE IN THE GLOBAL MARKETPLACE- The
Simplified USA Tax serves the strategic interests of the United States in
international markets as follows:
(A) Border adjustable tax-
(i) AMERICAN-MADE EXPORTS- Goods and services produced in the United
States can be sold into world markets free of tax.
(ii) FOREIGN-MADE IMPORTS- Goods and services imported into the
United States bear a fair and proportionate share of the tax burden in
the United States.
(iii) LEVELING THE INTERNATIONAL PLAYING FIELD- Border adjustments
for exports and imports are consistent with international standards and
practice.
(5) A SIMPLE AND UNDERSTANDABLE TAX- The Simplified USA Tax for
individuals--
(A) is written in a simple, understandable form,
(B) contains only a few exemptions, deductions, and credits, and can
be reported on a tax return only a small fraction the size of Form
1040.
(6) A nonintrusive, evenhanded tax-
(A) TAXPAYERS ARE IN CONTROL- When the rules are few and clear,
taxpayers can calculate their own tax correctly and file their own returns
without fear of mistake or of getting caught up in an argument with the
IRS.
(B) LIMITED ROLE FOR IRS- When the rules are few and clear, the IRS
does not have the broad interpretive power that puts taxpayers at risk of
being treated unfairly and unevenly.
(C) RESTORING VOLUNTARY COMPLIANCE- When the rules are few and clear,
the IRS can concentrate on helping taxpayers voluntarily pay their correct
share of tax revenues for public use and benefit under a tax system that
is understood and respected.
(7) Maintaining tax progressivity for individuals-
(A) GRADUATED TAX- Like the tax imposed by section 1 of the current
Code, the Simplified USA Tax for individuals is a graduated tax.
(B) FAMILY LIVING ALLOWANCE- The Simplified USA Tax recognizes that
every family's budget includes necessities. The Simplified USA Tax
provides a family living allowance that exempts from taxation the first
dollars earned and spent to maintain a basic standard of living.
(8) Businesses and individual share the tax burden-
(A) BUSINESS PORTION OF TAX BURDEN- Corporations and other businesses
pay about the same portion of the total tax as under the current
Code.
(B) INDIVIDUAL PORTION OF TAX BURDEN- Individuals pay about the same
portion of the total tax as under the current Code.
(9) Emphasizing personal independence and responsibility-
(A) REINFORCING A CULTURE OF WORK AND THRIFT- Instead of being solely
a calculation of how much they must pay to the government, the Simplified
USA Tax converts the income tax into an annual calculation of how much
people produce and contribute to the economy.
(B) GREATER CONTROL AND RESPONSIBILITY- Because people are not double
taxed on their saving, they have--
(i) more control over their own income and taxes,
(ii) a greater ability to plan and provide for their own future,
and
(iii) a fair opportunity to do so.
(10) More opportunity for wage earners at lower income levels-
(A) REFUNDABLE CREDIT FOR EMPLOYEE PAYROLL TAX- The amount of the
payroll tax paid or withheld under the Code from an employee's wages (and
paid into the Social Security and Hospital Insurance Trust Funds)
is--
(i) credited against the employee's income tax, and
(ii) refunded to the employee to the extent in excess of the
employee's income tax.
(B) NO EFFECT ON TRUST FUND OR BENEFITS- The income tax credit allowed
for payroll taxes deposited in the Social Security Trust Fund does
not--
(i) reduce the amount in such fund, or
(ii) reduce the payment of any person's benefits from the
fund.
TITLE II--SIMPLIFIED USA TAX FOR INDIVIDUALS
SEC. 201. SIMPLIFIED USA TAX FOR INDIVIDUALS.
(a) IN GENERAL- Chapter 1 of the Code is amended to read as follows:
`CHAPTER 1--SIMPLIFIED USA TAX FOR INDIVIDUALS
`Subchapter A. Basic rules.
`Subchapter B. Roth IRA and other savings provisions.
`Subchapter C. Basis, business transactions, and nonrecognition
transactions.
`Subchapter D. Rules for exclusions from gross income.
`Subchapter E. Rules relating to deductions.
`Subchapter F. Special business activities.
`Subchapter G. Accounting methods.
`Subchapter H. Nonresident aliens.
`Subchapter I. Trusts and estates.
`Subchapter J. Definitions and rules of application.
`Subchapter A--Basic Rules
`Sec. 1. Simplified USA tax for individuals.
`Sec. 2. Persons liable for the Simplified USA for individuals.
`Sec. 4. Exclusions from gross income.
`Sec. 5. Alimony and child support deductions.
`Sec. 6. Personal and dependency deduction.
`Sec. 7. Family Living Allowance.
`Sec. 9. Homeowner deduction.
`Sec. 10. Education deduction.
`Sec. 11. Philanthropic transfer deduction.
`Sec. 13. Limitation on deductions.
`Sec. 17. Rules for filing status and rate tables.
`Sec. 20. USA tax credits.
`Sec. 21. Payroll tax credit.
`Sec. 22. Taxes-paid tax credit.
`Sec. 23. Indexing for inflation.
`SEC. 1. SIMPLIFIED USA TAX FOR INDIVIDUALS.
`(a) IMPOSITION OF TAX- An income tax is imposed on each individual
described in section 2. The income tax shall equal the amount determined by
applying the tax schedules in section 15 to the taxable income of the taxpayer
for the taxable year and reducing the tax so determined by the USA tax credits
for the taxable year.
`(b) TAXABLE INCOME- `Taxable income' means adjusted gross income, reduced
by--
`(1) the personal and dependency deduction,
`(2) the Family Living Allowance, and
`(3) the USA deductions, including--
`(A) the homeowner deduction,
`(B) the education deduction, and
`(C) the philanthropic transfer deduction.
`(c) ADJUSTED GROSS INCOME- `Adjusted gross income' means gross income,
reduced by--
`(1) the alimony and child support deductions, and
`(2) the qualified IRA deduction.
`(d) NAME- The tax imposed by this chapter shall be known as the
`Simplified USA Tax for Individuals'.
`SEC. 2. PERSONS LIABLE FOR THE SIMPLIFIED USA TAX FOR INDIVIDUALS.
`(a) INDIVIDUALS ONLY- The Simplified USA Tax for Individuals shall apply
only to individuals.
`(b) CITIZENS AND RESIDENT ALIENS- The Simplified USA Tax for Individuals
shall apply to all citizens of the United States and to all resident aliens of
the United States. Except as specifically provided in this chapter, the
Simplified USA Tax for Individuals shall not apply to nonresident aliens.
`(c) NONRESIDENT ALIENS- For rules applicable to the compensation income
of nonresident aliens, see subchapter H (sections 131 and 132). For rules on
the withholding of tax on nonresident aliens, see chapter 5 (sections
1441-1464).
`(d) TAXPAYER- For purposes of this chapter, `taxpayer' means an
individual, or, in the case of a joint return, the husband and the wife.
`SEC. 3. GROSS INCOME.
`(a) GENERAL DEFINITION- Except as otherwise provided in this chapter,
`gross income for the taxable year' means all income from whatever source
derived by a taxpayer during the taxable year, including (but not limited to)
the following items:
`(1) Compensation for services, including (but not limited to)--
`(E) distributions from business entities (as defined in section
171).
`(2) Fringe benefits (except as specifically excluded by section 4(a)),
including (but not limited to)--
`(A) the cost of health, disability, life or other similar insurance
paid by an employer if the taxpayer is indirectly or directly the
beneficiary of the policy or has the right to name the beneficiary of the
policy,
`(B) employer-paid parking (unless the employee uses the automobile
parked in the space regularly on employer business),
`(C) employer-paid educational benefits,
`(D) employer-paid housing (other than housing provided for the
convenience of the employer),
`(E) employer-paid meals (other than meals provided for the
convenience of the employer or reimbursement for the reasonable cost of
meals incurred on overnight travel),
`(F) amounts contributed by an employer on behalf of an employee to a
group legal services plan, and
`(G) dependent care assistance received from an employer.
`(3) Distributions from business entities (as defined in section 171)
constituting--
`(A) compensation for use of capital, including interest, or
`(B) shares of profits (including dividends).
`(4) Interest not described in paragraph (3)(A).
`(7) Alimony, child support, and separate maintenance payments.
`(8) Includible social security benefits.
`(9) Income from the discharge of indebtedness.
`(10) Gains on the sale or disposition of assets.
`(11) Amounts stolen or embezzled.
`(12) Distributions from retirement plans and annuities (other than USA
Roth IRAs) to the extent not previously included as income, as determined in
accordance with section 33.
`(13) Amounts received through health, accident or disability insurance
to the extent that--
`(A) the cost of such insurance was paid by an employer and not
included in the employee's taxable income and
`(B) such amounts exceed the actual medical expenses incurred and not
paid or treated as paid with amounts otherwise excluded from
income.
`(b) DEFINITIONS- For purposes of subsection (a) and section 4--
`(1) EMPLOYER- `Employer' includes--
`(A) in the case of a partner who provides services for a partnership,
the partnership,
`(B) in the case of a proprietor, the proprietorship, and
`(C) in the case of an independent contractor, any business or
individual that hires the independent contractor.
`(2) Social security benefits-
`(A) IN GENERAL- `Social Security benefits' means any amount received
by the taxpayer by reason of entitlement to--
`(i) a monthly benefit under title II of the Social Security Act,
or
`(ii) a tier 1 railroad retirement benefit. The amount received by a
taxpayer shall be determined as if the Social Security Act did not
contain section 203(i) thereof.
`(B) TIER 1 RAILROAD RETIREMENT BENEFIT- `Tier 1 railroad retirement
benefit' means--
`(i) the amount of the annuity under the Railroad Retirement Act of
1974 equal to the amount of the benefit to which the taxpayer would have
been entitled under the Social Security Act if all of the service after
December 31, 1936, of the employee (on whose record the annuity is being
paid) has been included in the term `employment' as defined in the
Social Security Act, and
`(ii) a monthly annuity amount under section 3(f)(3) of the Railroad
Retirement Act of 1974.
`(C) WORKERS' COMPENSATION SUBSTITUTES- If by reason of section 224 of
the Social Security Act or section 3(a)(1) of the Railroad Retirement Act
of 1974, any social security benefit is reduced because of the receipt of
a benefit under a workers' compensation act, the term `social security
benefit' includes that portion of such benefit which equals such
reduction.
`(D) EFFECT OF EARLY PAYMENT- If social security benefits checks are
delivered before the end of the calendar month for which they are issued
and are not deposited until the month for which they are issued, they will
be treated as received in the month for which they are issued.
`(3) INCLUDIBLE SOCIAL SECURITY BENEFITS- `Includible social security
benefits' means the portion of social security benefits that would be
included in gross income under section 86(a) of the Internal Revenue Code of
1986, except that for purposes of applying such section, the term `modified
adjusted gross income' means adjusted gross income (as defined in section
1(c)), determined without regard to the inclusion of any social security
benefits.
`(c) Property Received for Services-
`(1) IN GENERAL- If, in connection with the performance of services,
property is transferred to any person other than the person for whom such
services are performed, the excess of--
`(A) the fair market value of such property (determined without regard
to any restriction other than a restriction which by its terms will never
lapse) at the first time the rights of the person having the beneficial
interest in such property are transferable or are not subject to a
substantial risk of forfeiture, whichever occurs earlier, over
`(B) the amount (if any) paid for such property, shall be included in
the gross income of the person who performed such services in the first
taxable year in which the rights of the person having the beneficial
interest in such property are transferable or are not subject to a
substantial risk of forfeiture, whichever is applicable. The preceding
sentence shall not apply if such person sells or otherwise disposes of
such property in an arm's length transaction before his rights in such
property become transferable or not subject to a substantial risk of
forfeiture.
`(2) RULES AND REGULATIONS- The Secretary shall prescribe rules and
regulations similar to those applicable under section 83 of the Internal
Revenue Code of 1986 for purposes of implementing this subsection.
`SEC. 4. EXCLUSIONS FROM GROSS INCOME.
`(a) GENERAL RULE- Gross income does not include:
`(1) Returns or benefits from previously taxed income-
`(A) Social security benefits (as defined in section 3(b)(2)), other
than includible social security benefits (as defined in section
3(b)(3)).
`(B) Amounts received under accident or health benefit plans (except
as provided in section 3(a)(13)).
`(C) Value of services provided pursuant to a group legal service plan
(but only if the cost of such services was paid by the employee or paid by
the employer and included in the gross income of the employee).
`(D) Amounts received under an insurance contract for certain living
expenses in the case of an individual whose principal residence is damaged
or destroyed or who is denied access because of the threat of such
occurrence.
`(E) Amounts treated as recovery of basis under any other provision of
chapter 1.
`(2) Compensation for special kinds of service-
`(A) In the case of a minister of the gospel--
`(i) the rental value of a home furnished to him, or
`(ii) the rental allowance paid to him as part of his compensation,
to the extent used by him to rent or provide a home.
`(B) Certain combat pay of members of the Armed Forces of the United
States (as provided in section 92).
`(C) Certain reduced uniform services retirement pay (as defined in
section 122 of the Internal Revenue Code of 1986).
`(D) Qualified military benefits (as defined in section 93).
`(E) Moving allowances for active military personnel (as defined in
section 217(g) of the Internal Revenue Code of 1986).
`(F) Certain foster care payments (as defined in section 94).
`(3) Gratuitous, charitable, and governmental transfers-
`(C) Supplemental security income, aid to families with dependent
children, food stamps, section 8 low-income rental assistance, benefits
under the low-income home energy assistance program, and benefits under
other similar Federal and State assistance programs for low-income
individuals and families.
`(D) Benefits or assistance received from a charitable organization as
the result of a disaster or by reason of financial need.
`(4) TAX-EXEMPT BOND INTEREST- Interest on State and local bonds (as
provided in section 91);
`(5) Compensation for injury and sickness-
`(A) Amounts received as compensation for personal injury or sickness
(as provided in section 95).
`(B) Reimbursement and direct payments under Medicare and
Medicaid.
`(6) Benefits primarily for the convenience of the employer and certain
fringe benefits-
`(A) Meals or lodging furnished for the convenience of the employer
(as provided in section 96).
`(B) Value of a parking space if employee uses the car parked in the
space regularly on company business.
`(C) A fringe benefit that is a no-additional-cost service (as defined
in section 97(b)), subject to rules prohibiting discrimination in favor of
the highly compensated.
`(D) A qualified employee discount (as defined in section 97(c)),
subject to rules prohibiting discrimination in favor of the highly
compensated.
`(E) Any property or services provided to an employee to the extent
that if the employee were treated as a business and the business paid for
those services, the employee could deduct the cost of such property or
services under the business tax.
`(F) A de minimis fringe benefit (as defined in section
97(d)).
`(G) Transportation in a commuter highway vehicle if such
transportation is in connection with travel between the employee's
residence and place of employment.
`(H) Any amount received directly or indirectly by an individual from
an employer for moving expenses if--
`(i) the move is associated with a change in job locations for the
same employer, and
`(ii) the expenses of such move would have been deductible under the
rules under section 217 of the Internal Revenue Code of 1986 if paid
directly by the employee.
`(I) Employer provided coverage under an accident or health
plan.
`(7) REPAYABLE RECEIPTS- The proceeds of borrowing or any other amounts
legally received that the taxpayer is legally obligated to return (except
that the imputed interest rules of section 7872 may apply if there is
inadequate stated interest).
`(8) CERTAIN INCOME EARNED ABROAD- Certain income and housing costs of
citizens and residents of the United States living outside the United States
in accordance with the rules under section 911 of the Internal Revenue Code
of 1986.
`(9) DISCHARGE OF INDEBTEDNESS- The amount of indebtedness discharged
unless the discharge is for services, property, or other valuable
right.
`(10) NONRECOGNITION TRANSACTIONS- Amounts to which the nonrecognition
transaction rules of section 77 apply.
`(11) PROCEEDS FROM SALE OF PRINCIPAL RESIDENCE- Amounts excludable
under section 76 (relating to certain proceeds from the sale of the
taxpayer's principal residence).
`(12) TAXABLE RECEIPTS OF A BUSINESS ENTITY- Amounts that are treated as
taxable receipts of a business entity under the Simplified USA Tax for
businesses and are not distributed to the individual taxpayer.
`(13) QUALIFIED RETIREMENT CONTRIBUTIONS- Employer contributions to
retirement plans that are exempt from taxation under chapter 3, including
contributions pursuant to a cash or deferred payment plan described in
section 401(k).
`(1) ROTH IRAS- For rules excluding from income earnings on, and
distributions from, Roth IRAs, see sections 30 and 408A.
`(2) OTHER RETIREMENT PLANS- For rules excluding or deferring from
income earnings on other retirement plans, see chapter 3.
`SEC. 5. ALIMONY AND CHILD SUPPORT DEDUCTIONS.
`(a) GENERAL RULE- A taxpayer shall be allowed an alimony and child
support deductions for an amount equal to the alimony, child support, or
separate maintenance payments paid during the taxpayer's taxable year.
`(b) DEFINITION OF ALIMONY, CHILD SUPPORT, AND SEPARATE MAINTENANCE
PAYMENTS- `Alimony, child support, and separate maintenance payments' means
any alimony, child support, or separate maintenance payment which is
includible in gross income of the recipient under section 3.
`SEC. 6. PERSONAL AND DEPENDENCY DEDUCTION.
`(a) AMOUNT OF EXEMPTION- The personal and dependency deduction for an
individual shall equal the number of exemptions multiplied by $2,700.
`(b) Number of Exemptions-
`(1) TAXPAYER- One exemption shall be allowed for the taxpayer unless
the taxpayer files a joint return with a spouse, in
which case 1 exemption shall be allowed for the husband and 1 for the wife.
`(2) ELIGIBLE DEPENDENT- An exemption shall be allowed for each eligible
dependent.
`(1) DEFINITION- `Dependent' means any of the following individuals over
half of whose support, for the calendar year was received from the taxpayer
or is treated as received from the taxpayer:
`(A) A son or daughter of the taxpayer, or a descendant of
either.
`(B) A stepson, stepdaughter, stepfather, or stepmother of the
taxpayer.
`(C) A brother, sister, stepbrother, or stepsister of the
taxpayer.
`(D) The father or mother of the taxpayer, or an ancestor of
either.
`(E) A son or daughter of a brother or sister of the
taxpayer.
`(F) A brother or sister of the mother or father of the
taxpayer.
`(G) A son-in-law, daughter-in-law, father-in-law, mother-in-law,
brother-in-law, or sister-in-law of the taxpayer.
`(H) An individual (other than an individual who at any time during
the taxable year was the spouse, determined without regard to section
7703, of a taxpayer) who, for the taxable year of the taxpayer, has as his
principal place of abode the home of the taxpayer and is a member of the
taxpayer's household.
`(2) RULES RELATING TO THE GENERAL DEFINITION- The Secretary shall
prescribe rules similar to the rules under section 152 of the Internal
Revenue Code of 1986 that shall apply to the general definition of
`dependent', including definitional rules, rules relating to multiple
support agreements, and support tests in cases of children of divorced
parents.
`(1) IN GENERAL- `Eligible dependent' means a dependent--
`(A) whose gross income for the calendar year in which the taxable
year of the taxpayer begins is less than the exemption amount, or
`(B) who is a child of the taxpayer and who--
`(i) has not attained the age of 19 at the close of the calendar
year in which the taxable year of the taxpayer begins, or
`(ii) is a student who has not attained the age of 24 at the close
of such calendar year.
`(2) EXCLUSIONS- A dependent who files a joint return with a spouse for
the calendar year is not an eligible dependent.
`(3) RULES RELATING TO DEFINITIONS- The Secretary shall prescribe rules
similar to those included in or applicable under the Internal Revenue Code
of 1986 relating to this subsection, including rules defining `child' and
`student' and rules relating to the income of handicapped dependents.
`(e) INFLATION ADJUSTMENT- The dollar amount contained in subsection (a)
shall be adjusted for inflation beginning with calendar year 2000 in
accordance with the procedures of section 23.
`SEC. 7. FAMILY LIVING ALLOWANCE.
`(a) AMOUNT OF ALLOWANCE- The Family Living Allowance for a taxpayer shall
be determined in accordance with the following schedule:
`Form of Return:
Family Living Allowance:
Taxpayers filing joint return
$8,140.
Surviving spouse
$8,140.
Head of household
$5,940.
Individual who is not married or a head of household
$4,840.
Married filing separate return
$4,070.
`(b) LIMITATION IN THE CASE OF CERTAIN DEPENDENTS- In the case of an
individual for whom another taxpayer can claim an exemption under section 6,
the Family Living Allowance for such individual shall not exceed the greater
of $700 or such individual's earned income (as defined in section
171(a)(6)).
`(c) ADJUSTMENTS FOR INFLATION- The dollar amounts contained in
subsections (a) and (b) shall be adjusted for inflation beginning with
calendar year 2000 in accordance with the procedures of section 23.
`SEC. 8. USA DEDUCTIONS.
`In computing taxable income, an individual shall be entitled to the
following deductions:
`(1) The homeowner deduction described in section 9.
`(2) The education deduction described in section 10.
`(3) The philanthropic transfer deduction described in section 11.
`SEC. 9. HOMEOWNER DEDUCTION.
`(a) IN GENERAL- The homeowner deduction shall equal the amount of
interest paid by the taxpayer during the taxable year on acquisition
indebtedness with respect to any qualified residence of the taxpayer.
`(1) ACQUISITION INDEBTEDNESS- `Acquisition indebtedness' means any
indebtedness that is secured by a qualified residence and that--
`(A) was incurred in acquiring, constructing, or substantially
improving the qualified residence, or
`(B) was incurred to refinance any indebtedness that is described in
subparagraph (A) or this subparagraph (B) but only to the extent that the
refinancing does not exceed the amount refinanced.
The aggregate amount treated as acquisition indebtedness shall not
exceed $1,000,000 ($500,000 in the case of a married individual filing
separately).
`(2) QUALIFIED RESIDENCE- `Qualified residence' means the principal
residence of the taxpayer and 1 other residence of the taxpayer that is
designated by the taxpayer and which--
`(A) is used by the taxpayer as a residence for more than 14 days
during such year for which such unit is rented, and
`(B) is not rented for more than 14 days during such year.
`(c) COOPERATIVE HOUSING CORPORATION TENANT- Any indebtedness secured by
stock held by a taxpayer as a tenant-stockholder in a cooperative housing
corporation shall be treated as secured by the house or apartment which the
taxpayer is entitled to occupy as a tenant-stockholder. If such stock cannot
be used to secure indebtedness, the indebtedness will be treated as so secured
if the taxpayer establishes that such indebtedness was incurred to acquire
stock.
`SEC. 10. EDUCATION DEDUCTION.
`(a) IN GENERAL- The education deduction shall equal the sum of the
qualified educational expenses for each eligible student.
`(b) Qualified Education Expenses-
`(1) IN GENERAL- `Qualified education expenses' means with respect to an
eligible student the lesser of--
`(B) the qualified higher education expenses of the eligible student
paid by the taxpayer during the taxable year.
`(2) Qualified higher education expenses-
`(A) IN GENERAL- `Qualified higher education expenses' means tuition
and fees required for the enrollment of an eligible student at an eligible
education institution. Such term shall not include expenses with respect
to any course or other education involving sports, games, or hobbies other
than as part of a degree program.
`(B) ELIGIBLE EDUCATIONAL INSTITUTION- `Eligible educational
institution' means--
`(i) an institution which is described in section 481 of the Higher
Education Act of 1965 (as in effect on May 15, 1998), and which is
eligible to participate in a program under title IV of such
Act.
`(ii) in the case of a student who has attained the age of 18 before
the beginning of the taxable year, and not graduated from high school
before the beginning of the taxable year, an accredited school providing
remedial education.
`(3) ELIGIBLE STUDENT- `Eligible student' means--
`(A) the taxpayer, but only if no other taxpayer treats the taxpayer
as a dependent for which an exemption is allowed in computing the
dependency deduction under section 6,
`(B) the taxpayer's spouse if a joint return is filed, and
`(C) any dependent of the taxpayer for whom the taxpayer is allowed an
exemption in computing the dependency deduction under section 6.
`(c) LIMITATION- The maximum education deduction in a taxable year is
$12,000 ($6,000 in the case of married individuals filing separate
returns).
`(d) INFLATION ADJUSTMENTS- The dollar amounts contained in subsections
(b)(1)(A) and (c) shall be adjusted for inflation beginning with calendar year
2000 in accordance with section 23.
`SEC. 11. PHILANTHROPIC TRANSFER DEDUCTION.
`(a) IN GENERAL- The philanthropic transfer deduction shall equal the
amount of charitable contributions made by the taxpayer in the taxable year,
subject to the limitations in subsection (b). A deduction shall be allowable
as a deduction only if verified under regulations prescribed by the
Secretary.
`(b) LIMITATION ON AMOUNT-
`(1) GENERAL RULE- A deduction for contributions to regular charities in
any taxable year shall be allowed only to the extent that such contributions
do not exceed 50 percent of the taxpayer's adjusted gross income. Other
charitable contributions shall be allowed only to the extent that such
contributions do not exceed the lesser of--
`(A) 30 percent of the taxpayer's adjusted gross income, or
`(B) the excess, if any, of 50 percent of the taxpayer's adjusted
gross income over the amount of charitable contributions to regular
charities.
`(2) CARRYOVER- If the amount of charitable contributions made in a
taxable year exceeds the amount which can be deducted in such year, the
excess shall be carried over for a period of up to 5 years in accordance
with rules to be prescribed by the Secretary.
`(3) REGULAR CHARITY- For purposes of this subsection, `regular charity'
means an organization described in section 101, that is not a private
foundation (other than a private operating foundation) (as such terms are
defined in section 102).
`(c) CHARITABLE CONTRIBUTION- `Charitable contribution' means a
contribution or gift to or for the use of a governmental or charitable
recipient (as defined in section 101).
`(d) CONTRIBUTIONS OF PROPERTY-
`(1) GENERAL RULE- In the case of a charitable contribution of property,
the amount of the contribution shall equal the lesser of the fair market
value of the property or the taxpayer's basis in the property.
`(2) FAIR MARKET VALUE DEDUCTIONS IN CERTAIN CASES- Notwithstanding
paragraph (1), in the case of a charitable contribution (other than a
contribution to a private foundation that is not a private operating
foundation) of--
`(B) tangible property if the use by the donee is related to its
purpose or function constituting the basis for its exemption from the
business tax or in the case of a governmental unit, to any governmental
unit, and
`(C) stocks, bonds, or other securities held for more than one
year,
the amount of the charitable contribution shall equal the fair market
value of the property.
`(3) CONTRIBUTIONS OF STOCK FOR WHICH MARKET QUOTATIONS ARE READILY
AVAILABLE-
`(A) IN GENERAL- In the case of contributions of qualified appreciated
stock, paragraph (2) shall apply without regard to whether the stock is
contributed to a private foundation.
`(B) QUALIFIED APPRECIATED STOCK- `Qualified appreciated stock' means
any stock of a corporation for which (as of the date of the contribution)
market quotations are readily available on an established securities
market, except that in the case of a donor to a private foundation, the
term does not include stock to the extent that the amount so contributed,
when increased by prior contributions by the donor of stock in the same
corporation, exceeds 10 percent in value of the outstanding stock of such
corporation.
`(e) OTHER RULES- The Secretary shall prescribe rules limiting the
availability of the philanthropic transfer deduction in certain cases,
including rules for--
`(1) contributions of property placed in trust,
`(2) contributions of partial interests in property,
`(3) contributions subject to liabilities that are assumed,
`(4) out-of-pocket expenditures on behalf of a charity to influence
legislation,
`(5) substantiation of contributions in excess of $250,
`(6) contributions designated for lobbying activity,
`(7) amounts paid to maintain certain students as members of taxpayer's
household,
`(8) qualified conservation contributions, and
`(9) deductions for travel expenses on behalf of a charity where there
is a significant element of personal pleasure.
`SEC. 13. LIMITATION ON DEDUCTIONS.
`(a) IN GENERAL- A taxpayer's deductions shall not reduce the taxpayer's
taxable income below zero. Except as provided in section 11(b) (relating to
the limitation on the philanthropic transfer deduction), a taxpayer shall not
be entitled to carry over any unused deductions.
`(b) DEDUCTIONS- For purposes of this section, `deductions' means--
`(1) the alimony and child support deductions,
`(2) the personal and dependency deduction,
`(3) the Family Living Allowance,
`(4) the USA deductions, and
`(5) the qualified IRA deduction.
`SEC. 15. TAX RATES.
`(a) MARRIED INDIVIDUALS FILING JOINT RETURNS AND SURVIVING SPOUSES- The
tax schedule for every married individual who files a joint return with a
spouse and for every surviving spouse (as defined in section 17(a)) is--
`If taxable income is:
The tax is:
Not over $40,000
15% of taxable income.
Over $40,000, but not over $80,000
$6,000, plus 25% of the excess over $40,000.
Over $80,000
$16,000, plus 30% of the excess over $80,000.
`(b) HEADS OF HOUSEHOLDS- The tax schedule for every head of household (as
defined in section 17(b)) is--
`If taxable income is:
The tax is:
Not over $35,000
15% of taxable income.
Over $35,000, but not over $70,000
$5,250, plus 25% of the excess over $35,000.
Over $70,000
$14,000, plus 30% of the excess over $70,000.
`(c) UNMARRIED INDIVIDUALS- The tax schedule for an unmarried individual
who is not a head of a household or a surviving spouse is--
`If taxable income is:
The tax is:
Not over $24,000
15% of taxable income.
Over $24,000, but not over $48,000
$3,600, plus 25% of the excess over $24,000.
Over $48,000
$9,600, plus 30% of the excess over $48,000.
`(d) MARRIED INDIVIDUALS FILING SEPARATE RETURNS- The tax schedule for a
married individual filing a separate return is--
`If taxable income is:
The tax is:
Not over $20,000
15% of taxable income.
Over $20,000, but not over $40,000
$3,000, plus 25% of the excess over $20,000.
Over $40,000
$8,000, plus 30% of the excess over $40,000.
`(e) ADJUSTMENTS FOR INFLATION- Beginning with calendar year 2000, the tax
schedules in subsections (a) through (d) shall be adjusted so that inflation
will not result in tax increases in accordance with the procedures under
section 23.
`(f) DEFINITIONS- See section 17 for rules on filing status.
`SEC. 16. KIDDIE TAX.
`(a) GENERAL RULE- If a child has a living parent and net unearned income
and the child has not attained the age of 14 before the close of the taxable
year--
`(1) the net unearned income of the child shall be included in the
taxable income of the eligible parent for purposes of determining the
parent's tax liability, or
`(2) the tax calculated under the tax rate schedules for the child as a
separate taxpayer shall not be less than the sum of--
`(A) the tax which would have been determined under the rate schedule
if the taxable income of the child were reduced by the net unearned income
of the child, plus
`(B) such child's share of the allocable parental tax.
`(b) CHILD'S SHARE OF ALLOCABLE PARENTAL TAX-
`(1) ALLOCABLE PARENTAL TAX- `Allocable parental tax' means the excess
of--
`(A) the tax that would have been determined under the rate schedules
on the eligible parent's taxable income if such income included the net
unearned income of all of the eligible parent's children to which this
section applies, over
`(B) the tax actually determined under the rate schedules without
regard to this section.
`(2) CHILD'S SHARE- A child's share of the allocable parental tax is
equal to the amount that bears the same ratio to the total allocable
parental tax as the child's net unearned income bears to the aggregate net
unearned income of all children to whom this section applies for whom the
eligible parent is the eligible parent.
`(c) ELIGIBLE PARENT- `Eligible parent' means--
`(1) both parents of the child if the parents file a joint return,
`(2) the surviving parent of a child if the child has only 1 surviving
parent,
`(3) the custodial parent if the child's parents are not married,
or
`(4) the parent with the greater taxable income if the parents are
married and filing separate returns.
`(d) NET UNEARNED INCOME- `Net unearned income' means the excess, if any,
of--
`(1) the adjusted gross income of the child, over
`(A) the earned income (as defined in section 171(a)(6)) of the child,
and
`(B) an amount equal to the Family Living Allowance for a dependent
child.
`SEC. 17. RULES FOR FILING STATUS AND RATE TABLES.
`(a) DEFINITION OF SURVIVING SPOUSE-
`(1) IN GENERAL- `Surviving spouse' means an individual--
`(A) whose spouse died during either of his 2 calendar years
immediately preceding the calendar year, and
`(B) who maintains as his home a household which constitutes for the
taxable year the principal place of abode (as a member of such household)
of a dependent--
`(i) who (within the meaning of section 6) is a son, stepson,
daughter, or stepdaughter of the taxpayer, and
`(ii) who the taxpayer is entitled to treat as an exemption for
purposes of computing the personal dependency deduction for the taxable
year under section 6.
For purposes of this paragraph, an individual shall be considered as
maintaining a household only if over half of the cost of maintaining the
household during the taxable year is furnished by such individual.
`(2) LIMITATIONS- Notwithstanding paragraph (1), for purposes of section
15, an individual shall not be considered to be a surviving spouse--
`(A) if the individual has remarried at any time before the close of
the taxable year, or
`(B) unless, for the individual's taxable year during which his spouse
died, a joint return could have been made under the provisions of section
6013 (without regard to subsection (a)(3) thereof).
`(3) SPECIAL RULE WHERE DECEASED SPOUSE WAS IN MISSING STATUS- If an
individual was in a missing status (within the meaning of section
6013(f)(3)) as a result of service in a combat zone and if such individual
remains in such status until the date referred to in subparagraph (A) or
(B), then, for purposes of paragraph (1)(A), the date on which such
individual died shall be treated as the earlier of the date determined under
subparagraph (A) or the date determined under subparagraph (B):
`(A) the date on which the determination is made under section 556 of
title 37 of the United States Code or under section 5566 of title 5 of
such Code (whichever is applicable) that such individual died while in
such missing status, or
`(B) the date which is 2 years after the date designated under section
92 (relating to exemption for combat zones)
as the date of termination of combatant activities in that zone.
`(b) DEFINITION OF HEAD OF HOUSEHOLD-
`(1) IN GENERAL- An individual shall be considered a head of a household
if, and only if, such individual is not married at the close of his taxable
year, is not a surviving spouse (as defined in subsection (a)), and
either--
`(A) maintains as his home a household which constitutes for more than
one-half of such taxable year the principal place of abode, as a member of
such household, of--
`(i) a son, stepson, daughter, or stepdaughter of the taxpayer, or a
descendant of a son or daughter of the taxpayer, but if such son,
stepson, daughter, stepdaughter, or descendant is married at the close
of the taxpayer's taxable year, only if the taxpayer is entitled to
claim such person as an exemption for the taxable year for purposes of
computing the dependency deduction under section 6 (or would be so
entitled but for the release of a claim to such exemption by the
custodial parent),
`(ii) any other person who is a dependent of the taxpayer, if the
taxpayer is entitled to claim such person as an exemption in determining
the personal dependency deduction for the taxable year, or
`(B) maintains a household which constitutes for such taxable year the
principal place of abode of the father or mother of the taxpayer, if the
taxpayer is entitled to a personal dependency deduction for the taxable
year for such father or mother.
For purposes of this paragraph, an individual shall be considered as
maintaining a household only if over half of the cost of maintaining the
household during the taxable year is furnished by such individual.
`(2) DETERMINATION OF STATUS- For purposes of this subsection--
`(A) a legally adopted child of a person shall be considered a child
of such person by blood;
`(B) an individual who is legally separated from his spouse under a
decree of divorce or of separate maintenance shall not be considered as
married;
`(C) a taxpayer shall be considered as not married at the close of his
taxable year if at any time during the taxable year his spouse is a
nonresident alien; and
`(D) a taxpayer shall be considered as married at the close of his
taxable year if his spouse (other than a spouse described in subparagraph
(C)) died during the taxable year.
`(3) LIMITATIONS- Notwithstanding paragraph (1), for purposes of this
chapter, a taxpayer shall not be considered to be a head of a
household--
`(A) if at any time during the taxable year he is a nonresident alien;
or
`(B) by reason of an individual who would not be a dependent for the
taxable year but for--
`(i) subparagraph (H) of section 6(c)(1) or
`(ii) multiple support rules prescribed by the
Secretary.
`(c) CERTAIN MARRIED INDIVIDUALS LIVING APART- For purposes of this part,
an individual shall be treated as not married at the close of the taxable year
if such individual is so treated under the provisions of section 7703(b).
`(d) NONRESIDENT ALIENS- In the case of a nonresident alien individual,
the taxes imposed by section 1 shall not apply.
`SEC. 20. USA TAX CREDITS.
`(a) IN GENERAL- The USA tax credits are and shall be applied in the
following order:
`(1) The foreign tax credit as prescribed by the Secretary under rules
similar to the rules of subpart A of part III of subchapter N of chapter 1
of the Internal Revenue Code of 1986, but only with respect to foreign taxes
on amounts that are included in the gross income of the taxpayer.
`(2) The payroll tax credit under section 21.
`(3) The taxes-paid tax credit under section 22.
`(b) REFUNDABLE CREDITS- If a taxpayer's USA tax credits (other than the
foreign tax credit) for a taxable year exceed the taxpayer's tax liability for
the taxable year (after application of the foreign tax credit but before
application of the other USA tax credits), the taxpayer shall be entitled to a
refund for such excess. The taxpayer may elect in lieu of a refund to apply
such excess as a tax paid for the following taxable year.
`SEC. 21. PAYROLL TAX CREDIT.
`(a) IN GENERAL- A taxpayer shall be allowed a payroll tax credit in an
amount equal to the sum of--
`(1) the employee's share of the basic FICA tax,
`(2) the employee's share of the basic Tier 1 railroad retirement tax,
and
`(3) one-half of the basic SECA tax payable with respect to the
taxpayer's compensation or earnings during the taxable year.
`(1) EMPLOYEE'S SHARE OF THE BASIC FICA TAX- `Employee's share of the
basic FICA tax' means the old-age, survivors and disability insurance tax
imposed by section 3101(a) and the portion of the hospital insurance tax
imposed by section 3101(b) that is attributable to the wage base on which
the section 3101(a) tax is imposed.
`(2) EMPLOYEE'S SHARE OF THE BASIC TIER 1 RAILROAD RETIREMENT TAX-
Employee's share of the basic Tier 1 railroad retirement tax' means--
`(A) the portion of the tax imposed by section 3201 with respect to
compensation below the applicable base (as defined in section 3231(e)(2));
and
`(B) the portion of the tax imposed by section 3211(a)(1) on railroad
employee representatives attributable to the tax imposed by section
3101(a) and the portion of the hospital insurance tax imposed by section
3101(b) that is attributable to the wage base on which the section 3101(a)
tax is imposed.
`(3) BASIC SECA TAX- `Basic SECA tax' means the old-age, survivors and
disability insurance tax
imposed by section 1401(a) on self-employment income and the portion of the
hospital insurance tax imposed by section 1401(b) on self-employment income that
is attributable to the amount of self-employment income (as determined under
section 1402(b)) on which the section 1401(a) tax is imposed.
`(c) NO CREDIT FOR REFUNDABLE TAX- No credit shall be allowed with respect
to any FICA tax or railroad retirement tax for which a taxpayer is entitled to
a refund because of overpayment of tax on the applicable wage base.
`SEC. 22. TAXES-PAID TAX CREDIT.
`The taxes-paid tax credit shall equal the sum of--
`(1) WAGE WITHHOLDING- The amount withheld as tax under chapter
24.
`(2) SPECIAL REFUNDS OF SOCIAL SECURITY TAX WHEN WAGES EARNED FROM MORE
THAN 1 EMPLOYER- The amount allowable under section 6413(c) as a special
refund of taxes imposed on wages.
`(3) OVERPAYMENTS OF PRIOR-YEAR TAX- Any overpayment of a prior tax
obligation that the taxpayer or the Secretary applies to the tax for the
taxable year.
`(4) ESTIMATED TAXES- Any estimated taxes paid by the taxpayer with
respect to the taxpayer's tax liability for the taxable year which are
treated as payment on account of income tax for purposes of section 6315
(relating to estimated taxes).
`SEC. 23. INDEXING FOR INFLATION.
`(a) PUBLICATION OF TABLES AND NUMBERS- Not later than December 15 of
1999, and each subsequent calendar year, the Secretary shall prescribe tables
and dollar amounts which shall apply in the immediately following calendar
year in lieu of the tables and dollar amounts that are required to be adjusted
for inflation in accordance with this section.
`(b) METHOD OF ADJUSTMENT-
`(1) IN GENERAL- The dollar amounts which are required to be adjusted
pursuant to this section for a calendar year shall be the dollar amounts as
stated in this chapter multiplied by the cost of living adjustment for such
calendar year, rounded as provided in subsection (d).
`(2) TAX RATE TABLES- In the case of a tax rate table, the dollar
amounts to be adjusted in accordance with paragraph (1) are the minimum and
maximum dollar amounts for each rate bracket for which a tax is imposed. The
amounts setting forth the bottom tax for each bracket shall be adjusted to
the extent necessary to reflect the adjustments in the rate brackets.
`(c) COST-OF-LIVING ADJUSTMENT-
`(1) IN GENERAL- The cost-of-living adjustment for any calendar year is
the percentage (if any) by which--
`(A) the CPI for the preceding calendar year, exceeds
`(B) the CPI for the calendar year 1998.
`(2) CPI FOR ANY CALENDAR YEAR- For purposes of paragraph (1), the CPI
for any calendar year is the average of the Consumer Price Index as of the
close of the 12-month period ending on August 31 of such calendar
year.
`(3) CONSUMER PRICE INDEX- For purposes of paragraph (2), `Consumer
Price Index' means the last Consumer Price Index for all-urban consumers
published by the Department of Labor. For purposes of the preceding
sentence, the revision of the Consumer Price Index which is most consistent
with the Consumer Price Index for calendar year 1999 shall be used.
`(1) IN GENERAL- If any increase determined under subsection (b) is not
a multiple of $50, such increase shall be rounded to the next lowest
multiple of $50.
`(2) MULTIPLES OF $25- Paragraph (1) shall be applied by substituting
`$25' for `$50' in the case of--
`(A) amounts for married individuals filing separately, and
`(B) any other dollar amount that is to be adjusted for inflation if
that dollar amount is less than $1,000.
`Subchapter B--Roth IRA and Other Savings Provisions
`Sec. 31. Deductible IRAs.
`Sec. 32. Effect of repeal of special savings provisions.
`SEC. 30. ROTH IRAS.
`(a) GENERAL RULE- Except as provided in this section, a Roth IRA shall be
treated for purposes of this title in the same manner as an individual
retirement plan.
`(b) ROTH IRA- `Roth IRA' means an individual retirement plan (as defined
in section 7701(a)(37)) which is designated (in such manner as the Secretary
may prescribe) at the time of establishment of the plan as a Roth IRA. Such
designation shall be made in such manner as the Secretary may prescribe.
`(c) TREATMENT OF CONTRIBUTIONS-
`(1) NO DEDUCTION ALLOWED- No deduction shall be allowed for a
contribution to a Roth IRA.
`(2) CONTRIBUTION LIMIT- The aggregate amount of contributions for any
taxable year to all Roth IRAs maintained for the benefit of an individual
(or, in the case of individuals filing a joint return, either spouse) shall
not exceed the taxpayer's adjusted gross income for the taxable year.
`(A) ROLLOVER CONTRIBUTIONS- No rollover contribution may be made to a
Roth IRA unless it is a qualified rollover contribution.
`(B) LIMITS- A taxpayer shall not be allowed to make a qualified
rollover contribution to a Roth IRA from an individual retirement plan
other than a Roth IRA during any taxable year if--
`(i) the taxpayer's adjusted gross income for such taxable year
exceeds $100,000, or
`(ii) the taxpayer is a married individual filing a separate
return.
`(C) MARITAL STATUS- Section 31(g)(4) shall apply for purposes of this
paragraph.
`(4) CONTRIBUTIONS PERMITTED AFTER AGE 70 1/2 - Contributions to a Roth
IRA may be made even after the individual for whom the account is maintained
has attained age 70 1/2 .
`(5) MANDATORY DISTRIBUTION RULES NOT TO APPLY BEFORE DEATH-
Notwithstanding subsections (a)(6) and (b)(3) of section 408 (relating to
required distributions), the following provisions shall not apply to any
Roth IRA:
`(A) Section 401(a)(9)(A).
`(B) The incidental death benefit requirements of section
401(a).
`(6) TIME WHEN CONTRIBUTIONS MADE- A taxpayer shall be deemed to have
made a contribution to a Roth IRA during a year if the contribution is made
on account of such year and is made not later than April 15 of the following
year.
`(d) EXCLUSION FROM INCOME- For purposes of this chapter--
`(1) GENERAL RULES- A distribution from a Roth IRA shall not be
includible in gross income.
`(2) NONQUALIFIED DISTRIBUTION- The automatic exclusion from gross
income under paragraph (1) shall not apply to any distribution, other than a
qualified special purpose distribution if--
`(A) it is made within the 5-taxable year period beginning with the
1st taxable year for which the individual made a contribution to a Roth
IRA (or such individual's spouse made a contribution to a Roth IRA)
established for such individual, or
`(B) in the case of a payment or distribution properly allocable (as
determined in the manner prescribed by the Secretary) to a qualified
rollover contribution from an individual retirement plan other than a Roth
IRA (or income allocable thereto), it is made within the 5-taxable year
period beginning with the taxable year in which the rollover contribution
was made.
`(3) NONQUALIFIED DISTRIBUTIONS- In applying section 33 to any
distribution from a Roth IRA described in paragraph (2), such distribution
shall be treated as made from contributions to the Roth IRA to the extent
that such distribution, when added to all previous distributions from the
Roth IRA, does not exceed the aggregate amount of contributions to the Roth
IRA. Only distributions attributable to earnings on accounts (as opposed to
distributions of contributions) shall be included in gross income.
`(4) Rollovers from an ira other than a roth ira-
`(A) IN GENERAL- Notwithstanding section 408(d)(3), in the case of any
distribution to which this paragraph applies there shall be included in
gross income any amount which would be includible were it not part of a
qualified rollover contribution.
`(B) DISTRIBUTIONS TO WHICH PARAGRAPH APPLIES- This paragraph shall
apply to a distribution from an individual retirement plan (other than a
Roth IRA) maintained for the benefit of an individual which is contributed
to a Roth IRA maintained for the benefit of such individual in a qualified
rollover contribution.
`(C) CONVERSIONS- The conversion of an individual retirement plan
(other than a Roth IRA) to a Roth IRA shall be treated for purposes of
this paragraph as a distribution to which this paragraph applies.
`(D) CONVERSION OF EXCESS CONTRIBUTIONS- If, no later than the due
date for filing
the return of tax for any taxable year (without regard to extensions), an
individual transfers, from an individual retirement plan (other than a Roth
IRA), contributions for such taxable year (and any earnings allocable thereto)
to a Roth IRA, no such amount shall be includible in gross income to the extent
no deduction was allowed with respect to such amount.
`(E) ADDITIONAL REPORTING REQUIREMENTS- Trustees of Roth IRAs,
trustees of individual retirement plans, or both, whichever is
appropriate, shall include such additional information in reports required
under section 408(i) as the Secretary may require to ensure that amounts
required to be included in gross income under subparagraph (A) are so
included.
`(4) COORDINATION WITH INDIVIDUAL RETIREMENT ACCOUNTS- Section 408(d)(2)
shall be applied separately with respect to Roth IRAs and other individual
retirement plans.
`(5) QUALIFIED SPECIAL PURPOSE DISTRIBUTION- `Qualified special purpose
distribution' means--
`(i) DISTRIBUTIONS UPON DEATH- Distributions made to a beneficiary
(or to the estate of the individual) on or after the death of the
individual.
`(ii) DISTRIBUTIONS UPON DISABILITY- Distributions attributable to
the individual's being disabled.
`(iii) DISTRIBUTIONS TO PAY MEDICAL EXPENSES- Distributions made to
the individual for amounts paid during the year for medical care, but
only to the extent that the amounts paid for medical care exceed 7.5% of
the adjusted gross income of the taxpayer. (determined without regard to
whether the employee itemizes deductions for such taxable
year).
`(iv) QDROS- Any distribution to an alternate payee pursuant to a
qualified domestic relations order (within the meaning of section
414(p)(1)).
`(v) DISTRIBUTIONS TO UNEMPLOYED INDIVIDUALS FOR HEALTH INSURANCE
PREMIUMS- Distributions to an individual--
`(I) if such individual has received unemployment compensation for
12 consecutive weeks under any Federal or State unemployment
compensation law by reason of such separation (or in the case of a
self-employed individual, to the extent provided in regulations, if
the individual would have received unemployment compensation but for
the fact the individual was self-employed),
`(II) if such distributions are made during any taxable year
during which such unemployment compensation is paid or the succeeding
taxable year,
`(III) to the extent such distributions do not exceed the amount
paid during the taxable year for insurance for the diagnosis, cure,
mitigation, treatment, or prevention of disease, or for the purpose of
affecting any structure or function of the body (or for transportation
primarily for and essential to such medical care) (including amounts
paid as premiums under part B of title XVIII of the Social Security
Act, relating to supplementary medical insurance for the aged) or for
any qualified long-term care insurance contract (as defined in section
7702B(b)) with respect to the individual and the individual's spouse
and dependents, and
`(IV) such distributions are not made after the individual has
been employed for at least 60 days after the separation from
employment to which clause (I) applies.
`(v) DISTRIBUTIONS TO PAY HIGHER EDUCATION EXPENSES- Distributions
to the extent such distributions do not exceed the qualified higher
education expenses (as defined in section 10(a)(2)) of--
`(II) the taxpayer's spouse, or
`(III) any child or grandchild of the taxpayer or the taxpayer's
spouse.
`(vi) DISTRIBUTIONS FOR FIRST HOME PURCHASES- Distributions which
are qualified first-time homebuyer distributions (as defined in
paragraph (6)).
`(6) Qualified first-time homebuyer distributions-
`(A) IN GENERAL- `Qualified first-time homebuyer distribution' means
any payment or distribution received by an individual to the extent such
payment or distribution is used by the individual before the close of the
120th day after the day on which such payment or distribution is received
to pay qualified acquisition costs with respect to a principal residence
of a first-time homebuyer who is such individual, the spouse of such
individual, or any child, grandchild, or ancestor of such individual or
the individual's spouse.
`(B) LIFETIME DOLLAR LIMITATION- The aggregate amount of payments or
distributions received by an individual which may be treated as qualified
first-time homebuyer distributions for any taxable year shall not exceed
the excess (if any) of--
`(ii) the aggregate amounts treated as qualified first-time
homebuyer distributions with respect to such individual for all prior
taxable years.
`(C) QUALIFIED ACQUISITION COSTS- `Qualified acquisition costs' means
the costs of acquiring, constructing, or reconstructing a residence. Such
term includes any usual or reasonable settlement, financing, or other
closing costs.
`(D) FIRST-TIME HOMEBUYER; OTHER DEFINITIONS- For purposes of this
paragraph--
`(i) FIRST-TIME HOMEBUYER- `First-time homebuyer' means any
individual if such individual (and if married, such individual's spouse)
had no present ownership interest in a principal residence during the
2-year period ending on the date of acquisition of the principal
residence to which this paragraph applies, and
`(ii) DATE OF ACQUISITION- `Date of acquisition' means the
date--
`(I) on which a binding contract to acquire the principal
residence to which subparagraph (A) applies is entered into,
or
`(II) on which construction or reconstruction of such a principal
residence is commenced.
`(E) SPECIAL RULE WHERE DELAY IN ACQUISITION- The Secretary shall
prescribe rules under which a distribution will not be penalized if made
in anticipation of being a qualified first-time homeowner distribution but
construction delays or other unanticipated factors delay the
closing.
`(e) QUALIFIED ROLLOVER CONTRIBUTION- For purposes of this section, the
term qualified rollover contribution means a rollover contribution to a Roth
IRA from another such account, or from an individual retirement plan, but only
if such rollover contribution meets the requirements of section 408(d)(3). For
purposes of section 408(d)(3)(B), there shall be disregarded any qualified
rollover contribution from an individual retirement plan (other than a Roth
IRA) to a Roth IRA.
`(f) Permitted Investments-
`(1) INVESTMENT PERMITTED- A Roth IRA shall not cease to be an
individual retirement account pursuant to section 408(e)(2) solely because
funds from such account are used to make a debt or equity investment in a
controlled business entity.
`(2) Loans to a controlled business entity-
`(A) EXCESS RETURN- If funds in a Roth IRA are loaned to a controlled
business entity, any return on such loans in excess of a fair return shall
be treated as gross income of the beneficiary that is then deposited in
the Roth IRA.
`(B) LOAN- For purposes of this section, an amount shall be treated as
loaned to a controlled business entity only if--
`(i) the amount is treated in the books and records of the business
entity as a loan,
`(ii) the transaction is reflected in a written note or other
evidence of indebtedness, and
`(iii) the business entity is required to pay interest at least once
per year and at the time such loan is made it is reasonable to expect
that such interest will be paid on a timely basis.
`(C) FAIR RETURN- For purposes of this subsection, a `fair return'
with respect to a loan is interest at a rate not in excess of 3 percentage
points plus the minimum rate of interest that would have to be charged
with respect to such loan to prevent it from being a below-market loan for
purposes of section 7872 (determined as if section 7872 applied to such
loan).
`(3) EQUITY INVESTMENT IN A CONTROLLED BUSINESS ENTITY- If funds in a
Roth IRA are contributed to the capital of, applied to acquire stock or
other equity interest in, or otherwise transferred to, a controlled business
entity in a transaction that is not considered a loan for purposes of this
subsection, any return on such equity shall be treated as gross income of
the beneficiary that is then deposited in the Roth IRA. The preceding
sentence shall not apply to--
`(A) the proceeds of the sale of such equity interest to a third
party, or
`(B) the proceeds received by the Roth IRA as the result of a complete
redemption of the beneficiary's interest in the business entity (including
any interests held through a Roth IRA).
`(4) CONTROLLED BUSINESS ENTITY- `Controlled business entity' means any
business entity in which the beneficiary of the Roth IRA holds at least
a
5 percent interest in the profits and losses (after taking into account the
investment through the Roth IRA) and in which an investment would cause the Roth
IRA to cease to be an individual retirement account by reason of section
408(e)(2) but for this subsection.
`(5) APPLICATION OF SECTION 4975- Section 4975 shall not apply to a loan
or equity investment by a Roth IRA in a controlled business entity.
`(6) TAX AND PENALTY AVOIDANCE- The Secretary shall prescribe
regulations that prohibit the provisions of this subsection to be used to
circumvent the application of subsection (d)(2) (relating to taxable
distributions). The regulations shall not prohibit bona fide investments in
controlled business entities. The regulations shall address loans to and
investments in a controlled business entity that are used to fund
distributions or dividends from the business entity to the account
beneficiary or a member of the beneficiary's family.
`SEC. 31. DEDUCTIBLE IRAS.
`(a) ALLOWANCE OF DEDUCTION- The `qualified IRA deduction' shall be an
amount equal to the qualified retirement contributions of the individual for
the taxable year, except as limited by subsection (b).
`(b) Maximum Amount of Deduction-
`(1) IN GENERAL- The amount allowable as a deduction under subsection
(a) to any individual for any taxable year shall not exceed the lesser
of--
`(B) an amount equal to the compensation includible in the
individual's gross income for such taxable year.
`(2) SPECIAL RULE FOR EMPLOYER CONTRIBUTIONS UNDER SIMPLIFIED EMPLOYEE
PENSIONS- This section shall not apply with respect to an employer
contribution to a simplified employee pension.
`(3) GRANDFATHERED PLANS- Notwithstanding paragraph (1), the amount
allowable as a deduction under subsection (a) with respect to any
contributions on behalf of an employee to a plan described in section
501(c)(18) of the Internal Revenue Code of 1986 shall not exceed the lesser
of--
`(B) an amount equal to 25 percent of the compensation (as defined in
section 415(c)(3)) includible in the individual's gross income for such
taxable year.
`(4) SPECIAL RULE FOR SIMPLE RETIREMENT ACCOUNTS- This section shall not
apply with respect to any amount contributed to a simple retirement account
established under section 408(p).
`(c) Special Rules for Certain Married Individuals-
`(1) IN GENERAL- In the case of an individual to whom this paragraph
applies for the taxable year, the limitation of paragraph (1) of subsection
(b) shall be equal to the lesser of--
`(A) the dollar amount in effect under subsection (b)(1)(A) for the
taxable year, or
`(i) the compensation includible in such individual's gross income
for the taxable year, plus
`(ii) the compensation includible in the gross income of such
individual's spouse for the taxable year reduced by--
`(I) the amount allowed as a deduction under subsection (a) to
such spouse for such taxable year, and
`(II) the amount of any contribution on behalf of such spouse to a
Roth IRA under section 30 for such taxable year.
`(2) INDIVIDUALS TO WHOM PARAGRAPH (1) APPLIES- Paragraph (1) shall
apply to any individual if--
`(A) such individual files a joint return for the taxable year,
and
`(B) the amount of compensation (if any) includible in such
individual's gross income for the taxable year is less than the
compensation includible in the gross income of such individual's spouse
for the taxable year.
`(d) Other Limitations and Restrictions-
`(1) BENEFICIARY MUST BE UNDER AGE 70 1/2 - No deduction shall be
allowed under this section with respect to any qualified retirement
contribution for the benefit of an individual if such individual has
attained age 70 1/2 before the close of such individual's taxable year for
which the contribution was made.
`(2) RECONTRIBUTED AMOUNTS- No deduction shall be allowed under this
section with respect to a rollover contribution described in section 402(c),
403(a)(4), 403(b)(8), or 408(d)(3).
`(3) AMOUNTS CONTRIBUTED UNDER ENDOWMENT CONTRACT- In the case of an
endowment contract described in section 408(b), no deduction
shall be allowed under this section for that portion of the amounts paid
under the contract for the taxable year which is properly allocable, under
regulations prescribed by the Secretary, to the cost of life insurance.
`(4) DENIAL OF DEDUCTION FOR AMOUNT CONTRIBUTED TO INHERITED ANNUITIES
OR ACCOUNTS- No deduction shall be allowed under this section with respect
to any amount paid to an inherited individual retirement account or
individual retirement annuity (within the meaning of section
408(d)(3)(C)(ii)).
`(e) QUALIFIED RETIREMENT CONTRIBUTION- For purposes of this section, the
term `qualified retirement contribution' means--
`(1) any amount paid in cash for the taxable year by or on behalf of an
individual to an individual retirement plan for such individual's benefit,
and
`(2) any amount contributed on behalf of any individual to a plan
described in section 501(c)(18) of the Internal Revenue Code of 1986.
`(f) Other Definitions and Special Rules-
`(1) COMPENSATION- For purposes of this section, the term `compensation'
includes earned income (as defined in section 401(c)(2)). The term
`compensation' does not include any amount received as a pension or annuity
and does not include any amount received as deferred compensation. The term
`compensation' shall include any alimony, child support and separate
maintenance payments includible in the individual's gross income with
respect to a divorce or separation instrument. For purposes of this
paragraph, section 401(c)(2) shall be applied as if the term trade or
business for purposes of section 1402 included service described in
subsection (c)(6).
`(2) MARRIED INDIVIDUALS- The maximum deduction under subsection (b)
shall be computed separately for each individual, and this section shall be
applied without regard to any community property laws.
`(3) TIME WHEN CONTRIBUTIONS DEEMED MADE- For purposes of this section,
a taxpayer shall be deemed to have made a contribution to an individual
retirement plan during a year if the contribution is made on account of such
year and is made not later than April 15 of the following year.
`(4) REPORTS- The Secretary shall prescribe regulations which prescribe
the time and the manner in which reports to the Secretary and plan
participants shall be made by the plan administrator of a qualified employer
or government plan receiving qualified voluntary employee
contributions.
`(5) EMPLOYER PAYMENTS- For purposes of this title, any amount paid by
an employer to an individual retirement plan shall be treated as payment of
compensation to the employee (other than a self-employed individual who is
an employee within the meaning of section 401(c)(1)) includible in his gross
income in the taxable year for which the amount was contributed, whether or
not a deduction for such payment is allowable under this section to the
employee.
`(6) Excess contributions treated as contribution made during subsequent
year for which there is an unused limitation-
`(A) IN GENERAL- If for the taxable year the maximum amount allowable
as a deduction under this section for contributions to an individual
retirement plan exceeds the amount contributed, then the taxpayer shall be
treated as having made an additional contribution for the taxable year in
an amount equal to the lesser of--
`(i) the amount of such excess, or
`(ii) the amount of the excess contributions for such taxable year
(determined under section 4973(b)(2) without regard to subparagraph (C)
thereof).
`(B) AMOUNT CONTRIBUTED- For purposes of this paragraph, the amount
contributed--
`(i) shall be determined without regard to this paragraph,
and
`(ii) shall not include any rollover contribution.
`(C) SPECIAL RULE WHERE EXCESS DEDUCTION WAS ALLOWED FOR CLOSED YEAR-
Proper reduction shall be made in the amount allowable as a deduction by
reason of this paragraph for any amount allowed as a deduction under this
section for a prior taxable year for which the period for assessing
deficiency has expired if the amount so allowed exceeds the amount which
should have been allowed for such prior taxable year.
`(7) ELECTION NOT TO DEDUCT CONTRIBUTIONS- For election not to deduct
contributions to individual retirement plans, see section
408(o)(2)(B)(ii).
`(g) Limitation on Deduction for Active Participants in Certain Pension
Plans-
`(1) IN GENERAL- If (for any part of any plan year ending with or within
a taxable year) an individual is an active participant, each of the dollar
limitations contained in subsections (b)(1)(A) and (c)(1)(A) for such
taxable year shall be reduced (but not below zero) by the amount determined
under paragraph (2).
`(2) Amount of reduction-
`(A) IN GENERAL- The amount determined under this paragraph with
respect to any dollar limitation shall be the amount which bears the same
ratio to such limitation as--
`(I) the taxpayer's adjusted gross income for such taxable year,
over
`(II) the applicable dollar amount, bears to
`(ii) $10,000 ($20,000 in the case of a joint return for a taxable
year beginning after December 31, 2007).
`(B) NO REDUCTION BELOW $200 UNTIL COMPLETE PHASE-OUT- No dollar
limitation shall be reduced below $200 under paragraph (1) unless (without
regard to this subparagraph) such limitation is reduced to zero.
`(C) ROUNDING- Any amount determined under this paragraph which is not
a multiple of $10 shall be rounded to the next lowest $10.
`(3) ADJUSTED GROSS INCOME; APPLICABLE DOLLAR AMOUNT- For purposes of
this subsection--
`(A) ADJUSTED GROSS INCOME- Adjusted gross income of any taxpayer
shall be determined without regard to the qualified IRA
deduction.
`(B) APPLICABLE DOLLAR AMOUNT- The term `applicable dollar amount'
means the following:
`(i) In the case of a taxpayer filing a joint return:
`For taxable years beginning in:
`The applicable dollar amount is:
2000
$51,000
2001
$52,000
2002
$53,000
2003
$54,000
2004
$60,000
2005
$65,000
2006
$70,000
2007
$75,000
2008 and thereafter
$80,000.
`(ii) In the case of any other taxpayer (other than a married
individual filing a separate return):
For taxable years beginning in:
The applicable dollar amount is:
2000
$31,000
2001
$32,000
2002
$33,000
2003
$34,000
2004
$40,000
2005
$45,000
2006 and thereafter
$50,000.
`(iii) In the case of a married individual filing a separate return,
zero.
`(4) SPECIAL RULE FOR MARRIED INDIVIDUALS FILING SEPARATELY AND LIVING
APART- A husband and wife who--
`(A) file separate returns for any taxable year, and
`(B) live apart at all times during such taxable year, shall not be
treated as married individuals for purposes of this subsection.
`(5) ACTIVE PARTICIPANT- For purposes of this subsection, the term
`active participant' means, with respect to any plan year, an
individual--
`(A) who is an active participant in--
`(i) a plan described in section 401(a) which includes a trust
exempt from tax,
`(ii) an annuity plan described in section 403(a),
`(iii) a plan established for its employees by the United States, by
a State or political subdivision thereof, or by an agency or
instrumentality of any of the foregoing,
`(iv) an annuity contract described in section 403(b),
`(v) a simplified employee pension (within the meaning of section
408(k)), or
`(vi) any simple retirement account (within the meaning of section
408(p), or
`(B) who makes deductible contributions to a trust described in
section 501(c)(18).
The determination of whether an individual is an active participant
shall be made without regard to whether or not such individual's rights
under a plan, trust, or contract are nonforfeitable. An eligible deferred
compensation plan (within the meaning of section 457(b) of the Internal
Revenue Code of 1986) shall not be treated as a plan described in
subparagraph (A)(iii).
`(6) CERTAIN INDIVIDUALS NOT TREATED AS ACTIVE PARTICIPANTS- For
purposes of this subsection, any individual described in any of the
following subparagraphs shall not be treated as an active
participant for any taxable year solely because of any participation so
described:
`(A) MEMBERS OF RESERVE COMPONENTS- Participation in a plan described
in subparagraph (A)(iii) of paragraph (5) by reason of service as a member
of a reserve component of the Armed Forces (as defined in section 10101 of
title 10, unless such individual has served in excess of 90 days on active
duty (other than active duty for training) during the year.
`(B) VOLUNTEER FIREFIGHTERS- A volunteer firefighter--
`(i) who is a participant in a plan described in subparagraph
(A)(iii) of paragraph (5) based on his activity as a volunteer
firefighter, and
`(ii) whose accrued benefit as of the beginning of the taxable year
is not more than an annual benefit of $1,800 (when expressed as a single
life annuity commencing at age 65).
`(7) SPECIAL RULE FOR CERTAIN SPOUSES- In the case of an individual who
is an active participant at no time during any plan year ending with or
within the taxable year but whose spouse is an active participant for any
part of any such plan year--
`(A) the applicable dollar amount under paragraph (3)(B)(i) with
respect to the taxpayer shall be $150,000, and
`(B) the amount applicable under paragraph (2)(A)(ii) shall be
$10,000.
`(h) CROSS REFERENCE- For failure to provide required reports, see section
6652(g).
`SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVISIONS.
`(1) IN GENERAL- An account that qualifies as an education IRA under the
Internal Revenue Code of 1986 as in effect immediately before adoption of
the Simplified USA Tax Act shall be treated as a Roth IRA for purposes of
this chapter (including rules allowing for tax-free rollover).
`(2) NO NEW CONTRIBUTIONS- Neither paragraph (1) nor section 530 of the
Internal Revenue Code of 1986 shall apply to an education IRA to which
contributions are made after December 31, 1999.
`(3) SPECIAL RULE- For purposes of applying section 30 to an account
that was an educational IRA, the designated beneficiary of such account
shall be treated as described in a subclause of clause (vi) of section
30(d)(5).
`(b) MEDICAL SAVINGS ACCOUNTS-
`(1) EQUIVALENT OF DEDUCTIBLE IRA- A medical savings account shall be
treated as an individual retirement plan other than a Roth IRA for purposes
of this chapter and chapter 3.
`(2) SPECIAL ROLLOVER RULES-
`(A) NO INCOME LIMIT- The income limits of section 30(c)(3)(B) shall
not apply to the rollover of a medical savings account into a Roth
IRA.
`(B) MEDICAL DISTRIBUTIONS- For purposes of applying section 30 to the
amount of any medical savings account rolled over to a Roth IRA, subclause
(iii) of section 30(d)(5) shall apply without regard to the limitation
based on adjusted gross income.
`(3) MEDICAL SAVINGS ACCOUNT- `Medical savings account' means an account
established under section 220 of the Internal Revenue Code of 1986.
`(c) QUALIFIED STATE TUITION PROGRAMS-
`(1) EDUCATION SAVINGS ACCOUNT PROGRAMS- No account shall fail to
qualify as a Roth IRA merely because in addition to the beneficiary of the
account, there is a `designated beneficiary' whose education expenses the
beneficiary expects to pay or have paid with the proceeds of the account.
The payment of such expenses with the proceeds of an account shall be
treated as a distribution from the account.
`(2) PREPAID TUITION CERTIFICATES-
`(A) CONTRIBUTION TO ACCOUNTS- An individual may contribute prepaid
tuition certificates to a Roth IRA before January 1, 2003, without
recognizing gross income on the contribution of such certificates. For
purposes of section 30, the amount contributed shall equal the cost of the
certificates.
`(B) PURCHASE OF PREPAID TUITION CERTIFICATES- A Roth IRA account may
purchase prepaid tuition certificates without violating section
408.
`(C) PREPAID TUITION CERTIFICATES- `Prepaid tuition certificates'
means credits or certificates that entitle a designated beneficiary of
such certificates to the waiver or payment of
qualified higher education expenses of the designated beneficiary.
`(3) ROLLOVER OF ACCOUNTS- An account to which section 529 of the
Internal Revenue Code of 1986 (before adoption of the Simplified USA Tax
Act) shall be treated as a Roth IRA for purposes of rules relating to
qualified rollovers (except that in the case of any such rollover, any
contributions made to the section 529 account after July 1, 1999, shall be
treated as contributions to the Roth IRA in the year of the rollover for
purposes of section 30(c)(2)).
`(A) TRANSITION PERIOD- Subsections (a) and (c) of section 529 of the
Internal Revenue Code of 1986 shall apply until January 1, 2003.
`(B) TRANSITION- The Secretary shall prescribe rules to facilitate use
of the Roth IRA rules to exempt earnings on accounts and certificates
previously exempted under section 529 of the Internal Revenue Code of
1986.
`(5) QUALIFIED HIGHER EDUCATION EXPENSES- For purposes of this
subsection, the definition `qualified higher education expenses' in section
529(e)(3) of the Internal Revenue Code of 1986 shall apply.
`SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
`(a) GENERAL RULE FOR ANNUITIES- Except as otherwise provided in this
chapter, gross income includes any amount received as an annuity (whether for
a period certain or during one or more lives) under an annuity, endowment, or
life insurance contract.
`(1) IN GENERAL- Gross income does not include that part of any amount
received as an annuity under an annuity, endowment, or life insurance
contract which bears the same ratio to such amount as the investment in the
contract (as of the annuity starting date) bears to the expected return
under the contract (as of such date).
`(2) EXCLUSION LIMITED TO INVESTMENT- The portion of any amount received
as an annuity which is excluded from gross income under paragraph (1) shall
not exceed the unrecovered investment in the contract immediately before the
receipt of such amount.
`(3) DEDUCTION WHERE ANNUITY PAYMENTS CEASE BEFORE ENTIRE INVESTMENT
RECOVERED-
`(i) after the annuity starting date, payments as an annuity under
the contract cease by reason of the death of an annuitant,
and
`(ii) as of the date of such cessation, there is unrecovered
investment in the contract,
the amount of such unrecovered investment (in excess of any amount
specified in subsection (e)(5) which was not included in gross income)
shall be allowed as a deduction from adjusted gross income in determining
taxable income of the annuitant for his last taxable year.
`(B) PAYMENTS TO OTHER PERSONS- In the case of any contract which
provides for payments meeting the requirements of subparagraphs (B) and
(C) of subsection (c)(2), the deduction under subparagraph (A) shall be
allowed to the person entitled to such payments for the taxable year in
which such payments are received.
`(1) INVESTMENT IN THE CONTRACT- For purposes of subsection (b), the
investment in the contract as of the annuity starting date is--
`(A) the aggregate amount of premiums or other consideration paid for
the contract (including any amounts earned on the contract which were
included in gross income and reinvested in the contract), minus
`(B) the aggregate amount received under the contract before such
date, to the extent that such amount was excludable from gross income
under this subtitle or prior income tax laws.
`(2) OTHER TERMS USED IN SUBSECTION (b)- Calculations under subsections
(a) and (b) shall be made in accordance with regulations prescribed by the
Secretary, which regulations shall generally be consistent with the section
72 of the Internal Revenue Code of 1986.
`(d) SPECIAL RULES FOR QUALIFIED EMPLOYER RETIREMENT PLANS-
`(1) SIMPLIFIED METHOD OF TAXING ANNUITY PAYMENTS-
`(A) IN GENERAL- In the case of any amount received as an annuity
under a qualified employer retirement plan--
`(i) subsection (b) shall not apply, and
`(ii) the investment in the contract shall be recovered as provided
in this paragraph.
`(B) METHOD OF RECOVERING INVESTMENT IN CONTRACT-
`(i) IN GENERAL- Gross income shall not include so much of any
monthly annuity payment under a qualified employer retirement plan as
does not exceed the amount obtained by dividing--
`(I) the investment in the contract (as of the annuity starting
date), by
`(II) the number of anticipated payments determined under the
table contained in clause (iii) (or, in the case of a contract to
which subsection (c)(3)(B) applies, the number of monthly annuity
payments under such contract).
`(ii) CERTAIN RULES MADE APPLICABLE- Rules similar to the rules of
paragraphs (2) and (3) of subsection (b) shall apply for purposes of
this paragraph.
`(iii) NUMBER OF ANTICIPATED PAYMENTS- 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 PAYMENTS WHERE MORE THAN ONE LIFE- If
the annuity is payable over the lives of more than 1 individual, the
number of anticipated payments shall be determined as
follows:
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 taxpayer
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 determined as if such payment had been so received.
`(D) EXCEPTION- This paragraph shall not apply in any case where the
primary annuitant has attained age 75 on the annuity starting date unless
there are fewer than 5 years of guaranteed payments under the
annuity.
`(E) ADJUSTMENT WHERE ANNUITY PAYMENTS NOT ON A MONTHLY BASIS- In any
case where the annuity payments are not made on a monthly basis,
appropriate adjustments in the application of this paragraph shall be made
to take into account the period on the basis of which such payments are
made.
`(F) QUALIFIED EMPLOYER RETIREMENT PLAN- For purposes of this
paragraph, the term `qualified employer retirement plan' means any plan or
contract described in paragraph (1), (2), or (3) of section
4974(c).
`(2) TREATMENT OF EMPLOYEE CONTRIBUTIONS 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 contract.
`(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, endowment, or life insurance
contract, and
`(ii) is not received as an annuity,
if no provision of this subtitle (other than this subsection) applies
with respect to such amount.
`(B) DIVIDENDS- For purposes of this section, any amount received
which is in the nature of a dividend or similar distribution shall be
treated as an amount not received as an annuity.
`(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 income to the extent allocable
to the investment in the contract.
`(3) ALLOCATION OF AMOUNTS TO INCOME AND INVESTMENT- For purposes of
paragraph (2)(B):
`(A) Any amount to which this subsection applies shall be treated as
allocable to income on the contract to the extent that such amount does
not exceed the excess (if any) of--
`(i) the cash value of the contract (determined without regard to
any surrender 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 investment in the contract to the extent that such amount is
not allocated to income under subparagraph (A).
`(4) SPECIAL RULES FOR APPLICATION OF PARAGRAPH (2)(B)- For purposes of
paragraph (2)(B):
`(A) LOANS TREATED AS DISTRIBUTIONS- 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
`(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 received under the contract
as an amount not received as an annuity. The preceding sentence shall not
apply for purposes of determining investment in the contract, except that
the investment in the contract shall be increased by any amount included
in gross income by reason of the amount treated as received under the
preceding sentence.
`(B) Treatment of transfers without 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 receiving 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 contract at such time,
under the contract as an amount not received 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 between spouses or incident to
divorce) applies.
`(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 annuity 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 CERTAIN CASES- Paragraph (5) of
section 72(e) of the Internal Revenue Code of 1986 shall apply to contracts
described in subparagraph (B) of such paragraph to the extent provided
therein.
`(6) INVESTMENT IN THE CONTRACT- For purposes of this subsection, the
investment in the contract as of any date is--
`(A) the aggregate amount of premiums or other consideration paid for
the contract before such date, minus
`(B) the aggregate amount received under the contract before such
date, to the extent that such amount was excludable from gross income
under this subtitle or prior income tax laws.
`(7) APPLICATION OF PARAGRAPH (2)(B) TO QUALIFIED PLANS-
`(A) IN GENERAL- Notwithstanding any other provision of this
subsection, in the case of any amount received before the annuity starting
date from a trust or contract described in paragraph (5)(D), paragraph
(2)(B) shall apply to such amounts.
`(B) ALLOCATION OF AMOUNT RECEIVED- For purposes of paragraph (2)(B),
the amount allocated to the investment in the contract shall be the
portion of the amount described in subparagraph (A) which bears the same
ratio to such amount as the investment in the contract bears to the
account balance. The determination under the preceding sentence shall be
made as of the time of the distribution or at such other time as the
Secretary may prescribe.
`(C) TREATMENT OF FORFEITABLE RIGHTS- If an employee does not have a
nonforfeitable 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 BEFORE 1987- In the case of a plan
which on May 5, 1986, permitted withdrawal of any employee contributions
before separation from service, subparagraph (A) shall apply only to the
extent that amounts received before the annuity starting date (when
increased by amounts previously received under the contract after December
31, 1986) exceed the investment in the contract as of December 31,
1986.
`(8) Treatment of modified endowment contracts-
`(A) IN GENERAL- Notwithstanding paragraph (5)(C), in the case of any
modified endowment contract (as defined in section 7702A)--
`(i) paragraphs (2)(B) and (4)(A) shall apply, and
`(ii) in applying paragraph (4)(A), `any person' shall be
substituted for `an individual'.
`(B) TREATMENT OF CERTAIN BURIAL CONTRACTS- Notwithstanding
subparagraph (A), paragraph (4)(A) shall not apply to any assignment (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 exceed $25,000.
`(A) IN GENERAL- For purposes of determining 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 contract, and
`(ii) all annuity contracts issued by the same company to the same
policyholder during any calendar year shall be treated as 1 annuity
contract.
The preceding sentence shall not apply to any contract described in
paragraph (5)(D).
`(B) REGULATORY AUTHORITY- The Secretary may by regulations prescribe
such additional 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 subsection (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 consideration paid, amounts
contributed by the employer shall be included, but only to the extent
that--
`(1) such amounts were includible in the gross income of the employee
under this subtitle or prior income tax laws; or
`(2) if such amounts had been paid directly to the employee at the time
they were contributed, they would not have been includible in the gross
income of the employee under the law applicable at the time of such
contribution.
`(g) RULES FOR TRANSFEREE WHERE TRANSFER WAS FOR VALUE- Where any contract
(or any interest therein) is transferred (by assignment or otherwise) for a
valuable consideration, to the extent that the contract (or interest therein)
does not, in the hands of the transferee, 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 actual value of such
consideration, plus the amount of the premiums and other consideration paid
by the transferee after the transfer, shall be taken into account in
computing the aggregate amount of the premiums or other consideration paid
for the contract;
`(2) for purposes of subsection (c)(1)(B), there shall be taken into
account only the aggregate amount received under the contract by the
transferee 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
contract as an annuity, whichever is the later.
`(h) OPTION TO RECEIVE ANNUITY IN LIEU OF LUMP SUM- If--
`(1) a contract provides for payment of a lump sum in full discharge of
an obligation under the contract, 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 payable; 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 provision of this section, if any
amount is held under an agreement to pay interest thereon, the interest
payments shall be included in gross income.
`(j) FACE-AMOUNT CERTIFICATES- For purposes of this section, the term
`endowment contract' includes a face-amount certificate, as defined in section
2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a-2), issued
after December 31, 1954.
`(k) Special Rules Applicable to Employee Annuities and Distributions
Under Employee Plans-
`(1) COMPUTATION OF CONSIDERATION PAID BY THE EMPLOYEE- In
computing--
`(A) the aggregate amount of premiums or other consideration paid for
the contract for purposes of subsection (c)(1)(A) (relating to the
investment in the contract), and
`(B) the aggregate premiums or other consideration 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 prescribed by the Secretary) to the cost of life, accident,
health, or other insurance.
`(2) Life insurance contracts-
`(A) This paragraph shall apply to any life insurance
contract--
`(i) purchased as a part of a plan described 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
participant.
`(B) Any contribution to a plan described in subparagraph (A)(i) or a
trust described in subparagraph (A)(ii) which is allowed as a deduction
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 applied to purchase the life insurance
protection under a contract described in subparagraph (A), is includible
in the gross income of the participant for the taxable year when so
applied.
`(C) In the case of the death of an individual insured under a
contract described in subparagraph (A), an amount equal to the cash
surrender value of the contract immediately before 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 payable by reason of the death of
the insured over such cash surrender value shall not be includible 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 described in section 401(a) or under a plan described in
section 403(a) at any time by an individual 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 individual under the
plan formula.
`(B) If a person receives an amount to which this paragraph applies,
his tax under this chapter for the taxable year in which such amount is
received shall be increased by an amount equal to 10 percent of the
portion of the amount so received which is includible in his gross income
for such taxable year.
`(C) For purposes of this paragraph, the term `5-percent owner' means
any individual who, at any time during the 5 plan years preceding 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 purposes 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 individual 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 section 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 determinable
physical or mental impairment which can be expected to result in death or to
be of long-continued and indefinite duration. An individual shall not be
considered to be disabled unless he furnishes proof of the existence thereof
in such form and manner as the Secretary may require.
`(6) DETERMINATION OF INVESTMENT IN THE CONTRACT IN THE CASE OF
QUALIFIED DOMESTIC RELATIONS ORDERS- Under regulations prescribed by the
Secretary, in the case of a distribution or payment made to an alternate
payee who is the spouse or former spouse of the participant pursuant 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 allocated 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
contract (as defined by section 122(b)(2) of the Internal Revenue 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 DEDUCTIBLE CONTRIBUTIONS-
`(1) TREATMENT OF CONTRIBUTIONS- For purposes of this section and
sections 402 and 403, notwithstanding section 414(h), any deductible
employee contribution made to a qualified employer plan or government plan
shall be treated as an amount contributed by the employer which is not
includible 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 contained in
paragraph (2) thereof) shall apply.
`(B) PURCHASE OF LIFE INSURANCE- To the extent any amount of
accumulated deductible employee contributions of an employee are applied
to the purchase of life insurance contracts, such amount shall be treated
as distributed to the employee in the year so applied.
`(3) SPECIAL RULE FOR TREATMENT OF ROLLOVER AMOUNTS- For purposes of
sections 402(c), 403(a)(4), and 408(d)(3), the Secretary shall prescribe
regulations providing for such allocations of amounts attributable to
accumulated
deductible employee contributions, and for such other rules, as may be
necessary to insure that such accumulated deductible employee contributions do
not become eligible for additional tax benefits (or freed from limitations)
through the use of rollovers.
`(4) ORDERING RULES- Unless the plan specifies 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 distributed.
`(n) LOANS TREATED AS DISTRIBUTIONS- For purposes 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 qualified
employer plan, such amount shall be treated as having been received by
such individual as a distribution under such plan.
`(B) ASSIGNMENTS OR PLEDGES- If during 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 individual 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 balance 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 balance of loans from the plan during
the 1-year period ending on the day before the date on which such loan
was made, over
`(II) the outstanding balance of loans from the plan on the date
on which such loan was made, or
`(ii) the greater of (I) one-half of the present value of the
nonforfeitable accrued benefit of the employee under the plan, or (II)
$10,000.
for purposes of clause (ii), the present value of the nonforfeitable
accrued benefit shall be determined without regard to any accumulated
deductible employee contributions (as defined in subsection
(m)(5)(B)).
`(B) REQUIREMENT THAT LOAN BE REPAYABLE 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 (determined at the time the loan is made) as the principal
residence of the participant.
`(C) REQUIREMENT OF LEVEL AMORTIZATION- Except as provided in
regulations, this paragraph shall not apply to any loan unless
substantially level amortization of such loan (with payments not less
frequently than quarterly) 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 (determined after the application of
such subsections) shall be treated as 1 plan.
`(o) 10-Percent Penalty for Premature Distributions From Annuity
Contracts-
`(1) IMPOSITION OF PENALTY- If any taxpayer receives any amount under an
annuity contract, 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 59
1/2 ,
`(B) made on or after the death of the holder (or, where the holder is
not an individual, the death of the primary annuitant),
`(C) attributable to the taxpayer's becoming disabled within the
meaning of subsection (k)(5),
`(D) which is a part of a series of substantially equal periodic
payments (not less frequently 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 contract before August 14,
1982,
`(G) under a qualified funding asset,
`(H) to which subsection (r) applies (without 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 section 401(a) or 403(a) and which is held by the employer
until such time as the employee separates from service.
`(3) CHANGE IN SUBSTANTIALLY EQUAL PAYMENTS- 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 period beginning on the date of
the first payment and after the taxpayer attains age 59 1/2 ,
or
`(ii) before the taxpayer attains age 59 1/2 ,
the taxpayer's tax for the 1st taxable year in which such modification
occurs shall be increased by an amount, determined under regulations, equal
to the tax which (but for paragraph (2)(D)) would have been imposed, plus
interest for the deferral period (within the meaning of subsection
(r)(4)(B)).
`(p) Certain Railroad Retirement Benefits Treated as Received Under
Employer Plans-
`(1) IN GENERAL- Notwithstanding any other provision of law, any benefit
provided under the Railroad Retirement Act of 1974 (other than a tier 1
railroad retirement benefit) shall be treated for purposes of this title as
a benefit provided under an employer plan which meets the requirements of
section 401(a).
`(2) TIER 2 TAXES TREATED AS CONTRIBUTIONS- For purposes of paragraph
(1)--
`(i) the tier 2 portion of the tax imposed by section 3201 (relating
to tax on employees) shall be treated as an employee
contribution,
`(ii) the tier 2 portion of the tax imposed 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 imposed 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 compensation paid after 1984, the tier
2 portion shall be the taxes imposed by sections 3201(b), 3211(a)(2), and
3221(b).
`(2) BEFORE 1985- With respect to compensation paid before 1985, see
section 72(r) of Internal Revenue Code of 1986 for the definition of tier 2
portion.
`(C) CONTRIBUTIONS NOT ALLOCABLE TO SUPPLEMENTAL ANNUITY OR WINDFALL
BENEFITS- 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 Retirement Act of 1974, or
`(ii) any benefit paid under section 3(h), 4(e), or 4(h) of such
Act.
`(3) TIER 1 RAILROAD RETIREMENT BENEFIT- For purposes of paragraph (1),
the term `tier 1 railroad retirement benefit' has the meaning given such
term by section 3(b)(2)(B).
`(q) Required Distributions Where Holder Dies Before Entire Interest Is
Distributed-
`(1) IN GENERAL- A contract shall not be treated as an annuity contract
for purposes of this chapter unless it provides that--
`(A) if any holder of such contract dies on or after the annuity
starting date and before the entire interest in such contract has been
distributed, the remaining portion of such interest 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 before the annuity starting
date, the entire interest in such contract will be distributed within 5
years after the death of such holder.
`(2) Exception for certain amounts payable 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 regulations
prescribe,
then for purposes of paragraph (1), the portion referred to in
subparagraph (A) shall be treated as distributed on the day on which such
distributions begin.
`(3) SPECIAL RULE WHERE SURVIVING SPOUSE BENEFICIARY- If the designated
beneficiary referred 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 holder of such contract.
`(4) DESIGNATED BENEFICIARY- For purposes of this subsection, the term
`designated beneficiary' means any individual designated a beneficiary by
the holder of the contract.
`(5) EXCEPTION FOR CERTAIN ANNUITY CONTRACTS- This subsection shall not
apply to any annuity contract--
`(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 annuity or provided under an
individual retirement account or annuity, or
`(D) which is a qualified funding asset.
`(6) Special rule where holder is corporation 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 annuitant' means the individual, the events in the life of whom
are of primary importance in affecting the timing or amount of the payout
under the contract.
`(7) TREATMENT OF CHANGES IN PRIMARY ANNUITANT 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 primary 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 Distributions From Qualified
Retirement Plans-
`(1) IMPOSITION OF ADDITIONAL TAX- If any taxpayer receives any amount
from a qualified retirement 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 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- 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 59
1/2 ,
`(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 subsection 72(m)(7) of the Internal Revenue Code of
1986,
`(iv) part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of
the employee or the joint lives (or joint life expectancies) of such
employee and his designated beneficiary,
`(v) made to an employee after separation 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 without regard to whether the employee itemizes
deductions for such taxable year).
`(C) PAYMENTS TO ALTERNATE PAYEES PURSUANT TO QUALIFIED DOMESTIC
RELATIONS ORDERS- Any distribution to an alternate payee pursuant to a
qualified domestic relations order (within the meaning of section
414(p)(1)).
`(D) Distributions to unemployed individuals for health insurance
premiums-
`(i) IN GENERAL- Distributions from an individual retirement plan to
an individual after separation from employment--
`(I) if such individual has received unemployment compensation for
12 consecutive weeks under any Federal or State unemployment
compensation law by reason of such separation,
`(II) if such distributions are made during any taxable year
during which such unemployment compensation is paid or the succeeding
taxable year, and
`(III) to the extent such distributions do not exceed the amount
paid during the taxable year for insurance described in section
213(d)(1)(D) of the Internal Revenue Code of 1986 with respect to the
individual and the individual's spouse and dependents.
`(ii) DISTRIBUTIONS AFTER REEMPLOYMENT- 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 INDIVIDUALS- To the extent provided in
regulations, 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 unemployment 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 paragraph (7)) of the
taxpayer for the taxable year. Distributions shall not be taken into
account under the preceding sentence if such distributions are described
in subparagraph (A), (C), or (D) or to the extent paragraph (1) does not
apply to such distributions by reason of subparagraph (B).
`(F) DISTRIBUTIONS FROM CERTAIN PLANS FOR FIRST HOME PURCHASES-
Distributions to an individual from an individual retirement plan which
are qualified first-time homebuyer distributions (as defined in paragraph
(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).
`(A) CERTAIN EXCEPTIONS NOT TO APPLY TO INDIVIDUAL RETIREMENT PLANS-
Subparagraphs (A)(v), and (C) of paragraph (2) shall not apply to
distributions from an individual retirement plan.
`(B) PERIODIC PAYMENTS UNDER QUALIFIED PLANS MUST BEGIN AFTER
SEPARATION- Paragraph (2)(A)(iv) shall not apply to any amount paid from a
trust described in section 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 begins after the employee separates from service.
`(4) CHANGE IN SUBSTANTIALLY EQUAL PAYMENTS-
`(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 disability)--
`(I) before the close of the 5-year period beginning with the date
of the first payment and after the employee attains age 59 1/2 ,
or
`(II) before the employee attains age 59 1/2 , 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)(A)(iv)) would have been imposed, plus
interest for the deferral 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 includible in gross
income and ending with the taxable year in which the modification described in
subparagraph (A) occurs.
`(5) EMPLOYEE- For purposes of this subsection, the term `employee'
includes any participant, 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 meaning of
section 408(p) during the 2-year period beginning on the date such
individual first participated in any qualified salary reduction arrangement
maintained by the individual's employer under section 408(p)(2), paragraph
(1) shall be applied by substituting `25 percent' for `10 percent'.
`(7) QUALIFIED HIGHER EDUCATION EXPENSES- 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--
`(ii) the taxpayer's spouse, or
`(iii) any child or grandchild of the taxpayer or the taxpayer's
spouse, at an eligible educational institution (as defined in section
10(b)(2)(B)).
`(B) COORDINATION WITH OTHER PROVISIONS- For purposes of this
subsection, section 30 and section 32, qualified higher education expenses
in any taxable year shall be treated as first paid with distributions
under section 32, next with distributions to which section 30(d)(5)(v)
(relating to early withdrawals from Roth IRAs to pay higher education
expenses) applies, and finally from withdrawals to which this subsection
applies.
`(8) QUALIFIED FIRST-TIME HOMEBUYER DISTRIBUTIONS- For purposes of this
subsection, the term `qualified first-time homebuyer distribution' 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 separately for purposes of this subsection. A taxpayer may elect to
treat distributions from an account other than Roth IRAs to which this
subsection applies as a qualified first-time homeowner distribution before
determining whether a distribution from a Roth IRA is a qualified first-time
homeowner distribution.
`(r) 10-PERCENT ADDITIONAL TAX FOR TAXABLE DISTRIBUTIONS FROM MODIFIED
ENDOWMENT CONTRACTS-
`(1) IMPOSITION OF ADDITIONAL TAX- If any taxpayer receives any amount
under a modified endowment 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 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 59
1/2 ,
`(B) which is attributable to the taxpayer's becoming disabled (within
the meaning of subsection (m)(7)), or
`(C) which is part of a series of substantially equal periodic
payments (not less frequently 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. 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--
`(1) the amount realized from the disposition, over
`(2) the taxpayer's adjusted basis in the property.
`(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 described in this chapter.
`(d) CONTRACTS MARKED TO MARKET-
`(1) IN GENERAL- Under regulations prescribed by the Secretary, a
markable contract held by the taxpayer at the end of the year shall be
treated 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,
`(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 extent inconsistent with
provisions of this chapter, adjusted basis and the existence of a sale or
exchange shall be determined 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 (relating to business
entities and basis in business entities), the taxpayer's adjusted basis on
January 1, 2000, in an asset acquired before that date, shall be its adjusted
basis as of December 31, 1999, 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 interest in a business entity
shall equal--
`(A) the cost of acquiring the interest,
`(B) increased by the amount of cash and basis of any property
contributed to the entity, and
`(C) decreased by the portion of any liquidating 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 provided in this section, a
taxpayer's basis on January 1, 2000, or any interest in a business entity
held as of December 31, 1999, shall be the basis of such interest as of
December 31, 1999, as determined under the Internal Revenue Code of
1986.
`(3) CROSS REFERENCES- See section 75 for rules relating to the effect
of certain business transactions on a taxpayer's basis.
`(4) SPECIAL RULE FOR CONTRIBUTION OF PERSONAL USE PROPERTY- If a
taxpayer contributes 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 INTERESTS-
`(1) INITIAL BASIS IN OLD PARTNERSHIPS- A partner's basis in a
partnership interest as of January 1, 2000, equals--
`(A) the partner's basis in the partnership as of the end of the
taxable year ending on December 31, 1999, 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 determined 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 reason of capital contributions).
`(3) ADJUSTMENT TO BASIS- Except as otherwise provided in this section,
a partner's basis in a partnership interest 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. A partner's basis in
a partnership shall not be adjusted by reason of any--
`(A) distribution from the partnership (except to the extent such
distribution is treated as distribution of basis in accordance with the
general principles of this chapter applicable to an individual's basis in
an interest in a business entity),
`(B) income, earnings, or loss of the partnership, or
`(C) any change in the partner's share of the partnership's
indebtedness.
`(4) SPECIAL RULE FOR TRANSITION DISTRIBUTIONS-
`(A) EFFECT OF TRANSITION DISTRIBUTION- A transition distribution from
partnership 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 distribution' is a distribution by a
business entity to an individual made during the first three months of
2000 but only to the extent that such distribution, when added to all
other distributions of the entity to the individual after March 31, 1999,
does not exceed the amount of taxable income allocated by the entity to
the individual during the taxable year of the entity ending on December
31, 1999.
`(5) PARTNERSHIP- For purposes of this section, `partnership' includes a
limited liability company that was taxable as a partnership under the
Internal Revenue Code of 1986.
`(c) SPECIAL RULES FOR SHARES OF S CORPORATIONS- Rules similar to those
contained in subsection (b) shall apply with respect to the basis of stock of
a corporation that was treated as an S corporation under the Internal Revenue
Code of 1986.
`(d) Special Rules for Proprietorships-
`(1) OLD PROPRIETORSHIP- A proprietor's basis in any business activity
conducted before January 1, 2000, which is treated as a business activity as
of such date equals--
`(A) the proprietor's adjusted basis in the assets of such business
entity as of the end of the taxable year ending on December 31, 1999,
minus
`(B) the balance of any indebtedness the interest on which the
proprietor had treated as business interest under section 163(h)(2)(A) of
the Internal Revenue Code of 1986.
`(2) NEGATIVE BASIS- If the amount determined under paragraph (1) is
negative, the proprietor 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 otherwise 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 activity 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 1999 exceeds 125
percent of the individual's distributive share of income for such period,
the amount of such excess distribution shall be treated as a cash
distribution to the partner on January 1, 2000, 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, 1999, a taxpayer receives any
property by gift, inheritance, or other gratuitous transfer, the taxpayer's
basis in the property 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--
`(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 business entity distributes
property (other than stock or other equity ownership described in paragraph
(3) in connection with a merger, acquisition or reorganization), 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 EQUITY OWNERSHIP- If a taxpayer
receives with respect 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
acquiring 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. 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 distribution 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
taxpayer's basis in its interest in the business entity or shall recognize
loss to the extent that the basis exceeds the fair market value of cash
and assets received.
`(B) DISTRIBUTION OF EQUITY INTERESTS- 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 equity interests in other business
entities controlled 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 reduce the
taxpayer's basis in the distributing 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 accordance with
the relative fair market values of such interests.
`(C) DISTRIBUTION OF BUSINESS PROPERTY- 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 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 INTERNAL REVENUE CODE- This section
shall be applied 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 corporate reorganization or
restructuring (except if the transaction is potentially abusive),
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 taxpayer is given the choice of
receiving cash or an equity interest in a business entity, the taxpayer
will be treated for purposes of this section as if he received the cash
and purchased the equity interest.
`(C) DEBT VERSUS EQUITY- The principles distinguishing debt and equity
that applied prior to the adopt of the Simplified USA Tax generally shall
apply for purposes of applying 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 entity, or
`(B) ownership of rights to more than 50% of the periodic
distributions that the business entity may make to its equity holders and
50% of the distributions if the business entity were liquidated.
`(A) SIGNIFICANT DOWNSIZING AND PARTIAL LIQUIDATIONS- The Secretary is
authorized to issue regulations under which distributions resulting from a
significant downsizing of a business entity will be treated in part as
return of equity holders' capital.
`(B) ASSUMPTION AND RELEASE OF LIABILITY- The Secretary shall
prescribe regulations 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 aggregating 2 years or more.
`(1) IN GENERAL- The amount of gain excluded from gross income under
subsection (a) with respect to any sale or exchange shall not exceed
$250,000.
`(2) $500,000 limitation for certain joint returns- Paragraph (1) shall
be applied by substituting `$500,000' for `$250,000' if--
`(A) a husband and wife make a joint return for the taxable year of
the sale or exchange of the property,
`(B) either spouse meets the ownership requirements of subsection (a)
with respect to such property,
`(C) both spouses meet the use requirements 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 1 sale or exchange every 2 years-
`(A) IN GENERAL- Subsection (a) shall not apply to any sale or
exchange by the taxpayer 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 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 exchange to which this
subsection applies, the ownership 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
`(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 and before the
date of such sale or exchange,
`(2) SALES AND EXCHANGES TO WHICH SUBSECTION 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.
`(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 individual whose spouse is deceased on the date of the
sale or exchange of property, the period such unmarried 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 INDIVIDUAL FROM SPOUSE OR FORMER SPOUSE-
In the case of an individual holding property transferred to such
individual by such individual'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 individual'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 section, if the taxpayer holds stock as a tenant-stockholder in a
cooperative housing corporation--
`(A) the holding requirements of subsection (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 purposes 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 taxpayer who--
`(A) becomes physically or mentally incapable 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 periods
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 taxpayer 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 principal
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 separately.
`(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 respect to which the taxpayer elects not to have
this section 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
resulted 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 nonrecognition of any part of the gain realized on the sale or
exchange of another residence, in determining the period 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 regulations prescribed by the
Secretary, the involuntary conversion of property held by an individual shall
not result in gross income to the individual to the extent that the individual
receives property in exchange for the involuntarily converted property. To the
extent that income is not recognized under this subsection, the taxpayer's
basis in the converted property shall carry over to the new property.
`(b) CERTAIN REACQUISITIONS OF REAL PROPERTY- 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 Internal 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)--
`(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 POLICIES- 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.
`(e) CERTAIN EXCHANGES OF UNITED STATES OBLIGATIONS- When so provided by
regulations promulgated by the Secretary in connection with the issue of
obligations of the United States, no gain or loss shall be recognized on the
surrender to the United States of obligations 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 SECURITIES- Under regulations
prescribed by the Secretary, 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 Revenue 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 regulations shall adopt principles similar to those under section
1038 of the Internal Revenue Code of 1986.
`SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANSACTIONS.
`(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)).
`(b) Limitation on Net Capital Loss-
`(1) IN GENERAL- Losses from sales or exchanges 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 regulations prescribed by the
Secretary, any loss not allowed 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 prescribed by the Secretary, the
principles of the Internal Revenue Code of 1986 (including, without
limitation, sections 1234 (relating to options), 1234A (relating to gains or
losses from certain terminations), 1253 (relating to franchises and
trademarks) and 1258 (gain from certain financial transactions) 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, except to the extent
inconsistent with principles of this chapter.
`(4) RECAPTURE- If a taxpayer claimed depreciation, amortization or
other cost recovery deductions 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
property.
`Subchapter D--Rules for Exclusions from Gross Income
`Sec. 91. Interest on tax-exempt bonds.
`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 is not a qualified bond (within the meaning of paragraph
(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 requirements 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 volume cap requirements set forth in regulations.
`(C) OTHER REQUIREMENTS- Such bond meets the applicable requirements
set forth in regulations.
`(1) STATUTORY REGULATIONS- The Secretary shall publish as regulations
governing the application of this section the text of part IV of subchapter
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
implement this section, except that no such regulations shall conflict with
the regulations mandated by paragraph (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 member 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
`(2) was hospitalized as a result of wounds, disease, 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 exceed $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, disease, 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
corresponding provisions of prior income tax laws, an area in which Armed
Forces of the United States are or have (after June 24, 1950) engaged in
combat.
`(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 President by Executive Order as the date of the
termination of combatant activities in such zone; except that June 25, 1950,
shall be considered the date of the commencing of combatant activities in
the combat 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 personal use of a vehicle) which--
`(1) is received by any member or former member 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 uniformed services, and
`(2) was excludable from gross income on September 9, 1986, under any
provision of law, regulation, 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 paragraph (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
`(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 Defined-
`(1) IN GENERAL- `Qualified foster care payment' 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 exempt from
tax under section 253(a), and
`(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- `Qualified foster individual' means
any individual who is living in a foster family home in which such
individual 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 licensed by a State (or political subdivision
thereof) as a placement agency and which is described in section 253(c)(3)
and exempt from tax under section 253(a).
`(3) LIMITATION BASED ON NUMBER OF INDIVIDUALS 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 payments (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 purposes of this section--
`(1) DIFFICULTY OF CARE PAYMENTS- `Difficulty of care payments' means
payments to individuals 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 individual with respect to which the State has determined that
there is a need for additional compensation, and
`(ii) provided in the home of the foster care provider,
and
`(B) are designated by the payor as compensation described in
subparagraph (A).
`(2) LIMITATION BASED ON NUMBER OF INDIVIDUALS- In the case of any
foster home, 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--
`(A) 10 qualified foster individuals who have not attained age 19,
and
`(B) 5 qualified foster individuals not described in subparagraph
(A).
`SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS.
`(a) IN GENERAL- Gross income does not include--
`(1) amounts received under workers' compensation 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 personal
injuries or sickness;
`(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 contributions 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 resulting 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 disability 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 employee of the United States engaged in the
performance of his official duties outside the United States.
Paragraph (2) shall not apply to any punitive damages 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 described in paragraph (2).
`(2) INDIVIDUALS TO WHOM SUBSECTION (a)(4) CONTINUES TO APPLY- An
individual is described 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 component 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.
`(3) SPECIAL RULES FOR COMBAT-RELATED INJURIES- For purposes of this
subsection, the term `combat-related injury' means personal injury or
sickness--
`(i) as a direct result of armed conflict,
`(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
individual, on application therefor, would be entitled to receive as
disability compensation from the Veterans' Administration.
`SEC. 96. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE
EMPLOYER.
`(a) MEALS AND LODGING FURNISHED TO EMPLOYEE, HIS SPOUSE, AND HIS
DEPENDENTS, PURSUANT 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 dependents 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 furnished on the business
premises of the employer, or
`(2) in the case of lodging, the employee is required to accept such
lodging on the business premises of his employer as a condition of his
employment.
`(b) SPECIAL RULES- For the purposes of subsection (a)--
`(1) PROVISIONS OF EMPLOYMENT CONTRACT OR STATE STATUTE NOT TO BE
DETERMINATIVE- In determining whether meals or lodging are furnished for the
convenience of the employer, the provisions of an employment contract or of
a State statute fixing terms of employment shall not be determinative of
whether the meals or lodging are intended as compensation.
`(2) CERTAIN FACTORS NOT TAKEN INTO ACCOUNT 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 accept or decline such meals, shall not be taken into account.
`(3) CERTAIN FIXED CHARGES FOR MEALS-
`(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 employer,
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--
`(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 foreign 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 employer for the convenience of
the employer because 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 enclave) which is not available to
the public and which normally accommodates 10 or more employees.
`(d) LODGING FURNISHED BY CERTAIN EDUCATIONAL 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 furnished 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--
`(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 provided by the educational institution which
is comparable to the qualified campus lodging provided to the employee,
over
`(B) the rent paid by the employee for the qualified campus lodging
during such calendar year.
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 begins.
`(3) QUALIFIED CAMPUS LODGING- For purposes 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 purposes of this paragraph, the term
`educational institution' 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 certain fringe benefits.
`(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 customers 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 additional cost (including
forgone revenue) in providing such service to the employee (determined
without regard 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 employee 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 property is being offered by the employer to customers,
or
`(B) in the case of services, 20 percent of the price at which the
services are being offered by the employer to customers.
`(2) GROSS PROFIT PERCENTAGE-
`(A) IN GENERAL- `Gross profit percentage' 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 business 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- `Employee discount' means the amount by
which--
`(A) the price at which the property or services are provided by the
employer to an employee for use by such employee, is less than
`(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 ordinary 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 employer's employees) so
small as to make accounting for it unreasonable or administratively
impracticable.
`(2) TREATMENT OF CERTAIN EATING FACILITIES- The operation by an
employer of any eating facility for employees shall be treated as a de
minimis fringe if--
`(A) such facility is located on or near the business premises of the
employer, and
`(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 athletic
facility--
`(i) which is located on the premises of the employer,
`(ii) which is operated by the employer, and
`(iii) substantially all the use of which is by employees of the
employer, their spouses, and their dependent children.
`(d) CERTAIN EDUCATIONAL TRAINING BENEFITS- Amounts paid or expenses
incurred by the employer for education or training provided to the employee
shall be excluded from gross income under section 4 if (and only if) such
amounts or expenses are ordinary and necessary business expenses and are not
for an advanced degree or to qualify an employee for a new line of work.
`(e) REGULATIONS- The Secretary shall prescribe regulations under this
section, including regulations that continue certain rules contained in
section 132 to the Internal Revenue Code of 1986 related to the fringe
benefits described in this section.
`Subchapter E--Rules Relating to Deductions
`Sec. 101. Charitable, etc. organizations.
`Sec. 102. Private foundations.
`SEC. 101. CHARITABLE, ETC. ORGANIZATIONS.
`(a) PURPOSE- This section provides definitions for purposes of
determining the philanthropic transfer deduction and for other purposes of
this chapter and chapter 2.
`(A) REGULAR CHARITY- `Regular charity' means--
`(i) a church or a convention or association of
churches,
`(ii) an educational organization which normally maintains a regular
faculty and curriculum and normally has a regularly enrolled body of
pupils or students in attendance at the place where its educational
activities are regularly carried on,
`(iii) an organization the principal purpose or functions of which
are the providing of medical or hospital care or medical education or
medical research, if the organization is a hospital, or if the
organization is a medical research organization directly engaged in the
continuous active conduct of medical research in conjunction with a
hospital,
`(iv) an organization which normally receives a substantial part of
its support (exclusive of income received in the exercise or performance
by such organization of its charitable, educational, or other purpose or
function constituting the basis for its exemption under section 253(a))
from the United States or any State or political subdivision thereof or
from direct or indirect contributions from the general public, and which
is organized and operated exclusively to receive, hold, invest, and
administer property and to make expenditures to or for the benefit of a
college or university which is an organization referred to in clause
(ii) of this subparagraph and which is an agency or instrumentality of a
State or political subdivision thereof, or which is owned or operated by
a State or political subdivision thereof or by an agency or
instrumentality of one or more States or political
subdivisions,
`(v) a governmental unit referred to in subsection
(c)(1),
`(vi) an organization referred to in subsection (c)(2) which
normally receives a substantial part of its support (exclusive of income
received in the exercise or
performance by such organization of its charitable, educational, or other
purpose or function constituting the basis for its exemption under section
253(a)) from a governmental unit referred to in subsection (c)(1) or from direct
or indirect contributions from the general public,
`(vii) a private foundation described in subparagraph (C),
or
`(viii) an organization described in section 102(a) (2) or
(3).
`(B) SPECIAL RULE FOR MEDICAL RESEARCH ORGANIZATIONS- For purposes of
determining whether a contribution is to a regular charity, a medical
research organization shall not be treated as described in clause (iii) of
paragraph (2) unless during the calendar year in which the contribution is
made such organization is committed to spend such contributions for such
research before January 1 of the fifth calendar year which begins after
the date such contribution is made,
`(C) CERTAIN PRIVATE FOUNDATIONS- The private foundations referred to
in subparagraph (A)(vii) and subsection (e)(1)(B) are--
`(i) a private operating foundation (as defined in section
4942(j)(3)),
`(ii) any other private foundation (as defined in section 102(a))
which, not later than the 15th day of the third month after the close of
the foundation's taxable year in which contributions are received, makes
qualifying distributions (as defined in section 4942(g), without regard
to paragraph (3) thereof), which are treated, after the application of
section 4942(g)(3), as distributions out of corpus (in accordance with
section 4942(h)) in an amount equal to 100 percent of such
contributions, and with respect to which the taxpayer obtains adequate
records or other sufficient evidence from the foundation showing that
the foundation made such qualifying distributions, and
`(iii) a private foundation all of the contributions to which are
pooled in a common fund and which would be described in section
102(a)(3) but for the right of any substantial contributor (hereafter in
this clause called `donor') or his spouse to designate annually the
recipients, from among organizations described in paragraph (1) of
section 102(a), of the income attributable to the donor's contribution
to the fund and to direct (by deed or by will) the payment, to an
organization described in such paragraph (1), of the corpus in the
common fund attributable to the donor's contribution; but this clause
shall apply only if all of the income of the common fund is required to
be (and is) distributed to one or more organizations described in such
paragraph (1) not later than the 15th day of the third month after the
close of the taxable year in which the income is realized by the fund
and only if all of the corpus attributable to any donor's contribution
to the fund is required to be (and is) distributed to one or more of
such organizations not later than one year after his death or after the
death of his surviving spouse if she has the right to designate the
recipients of such corpus.
`(2) REFERENCES- Any reference in other law or in legal documents to an
organization described in a clause of section 170(b)(1)(A) of the Internal
Revenue Code of 1986 shall constitute a reference to an organization
described in the same clause of section 101(b)(1)(A).
`(c) CHARITY- For purposes of determining the deductibility of a
philanthropic transfer, `charitable contribution' 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 exclusively
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 facilities or equipment) or
for the prevention of cruelty to children or animals,
`(C) no part of the net earnings of which inures to the benefit of any
private shareholder or individual, and
`(D) which qualifies for exemption from the business tax under section
253(c) and is not disqualified for tax exemption by reason of attempting
to influence legislation, and which does not participate in, or intervene
in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public
office.
`(3) [intentionally deleted]
`(4) In the case of a contribution or gift by an individual, a domestic
fraternal society, order, or association, operating under the lodge system,
but only if such contribution or gift is to be used exclusively for
religious, charitable, scientific, literary, or educational purposes, or for
the prevention of cruelty to children or animals.
`(5) A cemetery company owned and operated exclusively for the benefit
of its members, or any corporation chartered solely for burial purposes as a
cemetery corporation and not permitted by its charter to engage in any
business not necessarily incident to that purpose, if such company or
corporation is not operated for profit and no part of the net earnings of
such company or corporation inures to the benefit of any private shareholder
or individual.
`(d) RULES FOR SUBSECTION (c)-
`(1) LIMITATIONS- A contribution or gift by a corporation to a trust,
chest, fund, or foundation shall be deductible by reason of subsection
(c)(2)(B) only if it is to be used within the United States or any of its
possessions exclusively for purposes specified in subparagraph (B).
`(2) REFERENCES- Any reference in other law or in legal documents to an
organization described in a paragraph of section 170(c) of the Internal
Revenue Code of 1986 shall constitute a reference to an organization
described in the same paragraph number of section 101(c) if an organization
is described in such paragraph.
`(e) QUALIFIED CONSERVATION CONTRIBUTION-
`(1) IN GENERAL- `Qualified conservation contribution' means a
contribution--
`(A) of a qualified real property interest,
`(B) to a qualified organization,
`(C) exclusively for conservation purposes.
`(2) QUALIFIED REAL PROPERTY INTEREST- `Qualified real property
interest' means any of the following interests in real property:
`(A) the entire interest of the donor other than a qualified mineral
interest,
`(B) a remainder interest, and
`(C) a restriction (granted in perpetuity) on the use which may be
made of the real property.
`(3) QUALIFIED ORGANIZATION- For purposes of paragraph (1), the term
'qualified organization' means an organization which--
`(A) is described in clause (v) or (vi) of subsection (b)(1)(A),
or
`(B) is described in section 253(c)(3) and--
`(i) meets the requirements of section 102(a)(2), or
`(ii) meets the requirements of section 102(a)(3) and is controlled
by an organization described in subparagraph (A) or in clause (i) of
this subparagraph.
`(4) CONSERVATION PURPOSE DEFINED-
`(A) IN GENERAL- For purposes of this subsection, the term
'conservation purpose' means--
`(i) the preservation of land areas for outdoor recreation by, or
the education of, the general public,
`(ii) the protection of a relatively natural habitat of fish,
wildlife, or plants, or similar ecosystem,
`(iii) the preservation of open space (including farmland and forest
land) where such preservation is--
`(I) for the scenic enjoyment of the general public,
or
`(II) pursuant to a clearly delineated Federal, State, or local
governmental conservation policy, and will yield a significant public
benefit, or
`(iv) the preservation of an historically important land area or a
certified historic structure.
`(B) CERTIFIED HISTORIC STRUCTURE- For purposes of subparagraph
(A)(iv), the term `certified historic structure' means any building,
structure, or land area which--
`(i) is listed in the National Register, or
`(ii) is located in a registered historic district and is certified
by the Secretary of the Interior to the Secretary as being of historic
significance to the district.
A building, structure, or land area satisfies the preceding sentence
if it satisfies such sentence either at the time of the transfer or on the
due date (including extensions) for filing the transferor's return under
this chapter for the taxable year in which the transfer is made.
`(5) EXCLUSIVELY FOR CONSERVATION PURPOSES- For purposes of this
subsection--
`(A) CONSERVATION PURPOSE MUST BE PROTECTED- A contribution shall not
be treated as exclusively for conservation purposes unless the
conservation purpose is protected in perpetuity.
`(B) NO SURFACE MINING PERMITTED-
`(i) IN GENERAL- Except as provided in clause (ii), in the case of a
contribution of any interest where there is a retention of a qualified
mineral interest, subparagraph (A) shall not be treated as met if at any
time there may be extraction or removal of minerals by any surface
mining method.
`(ii) SPECIAL RULE- With respect to any contribution of property in
which the ownership of the surface estate and mineral interests were
separated before June 13, 1976, and remain so separated, subparagraph
(A) shall be treated as met if the probability of surface mining
occurring on such property is so remote as to be negligible.
`(6) QUALIFIED MINERAL INTEREST- For purposes of this subsection, the
term `qualified mineral interest' means--
`(A) subsurface oil, gas, or other minerals, and
`(B) the right to access to such minerals.
`(f) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL EXPENSES- No deduction shall
be allowed under section 211 for traveling expenses (including amounts
expended for meals and lodging) while away from home, whether paid directly or
by reimbursement, unless there is no significant element of personal pleasure,
recreation, or vacation in such travel.
`(g) TREATMENT OF CERTAIN AMOUNTS PAID TO OR FOR THE BENEFIT OF
INSTITUTIONS OF HIGHER EDUCATION- For purposes of section 11, if as the result
of a contribution to or for the benefit of an educational organization--
`(1) which is described in subsection (b)(1)(A)(ii), and
`(2) which is an institution of higher education (as defined in section
3304(f))
the taxpayer receives (directly or indirectly) as a result of paying such
amount the right to purchase tickets for seating at an athletic event in an
athletic stadium of such institution, 80 percent of such contribution
shall be treated as a charitable contribution (but only if such amount would
be allowable as a deduction but for the fact that the taxpayer received the
right to purchase tickets). If any portion of a payment is for the purchase of
such tickets, such portion and the remaining portion (if any) of such payment
shall be treated as separate amounts for purposes of this subsection.
`Subchapter F--Special Business Activities
`Sec. 111. Rules for rental of real estate.
`SEC. 111. RULES FOR RENTAL OF REAL ESTATE.
`(a) IN GENERAL- Except as provided in subsection (b)--
`(1) the activity of rental of real estate is a business activity to
which the Simplified USA Tax for businesses under chapter 2 applies,
`(2) a taxpayer shall not be entitled to any deductions under this
chapter with respect to rental property, and
`(3) a taxpayer shall recognize gross income only with respect to
distributions from the rental activity.
`(b) Insubstantial Rental Activity-
`(1) NOT RENTAL PROPERTY- If an individual or individuals own property,
such individual or individuals and their families use the property on more
than 14 days during the taxable year for nonbusiness purposes, the property
is rented for no more than 14 days during the taxable year, and the total
rental received by the individuals with respect to such property does not
exceed $10,000, the property shall not be considered rental property or used
in the activity of rental of real estate during the taxable year for
purposes of subsection (a) and the Simplified USA Tax for businesses under
chapter 2.
`(2) RENTS FROM NONRENTAL PROPERTY- Any rent from property described in
paragraph (1) shall be included in gross income for purposes of the
Simplified USA Income Tax.
`(c) USE FOR A NONBUSINESS PURPOSE- For purposes of this section, `use for
a nonbusiness purpose' means use other than--
`(1) use for which fair rent is paid,
`(2) use in connection with the preparation of the property for rental,
or
`(3) use that serves a clear business purpose.
Use during any part of a day shall constitute use for that day.
`Subchapter G--Accounting Methods and Periods
`Sec. 122. Cash method of accounting; installment sales.
`SEC. 121. TAXABLE YEAR.
`(a) IN GENERAL- The taxable year for all individuals subject to tax under
this chapter shall be the calendar year except as provided in subsection
(b).
`(b) Short Taxable Years-
`(1) BIRTH- An individual's taxable year in year of his birth shall
begin on the date of his birth.
`(2) DEATH- An individual's taxable year in the year of his death shall
end on the date of his death.
`SEC. 122. CASH METHOD OF ACCOUNTING; INSTALLMENT SALES.
`(a) IN GENERAL- All individuals shall determine their income and
deductions using the cash receipts and disbursement method.
`(1) IN GENERAL- Original issue discount shall not be included in gross
income until received.
`(2) PREVIOUSLY RECOGNIZED OID- Original issue discount included in
income under the Internal Revenue Code of 1986 shall increase the adjusted
basis of the instrument to which the original issue discount related and
shall not again be included in income when received.
`(1) IN GENERAL- Taxpayers shall take into account income from
installment sales when received.
`(2) REGULATIONS- The Secretary shall promulgate regulations
implementing paragraph (1). Such regulations shall generally follow the
principles of sections 453, 453A and 453B of the Internal Revenue Code of
1986, except to the extent such principles are inconsistent with other
provisions of this chapter.
`(d) CONSTRUCTIVE RECEIPT- Income shall be treated as received when
constructively received.
`(e) EFFECT OF CHANGE OF ACCOUNTING METHOD- Rules similar to those under
section 226 shall apply to ensure that a taxpayer does not deduct the same
expense twice or include the same item in income twice.
`Subchapter H--Nonresident Aliens
`Sec. 131. Tax on nonresident alien individuals.
`Sec. 132. Tax treatment of certain community income of nonresident
aliens.
`SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS.
`(1) INCOME OTHER THAN CERTAIN GAINS- There is hereby imposed for each
taxable year a tax of 30 percent of the amount received from sources within
the United States by a nonresident alien individual as--
`(A) interest (other than portfolio interest (as defined in subsection
(b)(2)), deposit interest (as defined in subsection (b)(3)) and original
issue discount, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, and other fixed or determinable
annual periodical gains, profits and income,
`(B) gains from the disposal of timber, coal, or iron ore with a
retained economic interest,
`(C) in the case of the sale of an original discount obligation or
payment on an original issue discount obligation, the interest accrued
while the individual was a nonresident alien, and
`(D) includible social security benefits (as defined in section
3(b)(2)).
`(2) CAPITAL GAINS OF CERTAIN ALIENS- In the case of a nonresident alien
individual present in the United States for a period or periods aggregating
183 days or more during the taxable year, there is hereby imposed a tax of
30 percent of the amount by which the gains, derived from sources within
the
United States, from the sale or exchange at any time during such year exceeds
his losses, allocable to sources within the United States, from the sale or
exchange at any time during such year of capital assets.
`(3) TAX DOES NOT APPLY TO BUSINESS INCOME- The taxes imposed by this
section shall not apply to the income of any business entity, except to the
extent such income is distributed as compensation, dividends, or
interest.
`(b) Special Rules and Definitions-
`(1) CERTAIN ANNUITIES- The taxes imposed by subsection (a) shall not
apply to any amount received as an annuity under a qualified annuity plan
described in section 403(a)(1), or from a qualified trust described in
section 401(a) and exempt under section 253(a) if--
`(A) all of the personal services by reason of which the annuity is
payable were either--
`(i) personal services performed outside the United States by an
individual who, at the time of performance of such personal services,
was a nonresident alien, or
`(ii) personal services by a nonresident alien temporarily present
in the United States for a period or periods not exceeding 90 days
during a taxable year, whose compensation for such services did not
exceed $3,000, and who performed such services for--
`(I) a nonresident alien individual, foreign partnership, or
foreign corporation, not engaged in a trade or business within the
United States, or
`(II) for an office or place of business maintained in a foreign
country or in a possession of the United States by an individual who
is a citizen or resident of the United States or by a domestic
partnership or a domestic corporation, and
`(B) at the time the first amount is paid as annuity under the annuity
plan or by the trust, 90 percent or more of the employees for whom
contributions or benefits are provided under such plan are citizens or
residents of the United States.
`(A) IN GENERAL- `Portfolio interest' means--
`(i) interest on obligations in registered form if the United States
person who would otherwise be required to withhold tax on such interest
under section 1441(a) receives a statement that the beneficial owner of
the obligation is not a United States person, and
`(ii) interest on obligations in nonregistered form if appropriate
precautions are taken to ensure that such obligations will be sold only
to persons who are not United States persons and such interest is paid
outside the United States.
`(B) EXCEPTIONS- Under rules to be prescribed by the Secretary,
portfolio interest does not include--
`(i) interest received by a 10-percent equity owner, or
`(ii) contingent interest.
`(3) DEPOSIT INTEREST- `Deposit interest' means interest on deposits
which are--
`(A) deposits with persons carrying on a banking business (including
savings and loans), and
`(B) amounts held by an insurance company under an agreement to pay
interest thereon.
`(4) OTHER EXCEPTIONS- The taxes imposed by subsection (a) shall not
apply to--
`(A) a percentage of any dividend paid by a business entity, 80
percent of whose gross receipts are not taken into account under chapter 1
because they are from outside the United States, equal to the percentage
of gross receipts not so taken into account,
`(B) gambling winnings (except to the extent that the Secretary
determines by regulation that the collection of the tax is
administratively feasible),
`(C) compensation paid by a foreign employer to a nonresident alien
individual for the period he is temporarily present in the United States
as a nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of
the Immigration and Nationality Act, as amended,
`(D) interest from a series E or series H savings bond if the
individual acquired the bond while a resident of the Ryuku Islands or the
Trust Territory of the Pacific Islands, or
`(E) amounts earned or payable to any person who is a bona fide
resident of Puerto Rico, Guam, American Samoa, or the Northern Mariana
Islands (and, therefore, is subject to the tax imposed by subchapter
A).
`(c) Expatriation To Avoid Tax-
`(1) IN GENERAL- A nonresident alien individual who at any time within
the 10-year period immediately preceding the close of the taxable year lost
United States citizenship shall be taxable in the manner described in
paragraph (2) unless none of the principal purposes of losing citizenship
was avoidance of tax under subchapter A or subtitle B.
`(2) ALTERNATIVE TAX- A nonresident alien individual described in
paragraph (1) shall be subject to tax on the items taxable under subsection
(a) as determined without regard to exceptions listed or based on
definitions contained in subsection (b) using the rate schedule for single
individuals under section 215. If the taxes determined under subsection (a)
are greater than the tax determined under this subsection, the greater tax
shall apply.
`SEC. 132. TAX TREATMENT OF CERTAIN COMMUNITY INCOME OF NONRESIDENT
ALIENS.
`(a) GENERAL RULE- In the case of a married couple one or both of whom are
nonresident alien individuals and who have community income for the taxable
year, such community income shall be treated as follows:
`(1) Compensation income shall be treated as income of the spouse who
rendered the services,
`(2) Partnership distributions shall be treated as the related
distributive shares of partnership income would be treated under section
1402(a)(5),
`(3) Community income which is derived from the separate property of a
spouse shall be treated as income of that spouse, and
`(4) All other such community income shall be treated as provided in the
applicable community property law.
`(b) EXCEPTION WHERE ELECTION UNDER SECTION 6013(g) IS IN EFFECT-
Subsection (a) shall not apply if an election under subsection (g) or (h) of
section 6013 (relating to election to treat nonresident alien individuals as
residents of the United States) is in effect.
`SEC. 133. RELATIONSHIP WITH TREATIES.
`(a) STATEMENT OF POLICY- It is the intention of the USA Tax Code to
promote a worldwide tax system in which each nation taxes--
`(1) under an individual tax, only the income of individuals who are
residents or citizens of that nation, and
`(2) under a business tax only the business activity in such
nation.
`(b) EFFECT OF TREATIES- No tax shall be imposed under section 131(a) on
income that is exempt from tax by reason of a treaty between the nation of
which the nonresident alien is a citizen or resident and the United States. If
any such treaty requires that a lower rate of
tax be imposed on some or all of the items of income subject to tax under
section 331(a), such lower rate shall apply to such items in the case of persons
to whom such treaty applies.
`(c) EFFECT OF UNILATERAL ACTION BY FOREIGN NATION- No tax shall be
imposed under section 331(a) on nonresident aliens who are citizens or
residents of another nation if--
`(1) such nation exempts from its income and withholding taxes
nonresident alien individuals who are residents or citizens of the United
States,
`(2) such nation has entered into a tax information sharing agreement
with the United States, and
`(3) the Secretary certifies that the preceding two requirements have
been satisfied.
`Subchapter I--Trusts and Estates
`Sec. 140. Prepayment of tax by trusts and estates.
`Sec. 141. Application of tax.
`Sec. 142. Special rules for credits and deductions.
`Sec. 143. Definitions and rules applicable to subchapter I.
`Sec. 144. Deduction for trusts distributing current income only.
`Sec. 145. Inclusion of amounts in gross income of beneficiaries of
trusts distributing current income only.
`Sec. 146. Deduction for estates and trusts accumulating income or
distributing corpus.
`Sec. 147. Inclusion of amounts in gross income of beneficiaries of
estates and trusts accumulating income or distributing corpus.
`Sec. 148. Special rules applicable to sections 146 and 147.
`Sec. 149. Charitable remainder trusts.
`Sec. 150. Definitions applicable to excess distribution rules.
`Sec. 151. Accumulation distribution allocated to preceding years.
`Sec. 152. Treatment of amounts deemed distributed by trust in preceding
years.
`Sec. 153. Trust income, deductions, and credits attributable to
grantors and others as substantial owners.
`Sec. 154. Definitions and rules.
`Sec. 155. Reversionary interests.
`Sec. 156. Power to control beneficial enjoyment.
`Sec. 157. Administrative powers.
`Sec. 158. Power to revoke.
`Sec. 159. Income for benefit of grantor.
`Sec. 160. Person other than grantor treated as substantial owner.
`Sec. 161. Foreign trusts having one or more United States
beneficiaries.
`Sec. 162. Limitation on charitable deduction.
`Sec. 163. Income of an estate or trust in case of divorce, etc.
`Sec. 164. Recognition of gain on certain transfers to certain foreign
persons and estates.
`Sec. 165. Treatment of funeral trusts.
`Sec. 166. Income in respect of a decedent.
`SEC. 140. PREPAYMENT OF TAX BY TRUSTS AND ESTATES.
`(a) PREPAYMENT OF TAX- A trust or estate shall prepay the Simplified USA
Tax for individuals in accordance with the provisions of this subchapter.
`(b) IMPOSITION OF TAX- There is hereby imposed a tax on the taxable
income of trusts and estates (as determined in accordance with this
subchapter) a tax determined as follows:
`If taxable income is:
The tax is:
Not over $1,600
15% of taxable income.
Over $1,600, but not over $3,800
$240, plus 25% of the excess over $1,600.
Over $3,800
$790, plus 30% of the excess over $3,800.
`(c) INFLATION ADJUSTMENT- The schedule in subsection (b) shall be
adjusted for inflation in accordance with section 23.
`(d) Business Activities-
`(1) TAX ON BUSINESS ACTIVITY DETERMINED AT BUSINESS LEVEL- If a trust
engages in business activity (as defined in section 206(b)), it shall be
considered a business entity with respect to such activities for purposes of
the business tax under chapter 2. The business entity shall be considered an
asset of the trust.
`(2) BUSINESS ENTITY AS SOLE BENEFICIARY- If the only beneficiaries of a
trust are business entities, no tax shall be imposed on such trust under
this subchapter.
`SEC. 141. APPLICATION OF TAX.
`(a) IN GENERAL- The tax imposed by section 140 shall apply to the taxable
income of estates or of any kind of property held in trust, including--
`(1) income accumulated in trust for the benefit of unborn or
unascertained persons or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will or
trust;
`(2) income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is to
be held or distributed as the court may direct;
`(3) income received by estates of deceased persons during the period of
administration or settlement of the estate; and
`(4) income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
`(b) COMPUTATION AND PAYMENT- The taxable income of an estate or trust
shall be computed in the same manner as in the case of an individual, except
as otherwise provided in this subchapter. The tax shall be computed on such
taxable income and shall be paid by the fiduciary. For purposes of this
subsection, a foreign trust or foreign estate shall be treated as a
nonresident alien individual who is not present in the United States at any
time.
`(c) EXCLUSION OF INCLUDIBLE GAIN FROM TAXABLE INCOME- The taxable income
of a trust does not include the amount of any includible gain as defined in
section 144(b) reduced by any deductions properly allocable thereto.
`SEC. 142. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.
`(a) USA Deduction and Family Living Allowance-
`(1) NO DEDUCTION OR ALLOWANCE- A trust or estate shall not be allowed
any USA Deductions or a Family Living Allowance.
`(2) SPECIAL DEDUCTION- For purposes of determining taxable income,
trusts and estates shall
be entitled to the following deductions from gross income--
`(A) ESTATE- An estate shall be allowed a deduction of $600.
`(B) DISTRIBUTING TRUST- A trust which, under its governing
instrument, is required to distribute all of its income currently shall be
allowed a deduction of $300.
`(C) OTHER TRUSTS- Trusts not described in subparagraph (B) shall be
allowed a deduction of $100.
`(b) Deduction for Amounts Paid or Permanently Set Aside for a Charitable
Purpose-
`(1) GENERAL RULE- In the case of an estate or trust, there shall be
allowed as a deduction in computing its taxable income (in lieu of the
philanthropic transfer deduction) any amount of the gross income, without
limitation, which pursuant to the terms of the governing instrument is,
during the taxable year, paid for a purpose specified in section 101(c)
(determined without regard to section 101(c)(2)(A)). If a charitable
contribution is paid after the close of such taxable year and on or before
the last day of the year following the close of such taxable year, then the
trustee or administrator may elect to treat such contribution as paid during
such taxable year. The election shall be made at such time and in such
manner as the Secretary prescribes by regulations.
`(2) POOLED INCOME FUNDS- In the case of a pooled income fund (as
defined in paragraph (3)), there shall also be allowed as a deduction in
computing its taxable income any amount of the gross income attributable to
gain from the sale of a capital asset held for more than 1 year, without
limitation, which pursuant to the terms of the governing instrument is,
during the taxable year, permanently set aside for a purpose specified in
section 101(c).
`(3) DEFINITION OF POOLED INCOME FUND- For purposes of paragraph (2), a
pooled income fund is a trust--
`(A) to which each donor transfers property, contributing an
irrevocable remainder interest in such property to or for the use of an
organization described in section 101(b)(1)(A) (other than in clauses
(vii) or (viii)), and retaining an income interest for the life of one or
more beneficiaries (living at the time of such transfer),
`(B) in which the property transferred by each donor is commingled
with property transferred by other donors who have made or make similar
transfers,
`(C) which cannot have investments in securities which are exempt from
taxes imposed by this subtitle,
`(D) which includes only amounts received from transfers which meet
the requirements of this paragraph,
`(E) which is maintained by the organization to which the remainder
interest is contributed and of which no donor or beneficiary of an income
interest is a trustee, and
`(F) from which each beneficiary of an income interest receives
income, for each year for which he is entitled to receive the income
interest referred to in subparagraph (A), determined by the rate of return
earned by the trust for such year.
For purposes of determining the amount of any charitable contribution
allowable by reason of a transfer of property to a pooled fund, the value of
the income interest shall be determined on the basis of the highest rate of
return earned by the fund for any of the 3 taxable years immediately
preceding the taxable year of the fund in which the transfer is made. In the
case of funds in existence less than 3 taxable years preceding the taxable
year of the fund in which a transfer is made the rate of return shall be
deemed to be 6 percent per annum, except that the Secretary may prescribe a
different rate of return.
`(c) UNUSED LOSS CARRYOVERS- If on the termination of an estate or trust,
the estate or trust has a loss carryover then such carryover shall be allowed
as a deduction, in accordance with regulations prescribed by the Secretary, to
the beneficiaries succeeding to the property of the estate or trust.
`(d) CERTAIN DISTRIBUTIONS BY CEMETERY PERPETUAL CARE FUNDS- In the case
of a cemetery perpetual care fund which--
`(1) was created pursuant to local law by a taxable cemetery corporation
for the care and maintenance of cemetery property, and
`(2) is treated for the taxable year as a trust for purposes of this
subchapter,
any amount distributed by such fund for the care and maintenance of
gravesites which have been purchased from the cemetery corporation before the
beginning of the
taxable year of the trust and with respect to which there is an obligation to
furnish care and maintenance shall be considered to be a distribution solely for
purposes of sections 144 and 146, but only to the extent that the aggregate
amount so distributed during the taxable year does not exceed $5 multiplied by
the aggregate number of such gravesites.
`SEC. 143. DEFINITIONS AND RULES APPLICABLE TO SUBCHAPTER I.
For purposes of this subchapter--
`(a) DISTRIBUTABLE NET INCOME- `Distributable net income' means, with
respect to any taxable year, the taxable income of the estate or trust
computed with the following modifications--
`(1) No deduction shall be taken under sections 144 and 146 (relating to
additional deductions).
`(2) No deduction shall be taken under section 142(a)(2) (relating to
deduction for personal exemptions).
`(3) Gains from the sale or exchange of capital assets shall be excluded
to the extent that such gains are allocated to corpus and are not (A) paid,
credited, or required to be distributed to any beneficiary during the
taxable year, or (B) paid, permanently
set aside, or to be used for the purposes specified in section 142(b). Losses
from the sale or exchange of capital assets shall be excluded, except to the
extent such losses are taken into account in determining the amount of gains
from the sale or exchange of capital assets which are paid, credited, or
required to be distributed to any beneficiary during the taxable year.
`(4) For purposes only of rules under section XX, there shall be
excluded those items of gross income constituting extraordinary dividends or
taxable stock dividends which the fiduciary, acting in good faith, does not
pay or credit to any beneficiary by reason of his determination that such
dividends are allocable to corpus under the terms of the governing
instrument and applicable local law.
`(5) There shall be included any tax-exempt interest.
`(6) In the case of a foreign trust--
`(A) There shall be included the amounts of gross income from sources
without the United States, reduced by any amounts which would be
deductible in respect of disbursements allocable to such income but for
the provisions of section 265(a)(1) (relating to disallowance of certain
deductions).
`(B) Gross income from sources within the United States shall be
determined without regard to section 894 (relating to income exempt under
treaty).
`(C) Paragraph (3) shall not apply to a foreign trust. In the case of
such a trust, there shall be included gains from the sale or exchange of
capital assets, reduced by losses from such sales or exchanges to the
extent such losses do not exceed gains from such sales or
exchanges.
If the estate or trust is allowed a deduction under section 142(b), the
amount of the modifications specified in paragraphs (5) and (6) shall be
reduced to the extent that the amount of income which is paid, permanently set
aside, or to be used for the purposes specified in section 142(b) is deemed to
consist of items specified in those paragraphs. For this purpose, such amount
shall (in the absence of specific provisions in the governing instrument) be
deemed to consist of the same proportion of each class of items of income of
the estate or trust as the total of each class bears to the total of all
classes.
`(b) INCOME- `Income', when not preceded by the words `taxable',
`distributable net', `undistributed net', or `gross', means the amount of
income of the estate or trust for the taxable year determined under the terms
of the governing instrument and applicable local law. Items of gross income
constituting extraordinary dividends or taxable stock dividends which the
fiduciary, acting in good faith, determines to be allocable to corpus under
the terms of the governing instrument and applicable local law shall not be
considered income.
`(c) BENEFICIARY- `Beneficiary' includes heir, legatee, devisee.
`(d) TREATMENT OF PROPERTY DISTRIBUTED IN KIND-
`(1) BASIS OF BENEFICIARY- The basis of any property received by a
beneficiary in a distribution from an estate or trust shall be--
`(A) the adjusted basis of such property in the hands of the estate or
trust immediately before the distribution, adjusted for
`(B) any gain or loss recognized to the estate or trust on the
distribution.
`(2) AMOUNT OF DISTRIBUTION- In the case of any distribution of property
(other than cash), the amount taken into account under sections 146(a)(2)
and 147(a)(2) shall be the lesser of--
`(A) the basis of such property in the hands of the beneficiary (as
determined under paragraph (1)), or
`(B) the fair market value of such property.
`(3) ELECTION TO RECOGNIZE GAIN-
`(A) IN GENERAL- In the case of any distribution of property (other
than cash) to which an election under this paragraph applies--
`(i) paragraph (2) shall not apply,
`(ii) gain or loss shall be recognized by the estate or trust in the
same manner as if such property had been sold to the distributee at its
fair market value, and
`(iii) the amount taken into account under sections 146(a)(2) and
147(a)(2) shall be the fair market value of such property.
`(B) ELECTION- Any election under this paragraph shall apply to all
distributions made by the estate or trust during a taxable year and shall
be made on the return of such estate or trust for such taxable
year.
Any such election, once made, may be revoked only with the consent of the
Secretary.
`(4) EXCEPTION FOR DISTRIBUTIONS DESCRIBED IN SECTION 148(a)- This
subsection shall not apply to any distribution described in section
148(a).
`(f) TREATMENT OF MULTIPLE TRUSTS- For purposes 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 primary 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 prescribed 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 and foreign income of trusts. Those rules
should generally be consistent with the rules under subchapter J of chapter 1
of the Internal Revenue Code of
1986, except that they shall take into account the principles of the
Simplified USA Tax.
`(i) CERTAIN REVOCABLE TRUSTS TREATED AS PART OF ESTATE-
`(1) IN GENERAL- If both the executor (if any) of an estate and the
trustee of a qualified revocable trust elect the treatment provided in this
section, such trust shall be treated and taxed as part of such estate (and
not as a separate trust) for all taxable years of the estate ending after
the date of the decedent's death and before the applicable date.
`(2) QUALIFIED REVOCABLE TRUST- For purposes of this subsection,
`qualified revocable trust' means any trust (or portion thereof) which was
treated under section 158 as owned by the decedent of the estate referred to
in paragraph (1) by reason of a power in the grantor (determined without
regard to section 154(e).
`(3) APPLICABLE DATE- For purposes of this subsection, `applicable date'
means--
`(A) if no return of tax imposed by chapter 11 is required to be
filed, the date which is 2 years after the date of the decedent's death,
and
`(B) if such a return is required to be filed, the date which is 6
months after the date of the final determination of the liability for tax
imposed by chapter 11.
`(4) ELECTION- The election under this subsection shall be made not
later than the time prescribed for filing the return of tax imposed by this
chapter for the first taxable year of the estate (determined with regard to
extensions) and, once made, shall be irrevocable.
`SEC. 144. DEDUCTION FOR TRUSTS DISTRIBUTING CURRENT INCOME ONLY.
`(a) DEDUCTION- In the case of any trust the terms of which--
`(1) provide that all of its income is required to be distributed
currently, and
`(2) do not provide that any amounts are to be paid, permanently set
aside, or used for the purposes specified in section 142(b) (relating to
deduction for charitable, etc., purposes),
there shall be allowed as a deduction in computing the taxable income of
the trust the amount of the income for the taxable year which is required to
be distributed currently. This section shall not apply in any taxable year in
which the trust distributes amounts other than amounts of income described in
paragraph (1).
`(b) LIMITATION ON DEDUCTION- If the amount of income required to be
distributed currently exceeds the distributable net income of the trust for
the taxable year, the deduction shall be limited to the amount of the
distributable net income. For this purpose, the computation of distributable
net income shall not include items of income which are not included in the
gross income of the trust and the deductions allocable thereto.
`SEC. 145. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF TRUSTS
DISTRIBUTING CURRENT INCOME ONLY.
`(a) INCLUSION- Subject to subsection (b), the amount of income for the
taxable year required to be distributed currently by a trust described in
section 144 shall be included in the gross income of the beneficiaries to whom
the income is required to be distributed, whether distributed or not. If such
amount exceeds the distributable net income, there shall be included in the
gross income of each beneficiary an amount which bears the same ratio to
distributable net income as the
amount of income required to be distributed to such beneficiary bears to the
amount of income required to be distributed to all beneficiaries.
`(b) CHARACTER OF AMOUNTS- The amounts specified in subsection (a) shall
have the same character in the hands of the beneficiary as in the hands of the
trust. For this purpose, the amounts shall be treated as consisting of the
same proportion of each class of items entering into the computation of
distributable net income of the trust as the total of each class bears to the
total distributable net income of the trust, unless the terms of the trust
specifically allocate different classes of income to different beneficiaries.
In the application of the preceding sentence, the items of deduction entering
into the computation of distributable net income shall be allocated among the
items of distributable net income in accordance with regulations prescribed by
the Secretary.
`SEC. 146. DEDUCTION FOR ESTATES AND TRUSTS ACCUMULATING INCOME OR
DISTRIBUTING CORPUS.
`(a) DEDUCTION- In any taxable year there shall be allowed as a deduction
in computing the taxable income of an estate or trust (other than a trust
described in section 144), the sum of--
`(1) any amount of income for such taxable year required to be
distributed currently (including any amount required to be distributed which
may be paid out of income or corpus to the extent such amount is paid out of
income for such taxable year); and
`(2) any other amounts properly paid or credited or required to be
distributed for such taxable year;
but such deduction shall not exceed the distributable net income of the
estate or trust.
`(b) CHARACTER OF AMOUNTS DISTRIBUTED- The amount determined under
subsection (a) shall be treated as consisting of the same proportion of each
class of items entering into the computation of distributable net income of
the estate or trust as the total of each class bears to the total
distributable net income of the estate or trust in the absence of the
allocation of different classes of income under the specific terms of the
governing instrument. In the application of the preceding sentence, the items
of deduction entering into the computation of distributable net income
(including the deduction allowed under section 142(b)) shall be allocated
among the items of distributable net income in accordance with regulations
prescribed by the Secretary.
`(c) LIMITATION ON DEDUCTION- No deduction shall be allowed under
subsection (a) in respect of any portion of the amount allowed as a deduction
under that subsection (without regard to this subsection) which is treated
under subsection (b) as consisting of any item of distributable net income
which is not included in the gross income of the estate or trust.
`SEC. 147. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF ESTATES
AND TRUSTS ACCUMULATING INCOME OR DISTRIBUTING CORPUS.
`(a) INCLUSION- Subject to subsection (b), there shall be included in the
gross income of a beneficiary to whom an amount specified in section 146(a) is
paid, credited, or required to be distributed (by an estate or trust described
in section 146), the sum of the following amounts:
`(1) AMOUNTS REQUIRED TO BE DISTRIBUTED CURRENTLY- The amount of income
for the taxable year required to be distributed currently to such
beneficiary, whether distributed or not. If the amount of income required to
be distributed currently to all beneficiaries exceeds the distributable net
income (computed without the deduction allowed by section 142(b), relating
to deduction for charitable, etc., purposes) of the estate or trust, then,
in lieu of the amount provided in the preceding sentence, there shall be
included in the gross income of the beneficiary an amount which bears the
same ratio to distributable net income (as so computed) as the amount of
income required to be distributed currently to such beneficiary bears to the
amount required to be distributed currently to all beneficiaries. For
purposes of this section, the phrase `the amount of income for the taxable
year required to be distributed currently' includes any amount required to
be paid out of income or corpus to the extent such amount is paid out of
income for such taxable year.
`(2) OTHER AMOUNTS DISTRIBUTED- All other amounts properly paid,
credited, or required to be distributed to such beneficiary for the taxable
year. If the sum of--
`(A) the amount of income for the taxable year required to be
distributed currently to all beneficiaries, and
`(B) all other amounts properly paid, credited, or required to be
distributed to all beneficiaries
exceeds the distributable net income of the estate or trust, then, in
lieu of the amount provided in the preceding sentence, there shall be
included in the gross income of the beneficiary an amount which
bears the same ratio to distributable net income (reduced by the amounts
specified in (A)) as the other amounts properly paid, credited or required to be
distributed to the beneficiary bear to the other amounts properly paid,
credited, or required to be distributed to all beneficiaries.
`(b) CHARACTER OF AMOUNTS- The amounts determined under subsection (a)
shall have the same character in the hands of the beneficiary as in the hands
of the estate or trust. For this purpose, the amounts shall be treated as
consisting of the same proportion of each class of items entering into the
computation of distributable net income as the total of each class bears to
the total distributable net income of the estate or trust unless the terms of
the governing instrument specifically allocate different classes of income to
different beneficiaries. In the application of the preceding sentence, the
items of deduction entering into the computation of distributable net
income (including the deduction allowed under section 142(b)) shall be
allocated among the items of distributable net income in accordance with
regulations prescribed by the Secretary. In the application of this subsection
to the amount determined under paragraph (1) of subsection (a), distributable
net income shall be computed without regard to any portion of the deduction
under section 142(b) which is not attributable to income of the taxable year.
`SEC. 148. SPECIAL RULES APPLICABLE TO SECTIONS 146 AND 147.
`(a) EXCLUSIONS- There shall not be included as amounts falling within
section 146(a) or 147(a)--
`(1) GIFTS, BEQUESTS, ETC- Any amount which, under the terms of the
governing instrument, is properly paid or credited as a gift or bequest of a
specific sum of money or of specific property and which is paid or credited
all at once or in not more than 3 installments. For this purpose an amount
which can be paid or credited only from the income of the estate or trust
shall not be considered as a gift or bequest of a specific sum of
money.
`(2) CHARITABLE, ETC., DISTRIBUTIONS- Any amount paid or permanently set
aside or otherwise qualifying for the deduction provided in section 142(b)
(computed without regard to sections 508(d), 162, and 4948(c)(4)).
`(3) DENIAL OF DOUBLE DEDUCTION- Any amount paid, credited, or
distributed in the taxable year, if section 144 or section 146 applied to
such amount for a preceding taxable year of an estate or trust because
credited or required to be distributed in such preceding taxable year.
`(b) Distributions in First Sixty-Five Days of Taxable Year-
`(1) GENERAL RULE- If within the first 65 days of any taxable year of an
estate or a trust, an amount is properly paid or credited, such amount shall
be considered paid or credited on the last day of the preceding taxable
year.
`(2) LIMITATION- Paragraph (1) shall apply with respect to any taxable
year of an estate or a trust only if the executor of such estate or the
fiduciary of such trust (as the case may be) elects, in such manner and at
such time as the Secretary prescribes by regulations, to have paragraph (1)
apply for such taxable year.
`(c) SEPARATE SHARES TREATED AS SEPARATE ESTATES OR TRUSTS- For the sole
purpose of determining the amount of distributable net income in the
application of sections 146 and 147, in the case of a single trust having more
than one beneficiary, substantially separate and independent shares of
different beneficiaries in the trust shall be treated as separate trusts.
Rules similar to the rules of the preceding provisions of this subsection
shall apply to treat substantially separate and independent shares of
different beneficiaries in an estate having more than 1 beneficiary as
separate estates. The existence of such substantially separate and independent
shares and the manner of treatment as separate trusts or estates, including
the application of sections 150 through 152, shall be determined in accordance
with regulations prescribed by the Secretary.
`SEC. 149. CHARITABLE REMAINDER TRUSTS.
`(a) GENERAL RULE- Notwithstanding any other provision of this subchapter,
the provisions of this section shall, in accordance with regulations
prescribed by the Secretary, apply in the case of a charitable remainder
annuity trust and a charitable remainder unitrust.
`(b) CHARACTER OF DISTRIBUTIONS- Amounts distributed by a charitable
remainder annuity trust or by a charitable remainder unitrust shall be
considered as having the following characteristics in the hands of a
beneficiary to whom is paid the annuity described in subsection (d)(1)(A) or
the payment described in subsection (d)(2)(A):
`(1) First, as amounts of income (other than gains, and amounts treated
as gains, from the sale or other disposition of capital assets) includible
in gross income to the extent of such income of the
trust for the year and such undistributed income of the trust for prior
years;
`(2) Second, as a capital gain to the extent of the capital gain of the
trust for the year and the undistributed capital gain of the trust for prior
years;
`(3) Third, as other income to the extent of such income of the trust
for the year and such undistributed income of the trust for prior years;
and
`(4) Fourth, as a distribution of trust corpus.
For purposes of this section, the trust shall determine the amount of its
undistributed capital gain on a cumulative net basis.
`(c) EXEMPTION FROM INCOME TAXES- A charitable remainder annuity trust and
a charitable remainder unitrust shall, for any taxable year, not be subject to
any tax imposed by this chapter. Any such trust shall be liable for tax on its
unrelated business taxable income (within the meaning of section 255).
`(1) CHARITABLE REMAINDER ANNUITY TRUST- For purposes of this section, a
charitable remainder annuity trust is a trust--
`(A) from which a sum certain (which is not less than 5 percent nor
more than 50 percent of the initial net fair market value of all property
placed in trust) is to be paid, not less often than annually, to one or
more persons (at least one of which is not an organization described in
section 101(c) and, in the case of individuals, only to an individual who
is living at the time of the creation of the trust) for a term of years
(not in excess of 20 years) or for the life or lives of such individual or
individuals,
`(B) from which no amount other than the payments described in
subparagraph (A) and other than qualified gratuitous transfers described
in subparagraph (C) may be paid to or for the use of any person other than
an organization described in section 101(c),
`(C) following the termination of the payments described in
subparagraph (A), the remainder interest in the trust is to be transferred
to, or for the use of, an organization described in section 101(c) or is
to be retained by the trust for such a use or, to the extent the remainder
interest is in qualified employer securities (as defined in subsection
(g)(4)), all or part of such securities are to be transferred to an
employee stock ownership plan (as defined in section 4975(e)(7) in a
qualified gratuitous transfer (as defined by subsection (g)).
`(D) the value (determined under section 7520 of such remainder
interest is at least 10 percent of the initial net fair market value of
all property placed in the trust.
`(2) CHARITABLE REMAINDER UNITRUST- For purposes of this section, a
charitable remainder unitrust is a trust--
`(A) from which a fixed percentage (which is not less than 5 percent
nor more than 50 percent) of the net fair market value of its assets,
valued annually, is to be paid, not less often than annually, to one or
more persons (at least one of which is not an organization described in
section 101(c) and, in the case of individuals, only to an individual who
is living at the time of the creation of the trust) for a term of years
(not in excess of 20 years) or for the life or lives of such individual or
individuals,
`(B) from which no amount other than the payments described in
subparagraph (A) and other than qualified gratuitous transfers described
in subparagraph (C) may be paid to or for the use of any person other than
an organization described in section 101(c),
`(C) following the termination of the payments described in
subparagraph (A), the remainder interest in the trust is to be transferred
to, or for the use of, an organization described in section 101(c) or is
to be retained by the trust for such a use or, to the extent the remainder
interest is in qualified employer securities (as defined in subsection
(g)(4)), all or part of such securities are to be transferred to an
employee stock ownership plan (as defined in section 4975(e)(7) in a
qualified gratuitous transfer (as defined by subsection (g)).
`(D) with respect to each contribution of property to the trust, the
value (determined under section 7520 of such remainder interest in such
property is at least 10 percent of the net fair market value of such
property as of the date such property is contributed to the
trust.
`(3) EXCEPTION- Notwithstanding the provisions of paragraphs (2)(A) and
(B), the trust instrument may provide that the trustee shall pay the income
beneficiary for any year--
`(A) the amount of the trust income, if such amount is less than the
amount required to be distributed under paragraph (2)(A), and
`(B) any amount of the trust income which is in excess of the amount
required to be distributed under paragraph (2)(A), to the extent that (by
reason of subparagraph (A)) the aggregate of the amounts paid in prior
years was less than the aggregate of such required amounts.
`(4) SEVERANCE OF CERTAIN ADDITIONAL CONTRIBUTIONS- If--
`(A) any contribution is made to a trust which before the contribution
is a charitable remainder unitrust, and
`(B) such contribution would (but for this paragraph) result in such
trust ceasing to be a charitable unitrust by reason of paragraph (2)(D),
such contribution shall be treated as a transfer to a separate trust under
regulations prescribed by the Secretary.
`(e) VALUATION FOR PURPOSES OF CHARITABLE CONTRIBUTION- For purposes of
determining the amount of any charitable contribution, the remainder interest
of a charitable remainder annuity trust or charitable remainder unitrust shall
be computed on the basis that an amount equal to 5 percent of the net fair
market value of its assets (or a greater amount, if required under the terms
of the trust instrument) is to be distributed each year.
`(f) CERTAIN CONTINGENCIES PERMITTED-
`(1) GENERAL RULE- If a trust would, but for a qualified contingency,
meet the requirements of paragraph (1)(A) or (2)(A) of subsection (d), such
trust shall be treated as meeting such requirements.
`(2) VALUE DETERMINED WITHOUT REGARD TO QUALIFIED CONTINGENCY- For
purposes of determining the amount of any charitable contribution (or the
actuarial value of any interest), a qualified contingency shall not be taken
into account.
`(3) QUALIFIED CONTINGENCY- For purposes of this subsection, the term
`qualified contingency' means any provision of a trust which provides that,
upon the happening of a contingency, the payments described in paragraph
(1)(A) or (2)(A) of subsection (d) (as the case may be) will terminate not
later than such payments would otherwise terminate under the trust.
`(g) QUALIFIED GRATUITOUS TRANSFER OF QUALIFIED EMPLOYER SECURITIES-
`(1) IN GENERAL- For purposes of this section, the term `qualified
gratuitous transfer' means a transfer of qualified employer securities to an
employee stock ownership plan (as defined in section 4975(e)(7) but only to
the extent that--
`(A) the securities transferred previously passed from a decedent
dying before January 1, 2000, to a trust described in paragraph (1) or (2)
of subsection (d),
`(B) no deduction under section 404 is allowable with respect to such
transfer,
`(C) such plan contains the provisions required by paragraph
(3),
`(D) such plan treats such securities as being attributable to
employer contributions but without regard to the limitations otherwise
applicable to such contributions under section 404, and
`(E) the employer whose employees are covered by the plan described in
this paragraph files with the Secretary a verified written statement
consenting to the application of sections 4978 and 4979A with respect to
such employer.
`(2) EXCEPTION- The term `qualified gratuitous transfer' shall not
include a transfer of qualified employer securities to an employee stock
ownership plan unless--
`(A) such plan was in existence on August 1, 1996,
`(B) at the time of the transfer, the decedent and members of the
decedent's family (within the meaning of section 171(a)(6)(D)) own
(directly or through constructive ownership rules) no more than 10 percent
of the value of the stock of the corporation referred to in paragraph (4),
and
`(C) immediately after the transfer, such plan owns (after the
application of section 318(a)(4) at least 60 percent of the value of the
outstanding stock of the corporation.
`(3) PLAN REQUIREMENTS- A plan contains the provisions required by this
paragraph if such plan provides that--
`(A) the qualified employer securities so transferred are allocated to
plan participants in a manner consistent with section 401(a)(4),
`(B) plan participants are entitled to direct the plan as to the
manner in which such securities which are entitled to vote and are
allocated to the account of such participant are to be voted,
`(C) an independent trustee votes the securities so transferred which
are not allocated to plan participants,
`(D) each participant who is entitled to a distribution from the plan
has the rights described in subparagraphs (A) and (B) of section
409(h)(1),
`(E) such securities are held in a suspense account under the plan to
be allocated each year, up to the limitations under section 415(c), after
first allocating all other annual additions for the limitation year, up to
the limitations under sections 415 (c) and (e), and
`(F) on termination of the plan, all securities so transferred which
are not allocated to plan participants as of such termination are to be
transferred to, or for the use of, an organization described in section
101(c). For purposes of the preceding sentence, the term `independent
trustee' means any trustee who is not a member of the family (within the
meaning of section 171(a)(6)(D)) of the decedent or a 5-percent
shareholder. A plan shall not fail to be
treated as meeting the requirements of section 401(a) by reason of meeting
the requirements of this subsection.
`(4) QUALIFIED EMPLOYER SECURITIES- For purposes of this section, the
term `qualified employer securities' means employer securities (as defined
in section 409(l)) which are issued by a domestic corporation--
`(A) which has no outstanding stock which is readily tradable on an
established securities market, and
`(B) which has only 1 class of stock.
`(5) TREATMENT OF SECURITIES ALLOCATED BY EMPLOYEE STOCK OWNERSHIP PLAN
TO PERSONS RELATED TO DECEDENT OR 5-PERCENT SHAREHOLDERS-
`(A) IN GENERAL- If any portion of the assets of the plan attributable
to securities acquired by the plan in a qualified gratuitous transfer are
allocated to the account of--
`(i) any person who is related to the decedent (within the meaning
of section 171(a)(5) or a member of the decedent's family (within the
meaning of section 171(a)(6)(D), or
`(ii) any person who, at the time of such allocation or at any time
during the 1-year period ending on the date of the acquisition of
qualified employer securities by the plan, is a 5-percent shareholder of
the employer maintaining the plan, the plan shall be treated as having
distributed (at the time of such allocation) to such person or
shareholder the amount so allocated.
`(B) 5-PERCENT SHAREHOLDER- For purposes of subparagraph (A), the term
`5-percent shareholder' means any person who owns (directly or through the
application of constructive ownership rules) more than 5 percent of the
outstanding stock of the corporation which issued such qualified employer
securities or of any corporation which is a member of the same controlled
group of corporations (within the meaning of section 409(l)(4)) as such
corporation.
`(C) CROSS REFERENCE- For excise tax on allocations described in
subparagraph (A), see section 4979A.
`(6) TAX ON FAILURE TO TRANSFER UNALLOCATED SECURITIES TO CHARITY ON
TERMINATION OF PLAN- If the requirements of paragraph (3)(F) are not met
with respect to any securities, there is hereby imposed a tax on the
employer maintaining the plan in an amount equal to the sum of--
`(A) the amount of the increase in the tax which would be imposed by
chapter 11 if such securities were not transferred as described in
paragraph (1), and
`(B) interest on such amount at the underpayment rate under section
6621 (and compounded daily) from the due date for filing the return of the
tax imposed by chapter 11.
`SEC. 150. DEFINITIONS APPLICABLE TO EXCESS DISTRIBUTION RULES.
`(a) UNDISTRIBUTED NET INCOME- For purposes of sections 150 through 152,
the term `undistributed net income' for any taxable year means the amount by
which the distributable net income of the trust for such taxable year exceeds
the sum of--
`(1) the amounts for such taxable year specified in paragraphs (1) and
(2) of section 146(a), and
`(2) the amount of taxes imposed on the trust attributable to such
distributable net income.
`(b) ACCUMULATION DISTRIBUTION- For purposes of sections 150 through 152,
except as provided in subsection (c), the term `accumulation distribution'
means, for any taxable year of the trust, the amount by which--
`(1) the amounts specified in paragraph (2) of section 146(a) for such
taxable year, exceed
`(2) distributable net income for such year reduced (but not below zero)
by the amounts specified in paragraph (1) of section 146(a).
For purposes of section 152 (other than subsection (c) thereof, relating
to multiple trusts), the amounts specified in paragraph (2) of
section 146(a) shall not include amounts properly paid, credited, or required
to be distributed to a beneficiary from a trust (other than a foreign trust) as
income accumulated before the birth of such beneficiary or before such
beneficiary attains the age of 21. If the amounts properly paid, credited, or
required to be distributed by the trust for the taxable year do not exceed the
income of the trust for such year, there shall be no accumulation distribution
for such year.
`(c) EXCEPTION FOR ACCUMULATION DISTRIBUTIONS FROM CERTAIN DOMESTIC
TRUSTS- For purposes of sections 150 through 152--
`(1) IN GENERAL- In the case of a qualified trust, any distribution in
any taxable year beginning
after the date of the enactment of this subsection shall be computed without
regard to any undistributed net income.
`(2) QUALIFIED TRUST- For purposes of this subsection, the term
`qualified trust' means any trust other than--
`(A) a foreign trust (or, except as provided in regulations, a
domestic trust which at any time was a foreign trust), or
`(B) a trust created before March 1, 1984, unless it is established
that the trust would not be aggregated with other trusts under section
143(f) if such section applied to such trust.
`(d) TAXES IMPOSED ON THE TRUST- For purposes of sections 150 through
152--
`(1) IN GENERAL- The term `taxes imposed on the trust' means the amount
of the taxes which are imposed for any taxable year of the trust under this
chapter (without regard to sections 150 through 152) and which, under
regulations prescribed by the Secretary, are properly allocable to the
undistributed portions of distributable net income and gains in excess of
losses from sales or exchanges of capital assets. The amount determined in
the preceding sentence shall be reduced by any amount of such taxes deemed
distributed under section 151(b) and (c) to any beneficiary.
`(2) FOREIGN TRUSTS- In the case of any foreign trust, the term `taxes
imposed on the trust' includes the amount, reduced as provided in the last
sentence of paragraph (1), of any income, war profits, 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 regulations 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 of paragraph
(2) of section 146(a) distributed on the last day of each of the preceding
taxable years, commencing with the earliest of such years, to the extent that
such amount exceeds the total of any undistributed net income for all earlier
preceding taxable years. The amount deemed to be distributed in any such
preceding taxable year under the preceding sentence shall not exceed the
undistributed net income for such preceding taxable year. For purposes of this
subsection, undistributed net income for each of such preceding taxable years
shall be computed without regard to such accumulation distribution and without
regard to any accumulation distribution determined for any succeeding taxable
year.
`(b) TOTAL TAXES DEEMED DISTRIBUTED- If any portion of an accumulation
distribution for any taxable year is deemed under subsection (a) to be an
amount within the meaning of paragraph (2) of section 146(a) distributed on
the last day of any preceding taxable year, and such portion of such
distribution is not less than the undistributed net income for such preceding
taxable year, the trust shall be deemed to have distributed on the last day of
such preceding taxable year an additional amount within the meaning of
paragraph (2) of section 146(a). Such additional amount shall be equal to the
taxes imposed on the trust for such preceding taxable year attributable to
the undistributed net income. For purposes of this subsection, the
undistributed net income and the taxes imposed on the trust for such preceding
taxable year attributable to such undistributed net income shall be computed
without regard to such accumulation distribution and without regard to any
accumulation distribution determined for any succeeding taxable year.
`(c) PRO RATA PORTION OF TAXES DEEMED DISTRIBUTED- If any portion of an
accumulation distribution for any taxable year is deemed under subsection (a)
to be an amount within the meaning of paragraph (2) of section 146(a)
distributed on the last day of any preceding taxable year and such portion of
the accumulation distribution is less than the undistributed net income for
such preceding taxable year, the trust shall be deemed to have distributed on
the last day of such preceding taxable year an additional amount within the
meaning of paragraph (2) of section 146(a). Such additional amount shall be
equal to the taxes imposed on the trust for such taxable year attributable to
the undistributed net income multiplied by the ratio of the portion of the
accumulation distribution to the undistributed net income of the trust for
such year. For purposes of this subsection, the undistributed net income and
the taxes imposed on the trust for such preceding taxable year attributable to
such undistributed net income shall be computed without regard to the
accumulation distribution and without regard to any accumulation distribution
determined for any succeeding taxable year.
`(d) RULE WHEN INFORMATION IS NOT AVAILABLE- If adequate records are not
available to determine the proper application of this subchapter to an amount
distributed by a trust, such amount shall be deemed to be an accumulation
distribution consisting of undistributed net income earned during the earliest
preceding taxable year of the trust in which it can be established that the
trust was in existence.
`(e) DENIAL OF REFUND TO TRUSTS AND BENEFICIARIES- No refund or credit
shall be allowed to a trust or a beneficiary of such trust for any preceding
taxable year by reason of a distribution deemed to have been made by such
trust in such year under this section.
`SEC. 152. TREATMENT OF AMOUNTS DEEMED DISTRIBUTED BY TRUST IN PRECEDING
YEARS.
`(a) GENERAL RULE- The total of the amounts which are treated under
section 151 as having been distributed by a trust in a preceding taxable year
shall be included in the income of a beneficiary of the trust when paid,
credited, or required to be distributed to the extent that such total would
have been included in the income of such beneficiary under section 147(a)(2)
(and, with respect to any tax-exempt interest to which section 103 applies,
under section 147(b)) if such total had been paid to such beneficiary on the
last day of such preceding taxable year. The tax imposed by this subtitle on a
beneficiary for a taxable year in which any such amount is included in his
income shall be determined only as provided in this section and shall consist
of the sum of--
`(1) a partial tax computed on the taxable income reduced by an amount
equal to the total of such amounts, at the rate and in the manner as if this
section had not been enacted,
`(2) a partial tax determined as provided in subsection (b) of this
section, and
`(3) in the case of a foreign trust, the interest charge determined as
provided in section 152.
`(b) TAX ON DISTRIBUTION-
`(1) IN GENERAL- The partial tax imposed by subsection (a)(2) shall be
determined.
`(A) by determining the number of preceding taxable years of the trust
on the last day of which an amount is deemed under section 151(a) to have
been distributed,
`(B) by taking from the 5 taxable years immediately preceding the year
of the accumulation distribution the 1 taxable year for which the
beneficiary's taxable income was the highest and the 1 taxable year for
which his taxable income was the lowest,
`(C) by adding to the beneficiary's taxable income for each of the 3
taxable years remaining after the application of subparagraph (B) an
amount determined by dividing the amount deemed distributed under section
151 and required to be included in income under subsection (a) by the
number of preceding taxable years determined under subparagraph (A),
and
`(D) by determining the average increase in tax for the 3 taxable
years referred to in subparagraph (C) resulting from the application of
such subparagraph.
The partial tax imposed by subsection (a)(2) shall be the excess (if
any) of the average increase in tax determined under subparagraph (D),
multiplied by the number of preceding taxable years determined under
subparagraph (A), over the amount of taxes (other than the amount of taxes
described in section 150(d)(2)) deemed distributed to the beneficiary under
sections 151 (b) and (c).
`(2) TREATMENT OF LOSS YEARS- For purposes of paragraph (1), the taxable
income of the
beneficiary for any taxable year shall be deemed to be not less than zero.
`(3) CERTAIN PRECEDING TAXABLE YEARS NOT TAKEN INTO ACCOUNT- For
purposes of paragraph (1), if the amount of the undistributed net income
deemed distributed in any preceding taxable year of the trust is less than
25 percent of the amount of the accumulation distribution divided by the
number of preceding taxable years to which the accumulation distribution is
allocated under section 151(a), the number of preceding taxable years of the
trust with respect to which an amount is deemed distributed to a beneficiary
under section 151(a) shall be determined without regard to such year.
`(4) EFFECT OF OTHER ACCUMULATION DISTRIBUTIONS- In computing the
partial tax under paragraph (1) for any beneficiary, the income of such
beneficiary for each of his prior taxable years shall include amounts
previously deemed distributed to such beneficiary in such year under section
151 as a result of prior accumulation distributions (whether from the same
or another trust).
`(5) MULTIPLE DISTRIBUTIONS IN THE SAME TAXABLE YEAR- In the case of
accumulation distributions made from more than one trust which are
includible in the income of a beneficiary in the same taxable year, the
distributions shall be deemed to have been made consecutively in whichever
order the beneficiary shall determine. Generation-skipping transfer bears to
the total accumulation distribution.
`(c) SPECIAL RULE FOR MULTIPLE TRUSTS-
`(1) IN GENERAL- If, in the same prior taxable year of the beneficiary
in which any part of the accumulation distribution from a trust (hereinafter
in this paragraph referred to as `third trust') is deemed under section
151(a) to have been distributed to such beneficiary, some part of prior
distributions by each of 2 or more other trusts is deemed under section
151(a) to have been distributed to such beneficiary, then subsections (b)
and (c) of section 151 shall not apply with respect to such part of the
accumulation distribution from such third trust.
`(2) ACCUMULATION DISTRIBUTIONS FROM TRUST NOT TAKEN INTO ACCOUNT UNLESS
THEY EQUAL OR EXCEED $1,000- For purposes of paragraph (1), an accumulation
distribution from a trust to a beneficiary shall be taken into account only
if such distribution, when added to any prior accumulation distributions
from such trust which are deemed under section 151(a) to have been
distributed to such beneficiary for the same prior taxable year of the
beneficiary, equals or exceeds $1,000.
`SEC. 153. TRUST INCOME, DEDUCTIONS, AND CREDITS ATTRIBUTABLE TO GRANTORS
AND OTHERS AS SUBSTANTIAL OWNERS.
`Where it is specified in sections 153 through 161 that the grantor or
another person shall be treated as the owner of any portion of a trust, there
shall then be included in computing the taxable income and credits of the
grantor or the other person those items of income, deductions, and credits
against tax of the trust which are attributable to that portion of the trust
to the extent that such items would be taken into account under this chapter
in computing taxable income or credits against the tax of an individual. Any
remaining portion of the trust shall be subject to sections 140 through 152.
No items of a trust shall be included in computing the taxable income and
credits of the grantor or of any other person solely on the grounds of his
dominion and control over the trust under section 61 (relating to definition
of gross income) or any other provision of this title, except as specified in
this subpart.
`SEC. 154. DEFINITIONS AND RULES.
`(a) ADVERSE PARTY- For purposes of sections 153 through 160, `adverse
party' means any person having a substantial beneficial interest in the trust
which would be adversely affected by the exercise or nonexercise of the power
which he possesses respecting the trust. A person having a general power of
appointment over the trust property shall be deemed to have a beneficial
interest in the trust.
`(b) NONADVERSE PARTY- For purposes of sections 153 through 160,
`nonadverse party' means any person who is not an adverse party.
`(c) RELATED OR SUBORDINATE PARTY- For purposes of sections 153 through
161, `related or subordinate party' means any nonadverse party who is--
`(1) the grantor's spouse if living with the grantor;
`(2) any one of the following: The grantor's father, mother, issue,
brother or sister; an employee of the grantor; a corporation
or any employee of a corporation in which the stock holdings of the grantor
and the trust are significant from the viewpoint of voting control; a
subordinate employee of a corporation in which the grantor is an executive.
For purposes of subsection (f) and sections 156 and 157, a related or
subordinate party shall be presumed to be
subservient to the grantor in respect of the exercise or nonexercise of the
powers conferred on him unless such party is shown not to be subservient by a
preponderance of the evidence.
`(d) RULE WHERE POWER IS SUBJECT TO CONDITION PRECEDENT- A person shall be
considered to have a power described in sections 153 through 161 even though
the exercise of the power is subject to a precedent giving of notice or takes
effect only on the expiration of a certain period after the exercise of the
power.
`(e) Grantor Treated as Holding Any Power or Interest of Grantor's
Spouse-
`(1) IN GENERAL- For purposes of sections 153 through 160, a grantor
shall be treated as holding any power or interest held by--
`(A) any individual who was the spouse of the grantor at the time of
the creation of such power or interest, or
`(B) any individual who became the spouse of the grantor after the
creation of such power or interest, but only with respect to periods after
such individual became the spouse of the grantor.
`(2) MARITAL STATUS- For purposes of paragraph (1)(A), an individual
legally separated from his spouse under a decree of divorce or of separate
maintenance shall not be considered as married.
`(f) Rules Not To Result in Foreign Ownership-
`(1) IN GENERAL- Notwithstanding any other provision in sections 153
through 160, sections 153 through 160 shall apply only to the extent such
application results in an amount (if any) being currently taken into account
(directly or through 1 or more entities) under this chapter in computing the
income of a citizen or resident of the United States or a domestic
corporation.
`(A) CERTAIN REVOCABLE AND IRREVOCABLE TRUSTS- Paragraph (1) shall not
apply to any portion of a trust if--
`(i) the power to revest absolutely in the grantor title to the
trust property to which such portion is attributable is exercisable
solely by the grantor without the approval or consent of any other
person or with the consent of a related or subordinate party who is
subservient to the grantor, or
`(ii) the only amounts distributable from such portion (whether
income or corpus) during the lifetime of the grantor are amounts
distributable to the grantor or the spouse of the grantor.
`(B) COMPENSATORY TRUSTS- Except as provided in regulations, paragraph
(1) shall not apply to any portion of a trust distributions from which are
taxable as compensation for services rendered.
`(3) SPECIAL RULES- Except as otherwise provided in regulations
prescribed by the Secretary, a controlled foreign corporation shall be
treated as a domestic corporation for purposes of paragraph (1).
`(4) RECHARACTERIZATION OF PURPORTED GIFTS- In the case of any transfer
directly or indirectly from a partnership or foreign corporation which the
transferee treats as a gift or bequest, the Secretary may recharacterize
such transfer in such circumstances as the Secretary determines to be
appropriate to prevent the avoidance of the purposes of this
subsection.
`(5) SPECIAL RULE WHERE GRANTOR IS FOREIGN PERSON- If--
`(A) but for this subsection, a foreign person would be treated as the
owner of any portion of a trust, and
`(B) such trust has a beneficiary who is a United States
person,
such beneficiary shall be treated as the grantor of such portion to the
extent such beneficiary has made (directly or indirectly) transfers of
property (other than in a sale for full and adequate consideration) to such
foreign person.
`(6) REGULATIONS- The Secretary shall prescribe such regulations as may
be necessary or appropriate to carry out the purposes of this subsection,
including regulations providing that paragraph (1) shall not apply in
appropriate cases.
`SEC. 155. REVERSIONARY INTERESTS.
`(a) GENERAL RULE- The grantor shall be treated as the owner of any
portion of a trust in which he has a reversionary interest in either the
corpus or the income therefrom, if, as of the inception of that portion of the
trust, the value of such interest exceeds 5 percent of the value of such
portion.
`(b) REVERSIONARY INTEREST TAKING EFFECT AT DEATH OF MINOR LINEAL
DESCENDANT BENEFICIARY- In the case of any beneficiary who--
`(1) is a lineal descendant of the grantor, and
`(2) holds all of the present interests in any portion of a trust,
the grantor shall not be treated under subsection (a) as the owner of such
portion solely by reason of a reversionary interest in such portion which
takes effect upon the death of such beneficiary before such beneficiary
attains age 21.
`(c) SPECIAL RULE FOR DETERMINING VALUE OF REVERSIONARY INTEREST- For
purposes of subsection (a), the value of the grantor's reversionary interest
shall be determined by assuming the maximum exercise of discretion in favor of
the grantor.
`(d) POSTPONEMENT OF DATE SPECIFIED FOR REACQUISITION- Any postponement of
the date specified for the reacquisition of possession or enjoyment of the
reversionary interest shall be treated as a new transfer in trust commencing
with the date on which the postponement is effective and terminating with the
date prescribed by the postponement. However, income for any period shall not
be included in the income of the grantor by reason of the preceding sentence
if such income would not be so includible in the absence of such
postponement.
`SEC. 156. POWER TO CONTROL BENEFICIAL ENJOYMENT.
`(a) GENERAL RULE- The grantor shall be treated as the owner of any
portion of a trust in respect of which the beneficial enjoyment of the corpus
or the income therefrom is subject to a power of disposition, exercisable by
the grantor or a nonadverse party, or both, without the approval or consent of
any adverse party.
`(b) EXCEPTIONS FOR CERTAIN POWERS- Subsection (a) shall not apply to the
following powers regardless of by whom held:
`(1) POWER TO APPLY INCOME TO SUPPORT OF A DEPENDENT- A power described
in section 159(b) to the extent that the grantor would not be subject to tax
under that section.
`(2) POWER AFFECTING BENEFICIAL ENJOYMENT ONLY AFTER OCCURRENCE OF
EVENT- A power, the exercise of which can only affect the beneficial
enjoyment of the income for a period commencing after the occurrence of an
event such that a grantor would not be treated as the owner under section
155 if the power were a reversionary interest; but the grantor may be
treated as the owner after the occurrence of the event unless the power is
relinquished.
`(3) POWER EXERCISABLE ONLY BY WILL- A power exercisable only by will,
other than a power in the grantor to appoint by will the income of the trust
where the income is accumulated for such disposition by the grantor or may
be so accumulated in the discretion of the grantor or a nonadverse party, or
both, without the approval or consent of any adverse party.
`(4) POWER TO ALLOCATE AMONG CHARITABLE BENEFICIARIES- A power to
determine the beneficial enjoyment of the corpus or the income therefrom if
the corpus or income is irrevocably payable for a purpose specified in
section 101(c) (relating to definition of charitable contributions) or to an
employee stock ownership plan (as defined in section 4975(e)(7)) in a
qualified gratuitous transfer (as defined in section 149(g)(1)).
`(5) POWER TO DISTRIBUTE CORPUS- A power to distribute corpus
either--
`(A) to or for a beneficiary or beneficiaries or to or for a class of
beneficiaries (whether or not income beneficiaries) provided that the
power is limited by a reasonably definite standard which is set forth in
the trust instrument; or
`(B) to or for any current income beneficiary, provided that the
distribution of corpus must be chargeable against the proportionate share
of corpus held in trust for the payment of income to the beneficiary as if
the corpus constituted a separate trust.
A power does not fall within the powers described in this paragraph if
any person has a power to add to the beneficiary or beneficiaries or to a
class of beneficiaries designated to receive the income or corpus, except
where such action is to provide for after-born or after-adopted
children.
`(6) POWER TO WITHHOLD INCOME TEMPORARILY- A power to distribute or
apply income to or
for any current income beneficiary or to accumulate the income for him,
provided that any accumulated income must ultimately be payable--
`(A) to the beneficiary from whom distribution or application is
withheld, to his estate, or to his appointees (or persons named as
alternate takers in default of appointment) provided that such beneficiary
possesses a power of appointment which does not exclude from the class of
possible appointees any person other than the beneficiary, his estate, his
creditors, or the creditors of his estate, or
`(B) on termination of the trust, or in conjunction with a
distribution of corpus which is augmented by such accumulated income, to
the current income beneficiaries in shares which have been irrevocably
specified in the trust instrument.
Accumulated income shall be considered so payable although it is
provided that if any beneficiary does not survive a date of distribution
which could reasonably have been expected to occur within the beneficiary's
lifetime, the share of the deceased beneficiary is to be paid to his
appointees or to one or more designated alternate takers (other than the
grantor or the grantor's estate) whose shares have been irrevocably
specified. A power does not fall within the powers described in this
paragraph if any person has a power to add to the beneficiary or
beneficiaries or to a class of beneficiaries designated to receive the
income or corpus except where such action is to provide for after-born or
after-adopted children.
`(7) POWER TO WITHHOLD INCOME DURING DISABILITY OF A BENEFICIARY- A
power exercisable only during--
`(A) the existence of a legal disability of any current income
beneficiary, or
`(B) the period during which any income beneficiary shall be under the
age of 21 years,
to distribute or apply income to or for such beneficiary or to
accumulate and add the income to corpus. A power does not fall within the
powers described in this paragraph if any person has a power to add to the
beneficiary or beneficiaries or to a class of beneficiaries designated to
receive the income or corpus, except where such action is to provide for
after-born or after-adopted children.
`(8) POWER TO ALLOCATE BETWEEN CORPUS AND INCOME- A power to allocate
receipts and disbursements as between corpus and income, even though
expressed in broad language.
`(c) EXCEPTION FOR CERTAIN POWERS OF INDEPENDENT TRUSTEES- Subsection (a)
shall not apply to a power solely exercisable (without the approval or consent
of any other person) by a trustee or trustees, none of whom is the grantor,
and no more than half of whom are related or subordinate parties who are
subservient to the wishes of the grantor--
`(1) to distribute, apportion, or accumulate income to or for a
beneficiary or beneficiaries, or to, for, or within a class of
beneficiaries; or
`(2) to pay out corpus to or for a beneficiary or beneficiaries or to or
for a class of beneficiaries (whether or not income beneficiaries).
A power does not fall within the powers described in this subsection if
any person has a power to add to the beneficiary or beneficiaries or to a
class of beneficiaries designated to receive the income or corpus, except
where such action is to provide for after-born or after-adopted children. For
periods during which an individual is the spouse of the grantor (within the
meaning of section 154(e)(2)), any reference in this subsection to the grantor
shall be treated as including a reference to such individual.
`(d) POWER TO ALLOCATE INCOME IF LIMITED BY A STANDARD- Subsection (a)
shall not apply to a power solely exercisable (without the approval or consent
of any other person) by a trustee or trustees, none of whom is the grantor or
spouse living with the grantor, to distribute, apportion, or accumulate income
to or for a beneficiary or beneficiaries, or to, for, or within a class of
beneficiaries, whether or not the conditions of paragraph (6) or (7) of
subsection (b) are satisfied, if such power is limited by a reasonably
definite external standard which is set forth in the trust instrument. A power
does not fall within the powers described in this subsection if any person has
a power to add to the beneficiary or beneficiaries or to a class of
beneficiaries designated to receive the income or corpus except where such
action is to provide for after-born or after-adopted children.
`SEC. 157. ADMINISTRATIVE POWERS.
`The grantor shall be treated as the owner of any portion of a trust in
respect of which--
`(1) POWER TO DEAL FOR LESS THAN ADEQUATE AND FULL CONSIDERATION- A
power exercisable by the grantor or a nonadverse party, or both, without the
approval or consent of any adverse party enables the grantor or any person
to purchase, exchange, or otherwise deal with or dispose of the corpus or
the income therefrom for less than an adequate consideration in money or
money's worth.
`(2) POWER TO BORROW WITHOUT ADEQUATE INTEREST OR SECURITY- A power
exercisable by the grantor or a nonadverse party, or both, enables the
grantor to borrow the corpus or income, directly or indirectly, without
adequate interest or without adequate security except where a trustee (other
than the grantor) is authorized under a general lending
power to make loans to any person without regard to interest or security.
`(3) BORROWING OF THE TRUST FUNDS- The grantor has directly or
indirectly borrowed the corpus or income and has not completely repaid the
loan, including any interest, before the beginning of the taxable year. The
preceding sentence shall not apply to a loan which provides for adequate
interest and adequate security, if such loan is made by a trustee other than
the grantor and other than a related or subordinate trustee subservient to
the grantor. For periods during which an individual is the spouse of the
grantor (within the meaning of section 154(e)(2)), any reference in this
paragraph to the grantor shall be treated as including a reference to such
individual.
`(4) GENERAL POWERS OF ADMINISTRATION- A power of administration is
exercisable in a nonfiduciary capacity by any person without the approval or
consent of any person in a fiduciary capacity. For purposes of this
paragraph, the term `power of administration' means any one or more of the
following powers: (A) a power to vote or direct the voting of stock or other
securities of a corporation in which the holdings of the grantor and the
trust are significant from the viewpoint of voting control; (B) a power to
control the investment of the trust funds either by directing investments or
reinvestments, or by vetoing proposed investments or reinvestments, to the
extent that the trust funds consist of stocks or securities of corporations
in which the holdings of the grantor and the trust are significant from the
viewpoint of voting control; or (C) a power to reacquire the trust corpus by
substituting other property of an equivalent value.
`SEC. 158. POWER TO REVOKE.
`(a) GENERAL RULE- The grantor shall be treated as the owner of any
portion of a trust, whether or not he is treated as such owner under any other
provision of this part, where at any time the power to revest in the grantor
title to such portion is exercisable by the grantor or a non-adverse party, or
both.
`(b) POWER AFFECTING BENEFICIAL ENJOYMENT ONLY AFTER OCCURRENCE OF EVENT-
Subsection (a) shall not apply to a power the exercise of which can only
affect the beneficial enjoyment of the income for a period commencing after
the occurrence of an event such that a grantor would not be treated as the
owner under section 155 if the power were a reversionary interest. But the
grantor may be treated as the owner after the occurrence of such event unless
the power is relinquished.
`SEC. 159. INCOME FOR BENEFIT OF GRANTOR.
`(a) GENERAL RULE- The grantor shall be treated as the owner of any
portion of a trust, whether or not he is treated as such owner under section
156, whose income without the approval or consent of any adverse party is, or,
in the discretion of the grantor or a nonadverse party, or both, may be--
`(1) distributed to the grantor or the grantor's spouse;
`(2) held or accumulated for future distribution to the grantor or the
grantor's spouse; or
`(3) applied to the payment of premiums on policies of insurance on the
life of the grantor or the grantor's spouse (except policies of insurance
irrevocably payable for a purpose specified in section 101(c) (relating to
definition of charitable contributions)).
This subsection shall not apply to a power the exercise of which can only
affect the beneficial enjoyment of the income for a period commencing after
the occurrence of an event such that the grantor would not be treated as the
owner under section 153 if the power were a reversionary interest; but the
grantor may be treated as the owner after the occurrence of the event unless
the power is relinquished.
`(b) OBLIGATIONS OF SUPPORT- Income of a trust shall not be considered
taxable to the grantor under subsection (a) or any other provision of this
chapter merely because such income in the discretion of another person, the
trustee, or the grantor acting as
trustee or co-trustee, may be applied or distributed for the support or
maintenance of a beneficiary (other than the grantor's spouse) whom the grantor
is legally obligated to support or maintain, except to the extent that such
income is so applied or distributed. In cases where the amounts so applied or
distributed are paid out of corpus or out of other than income for the taxable
year, such amounts shall be considered to be an amount paid or credited within
the meaning of paragraph (2) of section 146(a) and shall be taxed to the grantor
under section 147.
`SEC. 160. PERSON OTHER THAN GRANTOR TREATED AS SUBSTANTIAL OWNER.
`(a) GENERAL RULE- A person other than the grantor shall be treated as the
owner of any portion of a trust with respect to which:
`(1) such person has a power exercisable solely by himself to vest the
corpus or the income therefrom in himself, or
`(2) such person has previously partially released or otherwise modified
such a power and after the release or modification retains such control as
would, within the principles of sections 153 to 159, inclusive, subject a
grantor of a trust to treatment as the owner thereof.
`(b) EXCEPTION WHERE GRANTOR IS TAXABLE- Subsection (a) shall not apply
with respect to a power over income, as originally granted or thereafter
modified, if the grantor of the trust or a transferor (to whom section 161
applies) is otherwise treated as the owner under sections 153 through 159 or
section 161.
`(c) OBLIGATIONS OF SUPPORT- Subsection (a) shall not apply to a power
which enables such person, in the capacity of trustee or cotrustee, merely to
apply the income of the trust to the support or maintenance of a person whom
the holder of the power is obligated to support or maintain except to the
extent that such income is so applied. In cases where the amounts so applied
or distributed are paid out of corpus or out of other than income of the
taxable year, such amounts shall be considered to be an amount paid or
credited within the meaning of paragraph (2) of section 146(a) and shall be
taxed to the holder of the power under section 147.
`(d) EFFECT OF RENUNCIATION OR DISCLAIMER- Subsection (a) shall not apply
with respect to a power which has been renounced or disclaimed within a
reasonable time after the holder of the power first became aware of its
existence.
`SEC. 161. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES
BENEFICIARIES.
`(a) TRANSFEROR TREATED AS OWNER-
`(1) IN GENERAL- A United States person who directly or indirectly
transfers property to a foreign trust (other than a trust described in
section 6048(a)(3)(B)(ii)) shall be treated as the owner for his taxable
year of the portion of such trust attributable to such property if for such
year there is a United States beneficiary of any portion of such
trust.
`(2) EXCEPTIONS- Paragraph (1) shall not apply--
`(A) TRANSFERS BY REASON OF DEATH- To any transfer by reason of the
death of the transferor.
`(B) TRANSFERS AT FAIR MARKET VALUE- To any transfer of property to a
trust in exchange for consideration of at least the fair market value of
the transferred property. For purposes of the preceding sentence,
consideration other than cash shall be taken into account at its fair
market value.
`(3) CERTAIN OBLIGATIONS NOT TAKEN INTO ACCOUNT UNDER FAIR MARKET VALUE
EXCEPTION-
`(A) IN GENERAL- In determining whether paragraph (2)(B) applies to
any transfer by a person described in clause (ii) or (iii) of subparagraph
(C), there shall not be taken into account--
`(i) except as provided in regulations, any obligation of a person
described in subparagraph (C), and
`(ii) to the extent provided in regulations, any obligation which is
guaranteed by a person described in subparagraph (C).
`(B) TREATMENT OF PRINCIPAL PAYMENTS ON OBLIGATION- Principal payments
by the trust on any obligation referred to in subparagraph (A) shall be
taken into account on and after the date of the payment in determining the
portion of the trust attributable to the property transferred.
`(C) PERSONS DESCRIBED- The persons described in this subparagraph
are--
`(ii) any grantor, owner, or beneficiary of the trust,
and
`(iii) any person who is related (within the meaning of section
143(i)(2)(B) to any grantor, owner, or beneficiary of the
trust.
`(4) Special rules applicable to foreign grantor who later becomes a
united states person-
`(A) IN GENERAL- If a nonresident alien individual has a residency
starting date within 5 years after directly or indirectly transferring
property to a foreign trust, this section and section 6048 shall be
applied as if such individual transferred to such trust on the residency
starting date an amount equal to the portion of such trust attributable to
the property transferred by such individual to such trust in such
transfer.
`(B) TREATMENT OF UNDISTRIBUTED INCOME- For purposes of this section,
undistributed net income for periods before such individual's residency
starting date shall be taken into account in determining the portion of
the trust which is attributable to property transferred by such individual
to such trust but shall not otherwise be taken into account.
`(C) RESIDENCY STARTING DATE- For purposes of this paragraph, an
individual's residency starting date is the residency starting date
determined under section 7701(b)(2)(A).
`(5) OUTBOUND TRUST MIGRATIONS- If--
`(A) an individual who is a citizen or resident of the United States
transferred property to a trust which was not a foreign trust,
and
`(B) such trust becomes a foreign trust while such individual is
alive, then this section and section 6048 shall be applied as if such
individual transferred to such trust on the date such trust becomes a
foreign trust an amount equal to the portion of such trust attributable to
the property previously transferred by such individual to such trust. A
rule similar to the rule of paragraph (4)(B) shall apply for purposes of
this paragraph.
`(b) TRUSTS ACQUIRING UNITED STATES BENEFICIARIES- If--
`(1) subsection (a) applies to a trust for the transferor's taxable
year, and
`(2) subsection (a) would have applied to the trust for his immediately
preceding taxable year but for the fact that for such preceding taxable year
there was no United States beneficiary for any portion of the trust,
then, for purposes of this chapter, the transferor shall be treated as
having income for the taxable year (in addition to his other income for such
year) equal to the undistributed net income (at the close of such immediately
preceding taxable year) attributable to the portion of the trust referred to
in subsection (a).
`(c) TRUSTS TREATED AS HAVING A UNITED STATES BENEFICIARY-
`(1) IN GENERAL- For purposes of this section, a trust shall be treated
as having a United States beneficiary for the taxable year unless--
`(A) under the terms of the trust, no part of the income or corpus of
the trust may be paid or accumulated during the taxable year to or for the
benefit of a United States person, and
`(B) if the trust were terminated at any time during the taxable year,
no part of the income or corpus of such trust could be paid to or for the
benefit of a United States person.
`(2) ATTRIBUTION OF OWNERSHIP- For purposes of paragraph (1), an amount
shall be treated as paid or accumulated to or for the benefit of a United
States person if such amount is paid to or accumulated for a foreign
corporation, foreign partnership, or foreign trust or estate, and--
`(A) in the case of a foreign corporation, such corporation is a
controlled foreign corporation,
`(B) in the case of a foreign partnership, a United States person is a
partner of such partnership, or
`(C) in the case of a foreign trust or estate, such trust or estate
has a United States beneficiary (within the meaning of paragraph
(1)).
`(3) CERTAIN UNITED STATES BENEFICIARIES DISREGARDED- A beneficiary
shall not be treated as a United States person in applying this section with
respect to any transfer of property to foreign trust if such beneficiary
first became a
United States person more than 5 years after the date of such transfer.
`(d) REGULATIONS- The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this section.
`SEC. 162. LIMITATION ON CHARITABLE DEDUCTION.
`In computing the deduction allowable under section 142(c) to a trust, no
amount otherwise allowable under section 142(c) as a deduction shall be
allowed as a deduction with respect to income of the taxable year which is
allocable to unrelated business income for such year.
`SEC. 163. INCOME OF AN ESTATE OR TRUST IN CASE OF DIVORCE, ETC.
`(a) INCLUSION IN GROSS INCOME OF WIFE- There shall be included in the
gross income of a wife who is divorced or legally separated under a decree of
divorce or of separate maintenance (or who is separated from her husband under
a written separation agreement) the amount of the income of any trust which
such wife is entitled to receive and which, except for this section, would be
includible in the gross income of her husband, and such amount shall not,
despite any other provision of this subtitle, be includible in the gross
income of such husband. This subsection shall not apply to that part of any
such income of the trust which the terms of the decree, written separation
agreement, or trust instrument fix, in terms of an amount of money or a
portion of such income, as a sum which is payable for the support of minor
children of such husband. In case such income is less than the amount
specified in the decree, agreement, or instrument, for the purpose of applying
the preceding sentence, such income, to the extent of such sum payable for
such support, shall be considered a payment for such support.
`(b) WIFE CONSIDERED A BENEFICIARY- For purposes of computing the taxable
income of the estate or trust and the taxable income of a wife to whom
subsection (a) applies, such wife shall be considered as the beneficiary.
`(c) CROSS REFERENCE- For definitions of `husband' and `wife', as used in
this section, see section 7701(a)(17).
`SEC. 164. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CERTAIN FOREIGN
TRUSTS AND ESTATES.
`(a) IN GENERAL- Except as provided in regulations, in the case of any
transfer of property by a United States person to a foreign estate or trust,
for purposes of this subtitle, such transfer shall be treated as a sale or
exchange for an amount equal to the fair market value of the property
transferred, and the transferor shall recognize as gain the excess of--
`(1) the fair market value of the property so transferred, over
`(2) the adjusted basis (for purposes of determining gain) of such
property in the hands of the transferor.
`(b) EXCEPTION- Subsection (a) shall not apply to a transfer to a trust by
a United States person to the extent that any person is treated as the owner
of such trust under section 153.
`(c) TREATMENT OF TRUSTS WHICH BECOME FOREIGN TRUSTS- If a trust which is
not a foreign trust becomes a foreign trust, such trust shall be treated for
purposes of this section as having transferred, immediately before becoming a
foreign trust, all of its assets to a foreign trust.
`SEC. 165. TREATMENT OF FUNERAL TRUSTS.
`(a) IN GENERAL- In the case of a qualified funeral trust, sections 144
through 161 shall not apply, and no deduction shall be allowed by section
142(b).
`(b) QUALIFIED FUNERAL TRUST- `Qualified funeral trust' means any trust
(other than a foreign trust) if--
`(1) the trust arises as a result of a contract with a person engaged in
the trade or business of providing funeral or burial services or property
necessary to provide such services,
`(2) the sole purpose of the trust is to hold, invest, and reinvest
funds in the trust and to use such funds solely to make payments for such
services or property for the benefit of the beneficiaries of the
trust,
`(3) the only beneficiaries of such trust are individuals with respect
to whom such services or property are to be provided at their death under
contracts described in paragraph (1),
`(4) the only contributions to the trust are contributions by or for the
benefit of such beneficiaries,
`(5) the trustee elects the application of this subsection, and
`(6) the trust would (but for the election described in paragraph (5))
be treated as owned under sections 153 through 161 by the purchasers of the
contracts described in paragraph (1).
`(c) Dollar Limitation on Contributions-
`(1) IN GENERAL- Any trust which accepts aggregate contributions by or
for the benefit of an individual in excess of $7,000 shall not be a
qualified funeral trust.
`(2) RELATED TRUSTS- For purposes of paragraph (1), all trusts having
trustees which are related persons shall be treated as 1 trust. For purposes
of the preceding sentence, persons are related if--
`(A) the relationship between such persons is described in section
171(a)(5), or
`(B) the Secretary determines that treating such persons as related is
necessary to prevent avoidance of the purposes of this section.
`(3) INFLATION ADJUSTMENT- In the case of any contract referred to in
subsection (b)(1) which is entered into during any calendar year after 1999,
the dollar amount referred to in paragraph (1) shall be adjusted for
inflation in accordance with section 23.
`(d) APPLICATION OF RATE SCHEDULE- Section 140(b) shall be applied to each
qualified funeral trust by treating each beneficiary's interest in each such
trust as a separate trust.
`(e) TREATMENT OF AMOUNTS REFUNDED TO PURCHASER ON CANCELLATION- No gain
or loss shall be recognized to a purchaser of a contract described in
subsection (b)(1) by reason of any payment from such trust to such purchaser
by reason of cancellation of such contract. If any payment referred to in the
preceding sentence consists of property other than money, the basis of such
property in the hands of such purchaser shall be the same
as the trust's basis in such property immediately before the payment.
`(f) SIMPLIFIED REPORTING- The Secretary may prescribe rules for
simplified reporting of all trusts having a single trustee.
`SEC. 166. INCOME IN RESPECT OF A DECEDENT.
`(a) INCLUSION IN GROSS INCOME-
`(1) GENERAL USE- The amount of all items of gross income in respect of
a decedent which are not properly includible in respect of a taxable period
in which falls the date of his death, or a prior period, shall be included
in gross income, for the taxable year when received, of--
`(A) the estate of the decedent, if the right to receive the amount is
acquired by the decedent's estate,
`(B) the person who, by reason of the death of the decedent, acquires
the right to receive the amount, if the right to receive the amount is not
acquired by the decedent's estate from the decedent,
`(C) the person who acquires from the decedent the right to receive
the amount by bequest, devise or inheritance, if the amount is received
after a distribution by the decedent's estate of such right.
`(2) DEFINITION- The Secretary shall prescribe regulations on the
treatment of income from sales of rights to receive income and installment
sales.
`(b) The amount of any homeowner deduction or foreign tax credit in
respect of a decedent which is not properly allowable to the decedent with
respect to the taxable period in which falls the date of his death, or a prior
period, shall be allowed in accordance with regulations that reflect the
principles of section 691(b) of the Internal Revenue Code of 1986.
`Subchapter J--Definitions and Rules of Application
`Sec. 172. Rules of application.
`SEC. 171. DEFINITIONS.
`(a) IN GENERAL- When used in this chapter, where not otherwise distinctly
expressed or manifestly incompatible with the intent thereof--
`(1) BUSINESS ENTITY- The definition of `business entity' in section 206
(relating to the business tax) shall apply.
`(2) BUSINESS TAX- `Business tax' and `Simplified USA Tax for
businesses' mean the tax imposed by section 201 and, to the extent required
by the context, the provisions of chapter 2.
`(3) INTERNAL REVENUE CODE OF 1986- `Internal Revenue Code of 1986'
means the Internal Revenue Code of 1986 as in effect immediately before the
enactment of the Simplified USA Tax Act of 1999.
`(4) UNITED STATES- `United States' means the States and the District of
Columbia.
`(5) RELATED PARTY- `Related party' means--
`(A) Members of a family, as defined in paragraph (6)(D);
`(B) An individual and a business entity more than 50 percent in value
of which is owned, directly or indirectly, by or for such individual
(applying rules of constructive ownership);
`(C) Two business entities that are eligible to file a consolidated
return under chapter 2;
`(D) A grantor and a fiduciary of any trust;
`(E) A fiduciary of a trust and a fiduciary of another trust, if the
same person is a grantor of both trusts;
`(F) A fiduciary of a trust and a beneficiary of such trust;
`(G) A fiduciary of a trust and a beneficiary of another trust, if the
same person is a grantor of both trusts;
`(H) A fiduciary of a trust and a corporation more than 50 percent in
value of the outstanding stock of which is owned, directly or indirectly,
by or for the trust or by or for a person who is a grantor of the
trust;
`(I) A person and an organization to which section 251 (relating to
certain educational and charitable organizations which are exempt from
tax) applies and which is controlled directly or indirectly by such person
or (if such person is an individual) by members of the family of such
individual;
`(J) Two business entities if the same persons own more than 50
percent of the value of each (applying rules of constructive ownership),
with value measured by--
`(i) the value of the outstanding stock in the case of a
corporation,
`(ii) the capital interest or the profits interest, whichever is
greater, in the case
of a partnership or limited liability company;
`(K) Except in the case of a sale or exchange in satisfaction of a
pecuniary bequest, an executor of an estate and a beneficiary of such
estate.
`(6) CONSTRUCTIVE OWNERSHIP- For purposes of determining, in applying
paragraph (5), the ownership of a business entity--
`(A) Stock or other equity interest owned, directly or indirectly, by
or for a corporation, partnership, estate, or trust shall be considered as
being owned proportionately by or for its shareholders, partners, or
beneficiaries;
`(B) An individual shall be considered as owning the stock or other
equity interest owned, directly or indirectly, by or for his
family;
`(C) An individual owning (otherwise than by the application of
subparagraph (B)) any stock in a corporation or other equity interest in
another form of business entity shall be considered as owning the stock
owned, directly or indirectly, by or for his partner;
`(D) The family of an individual shall include only his brothers and
sisters (whether by the whole or half blood), spouse, ancestors, and
lineal descendants; and
`(E) Stock or other equity interest constructively owned by a person
by reason of the application of subparagraph (A) shall, for the purpose of
applying subparagraph (A), (B), or (C), be treated as actually owned by
such person, but stock or other equity interest constructively owned by an
individual by reason of the application of subparagraph (B) or (C) shall
not be treated as owned by him for the purpose of again applying either of
such paragraphs in order to make another the constructive owner of such
stock or equity interest.
`(A) IN GENERAL- `Earned income' means--
`(i) wages, salaries, tips, and other employee compensation,
plus
`(ii) the amount of the taxpayer's net earnings from self-employment
for the taxable year (within the meaning of section
1402(a)).
`(B) SPECIAL RULES- For purposes of subparagraph (A)--
`(i) the earned income of an individual shall be computed without
regard to any community property laws,
`(ii) no amount received as a pension or annuity shall be taken into
account,
`(iii) no income of nonresident alien individuals not connected with
United States business shall be taken into account, and
`(iv) no amount received for services provided by an individual
while the individual is an inmate at a penal institution shall be taken
into account.
`(b) TERMS DEFINED IN CHAPTER 1- If a term that is used but not defined in
this chapter or in section 7701 is defined in chapter 2, the definition in
chapter 2 shall apply except if manifestly
incompatible with the intent of the provision in which the term is used.
`SEC. 172. RULES OF APPLICATION.
`(a) DEFINITIONS- Any definition included in this chapter shall apply for
all purposes of this chapter unless--
`(1) such definition is limited to the purposes of a particular chapter,
section, or subsection, or
`(2) the definition clearly would not be applicable in a particular
context.
`(b) INTERPRETATIONS CONSISTENT WITH INTERNAL REVENUE CODE OF 1986- Terms
not defined in this chapter or elsewhere in this title, but defined in the
Internal Revenue Code of 1986, shall be interpreted in a manner consistent
with the Internal Revenue Code of 1986, except to the extent such
interpretation would be inconsistent with the principles and purposes of this
chapter.'
(c) EXEMPTION FROM PROHIBITED TRANSACTION TAX- Section 4975(g) of the Code
is amended by--
(1) striking `or' at the end of paragraph (2),
(2) deleting the period at the end of paragraph (3) and inserting `;
or',
(3) and inserting the following new paragraph (4):
`(4) to a Roth IRA in the case of a loan to or equity investment in a
controlled business entity as permitted by section 30(f)).'
TITLE III--SIMPLIFIED USA TAX FOR BUSINESSES
SEC. 301. REPEAL OF CORPORATE INCOME TAX; NEW TAX PAID BY CORPORATIONS AND
OTHER BUSINESSES.
(a) IN GENERAL- Chapter 2 of the Internal Revenue Code is renumbered
chapter 3 and following new chapter is inserted after chapter 1:
`CHAPTER 2--SIMPLIFIED USA TAX FOR BUSINESSES
`Subchapter A. Imposition of tax.
`Subchapter B. Basic rules for business tax.
`Subchapter C. Capital contributions, mergers, acquisitions, and
distributions.
`Subchapter D. Accounting methods.
`Subchapter E. Land and rental property.
`Subchapter F. Insurance and financial products.
`Subchapter G. Financial intermediation and financial
institutions.
`Subchapter H. Tax-exempt organizations.
`Subchapter I. Cooperatives.
`Subchapter J. Sourcing rules.
`Subchapter K. Business conducted in a possession.
`Subchapter L. Payroll tax credit.
`Subchapter M. Import tax.
`Subchapter N. Transition rules.
`Subchapter O. Rules for administration, consolidated returns.
`Subchapter P. Definitions and rules of applications.
`Subchapter A--Imposition of Tax
`SEC. 201. TAX IMPOSED.
`(a) TAXABLE BUSINESS ACTIVITY- A tax is imposed on the sale of goods and
services in the United States by a business entity. The amount of the tax
equals the amount by which--
`(1) the business tax exceeds,
`(2) the payroll tax credit.
`(b) BUSINESS TAX IMPOSED-
`(1) IN GENERAL- The `business tax' imposed on a business entity that
sells or leases property or sells services in the United States equals the
sum of--
`(A) 8 percent of the portion of the gross profits of the business
entity for the taxable year that does not exceed $150,000, and
`(B) 12 percent of such portion of the gross profits of the business
entity for the taxable year that exceeds $150,000.
`(2) LIMITATION ON APPLICATION OF BENEFITS OF GRADUATED RATE SCHEDULE-
The Secretary shall prescribe rules under which the gross profits of
business entities under common control are aggregated for purposes of
applying the benefit of the lower rate described in subparagraph (A) of
paragraph (1). Such rules shall be similar to rules applicable under
sections 1551 and 1561 of the Internal Revenue Code of 1986.
`(c) PAYROLL TAX CREDIT- The `payroll tax credit' is a credit for the
social security, railroad retirement and hospital insurance taxes paid by an
employer, as determined in accordance with subchapter L (sections 281 through
283).
`(d) IMPORT TAX- For rules relating to the import tax imposed by this
chapter, see subchapter M (sections 286 through 288).
`Subchapter B--Basic Rules for Business Tax
`Sec. 202. Gross profits.
`Sec. 203. Taxable receipts.
`Sec. 204. Deductible amounts.
`Sec. 205. Cost of business purchases.
`Sec. 206. Business entity and business activity.
`Sec. 207. Loss carryover deduction.
`SEC. 202. GROSS PROFITS.
`Gross profits' means for a taxable year of a business entity the amount
by which--
`(1) the taxable receipts of the business entity for the taxable year
exceed,
`(2) the deductible amounts for the business entity for the taxable
year.
`SEC. 203. TAXABLE RECEIPTS.
`(a) IN GENERAL- `Taxable receipts' means all receipts from the sale of
property, use of property, and performance of services in the United
States.
`(b) GAMES OF CHANCE- Amounts received for playing games of chance by
business entities engaging in the activity of providing such games shall be
treated as receipts from the sale of property or services.
`(c) IN-KIND RECEIPTS- The taxable receipts attributable to the receipt of
property, use of property or services in whole or partial exchange for
property, use of property or services equal the fair market value of the
services or property received.
`(d) TAXES- Taxable receipts do not include any excise tax, sales tax,
custom duty, or other separately stated levy imposed by a Federal, State, or
local government received by a business entity in connection with the sale of
property or services or the use of property.
`(1) IN GENERAL- Except as provided in subchapter G (relating to
financial intermediation and financial institutions), taxable receipts do
not include financial receipts.
`(2) FINANCIAL RECEIPTS- `Financial receipts' include--
`(B) dividends and other distributions by a business entity,
`(C) proceeds from the sale of stock, other ownership interests in
business entities, or other financial instruments (as defined in section
242(b)(3)),
`(D) proceeds from life insurance policies,
`(E) proceeds from annuities,
`(F) proceeds from currency hedging or exchanges, and
`(G) proceeds from other financial transactions.
`(1) FINANCIAL INTERMEDIATION- See subchapters F and G for rules
relating to financial intermediation.
`(2) EXPORTS, SALES IN THE UNITED STATES- See subchapter J for the
exclusion from gross receipts for export sales and for rules on sales of
property and services in the United States.
`(3) LAND- See subchapter E for rules relating to certain sales of
land.
`(4) INSURANCE PROCEEDS- See section 237 for rules on the inclusion of
certain insurance proceeds in taxable receipts.
`SEC. 204. DEDUCTIBLE AMOUNTS.
`(a) IN GENERAL- `Deductible amounts' for a business entity in a taxable
year include--
`(1) the cost of business purchases in the taxable year (as determined
under section 205),
`(2) such entity's loss carryover deduction (as determined under section
207) , and
`(3) the transition basis deduction (as determined under section
290).
`(b) FINANCIAL INTERMEDIATION- See subchapters F and G for special rules
for business entities engaging in financial intermediation.
`SEC. 205. COST OF BUSINESS PURCHASES.
`(1) IN GENERAL- `Business purchases' means the acquisition of--
`(B) the use of property, or
in the United States for use in a business activity.
`(2) EXAMPLES- Business purchases include (without limitation)
the--
`(A) purchase or rental of real property,
`(B) purchase or rental of capital equipment,
`(C) purchase of supplies and inventory,
`(D) purchase of services from independent contractors,
`(E) purchase of financial intermediation services (as determined in
accordance with section 236),
`(F) purchase of a business loss policy (as determined in accordance
with section 237), and
`(G) imports for use in a business activity.
`(3) EXCLUSIONS- Business purchases do not include--
`(A) payments for use of money or capital, such as interest or
dividends (except to the extent that a portion so paid is a fee for
financial intermediation services),
`(B) premiums for life insurance,
`(C) the acquisition of savings assets or other financial instruments
(as defined in section 242(b)(3)).
`(D) property acquired outside the United States (but such property
shall be taken into account as an import if imported),
`(E) services performed outside the United States (unless treated as
imported into the United States),
`(F) compensation expenses for an individual (other than amounts paid
to an individual in his capacity as a business entity), or
`(G) taxes (except as provided in subsection (b)(2) relating to
product taxes).
`(4) COMPENSATION EXPENSES- `Compensation expenses' means--
`(A) wages, salaries or other cash payable for services,
`(B) any taxes imposed on the recipient that are withheld by the
business entity,
`(C) the cost of property purchased to provide employees with
compensation (other than property incidental to the provision of fringe
benefits that are excluded from income under the individual tax),
`(D) the cost of fringe benefits which are includible in an
employee's, partner's, or proprietor's income under the Simplified USA
Income Tax (or are excluded solely because they constitute employee
savings), including (without limitation)--
`(i) contributions to retirement and severance benefit
plans,
`(ii) premiums for the cost of life, health, accident, disability
and other insurance policies for which the service provider, members of
his family, or persons designated by him or members of his family are
the beneficiaries,
`(iii) rental of parking spaces or parking fees (unless the parking
space is used for a vehicle that is regularly used in a business
activity);
`(iv) employer paid educational benefits;
`(v) employer paid housing (other than housing provided for the
convenience of the employer); and
`(vi) employer paid meals (other than meals provided for the
convenience of the employer).
`(b) Cost of Business Purchases-
`(1) IN GENERAL- The `cost of a business purchase' is the amount paid or
to be paid for the business purchase.
`(A) IN GENERAL- The `cost of business purchases' includes any product
taxes paid with respect to the property or services purchased.
`(B) PRODUCT TAX- `Product tax' means any excise tax, sales or use
tax, custom duty, or other separately stated levy imposed by a Federal,
State, or local government on the production, severance or consumption of
property or
on the provision of services, whether or not separately stated, and including
any such taxes that are technically imposed on the seller of property or
services.
`(C) TAXES NOT PRODUCT TAXES- Product taxes do not include--
`(ii) state and local property taxes,
`(iii) franchise or income taxes,
`(iv) payroll taxes and self-employment taxes, or
`(3) IMPORTS- In the case of an import by a business entity, the cost of
the import is the import price for purposes of the import tax. The import
tax is not part of the cost of the import.
`(c) PROPERTY AND SERVICES ACQUIRED FOR PROPERTY- If a business entity
receives property or services from a business entity in whole or partial
exchange for property or services, the property or services acquired shall be
treated as if they were purchased for an amount equal to the fair market value
of the services or property received. For purposes of this section, property
includes stock and other equity interests in business other than stock or an
equity interest in the business entity acquiring the property or services. See
section 210(b) for rules on property or services received in exchange for an
equity interest in the recipient.
`(d) GAMBLING PAYMENTS- In the case of a business involving gambling,
lotteries, or other games of chance, business purchases include amounts paid
to winners.
`(e) SAVINGS ASSETS- `Savings assets' means stocks, bonds, securities,
certificates of deposits, investments in partnerships and limited liability
companies, shares of mutual funds, life insurance policies, annuities, and
other similar savings or investment assets.
`(1) FINANCIAL INTERMEDIATION AND INSURANCE- For rules relating to fees
for financial intermediation services and insurance, see subchapter F.
`(2) LAND- For special rules relating to the acquisition of land, see
subchapter E.
`(3) RENTAL REAL ESTATE- For special rules relating to the rental of
real estate previously occupied by an owner of the real estate, see section
232.
`(4) OUTSIDE THE UNITED STATES- For special rules relating to services
performed outside the United States but used inside the United States and
international services, see subchapter J.
`SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY.
`(a) BUSINESS ENTITY- For purposes of the business tax, `business entity'
means any corporation, unincorporated association, partnership, limited
liability company, proprietorship, independent contractor, individual, or any
other person engaging in business activity in the United States. An individual
shall be considered a business entity only with respect to the individual's
business activities.
`(b) BUSINESS ACTIVITY- `Business activity' means the sale of property or
services, the leasing of property, the development of property or services for
subsequent sale or use in producing property or services for subsequent sale.
`Business activity' does not include casual or occasional sales of property
used by an individual (other than in a business activity), such as the sale by
an individual of a vehicle used by the individual.
`(c) Exception for Certain Employees-
`(1) IN GENERAL- `Business activity' does not include--
`(A) the performance of services by an employee for an employer that
is a business entity with respect to the activity in which the employee is
engaged, or
`(B) the performance of regular domestic household services (including
babysitting, housecleaning, and lawn cutting) by an employee of an
employer that is an individual or family.
`(2) EMPLOYEE DEFINED- For purposes of this subsection, `employee'
includes an individual partner who provides services to a partnership or an
individual member who provides services to a limited liability company, or a
proprietor with respect to compensation for services from his
proprietorship.
`SEC. 207. LOSS CARRYOVER DEDUCTION.
`(a) DEDUCTION- The `loss carryover deduction' for a taxable year is the
lesser of--
`(1) the business entity's gross profits for the taxable year
(determined without the loss carryover deduction), or
`(2) the amount of the loss carryover to the taxable year.
`(1) GENERAL RULE- A loss for any taxable year shall be a loss carryover
to each of the 215 taxable years following the taxable year of the
loss.
`(2) LOSS CARRYOVERS TO A TAXABLE YEAR- The loss carryover to a taxable
year is the sum of the loss carryovers from all prior taxable years
beginning on or after January 1, 2000, that can be carried over to the
taxable year.
`(3) REDUCTION OF LOSS CARRYOVERS AS A RESULT OF THE DEDUCTION- A
business entity's loss carryovers shall be reduced each year by the amount
of the loss carryover deduction for the year. Loss carryovers shall be
reduced in the order that they arose.
`(c) LOSS FOR TAXABLE YEAR- A business entity's loss (if any) for the
taxable year equals the excess (if any) of--
`(A) the cost of business purchases for the taxable year, and
`(B) the transition basis adjustment for the taxable year,
over
`(2) taxable receipts for the taxable year.
`(1) CONSOLIDATED RETURNS- In the case of a consolidated return, the
loss for a taxable year shall be determined on a consolidated group basis.
In the case of a deconsolidation, the loss carryovers from the consolidated
group shall be allocated in accordance with rules to be prescribed by the
Secretary.
`(2) Loss carryovers of acquired business entity-
`(A) IN GENERAL- If a business entity acquires another business entity
in a transaction that is considered the acquisition of a business entity
and the two entities file a consolidated return or if two business
entities merge, the loss carryovers will survive and can be applied
against the taxable receipts attributable to the business activities
carried on (or in the case of a merger formerly carried on) by either
entity.
`(B) ASSET ACQUISITION- If a business entity acquires all or
substantially all of the assets of another entity in a transaction that is
considered an asset acquisition rather than the acquisition of a business
entity, the acquirer will be treated as if it acquired the loss carryovers
of the selling entity. For purposes of this rule, the assets of a business
entity include ownership interests in other business entities.
`(C) SUBSTANTIALLY ALL- For purposes of this paragraph `substantially
all' means more than 80 percent of the fair market value of a business
entity's net assets. Under rules prescribed by the Secretary, the parties
to a transaction may elect to treat acquisitions in excess of 70 percent
of the fair market value of a business entity's net assets as acquisitions
of `substantially all' of a business entity's net assets.
`Subchapter C--Capital Contributions, Mergers, Acquisitions, and
Distributions
`Sec. 210. Contributions to a business entity.
`Sec. 211. Distributions of property.
`Sec. 212. Asset acquisitions.
`Sec. 213. Mergers and stock acquisitions.
`Sec. 214. Spin-offs, split-off, etc.
`Sec. 215. Allocation of certain tax attributes.
`SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.
`(1) CASH- If a business entity contributes cash to a business entity of
which it is or becomes a partial or full owner, the amount contributed is
not a deductible amount to the contributor or a taxable receipt to the
recipient.
`(2) PROPERTY OR SERVICES- If a business entity contributes property or
services to a business entity of which it is or becomes a partial or full
owner, the transaction will not result in taxable receipts to the
contributor or a deduction for a business purchase for the recipient and
will not constitute a sale resulting in taxable receipts to the
contributor.
`(1) CASH- If an individual contributes cash to a business entity, the
cash received is not a taxable receipt.
`(2) NEW PROPERTY- If an individual contributes to a business entity
property that the individual purchased for the business entity but which was
not used by any person after its purchase, the property shall be considered
purchased by such business entity from the person from which the individual
purchased the property.
`(3) PERSONAL USE PROPERTY-
`(A) IN GENERAL- If an individual contributes personal use property to
a business entity in which the individual has an ownership interest or for
which the individual receives an ownership interest, the business entity
shall not be permitted to deduct the value of the property received as a
business expense. The business entity will have a tax basis in the
contributed property equal to the contributor's basis.
`(B) PERSONAL USE PROPERTY- `Personal use property' means any property
used by an individual at any time other than in a business
activity.
`(4) SERVICES- If an individual contributes services to a business
entity in which the individual has an ownership interest or receives an
ownership interest, the business entity shall not be permitted to deduct the
value of the services received (or the value of the equity interest provided
to the services provider).
`SEC. 211. DISTRIBUTIONS OF PROPERTY.
`(a) DISTRIBUTIONS OTHER THAN TO CONTROLLING BUSINESS- If a business
entity distributes all or a portion of its assets to its owners (other than a
controlling business entity), the business entity will be treated as if it
sold the assets to its owners at fair market value. The fair market value will
be determined by the distributing corporation and those determinations, unless
unreasonable, will be binding on the recipients.
`(b) DISTRIBUTIONS TO A CONTROLLING BUSINESS- If a business entity
distributes all or a portion of its assets to a controlling business, the
controlling business will assume the distributing entity's tax attributes with
respect to the assets and neither entity will have taxable receipts or a
deduction as a result of the transaction.
`(c) DISTRIBUTION OF PERSONAL USE PROPERTY- If personal use property is
distributed to the individual who contributed the personal use property to a
business entity, the fair market value of the property for purposes of
paragraph (a) shall equal the basis of the property plus any enhancement in
value of the property attributable to business purchases with respect to the
property.
`(d) CONTROLLING BUSINESS ENTITY- A business entity is a `controlling
business entity' with respect to another business entity if it owns directly
or indirectly more than 50 percent of the profits or capital interest in the
other business entity.
`(e) APPLICATION OF THIS SECTION- This section applies to both liquidating
and nonliquidating distributions. Property shall be treated as distributed if
the property is used for a nonbusiness purpose (as defined in section 232) for
more than an insubstantial period
of time during a taxable year. See section 232 for rules relating to certain
rental property.
`SEC. 212. ASSET ACQUISITIONS.
`(a) IN GENERAL- If a business entity transfers some or all of its assets,
the consideration received for such assets shall be allocated among the assets
transferred in the same manner as was required by section 1060 of the Internal
Revenue Code of 1986. If the transferee and transferor agree in writing on the
allocation of any consideration, or as to the fair market value of any of the
assets, such agreement shall be binding on both the transferor and transferee
unless the Secretary determines that such allocation (or fair market value) is
not appropriate.
`(b) TAX CONSEQUENCES- The tax consequences of an asset acquisition shall
be determined in accordance with the rules of this chapter and shall be
dependent upon allocations made under subsection (a). In general,
consideration allocable to savings assets, such as stock in another business
entity, would not be included in taxable receipts of the transferor and would
not be a business purchase of the purchaser, but consideration allocable to
the sale of tangible property and intangible property (other than savings
assets) will constitute taxable receipts of the seller and a business purchase
of the purchaser.
`(c) ELECTION TO TREAT ASSET ACQUISITION AS A STOCK ACQUISITION- In the
case of the sale of substantially all of the assets of a business entity or
substantially all of the assets of a line of business or a separately standing
business of a business entity, the transferee and transferor can jointly elect
to treat the acquisition as if it were an acquisition of the stock of a
business entity holding the assets so transferred. In such case, the rules of
section 213 shall apply.
`(d) AUTHORITY TO REQUIRE ALLOCATION AGREEMENT AND NOTICE TO THE
SECRETARY- If the Secretary determines that certain types of asset
acquisitions have significant possibilities of tax avoidance, the Secretary
may require--
`(1) parties to such types of acquisitions to enter into agreements
allocating consideration,
`(2) parties to acquisitions involving certain kinds of assets to enter
into agreements allocating part of the consideration to those assets,
or
`(3) parties to certain acquisitions to report information to the
Secretary.
`(e) ASSET ACQUISITION RULES DO NOT APPLY IF CONSIDERATION INCLUDES EQUITY
IN PURCHASER-
`(1) IN GENERAL- If a business entity issues its own equity or equity in
a subsidiary or other controlled entity as part of the consideration for the
transfer of assets to it, the transaction shall not be treated as an asset
acquisition and the rules of section 13 shall apply.
`(2) EQUITY- For purposes of this subsection, equity means--
`(A) stock, in the case of a corporation,
`(B) partnership or similar interest, in the case of a partnership or
limited liability company, and
`(C) an ownership interest or interest in profits in the case of any
other business entity.
`SEC. 213. MERGERS AND STOCK ACQUISITIONS.
`(a) MERGERS- A merger of one business entity into another or two
businesses entities into a third business entity or any other similar
transaction shall have no direct consequences under the business tax. The
surviving entity shall assume the tax attributes of the merged corporations,
including any loss carryovers and credit carryovers.
`(b) STOCK ACQUISITION- The acquisition of all or substantially all of the
ownership interest in one business entity either for cash or in exchange for
ownership in the acquiring entity or an entity controlled by the acquired
entity shall have no direct consequences under the business tax.
`SEC. 214. SPIN-OFFS, SPLIT-OFFS, ETC.
`A spin-off, split-off or split-up of a business entity shall have no
direct tax consequences under the business tax.
`SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES.
`The Secretary shall prescribe rules for allocation of loss carryovers and
payroll tax credit carryovers in cases of substantial shifts of assets from
one business entity to another business entity. Under such rules, a portion of
a business entity's carryovers may be deemed transferred when assets are
transferred.
`Subchapter D--Accounting Method Rules
`Sec. 220. General accounting rules.
`Sec. 221. Use of the cash method of accounting.
`Sec. 223. Long-term contracts.
`Sec. 224. Post-sale price adjustments and refunds.
`Sec. 226. Transition rules.
`SEC. 220. GENERAL ACCOUNTING RULES.
`(a) IN GENERAL- Except as provided in section 221, a business entity
shall use an accrual method of accounting for purposes of determining the
timing of recognition of taxable receipts and deduction of business purchases.
All business purchases shall be deducted when incurred (in the case of a
business entity using the accrual method of accounting) or when paid (in case
of a business entity using the cash method of accounting) without regard to
whether the business purchases are for or relate to--
`(2) assets with a useful life of more than one year, or
`(3) property that will be used to produce other property.
`(b) ECONOMIC PERFORMANCE- For purposes of determining whether an amount
has been incurred, the all events test shall not be treated as met any earlier
than when economic performance with respect to such item occurs.
`(c) CONSISTENT ACCOUNTING METHODS- Except as otherwise expressly provided
in this chapter, a business entity shall secure the consent of the Secretary
before changing the method of accounting by which it determines gross profits.
This provision shall not apply to changes required by the adoption of the
business tax.
`SEC. 221. USE OF THE CASH METHOD OF ACCOUNTING.
`(a) IN GENERAL- A business entity that was permitted to use and used the
cash method of accounting under the Internal Revenue Code of 1986 shall be
permitted to continue to use the cash method of accounting.
`(b) NEW BUSINESS ENTITIES- A new business entity shall be permitted to
use the cash method of accounting if permitted to under regulations prescribed
by the Secretary.
`(c) CHANGE OR EXPANSION OF BUSINESS- Subsection (a) shall cease to apply
to a business entity that changes or expands its business such that under
regulations prescribed by the Secretary it is no longer eligible to use the
cash method of accounting.
`(1) USE OF CASH METHOD- The Secretary shall prescribe regulations
defining which business entities may use the cash method of accounting. In
general, those regulations shall be consistent with the rules under sections
447 and 448 of the Internal Revenue Code of 1986, except that all
corporations shall be treated as C corporations were treated under those
sections. The regulations shall not require a business entity described in
subsection (a) to convert to the accrual method prior to January 1,
2001.
`(2) CHANGE IN ACCOUNTING METHOD- The Secretary shall prescribe
regulations to prevent double counting of taxable receipts and deductible
expenses in the case of a change in accounting method.
`SEC. 222. TAXABLE YEAR.
`(a) COMPUTATION OF GROSS PROFITS- Gross profits shall be computed on the
basis of a business entity's taxable year.
`(b) TAXABLE YEAR- `Taxable year' means--
`(1) the taxpayer's annual accounting period, if it is a calendar year
or a fiscal year;
`(2) the calendar year, if subsection (g) applies; or
`(3) the period for which the return is made if the return is made for a
period of less than 12 months.
`(c) ANNUAL ACCOUNTING PERIOD- `Annual accounting period' means the annual
period on the basis of which the business entity regularly keeps its books.
`(d) CALENDAR YEAR- `Calendar year' means a period of 12 months ending on
December 31.
`(e) FISCAL YEAR- `Fiscal year' means a period of 12 months ending on the
last day of any month other than December. In the case of any business entity
that has made the election provided by subsection (f), the term means the
annual period (varying from 52 to 53 weeks) so elected.
`(f) ELECTION OF 52-53 WEEK YEAR-
`(1) GENERAL RULE- A business entity which, in keeping its books,
regularly computes its income or profits on a basis of an annual period
which varies from 52 to 53 weeks and ends always on the same day of the week
and ends always--
`(A) on whatever date such same day of the week last occurs in a
calendar month, or
`(B) on whatever date such same day of the week falls which is nearest
to the last day of a calendar month,
may elect to compute its gross profits on the basis of such annual
period.
`(2) REGULATIONS- The Secretary shall prescribe such regulations as he
deems necessary for the application of this subsection, including
regulations relating to the application of effective dates to taxpayers
using a 52-53 week year.
`(g) CALENDAR YEAR REQUIRED-
`(1) NO ACCOUNTING PERIOD- A business entity's taxable year shall be the
calendar year if the business entity does not have an annual accounting
period or has an annual accounting period that does not qualify as a fiscal
year.
`(2) NEW BUSINESS ENTITY- The taxable year of a business entity that
begins business activity after December 31, 1999, shall be the calendar year
(or a 52-53 week fiscal year ending in December) unless the business entity
can demonstrate a business reason for selecting an accounting period other
than the calendar year.
`(h) TRANSITION RULE FOR BUSINESS ENTITIES WITH A FISCAL YEAR-
`(1) IN GENERAL- A business entity with a taxable year that is not the
calendar year shall have a short taxable year ending on December 31, 1999,
and a subsequent taxable year beginning on January 1, 2000, and ending on
the day immediately preceding the beginning of the business entity's next
fiscal year.
`(2) BUSINESS ENTITIES WITH 52-53 WEEK YEAR ENDING IN DECEMBER-
`(A) IN GENERAL- If a business entity has a 52-53 week taxable year
(under the Internal Revenue Code of 1986) that ends in December 1999, it
may elect to begin its first taxable year for the business tax on the
first day immediately following the last day of such taxable
year.
`(B) NO ELECTION- If a business entity that has a 52-53 week taxable
year that ends in December 1999, does not make the election under
subparagraph (A) or is prohibited from making such election by
subparagraph (C), the business entity's taxable year under the Internal
Revenue Code of 1986 that would end in December 1999 shall end on December
31, 1999.
`(C) ANTI-ABUSE RULE- Subparagraph (A) shall not apply to any taxpayer
that enters into business transactions in 1999 following the scheduled end
of its fiscal year with business entities that are not subject to the
business tax at the time of such transactions if such transactions deviate
from the normal course of business in order to achieve some tax
benefit.
`SEC. 223. LONG-TERM CONTRACTS.
`(a) IN GENERAL- In the case of a long-term contract--
`(1) CONTRACTOR EXPENSES- The contractor shall be entitled to deduct its
business purchases when paid or incurred.
`(2) CONTRACTOR RECEIPTS- The contractor shall recognize taxable
receipts--
`(A) in the case of a project in which the acquirer has no ownership
interest in the project until delivery--
`(i) upon delivery of the project, in the case of an accrual basis
contractor, or
`(ii) upon the later of delivery of the project or the receipt of
payment, in the case of cash-basis contractor.
`(B) in the case of a project in which the acquirer obtains an
ownership interest as the project is constructed--
`(i) when the contractor has the right to payments, in the case of
an accrual basis contractor, or
`(ii) upon the later of when the contractor receives the cash or has
the right to payments, in the case of a cash basis
contractor.
`(3) ACQUIRER EXPENSES- The acquirer that is a business entity shall be
entitled to deduct its costs of the business purchase--
`(A) in the case of a cash-basis acquirer, at such time as a cash
basis contractor would be required to treat the amounts paid as taxable
receipts, or
`(B) in the case of an accrual-basis acquirer, at such time as an
accrual basis contractor would be required to treat the amounts paid or
due as taxable receipts.
`(1) IN GENERAL- A contractor shall be treated as having a right to
payments with respect to a project at any time to the extent that the
contractor would not be required to return payments received (or would be
entitled to collect payments not yet received) if the project were
terminated at such time by the contractor.
`(2) CONTRACTUAL PROVISIONS- If a long-term contract includes a
procedure for paying the contractor as work is completed (for example, by
reason of a draw down from a trust account), the contractual provisions
shall generally govern when a contractor has a right to payment.
`(3) PERCENTAGE COMPLETION METHOD OF ACCOUNTING- If a long-term contract
does not include a mechanism for paying the contractor as work is completed,
the percentage-of-completion method of accounting shall be used to determine
the timing of taxable receipts of the contractor and business purchases of
the acquirer.
`(1) IN GENERAL- `Long-term contract' means--
`(A) any contract that covers service or production through parts of
two different calendar years if the contract includes a formal deposit and
draw-down mechanism, and
`(B) any contract for the manufacture, building, installation, or
construction of property if such contract is not completed within the
taxable year of the contractor in which such contract is entered
into.
`(2) EXCEPTION- A contract for the manufacture of property shall not be
treated as a long-term contract unless such contract involves the
manufacture of--
`(A) any unique item of a type which is not normally included in the
finished goods inventory of the taxpayer, or
`(B) any item which normally requires more than 12 calendar months to
complete.
`(d) CONSISTENCY- The Secretary may require business entities to file
statements containing such information with respect to long-term contracts as
the Secretary may prescribe to ensure consistency in reporting.
`(e) FOREIGN CONTRACTS- This section shall not be construed to permit a
deduction for a business purchase for the cost of property produced outside
the United States pursuant to a long-term contract at any time prior to the
import of such property into the United States.
`SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS.
`(a) RECEIPT OF PRICE ADJUSTMENT- In the case of a post-sale price
adjustment attributable to a business purchase which was taken into account in
computing gross profits for a prior taxable year, the amount of such
adjustment shall be treated as a reduction or increase, as the case may be, in
the cost of business purchases for the taxable year in which the adjustment is
made or incurred.
`(b) ISSUANCE OF PRICE ADJUSTMENT- In the case of a post-sale price
adjustment attributable to a sale the receipts from which were taken into
account in determining taxable receipts for a prior taxable year, the amount
of such adjustment shall be treated as a reduction or increase, as the case
may be, in taxable receipts for the taxable year in which the adjustment is
made or incurred.
`(c) POST-SALE PRICE ADJUSTMENT- `Post-sale price adjustment' means a
refund, rebate, or other price allowance attributable to a sale of property or
services or an upward adjustment in price that was not previously taken into
account under the business entity's method of accounting.
`SEC. 225. BAD DEBTS.
`(a) SELLER- If an amount owed to an accrual basis business entity for
property or services sold--
`(1) was taken into account as a taxable receipt in a prior taxable
year, and
`(2) becomes wholly or partially uncollectible during the taxable year,
then the seller shall treat the amount as a reduction in taxable receipts
for the taxable year in which it becomes wholly or partially
uncollectible.
`(b) NOTICE REQUIREMENT- No reduction shall be allowed under subsection
(a) unless the seller notifies the purchaser of the amount which the seller
has treated as wholly or partially uncollectible.
`(c) SUBSEQUENT COLLECTION- If an amount which was treated as
uncollectible under subsection (a) is subsequently collected, it shall be
treated as a taxable receipt when collected.
`(d) PURCHASER- If a purchaser receives notice under subsection (b) from a
seller and the purchaser has treated the amount labeled uncollectible as a
business purchase in a prior taxable year, then the purchaser shall treat such
amount as a reduction in the cost of business purchases in the taxable year to
which the notice relates. If the purchaser subsequently repays such amount,
the repayment shall constitute the cost of a business purchase.
`SEC. 226. TRANSITION RULES.
`(a) NO DOUBLE DEDUCTIONS- A business entity shall not be entitled to
treat as a `cost of business purchase' any amount that the business entity
deducted in computing taxable income under the income tax in effect prior the
effective date of the business tax.
`(b) NO DOUBLE INCLUSION- A business entity shall not be required to
include in taxable receipts any receipt that the business entity took into
account in computing taxable income under the income tax in effect prior to
the effect date of the business tax.
`(c) NO LOSS OF DEDUCTION- An expense which--
`(1) a business entity would have been able to deduct as a cost of a
business purchase in an accounting period before the effective date of the
business tax if the business tax had been in effect in such period,
and
`(2) the business entity would have been able to deduct as an expense in
computing taxable income in a period after the business tax is effective if
the income tax had continued in effect,
shall be treated as a cost of a business purchase incurred or paid at the
time that it would have been paid or incurred under the income tax if the
income tax had continued in effect. This subsection shall not apply to any
amount which is to be taken into account under subchapter N (relating to
amortization of transition basis, inventory costs, and safe harbor leases),
any amounts which would have been deducted under the income tax through loss
carryover deductions, or any deductions deferred by the uniform capitalization
rules under section 263A of the Internal Revenue Code of 1986.
`(d) ALL TAXABLE RECEIPTS TAXED- A receipt which--
`(1) a business entity would have been required to treat as a taxable
receipt in an accounting period before the effective date of the business
tax if the business tax had been in effect in such period, and
`(2) the business entity would have been required to include in gross
income in a period after the business tax is effective if the income tax had
continued in effect
shall be treated as a taxable receipt at the time that it would have been
included in income if the income tax had continued in effect.
`Subchapter E--Land and rental property
`Sec.230.No deduction for land purchased for nonbusiness use.
`Sec.231.Taxable receipts for land held for nonbusiness use.
`Sec.232.Certain rental property.
`SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR NONBUSINESS USE.
`(a) IN GENERAL- The acquisition of unimproved land shall not constitute a
business purchase if the unimproved land is not acquired to be used in a
business activity or if the land is acquired for--
`(2) development (including subdivision), or
`(3) temporary leasing or other use not commensurate with the value of
the land,
`(4) indefinite future use in a business activity, or
`(5) use in compensating employees.
`(b) FUTURE USE IN BUSINESS ACTIVITY- Unimproved land will not be
considered held for `indefinite future use in a business activity' if promptly
upon acquisition, the purchaser or the lessee begins construction of
improvements on the land (other than improvements, such as paving or sewage
lines, intended for indefinite future development) that will be used in a
business activity. Such improvement must be commensurate with the value of the
land.
`(c) UNIMPROVED LAND- `Unimproved land' means--
`(1) land with no buildings on it,
`(2) land with improvements if the value of the improvements is
relatively small in comparison to the value of the land and it is
anticipated that the improvements will be demolished and not used,
`(3) land in excess of the amount reasonably needed for the buildings
located on it.
`(d) CONVERSION TO BUSINESS USE- If the acquisition of land is not treated
as a business purchase by reason of subsection (a) and the land is
subsequently used in a manner for which it could have been treated as a
business purchase, the cost of the land will be treated as a business purchase
when the improvements on the land are placed in service (or in the case of
construction for sale, substantially completed and advertised for sale).
`SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD FOR NONBUSINESS USE.
`(a) TAX BASIS- A business entity shall have a tax basis in land equal to
the cost of the land if such cost is not deductible by reason of section
230(a) and the land has not been converted to business use for purposes of
section 230(d).
`(b) TAXABLE RECEIPTS OF A LAND SALE- The taxable receipts from the sale
of land (or portion thereof) in which a business entity has a tax basis by
reason of subsection (a) shall be the amount by which the proceeds exceed the
basis of such land (or portion thereof).
`SEC. 232. CERTAIN RENTAL PROPERTY.
`(a) IN GENERAL- Except as provided in subsection (b), the activity of
rental of real estate is a business activity to which the business tax
applies.
`(b) NOT RENTAL PROPERTY- Subsection (a) shall not apply to property
described in section 111(b)(1) (relating to property owned by individuals and
used for at least 14 days for a nonbusiness purpose and rented for no more
than 14 days during the taxable year).
`(c) RENTAL PROPERTY BECOMES NONRENTAL PROPERTY- If property which is
considered rental property for purposes of subsection (a) in one taxable year
ceases to be rental property (by reason of subsection (b)) in the following
taxable year, the property (and any associated debt) shall be treated as
distributed by the business entity to its owners. Section 211(a) shall apply
to such distribution.
`Subchapter F--Insurance and Financial Products
`Sec. 235. General rules.
`Sec. 236. Fees for financial intermediation services.
`Sec. 237. Deductible insurance premiums.
`Sec. 238. Nondeductible insurance premiums.
`Sec. 239. Certain implicit fees for financial intermediate
services.
`SEC. 235. GENERAL RULES.
`(a) TAXABLE RECEIPTS- Except in the case of a financial intermediation
business, taxable receipts do not include financial receipts (as defined in
section 203(e)(2)).
`(b) BUSINESS PURCHASES- Except in the case of a financial intermediation
business, business purchases do not include the cost of financial instruments
(as defined in section 242(b)(3)) or payments for use of money or capital,
other than fees for financial intermediation services.
`SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERVICES.
`(a) BUSINESS PURCHASE- Business purchases include explicit fees and
implicit fees for financial intermediation services (except to the extent that
such fees are for services treated as performed outside the United States
and not imported into the United States or for services treated as
exported.).
`(b) FINANCIAL INTERMEDIATION SERVICES- The definition of `financial
intermediation service' in section 241 applies for purposes of this
section.
`(1) IN GENERAL- `Explicit fees for financial intermediation services'
means separately stated fees for services provided by a business entity in
the financial intermediation business. Explicit fees do not include fees for
use of money or capital.
`(2) EXAMPLES- Explicit fees for financial intermediation services
include (without limitation)--
`(A) separately listed maintenance and service charges of providers of
financial intermediation services,
`(B) loan documentation fees,
`(D) loan origination fees,
`(G) fees for credit checks.
`(3) EXCLUSIONS- Explicit fees for financial intermediation services do
not include prepaid interest and other fees for use of money or capital even
if such fees are separately stated or are labeled as service fees.
`(1) Implicit fees attributable to borrowing-
`(A) IN GENERAL- Implicit fees attributable to borrowing from banks
and other financial institutions shall include the portion of interest
payments that the Secretary designates as constituting service
fees.
`(B) TIMING- Implicit fees determined under this paragraph shall not
be deductible in any taxable year prior to the taxable year in which the
interest is paid. If the amount of the interest to which implicit fees
relate was deducted as original issue discount under the Internal Revenue
Code of 1986, the implicit fees with respect to such interest shall not
constitute a deductible business purchase.
`(C) Designation by secretary-
`(i) ESTIMATE OF DIFFERENTIAL- The Secretary shall estimate for each
calendar year the difference between the cost of funds for banks and the
rates of interest (including discount points) charged to the most
credit-worthy depositors of banks. The determinations shall be made
separately for--
`(I) loans with terms of not more than 3 years,
`(II) loans with terms of over 3 but not over 9 years,
and
`(III) loans with terms of over 9 years.
`(ii) DESIGNATION OF IMPLICIT FEES- The Secretary shall designate
the differences determined under clause (i) as the portion of interest
expense on loans from banks and other financial institutions that
constitutes an implicit fee for term loans originated during the
following calendar year for the respective periods listed in subclauses
(I) through (III) of clause (i). The difference determined for loans
described in subclause (I) of clause (i) shall apply to determine the
implicit fee portion of interest on demand loans outstanding during the
following calendar year.
`(iii) HISTORICAL DETERMINATION- The Secretary shall make an
historical determination in accordance with the principles of this
subparagraph to designate the portion of interest on term loans made
before January 1, 1999, that will constitute implicit fees.
`(2) IMPLICIT FEES FOR OTHER FINANCIAL INTERMEDIATION ACTIVITY- Implicit
fees for financial intermediation services include the portion of the fees
or other charges paid to a provider of financial intermediation services
(other than lending) as such provider designates in accordance with section
39.
`SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS.
`(a) IN GENERAL- The cost of insurance premiums on business loss policies
that insure risks in the United States constitute costs of business purchases.
Proceeds from such policies constitute taxable receipts.
`(b) BUSINESS LOSS POLICY- A `business loss policy' is an insurance
policy--
`(1) owned by a business entity,
`(2) the beneficiary of which is the business entity or another business
entity doing business with the owner of the policy,
`(3) that has no inside buildup or other savings component,
`(4) that covers losses on a loss incurred or claims made basis during
the term of the policy,
`(5) that has a term of not more than 2 years,
`(6) that is not a direct or indirect form of compensation, and
`(7) that covers direct losses of the business, such as--
`(A) damage to or theft of property used in business
activity,
`(B) tort claims against the business,
`(C) loss of use of business premises or services,
`(E) alleged or actual breach of fiduciary obligations.
`SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS.
`(a) NONDEDUCTIBILITY- The cost of insurance policies that are not
business loss policies are not deductible costs of business purchases.
`(b) PROCEEDS OF NONDEDUCTIBLE POLICIES- Insurance proceeds from policies
described in subsection (a) do not constitute taxable receipts.
`(c) APPLICATION OF THIS SECTION TO CERTAIN INSURANCE- This section shall
apply to life insurance policies.
`SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL INTERMEDIATION SERVICES.
`(a) DEDUCTIBILITY OF FEES- If a financial intermediation business (as
defined in section 241(b)) elects to determine implicit fees for financial
intermediation services pursuant to this section and notify its business
customers of their share of the implicit fees in accordance with this section,
a business entity which receives such notice may treat the amount reported in
the notice as an implicit fee for financial intermediation services in the
calendar year to which such notice relates.
`(b) Allocation and Reporting-
`(1) IN GENERAL- A financial intermediation business may--
`(A) allocate fees received for services for which no separately
stated fees (or implicit fees for borrowing determined under section
236(d)(1)) are charged among recipients of such services on a reasonable
and consistent basis, and
`(B) report to each recipient not later than February 15th of each
year the amount so allocated to it with respect to the immediately
preceding calendar year.
`(2) MAXIMUM FEES ALLOCATED- The maximum amount that may be allocated by
a financial intermediation business for a calendar is the excess of--
`(A) the gross profits of the financial intermediation business for
the calendar year (as reasonably estimated by the financial intermediation
business), over
`(B) the explicit fees for financial intermediation services received
by the financial intermediation business.
`(3) REASONABLE ALLOCATION- An allocation will not be considered
reasonable unless it takes into account and allocates fees to--
`(A) both services provided to business entities and services provided
to individuals (other than in a business capacity), and
`(B) both persons who receive money from the financial intermediation
business and persons who pay money to the financial intermediation
business (even though amounts allocated to the former do not constitute
implicit fees).
`(4) REGULATIONS- The Secretary shall prescribe regulations relating to
the allocations under this subsection, including regulations
addressing--
`(A) rules for timing of deductions of implicit fees paid by fiscal
year recipients,
`(B) subsequent year adjustments if a financial intermediation
business allocates too much in a calendar year,
`(C) rules for advance approval from the Secretary for allocation
procedures, and
`(D) safe-harbor alternatives to the allocation procedures described
in this subsection.
`(c) NOT APPLICABLE TO LENDING SERVICES- This section shall not apply to
lending services.
`Subchapter G--Financial Intermediation and Financial
Institutions
`Sec. 241. Activities constituting a financial intermediation
business.
`Sec. 242. General rule for taxation.
`Sec. 243. Special rule for banks.
`Sec. 244. Insurance companies.
`Sec. 245. Financial pass-through entities.
`Sec. 246. Financial intermediation by other businesses.
`SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL INTERMEDIATION BUSINESS.
`(a) FINANCIAL INTERMEDIATION BUSINESS- The providing of financial
intermediation services shall be considered a business activity. The gross
profit of a business entity providing financial intermediation services shall
be determined by taking into account the rules of this subchapter.
`(b) SEPARATE BUSINESS ACTIVITY- The provision of financial intermediation
services for unrelated persons shall be considered a separate business
activity and a business shall be considered a separate entity with respect to
such activity. An entity engaging in such business is referred to in this
chapter as a `financial intermediation business'.
`(c) FINANCIAL INTERMEDIATION BY A BUSINESS- Section 246 shall apply to a
business that provides financial intermediation services for itself and
related parties but generally does not provide such services for unrelated
parties.
`(1) FINANCIAL INTERMEDIATION SERVICES- `Financial intermediation
services' include--
`(C) market-making and dealer services, and
`(D) any other service provided as business activity in which a person
acts as an intermediary in--
`(i) the transfer of property, services, or financial assets,
liabilities, risks or instruments (or income or expense derived
therefrom) between two or more persons, or
`(ii) the pooling of economic risk among other persons
and derives all or a portion of such person's gross receipts from
streams of income or expense, discounts, or other financial flows
associated with the matter with respect to which such person is acting as
an intermediary.
`(2) LENDING SERVICES- `Lending services' means the regular making of
loans and providing credit to, or taking deposits from customers, but does
not include an installment or delayed payment arrangement provided by a
seller of property or
services under which additional charges or fees are imposed by the seller for
the late payment.
`(3) MARKET-MAKING OR DEALER SERVICES- `Market-making or dealer
services' means services provided by a person who--
`(A) regularly purchases financial instruments from or sells financial
instruments to customers in the ordinary course of a trade or
business,
`(B) regularly offers to enter into, assume, offset, assign, or
otherwise terminate positions in financial instruments with customers in
the ordinary course of a trade or business.
`SEC. 242. GENERAL RULE FOR TAXATION.
`(a) IN GENERAL- In the case of a financial intermediation business, gross
profits shall be computed by--
`(1) substituting financial receipts for taxable receipts, and
`(2) including financial expenses as business purchases.
`(1) FINANCIAL RECEIPTS- `Financial receipts' means all receipts other
than amounts received as contributions to capital.
`(2) FINANCIAL EXPENSES- `Financial expenses' include--
`(A) payments for principal and interest that is properly allocable to
the provision of financial intermediation services,
`(B) the cost of and payments under financial instruments (other than
financial instruments in the person subject to the tax imposed under this
chapter and any person related to such person),
`(C) claims and cash surrender values paid in connection with
insurance or reinsurance services, and
`(D) amounts paid for reinsurance.
`(3) FINANCIAL INSTRUMENT- `Financial instrument' means any--
`(A) share of stock in a corporation,
`(B) equity ownership in any widely held or publicly traded
partnership, trust, or other business entity,
`(C) note, bond, debenture, or other evidence of
indebtedness,
`(D) interest rate, currency, or equity notional principal
contract,
`(E) evidence or interest in, or a derivative financial instrument in,
any financial instrument described in subparagraph (A), (B), (C), or (D),
or any currency, including any option, forward contract, short position,
and any similar financial instrument in such a financial instrument or
currency, and
`(i) is not a financial instrument described in subparagraph (A),
(B), (C), (D) or (E),
`(ii) is a hedge with respect to such a financial instrument,
and
`(iii) is clearly identified in the dealer's records as being
described in this subparagraph before the close of the day on which it
was acquired or entered into.
`(c) INTERNATIONAL MATTERS- For purposes of this section in the case of a
financial intermediation business with activity in and outside the United
States--
`(1) INCLUSION REGARDLESS OF SOURCE-
`(A) Financial receipts shall be determined without regard to whether
they are received for property or service provided in or outside the
United States, except that financial receipts do not include amounts
that--
`(i) are not taxable receipts (as determined without regard to this
section), but
`(ii) would have been taxable receipts (as determined without regard
to this section) if they had been received for services or property in
the United States.
`(B) Financial expenses shall be determined without regard to whether
they are received for property or services acquired in or outside the
United States.
`(2) ALLOCATION- Under regulations prescribed by the Secretary, gross
profits (as determined without regard to this paragraph) shall be reduced by
the amount of financial intermediation gross profit attributable to
financial intermediation activity provided outside the United States.
`(3) GROSS PROFIT ATTRIBUTABLE TO FINANCIAL INTERMEDIATION ACTIVITY-
`Gross profits attributable to financial intermediation activity' means the
excess of--
`(A) gross profits as determined under this section (but without
regard to paragraph (2)), over
`(B) gross profits as determined without regard to this
subchapter.
`SEC. 243. SPECIAL RULES FOR BANKS.
`(a) IN GENERAL- In the case of a bank, gross profits shall be determined
in accordance with section 242, except that--
`(1) FINANCIAL RECEIPTS- Financial receipts shall include only--
`(A) taxable receipts (as determined without regard to this
subchapter),
`(B) interest on loans made or acquired by the bank,
`(C) gain on the sale of loans,
`(D) discount points received, and
`(E) any explicit fees for financial or fiduciary services not
included in subparagraphs (A) through (E).
`(2) FINANCIAL EXPENSES- Financial expenses shall include only--
`(A) interest paid to depositors and on other funds borrowed by the
bank, and
`(B) reasonable additions to reserves for bad debts.
`(3) FORECLOSURE PROPERTY- Gross profits shall properly take into
account proceeds from the operation or sale of foreclosure property.
`(1) IN GENERAL- `Bank' means a bank or trust company incorporated and
doing business under the laws of the United States, the District of
Columbia, or any State, a substantial part of the business of which consists
of receiving deposits and making loans and discounts, or of exercising
fiduciary powers similar to those exercised by national banks under the
authority of the Comptroller of the Currency, and which is subject by law to
supervision and examination by State or Federal authority having supervision
over banking institutions or credit unions. Such term includes domestic
building and loan associations and credit unions.
`(2) OTHER ACTIVITIES- If a bank is engaged in significant amounts of
activities other than those described in paragraph (1), the bank shall be
considered as a separate business entity with respect to such other
activity.
`SEC. 244. INSURANCE COMPANIES.
`(a) IN GENERAL- In the case of companies providing insurance services,
gross profits shall be determined in accordance with section 242, except--
`(1) subsection (c) of section 242 (relating to international
operations) shall not apply, and
`(2) the rules of subchapter J (sourcing rules) shall apply to determine
financial receipts and financial expenses.
`(b) RESULT INCONSISTENT WITH STATUTORY INTENT- If an insurance company
determines that the application of subsection (a) produces results
inconsistent with the territorial approach of the business tax, it may apply
to the Secretary for permission to apply section 242(c) in lieu of subsection
(a).
`SEC. 245. FINANCIAL PASS-THROUGH ENTITIES.
`(a) IN GENERAL- In the case of a financial pass-thru entity, gross
profits shall be determined in accordance with section 242, except--
`(1) financial receipts shall include contributions to capital,
`(2) financial expenses shall include--
`(A) distributions to persons holding interests in the pass-thru
entity,
`(B) investments in related entities (including wholly owned entities)
engaging in real estate investment.
`(1) IN GENERAL- `Pass-thru entity' means a business entity that is
intended to serve as a conduit. The Secretary shall prescribe regulations
defining pass-thru entity. Such term shall include--
`(A) entities that would qualify as regulated investment companies
under the Internal Revenue Code of 1986,
`(B) entities that would qualify as real estate investment trusts
under the Internal Revenue Code of 1986,
`(C) entities that would qualify as REMICs under the Internal Revenue
Code of 1986, and
`(D) partnerships whose purposes are to invest the funds of the
partners in financial instruments, distribute or reinvest the income from
such investments, and distribute or reinvest the proceeds from the sale of
such instruments.
`(2) ENGAGEMENT IN BUSINESS ACTIVITY- An entity will not qualify as a
pass-thru entity if it engages in more than an insubstantial amount of
rental or other business activity
(other than investing in and selling financial instruments). The preceding
sentence will not apply if the business entity treats the business activity as
engaged in by a separate business entity (separately subject to tax under this
chapter).
`SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSINESSES.
`(a) IN GENERAL- If a business entity that is not regularly in the
business of providing financial intermediation services to unrelated parties
engages in significant financial intermediation activity, its gross profits
shall be increased by its gross profits from financial intermediation activity
(determined as if such activity were activity of a pass-thru entity that paid
all costs of such financial intermediation activity including--
`(1) compensation for persons engaging in such activity,
`(2) equipment involved in such activity, and
`(3) office space for persons involved in such activity).
`(b) PROXY- A business entity to which subsection (a) applies will be
treated as satisfying the requirements of that subsection if it increases its
gross receipts by the portion of employee compensation properly allocable to
the provision of financial intermediation services.
`(c) SIGNIFICANT FINANCIAL INTERMEDIATION- A business will be considered
as engaging in substantial financial intermediation if--
`(1) more than 5 percent of the compensation paid by the business to its
employees is for employees whose primary activity is the management of the
business's investments in financial instruments, or
`(2) at all times during the taxable year and the immediately preceding
full taxable year, more than 10 percent of its assets are financial
instruments other than--
`(A) equity interests in business entities in which it holds more than
50 percent in value of the outstanding equity,
`(B) equity interests in joint ventures in which the company is
actively participating,
`(C) purchase money loans to its customers, and
`(D) business loans and equity investments that serve a direct
business purpose.
`Subchapter H--Tax-Exempt Organizations
`Sec. 251. Exemption for governmental entities.
`Sec. 252. Taxable activity of governmental entities.
`Sec. 253. Tax-exempt organizations.
`Sec. 254. Special rules for (c)(3) organizations.
`Sec. 255. Tax on unrelated business activity.
`Sec. 256. Unrelated business activity.
`SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES.
`(a) STATES- Except as provided in section 252, a state, political
subdivision thereof and the District of Columbia shall be exempt from taxation
under this chapter on any gross profits derived from the exercise of any
essential governmental function.
`(b) POSSESSIONS- The government of any possession of the United States
shall be exempt from taxation under this chapter on any gross profits earned
by the possession.
`SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTITIES.
`(a) CERTAIN ACTIVITIES TAXABLE- A governmental entity shall be considered
a business and subject to tax on any business activity of a type frequently
provided by business entities subject to tax under this chapter.
`(b) CERTAIN ACTIVITIES TREATED AS ESSENTIAL GOVERNMENT FUNCTIONS-
Subsection (a) shall not apply to the following activities, which shall be
treated as essential government functions:
`(1) Provision of mass transportation services.
`(2) Provision of public utility services.
`SEC. 253. TAX-EXEMPT ORGANIZATIONS.
`(a) EXEMPTION FROM TAXATION- An organization described in subsection (c)
or (d) shall be exempt from taxation under this chapter.
`(b) TAX ON UNRELATED BUSINESS ACTIVITY- An organization exempt from
taxation under subsection (a) shall be subject to tax to the extent provided
in sections 255 and 256, but shall be considered a tax-exempt organization for
purposes of any law that refers to tax-exempt organizations.
`(c) LIST OF EXEMPT ORGANIZATIONS- The following organizations are
referred to in subsection (a):
`(1) INSTRUMENTALITY OF THE UNITED STATES- Any corporation organized
under Act of Congress which is an instrumentality of the United States but
only if such corporation--
`(A) is exempt from Federal income taxes--
`(i) under such Act as amended and supplemented before July 18,
1984, or
`(ii) under this title without regard to any provision of law which
is not contained in this title and which is not contained in a revenue
Act, or
`(B) is described in subsection (h).
`(2) TITLE HOLDING COMPANIES- Corporations organized for the exclusive
purpose of holding title to property, collecting income therefrom, and
turning over the entire amount thereof, less expenses, to an organization
which itself is exempt under this section. Rules similar to the rules of
subparagraph (G) of paragraph (25) shall apply for purposes of this
paragraph.
`(3) CHARITABLE, EDUCATIONAL AND RELIGIOUS ORGANIZATIONS- Corporations,
and any community chest, fund, or foundation, organized and operated
exclusively for religious, charitable, scientific, testing for public
safety, literary, or educational purposes, or to foster national or
international amateur sports competition (but only if no part of its
activities involve the provision of athletic facilities or equipment), or
for the prevention of cruelty to children or animals, no part of the net
earnings of which inures to the benefit of any private shareholder or
individual, no substantial part of the activities of which is carrying on
propaganda, or otherwise attempting, to influence legislation (except as
otherwise provided in subsection (g)), and which does not participate in, or
intervene in (including the publishing or distributing of statements), any
political campaign on behalf of (or in opposition to) any candidate for
public office.
`(4) SOCIAL WELFARE ORGANIZATIONS, ETC-
`(A) Civic leagues or organizations not organized for profit but
operated exclusively for the promotion of social welfare, or local
associations of employees, the membership of which is limited to the
employees of a designated person or persons in a particular municipality,
and the net earnings of which are devoted exclusively to charitable,
educational, or recreational purposes.
`(B) Subparagraph (A) shall not apply to an entity unless no part of
the net earnings of such entity inures to the benefit of any private
shareholder or individual
`(5) LABOR AND AGRICULTURAL ORGANIZATIONS- Labor, agricultural, or
horticultural organizations.
`(6) TRADE ASSOCIATIONS- Business leagues, chambers of commerce,
real-estate boards, boards of trade, or professional football leagues
(whether or not administering a pension fund for football players) not
organized for profit and no part of the net earnings of which inures to the
benefit of any private shareholder or individual.
`(7) SOCIAL CLUBS- Clubs organized for pleasure, recreation, and other
nonprofitable purposes, substantially all of the activities of which are for
such purposes and no part of the net earnings of which inures to the benefit
of any private shareholder.
`(8) CERTAIN FRATERNAL SOCIETIES- Fraternal beneficiary societies,
orders, or associations--
`(A) operating under the lodge system or for the exclusive benefit of
the members of a fraternity itself operating under the lodge system,
and
`(B) providing for the payment of life, sick, accident, or other
benefits to the members of such society, order, or association or their
dependents.
`(9) VEBA'S- Voluntary employees' beneficiary associations providing for
the payment of life, sick, accident, or other benefits to the members of
such association or their dependents or designated beneficiaries, if no part
of the net earnings of such association inures (other than through such
payments) to the benefit of any private shareholder or individual.
`(10) OTHER FRATERNAL ORGANIZATIONS- Domestic fraternal societies,
orders, or associations, operating under the lodge system--
`(A) the net earnings of which are devoted exclusively to religious,
charitable, scientific, literary, educational, and fraternal purposes,
and
`(B) which do not provide for the payment of life, sick, accident, or
other benefits.
`(11) LOCAL TEACHERS' RETIREMENT FUNDS- Teachers' retirement fund
associations of a purely local character, if--
`(A) no part of their net earnings inures (other than through payment
of retirement benefits) to the benefit of any private shareholder or
individual, and
`(B) the income consists solely of amounts received from public
taxation, amounts received from assessments on the teaching salaries of
members, and income in respect of investments.
`(12) CERTAIN COOPERATIVES-
`(A) Benevolent life insurance associations of a purely local
character, mutual ditch or irrigation companies, mutual
or cooperative telephone companies, or like organizations; but only if 85
percent or more of the income consists of amounts collected from members for the
sole purpose of meeting losses and expenses.
`(B) In the case of a mutual or cooperative telephone company,
subparagraph (A) shall be applied without taking into account any income
received or accrued--
`(i) from a nonmember telephone company for the performance of
communication services which involve members of the mutual or
cooperative telephone company,
`(ii) from qualified pole rentals,
`(iii) from the sale of display listings in a directory furnished to
the members of the mutual or cooperative telephone company,
or
`(iv) from the prepayment of a loan under section 306A, 306B, or 311
of the Rural Electrification Act of 1936 (as in effect on January 1,
1987).
`(C) In the case of a mutual or cooperative electric company,
subparagraph (A) shall be applied without taking into account any income
received or accrued--
`(i) from qualified pole rentals, or
`(ii) from the prepayment of a loan under section 306A, 306B, or 311
of the Rural Electrification Act of 1936 (as in effect on January 1,
1987).
`(D) For purposes of this paragraph, the term `qualified pole rental'
means any rental of a pole (or other structure used to support wires) if
such pole (or other structure)--
`(i) is used by the telephone or electric company to support one or
more wires which are used by such company in providing telephone or
electric services to its members, and
`(ii) is used pursuant to the rental to support one or more wires
(in addition to the wires described in clause (i)) for use in connection
with the transmission by wire of electricity or of telephone or other
communications.
For purposes of the preceding sentence, the term `rental' includes any
sale of the right to use the pole (or other structure).
`(13) NONPROFIT CEMETERIES- Cemetery companies owned and operated
exclusively for the benefit of their members or which are not operated for
profit; and any corporation chartered solely for the purpose of the disposal
of bodies by burial or cremation which is not permitted by its charter to
engage in any business not necessarily incident to that purpose and no part
of the net earnings of which inures to the benefit of any private
shareholder or individual.
`(14) GRANDFATHERED MUTUAL FINANCIAL INSTITUTIONS-
`(A) Credit unions without capital stock organized and operated for
mutual purposes and without profit, but only if organized before July 1,
1999.
`(B) Certain corporations or associations organized before September
1, 1957, and described in subparagraphs (B) or (C) of section 501(c)(14)
of the Internal Revenue Code of 1986.
`(15) GRANDFATHERED SMALL INSURANCE COMPANIES- Insurance companies
organized before July 1, 1999, and described in section 501(c)(15) of the
Internal Revenue Code of 1986.
`(16) CROP FINANCING ASSOCIATIONS- Corporations organized by an
association subject to part IV of this subchapter or members thereof, for
the purpose of financing the ordinary crop operations of such members or
other producers, and operated in conjunction with such association.
Exemption shall not be denied any such corporation because it has capital
stock, if the dividend rate of such stock is fixed at not to exceed the
legal rate of interest in the State of incorporation or 8 percent per annum,
whichever is greater, on the value of the consideration for which the stock
was issued, and if substantially all such stock (other than nonvoting
preferred stock, the owners of which are not entitled or permitted to
participate, directly or indirectly, in the profits of the corporation, on
dissolution or otherwise, beyond the fixed dividends) is owned by such
association, or members thereof; nor shall exemption be denied any such
corporation because there is accumulated and maintained by it a reserve
required by State law or a reasonable reserve for any necessary
purpose.
`(17) SUPPLEMENTAL EMPLOYMENT BENEFIT TRUST-
`(A) A trust or trusts forming part of a plan providing for the
payment of supplemental unemployment compensation benefits, if--
`(i) under the plan, it is impossible, at any time prior to the
satisfaction of all liabilities, with respect to employees under the
plan, for any part of the corpus or income to be (within the taxable
year or thereafter) used for, or diverted to, any purpose other than the
providing of supplemental unemployment compensation
benefits,
`(ii) such benefits are payable to employees under a classification
which is set forth in the plan and which is found by the
Secretary not to be discriminatory in favor of employees who are highly
compensated employees (within the meaning of section 414(q)), and
`(iii) such benefits do not discriminate in favor of employees who
are highly compensated employees (within the meaning of section 414(q).
A plan shall not be considered discriminatory within the meaning of this
clause merely because the benefits received under the plan bear a
uniform relationship to the total compensation, or the basic or regular
rate of compensation, of the employees covered by the plan.
`(B) Rules similar to those contained in subparagraphs (B) through (E)
of section 501(c)(7) of the Internal Revenue Code of 1986 shall apply to
subparagraph (A).
`(18) GRANDFATHERED TRUSTS- A trust or trusts created before June 25,
1959, and described in section 501(c)(18) of the Internal Revenue Code of
1986.
`(19) CERTAIN VETERANS' ORGANIZATIONS- A post or organization of past or
present members of the Armed Forces of the United States, or an auxiliary
unit or society of, or a trust or foundation for, any such post or
organization--
`(A) organized in the United States or any of its
possessions,
`(B) at least 75 percent of the members of which are past or present
members of the Armed Forces of the United States and substantially all of
the other members of which are individuals who are cadets or are spouses,
widows, or widowers of past or present members of the Armed Forces of the
United States or of cadets, and
`(C) no part of the net earnings of which inures to the benefit of any
private shareholder or individual.
`(20) LEGAL SERVICE PLAN TRUSTS- An organization or trust created or
organized in the United States, the exclusive function of which is to form
part of a qualified group legal services plan or plans.
`(21) BLACK LUNG ACT TRUSTS- A trust or trusts established in writing,
created or organized in the United States, and contributed to by any person
(except an insurance company) if--
`(A) the purpose of such trust or trusts is exclusively--
`(i) to satisfy, in whole or in part, the liability of such person
for, or with respect to, claims for compensation for disability or death
due to pneumoconiosis under Black Lung Acts,
`(ii) to pay premiums for insurance exclusively covering such
liability,
`(iii) to pay administrative and other incidental expenses of such
trust in connection with the operation of the trust and the processing
of claims against such person under Black Lung Acts, and
`(iv) to pay accident or health benefits for retired miners and
their spouses and dependents (including administrative and other
incidental expenses of such trust in connection therewith) or premiums
for insurance exclusively covering such benefits; and
`(B) such trusts meets requirements similar to those contained in
section 501(c)(21) of the Internal Revenue Code of 1986.
`(22) MULTIEMPLOYER ERISA TRUST- A trust created or organized in the
United States and established in writing by the plan sponsors of
multiemployer plans if--
`(A) the purpose of such trust is exclusively--
`(i) to pay any amount described in section 4223(c) or (h) of the
Employee Retirement Income Security Act of 1974, and
`(ii) to pay reasonable and necessary administrative expenses in
connection with the establishment and
operation of the trust and the processing of claims against the trust,
`(B) no part of the assets of the trust may be used for, or diverted
to, any purpose other than--
`(i) the purposes described in subparagraph (A), or
`(ii) prudent investment in securities, obligations, or time or
demand deposits,
`(C) such trust meets the requirements of paragraphs (2), (3), and (4)
of section 4223(b), 4223(h), or, if applicable, section 4223(c) of the
Employee Retirement Income Security Act of 1974, and
`(D) the trust instrument provides that, on dissolution of the trust,
assets of the trust may not be paid other than to plans which have
participated in the plan or, in the case of a trust established under
section 4223(h) of such Act, to plans with respect to which employers have
participated in the fund.
`(23) GRANDFATHERED VETERANS' INSURANCE ORGANIZATION- Any association
organized before 1880 more than 75 percent of the members of which are
present or past members of the Armed Forces and a principal purpose of which
is to provide insurance and other benefits to veterans or their
dependents.
`(24) ERISA TRUST- A trust described in section 4049 of the Employee
Retirement Income Security Act of 1974 (as in effect on the date of the
enactment of the Single-Employer Pension Plan Amendments Act of 1986).
`(25) Real title holding corporation or trust-
`(A) Any corporation or trust which--
`(i) has no more than 35 shareholders or beneficiaries,
`(ii) has only 1 class of stock or beneficial interest,
and
`(iii) is organized for the exclusive purposes of--
`(I) acquiring real property and holding title to, and collecting
income from, such property, and
`(II) remitting the entire amount of income from such property
(less expenses) to 1 or more organizations described in subparagraph
(C) which are shareholders of such corporation or beneficiaries of
such trust.
`For purposes of clause (iii), the term `real property' shall not
include any interest as a tenant in common (or similar interest) and shall
not include any indirect interest.
`(B) A corporation or trust shall be described in subparagraph (A)
without regard to whether the corporation or trust is organized by 1 or
more organizations described in subparagraph (C).
`(C) An organization is described in this subparagraph if such
organization is--
`(i) a qualified pension, profit sharing, or stock bonus plan that
meets the requirements of section 401(a),
`(ii) a governmental plan (within the meaning of section
414(d)),
`(iii) the United States, any State or political subdivision
thereof, or any agency or instrumentality of any of the foregoing,
or
`(iv) any organization described in paragraph (3).
`(D) A corporation or trust shall in no event be treated as described
in subparagraph (A) unless such corporation or trust permits its
shareholders or beneficiaries--
`(i) to dismiss the corporation's or trust's investment adviser,
following reasonable notice, upon a vote of the shareholders or
beneficiaries holding a majority of interest in the corporation or
trust, and
`(ii) to terminate their interest in the corporation or trust by
either, or both, of the following alternatives, as determined by the
corporation or trust:
`(I) by selling or exchanging their stock in the corporation or
interest in the trust (subject to any Federal or State securities law)
to any organization described in subparagraph (C) so long as the sale
or exchange does not increase the number of shareholders or
beneficiaries in such corporation or trust above 35, or
`(II) by having their stock or interest redeemed by the
corporation or trust after the shareholder or beneficiary has provided
90 days notice to such corporation or trust.
`(E)(i) For purposes of this paragraph--
`(I) a corporation which is a qualified subsidiary shall not be
treated as a separate corporation, and
`(II) all assets, liabilities, and items of income, deduction, and
credit of a qualified subsidiary shall be treated as assets,
liabilities, and such items (as the case may be) of the corporation or
trust described in subparagraph (A).
`(ii) For purposes of this subparagraph, the term `qualified
subsidiary' means any corporation if, at all times during the period such
corporation was in existence, 100 percent of the stock of such corporation
is held by the corporation or trust described in subparagraph
(A).
`(iii) For purposes of this subtitle, if any corporation which was a
qualified subsidiary ceases to meet the requirements of clause (ii), such
corporation shall be treated as a new corporation acquiring all of its
assets (and assuming all of its liabilities) immediately before such
cessation from the corporation or trust described in subparagraph (A) in
exchange for its stock.
`(F) For purposes of subparagraph (A), the term `real property'
includes any personal property which is leased under, or in connection
with, a lease of real property, but only if the rent attributable to such
personal property for the taxable year does not exceed 15 percent of the
total rent for the taxable year attributable to both the real and personal
property leased under, or in connection with, such lease.
`(G) (i) An organization shall not be treated as failing to be
described in this paragraph merely by reason of the receipt of any
otherwise disqualifying income which is incidentally derived from the
holding of real property.
`(ii) Clause (i) shall not apply if the amount of gross income
described in such clause exceeds 10 percent of the organization's gross
income for the taxable year unless the organization establishes to the
satisfaction of the Secretary that the receipt of gross income described
in clause (i) in excess of such limitation was inadvertent and reasonable
steps are being taken to correct the circumstances giving rise to such
income.
`(26) STATE ESTABLISHED MEDICAL CARE INSURER- Any membership
organization if--
`(A) such organization is established by a State exclusively to
provide coverage for medical care on a not-for-profit basis to individuals
described in subparagraph (B) through--
`(i) insurance issued by the organization, or
`(ii) a health maintenance organization under an arrangement with
the organization,
`(B) the only individuals receiving such coverage through the
organization are individuals--
`(i) who are residents of such State, and
`(ii) who, by reason of the existence or history of a medical
condition--
`(I) are unable to acquire medical care coverage for such
condition through insurance or from a health maintenance organization,
or
`(II) are able to acquire such coverage only at a rate which is
substantially in excess of the rate for such coverage through the
membership organization,
`(C) the composition of the membership in such organization is
specified by such State, and
`(D) no part of the net earnings of the organization inures to the
benefit of any private shareholder or individual. A spouse and any
qualifying child) of an individual described in subparagraph (B) (without
regard to this sentence) shall be treated as described in subparagraph
(B).
`(27) GRANDFATHERED WORKERS COMPENSATION ORGANIZATION- Any membership
organization established before June 1, 1996, by a State exclusively to
reimburse its members for losses arising under workmen's compensation acts,
and described in section 501(c)(27) of the Internal Revenue Code of
1986.
`(d) RELIGIOUS AND APOSTOLIC ORGANIZATIONS- The following organizations
are referred to in subsection (a): Religious or apostolic associations or
corporations, if such associations or corporations have a common treasury or
community treasury, even if such associations or corporations engage in
business for the common
benefit of the members, but only if such activity is treated as unrelated
business activity.
`(e) COOPERATIVE HOSPITAL SERVICE ORGANIZATIONS- For purposes of this
chapter, an organization shall be treated as an organization organized and
operated exclusively for charitable purposes, if--
`(1) such organization is organized and operated solely--
`(A) to perform, on a centralized basis, one or more of the following
services which, if performed on its own behalf by a hospital which is an
organization described in subsection (c)(3) and exempt from taxation under
subsection (a), would constitute activities in exercising or performing
the purpose or function constituting the basis for its exemption: data
processing, purchasing (including the purchasing of insurance on a group
basis), warehousing, billing and collection, food, clinical, industrial
engineering, laboratory, printing, communications, record center, and
personnel (including selection, testing, training, and education of
personnel) services; and
`(B) to perform such services solely for two or more hospitals each of
which is--
`(i) an organization described in subsection (c)(3) which is exempt
from taxation under subsection (a),
`(ii) a constituent part of an organization described in subsection
(c)(3) which is exempt from taxation under subsection (a) and which, if
organized and operated as a separate entity, would constitute an
organization described in subsection (c)(3), or
`(iii) owned and operated by the United States, a State, the
District of Columbia, or a possession of the United States, or a
political subdivision or an agency or instrumentality of any of the
foregoing;
`(2) such organization is organized and operated on a cooperative basis
and allocates or pays, within 8 1/2 months after the close of its taxable
year, all net earnings to patrons on the basis of services performed for
them; and
`(3) if such organization has capital stock, all of such stock
outstanding is owned by its patrons.
`For purposes of this title, any organization which, by reason of the
preceding sentence, is an organization described in subsection (c)(3) and
exempt from taxation under subsection (a), shall be treated as a hospital and
as an organization referred to in section 101(b)(1)(A)(iii).
`(f) COOPERATIVE SERVICE ORGANIZATIONS OF OPERATING EDUCATIONAL
ORGANIZATIONS- For purposes of this chapter, if an organization is--
`(1) organized and operated solely to hold, commingle, and collectively
invest and reinvest (including arranging for and supervising the performance
by independent contractors of investment services related thereto) in stocks
and securities, the moneys contributed thereto by each of the members of
such organization, and to collect income therefrom and turn over the entire
amount thereof, less expenses, to such members,
`(2) organized and controlled by one or more such members, and
`(3) comprised solely of members that are organizations described in
clause (ii) or (iv) of section 101(b)(1)(A)--
`(A) which are exempt from taxation under subsection (a), or
`(B) the gross profits of which are excluded from taxation under
section 251(a),
then such organization shall be treated as an organization organized and
operated exclusively for charitable purposes.
`(g) EXPENDITURES BY PUBLIC CHARITIES TO INFLUENCE LEGISLATION-
`(1) GENERAL RULE- In the case of an organization to which this
subsection applies, exemption from taxation under subsection (a) shall be
denied because a substantial part of the activities of such organization
consists of carrying on propaganda, or
otherwise attempting, to influence legislation, but only if such organization
normally--
`(A) makes lobbying expenditures in excess of the lobbying ceiling
amount for such organization for each taxable year, or
`(B) makes grass roots expenditures in excess of the grass roots
ceiling amount for such organization for each taxable year.
`(2) DEFINITIONS- For purposes of this subsection--
`(A) LOBBYING EXPENDITURES- `Lobbying expenditures' means expenditures
for the purpose of influencing legislation (as defined in section
4911(d)).
`(B) LOBBYING CEILING AMOUNT- The lobbying ceiling amount for any
organization for any taxable year is 150 percent of the lobbying
nontaxable amount for such organization for such taxable year, determined
under section 4911.
`(C) GRASS ROOTS EXPENDITURES- `Grass roots expenditures' means
expenditures for the purpose of influencing legislation (as defined in
section 4911(d) without regard to paragraph (1)(B) thereof).
`(D) GRASS ROOTS CEILING AMOUNT- The grass roots ceiling amount for
any organization for any taxable year is 150 percent of the grass roots
nontaxable amount for such organization for such taxable year, determined
under section 4911.
`(3) ORGANIZATIONS TO WHICH THIS SUBSECTION APPLIES- This subsection
shall apply to any organization which has elected (in such manner and at
such time as the Secretary may prescribe) to have the provisions of this
subsection apply to such organization and which, for the taxable year which
includes the date the election is made, is described in subsection (c)(3)
and is not described in paragraph (4) and is not a private foundation.
`(4) DISQUALIFIED ORGANIZATIONS- This subsection does not apply
to--
`(B) an integrated auxiliary of a church or of a convention or
association of churches, or
`(C) a member of an affiliated group of organizations (within the
meaning of section 4911(f)(2)) if one or more members of such group is
described in subparagraph (A) or (B).
`(5) YEARS FOR WHICH ELECTION IS EFFECTIVE- An election by an
organization under this subsection shall be effective for all taxable years
of such organization which--
`(A) end after the date the election is made, and
`(B) begin before the date the election is revoked by such
organization (under regulations prescribed by the Secretary).
`(6) NO EFFECT ON CERTAIN ORGANIZATIONS- With respect to any
organization for a taxable year for which--
`(A) such organization is described in paragraph (5), or
`(B) an election under this subsection is not in effect for such
organization, nothing in this subsection or in section 4911 shall be
construed to affect the interpretation of the phrase, `no substantial part
of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation,' under subsection (c)(3).
`(h) GOVERNMENT CORPORATIONS EXEMPT UNDER SUBSECTION (c)(1)- For purposes
of subsection (c)(1), the following organizations are described in this
subsection:
`(1) The Central Liquidity Facility established under title III of the
Federal Credit Union Act (12 U.S.C. 1795 et seq.).
`(2) The Resolution Trust Corporation established under section 21A of
the Federal Home Loan Bank Act.
`(3) The Resolution Funding Corporation established under section 21B of
the Federal Home Loan Bank Act.
`(i) CERTAIN EDUCATIONAL ORGANIZATIONS- An organization shall not be
eligible for exemption as an educational organization under subsection (c)(3)
if a substantial amount of its activities and funds are devoted to--
`(1) conducting seminars and other similar programs,
`(2) conducting research to educate Congress or the general public about
public policy issues,
`(3) producing books and pamphlets, or
`(4) a combination of the foregoing.
`SEC. 254. SPECIAL RULES FOR (c)(3) ORGANIZATIONS.
`(a) NEW ORGANIZATIONS MUST NOTIFY SECRETARY- Except as provided in
subsection (c), an organization shall not be treated as an organization
described in section 253(c)(3)--
`(1) unless that it has given notice to the Secretary, in such manner as
the Secretary may prescribe, that it is applying for recognition of such
status, or
`(2) for any period before giving of such notice, if such notice is
given after the time prescribed by the Secretary by regulations for giving
notice under this subsection.
`(b) PRESUMPTION THAT ORGANIZATIONS ARE PRIVATE FOUNDATIONS- Except as
provided in subsection (c), any organization described in section 253(c)(3)
and which does not notify the Secretary, at such time and in such manner as
the Secretary may by regulations prescribe, that it is not a private
foundation (as defined in section 102) shall be presumed to be a private
foundation.
`(c) EXCEPTIONS- Subsections (a) and (b) shall not apply to--
`(1) organizations organized before October 10, 1969;
`(2) organizations which obtained recognition of tax-exempt status under
section 501(c)(3) of the Internal Revenue Code of 1986 (in the case of
subsection (a) only);
`(3) organizations which were determined not to be private foundations
under the Internal Revenue Code of 1986;
`(4) churches, their integrated auxiliaries, and conventions and
associations of churches;
`(5) any organization that is not a private foundation and the gross
receipts of which in each taxable year are not more than $25,000, or
`(6) such other classes of organizations which the Secretary may
exempt.
`SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY.
`(a) IN GENERAL- Each organization described in subsection (b) shall be
subject to the Simplified USA Tax for businesses under section 201 on its
gross profits from its unrelated business activity.
`(b) ORGANIZATIONS SUBJECT TO TAX- This section shall apply to--
`(1) organizations exempt from the business tax under section 253(a),
other than instrumentalities of the United States described in section
253(c)(1).
`(2) colleges and universities which are instrumentalities of any
government and corporations owned by one or more such colleges or
universities.
`SEC. 256. UNRELATED BUSINESS ACTIVITY.
`(a) IN GENERAL- `Unrelated business activity' means any trade or business
the conduct of which is not substantially related (aside from the need of such
organization for income or funds or the use it makes of the profits derived)
to the exercise or performance by such organization of its charitable,
educational, or other purpose or function constituting the basis for its
exemption under section 253, except that such term does not include any trade
or business--
`(1) in which substantially all the work in carrying on such trade or
business is performed for the organization without compensation; or
`(2) which is carried on, in the case of an organization described in
section 253(c)(3) or in the case of a college or university described in
section 255(b), by the organization primarily for the convenience of its
members, students, patients, officers, or employees, which is the selling by
the organization of items of work-related clothes and equipment and items
normally sold through vending machines, through food dispensing facilities,
or by snack bars, for the convenience of its members at their usual places
of employment; or
`(3) which is the selling of merchandise, substantially all of which has
been received by the organization as gifts or contributions.
`(b) ADVERTISING, ETC., ACTIVITIES- For purposes of this section, `trade
or business' includes any activity which is carried on for the production of
income from the sale of goods or the performance of services. For purposes of
the preceding sentence, an activity does not lose identity as a trade or
business merely because it is carried on within a larger aggregate of similar
activities or within a larger complex of other endeavors which may, or may
not, be related to the exempt purposes of the organization. Where an activity
carried on for profit constitutes an unrelated trade or business, no part of
such trade or business shall be excluded from such classification merely
because it does not result in profit.
`(1) CERTAIN BUSINESS ACTIVITIES- An activity shall not be considered a
`trade or business' solely because the activity is a business activity (such
as certain passive rental activity) that would be subject to the business
tax if conducted by a business entity other than a tax-exempt
organization.
`(2) REGULATIONS- The Secretary shall prescribe regulations defining a
`trade or business.' Such regulations shall be consistent with the
provisions under sections 511 through 513 of
the Internal Revenue Code of 1986, except to the extent such provisions are
inconsistent with other principles of the business tax. The regulations shall
include exclusions from the definition of `trade or business' similar to those
contained in section 513 of the Internal Revenue Code for--
`(A) certain bingo games,
`(B) certain hospital services, and
`(C) certain public entertainment activity at fairs and expositions by
an organization which regularly conducts, as one of its substantial exempt
purposes, an agricultural or educational fair or exhibition.
`(3) TRADE SHOWS- The conduct of trade shows and conventions shall not
be excluded from the definition of trade or business.
`Subchapter I--Cooperatives
Sec. 260. Patronage dividends of cooperatives.
`SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES.
`(a) PATRONAGE DIVIDENDS PAID BY SUPPLY COOPERATIVES- A qualified
patronage dividend paid by a supply cooperative to a patron shall be treated
as if it is a refund of a portion of the amounts paid by the patron
for goods, services, or use of capital. In general, if the supply cooperative
included the amount received from the patron in taxable receipts, the dividend
shall reduce taxable receipts in the year incurred. If the recipient of the
dividend is a business entity which deducted the cost of business purchases to
which the dividend related, the recipient will reduce its cost of business
purchases by the amount of the dividend in the year the dividend is paid or
incurred.
`(b) PATRONAGE DIVIDENDS PAID BY MARKETING COOPERATIVES- A qualified
patronage dividend paid to a patron by a marketing cooperative shall be
treated as an upward price adjustment in the amount received by the patron for
its goods marketed by the cooperative. In general, the cooperative will
increase its cost of business purchases by the amount of the qualified
patronage dividend and the recipient will increase its taxable receipts by the
amount of the qualified patronage dividend.
`(c) DIVIDEND TREATMENT- Only the portion of a patronage dividend that is
not a qualified patronage dividend shall be treated as a dividend under this
chapter and chapter 2.
`(1) QUALIFIED PATRONAGE DIVIDEND- A `qualified patronage dividend' is
that part of a patronage dividend that is attributable to the patron's
allocable share of patronage earnings of a marketing cooperative or a supply
cooperative.
`(2) SUPPLY COOPERATIVE- A `supply cooperative' is a cooperative that
sells goods or service to patrons and provided patronage dividends with
respect to the quantity of purchases of the patrons.
`(3) MARKETING COOPERATIVE- A `marketing cooperative' is a cooperative
that sells goods produced by its members and provides patronage dividends to
the members based on the quantities of goods sold or provided for
sale.
`(1) NOTICES OF ALLOCATION AND PER-UNIT RETAIN CERTIFICATES- Except as
provided in paragraph (2), a notice of allocation, per-unit retain
certificate, or other similar document shall not be treated as a patronage
dividend until it is redeemed in cash or property.
`(2) OPPORTUNITY TO RECEIVE CASH- If a patron is given an opportunity to
receive a patronage dividend in cash, but instead chooses to accept a
per-unit retain certificate or a qualified notice of allocation, the patron
will be treated as receiving cash and simultaneously contributing to the
capital of the cooperative.
`(3) APPLICATION LIMITED TO QUALIFIED COOPERATIVES- Under rules to be
prescribed by the Secretary, this section shall apply only to cooperatives
to which one of the following provisions of the Internal Revenue Code of
1986 would have applied:
`(A) Section 501(c)(12) (relating to cooperative telephone companies
and similar organizations).
`(B) Section 501(c)(14) (relating to certain cooperative
banks).
`(C) Section 521 (relating to farm cooperatives).
`(D) Section 1381 (relating to cooperatives generally).
`(4) REGULATIONS- The Secretary shall prescribe regulations for the
application of this section. The regulations shall generally be consistent
with subchapter T of chapter 1 of the Internal Revenue Code of 1986 except
to the extent that such rules are inconsistent with provisions of this
chapter.
`Subchapter J--Sourcing Rules
`Sec. 265. Exports of property or services.
`Sec. 266. Imports of property or services.
`Sec. 267. Import or export of services.
`Sec. 268. International transportation services.
`Sec. 269. International communications.
`SEC. 265. EXPORTS OF PROPERTY OR SERVICES.
`(a) GENERAL RULE- Taxable receipts do not include amounts received by the
exporter thereof for property or services exported from the United States for
use or consumption outside the United States.
`(b) EXPORT THROUGH NONBUSINESS ENTITY- For purposes of subsection (a), if
property or services are sold to a governmental entity or a tax-exempt
organization for export and are exported other than in an activity of such
entity which is subject to the business tax, then the seller of such property
or services is deemed to be the exporter thereof.
`(c) EXPORT OF SERVICES- See section 267 for rules for determining whether
services are exported or imported.
`SEC. 266. IMPORTS OF PROPERTY OR SERVICES.
`(a) IN GENERAL- The import of property or services for consumption in the
United States shall constitute a business purchase if such property or service
is to be used in a business activity in the United States. Property being held
for sale or retail by a business entity that is in the business of selling
goods shall be considered held for `use in a business activity'.
`(b) Amount of Business Purchase-
`(1) IN GENERAL- The cost of business purchases with respect to the
import of property or services for use or consumption in the United States
is the customs value, price or other amount used for purposes of determining
the import tax under section 286 or section 287.
`(2) IMPORT TAX- The cost of business purchases does not include any
import tax paid. No deduction shall be allowed with respect to property or
service imported by a business entity unless the import tax is paid with
respect to such import.
`SEC. 267. IMPORT OR EXPORT OF SERVICES.
`(a) IN GENERAL- Except as otherwise provided in this subchapter or in
rules prescribed under subchapter G (relating to financial intermediation
business), services shall not be treated as imported or exported from the
location in which they are performed.
`(b) IMPORT OF SERVICES- A business entity shall be treated as importing a
service if--
`(1) the entire benefit of the service will be realized in the United
States, and
`(2) the benefit will be realized in connection with the United States
business activities of the business entity.
`(c) EXPORT OF SERVICES- A business will be treating as exporting a
service if--
`(1) the entire benefit of the service will be realized outside of the
United States, and
`(2) the benefit will be realized solely in connection with the
activities of the purchaser occurring outside the United States.
`(d) Services Acquired From Service Provider That Provides Services in and
Outside the United States-
`(1) IN GENERAL- If a business entity acquires services from a service
provider that provides services both in and outside the United States and
the service provider shows on the invoice where the services are
provided--
`(A) the business entity shall treat the services as provided where
stated on the invoice, and
`(B) the service provider shall treat as taxable receipts any services
listed as provided in the United States.
`(2) NO INVOICE- If a business entity acquires services from a service
provider that provides services both in and outside the United States and
the service provider does not show on an invoice where such services are
provided--
`(A) the business entity shall treat the services as if provided in
the location to which payment is sent, and
`(B) the service provider shall treat as taxable receipts any payments
received in the United States.
`(e) SPECIAL RULES PREVAIL- See sections 268 and 269 for special rule
relating to transportation and communication services.
`SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES.
`(a) Transportation of Property-
`(A) EXPORTS- Taxable receipts do not include receipts from the
transportation of property exported from the United States.
`(B) IMPORTS- Taxable receipts include receipts from transportation of
property imported into the United States only if such costs are not taken
into account in determining the import tax.
`(C) PRESUMPTIONS- The Secretary shall prescribe regulations
describing situations in which a transporter of property must presume that
no import tax has been paid on the cost of its services.
`(A) EXPORTS- Business purchases do not include amounts paid or
incurred for the cost of transportation of property exported from the
United States.
`(B) IMPORTS- Amounts paid or incurred for transportation of goods
imported into the United States, shall constitute a cost of business
purchase only to the extent that they are taken into account in
determining the customs value for purposes of section 286(a) (relating to the
import tax).
`(b) Transportation of Passengers-
`(1) TAXABLE RECEIPTS- Taxable receipts--
`(A) include receipts from the transportation of passengers from the
United States to a destination outside the United States, but
`(B) do not include receipts from the transportation of passengers
from outside the United States to a destination in the United
States.
`(2) BUSINESS PURCHASES- Business purchases--
`(A) include amounts paid or incurred in a business activity for the
transportation of passengers from the United States to a destination
outside the United States, but
`(B) do not include amounts paid or incurred for transportation of
passengers from outside the United States to a destination in the United
States.
`(3) SIMPLIFYING RULES- The Secretary may provide rules that simplify
this subsection, including rules under which--
`(A) half of receipts attributable to transportation to or from the
United States are treated as taxable receipts,
`(B) half of the cost for business trips to and from the United States
are treated as business purchases, and
`(C) all transportation expenses of a business entity that has no
regular business outside the United States are treated as business
purchases.
`SEC. 269. INTERNATIONAL COMMUNICATIONS.
`(a) IN GENERAL- For purposes of section 266, communications services
shall be treated as provided at the point of origin of the communications and
shall not be treated as imported or exported.
`(b) COMMUNICATIONS SERVICES- Communications services include--
`(1) telephone communications services,
`(2) courier services (except in the case of transportation of property
that is imported or exported),
`(3) satellite transmission services,
`(5) facsimile transmission services, and
`(6) other similar services.
`SEC. 270. INSURANCE.
`(a) IN GENERAL- Insurance services will be treated as provided at the
location of the insurance company providing the services. Except as the
Secretary may prescribe by regulations, insurance companies will be treated as
providing services at the location to which insurance payments are made.
`(b) INSURED RISKS IN THE UNITED STATES- If insurance services are
provided outside the United States and the insured risk is located in the
United States--
`(1) the insurance service shall be treated as imported,
`(2) the insurance premiums shall be subject to the import tax,
and
`(3) payments of insurance benefits shall not be treated as
imported.
`(c) INSURED RISK OUTSIDE THE UNITED STATES- If insurance services are
provided inside the United States and the insured risk is located outside the
United States--
`(1) insurance services shall be treated as exported,
`(2) payments of insurance benefits shall be treated as payments for
services outside the United States, and shall not be deducted as business
purchases.
`(d) INSURANCE SERVICES- Insurance services means the provision of
insurance and services related to insurance other than insurance that is
treated as a savings asset.
`SEC. 271. BANKING SERVICES.
`The Secretary shall prescribe regulations on the location of banking
services and the extent to which such services are to be treated as imported
or exported.
`Subchapter K--Business Conducted in a Possession
`Sec. 276. Treatment of possessions.
`SEC. 276. TREATMENT OF POSSESSIONS.
`(a) IN GENERAL- For purposes of the business tax imposed by this chapter,
the U.S. possessions shall not be treated as part of the United States.
`(b) EFFECT ON PAYROLL TAX CREDIT- A business entity may not claim a
payroll tax credit with respect to any payroll taxes paid with respect to
income of residents of the U.S. possessions.
`(c) POSSESSION- For purposes of this subchapter, `U.S. possession' or
`possession' means a possession of the United States and includes the
Commonwealth of Puerto Rico and the Virgin Islands.
`Subchapter L--Payroll Tax Credit
`Sec. 281. Amount of credit.
`Sec. 282. Current-year payroll tax credit.
`Sec. 283. Credit carryover.
`SEC. 281. AMOUNT OF CREDIT.
`(a) AMOUNT OF CREDIT- The payroll tax credit for a business entity for a
taxable year is the lesser of--
`(A) the current-year payroll tax credit, and
`(B) the credit carryovers to the taxable year, or
`(2) the business entity's business tax for the taxable year (determined
without regard to the payroll tax credit).
`(b) CONSOLIDATED RETURNS- In the case of business entities filing
consolidated returns, the amount of the credit shall be determined using the
combined payroll tax credits and credit carryovers of the business entities
and the combined business tax of the business entities.
`SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT.
`(a) IN GENERAL- The `current-year payroll tax credit' is an amount equal
to the sum of--
`(1) the employer's share of the FICA tax imposed on wages of its
employees during the taxable year,
`(2) the employer's share of the tier 1 railroad retirement tax for its
employees during the taxable year,
`(3) one-half of the allocable portion of the SECA tax imposed on
individuals (other than independent contractors and other business entities)
who provide services to the business entity.
`(1) EMPLOYER'S SHARE OF THE FICA TAX- `Employer's share of the FICA
tax' means the old-age, survivors, disability and hospital insurance taxes
imposed by section 3111.
`(2) EMPLOYER'S SHARE OF THE TIER 1 RAILROAD RETIREMENT TAX- `Employer's
share of the tier 1 railroad retirement tax' means--
`(A) the tier 1 railroad retirement tax imposed by section 3221(a),
and
`(B) the portion of the tax imposed by section 3211(a)(1) on employee
representatives attributable to the tax imposed by section 3111.
`(3) ONE-HALF OF THE ALLOCABLE PORTION OF THE SECA TAX-
`(A) SECA TAX- `SECA tax' means the self-employment tax imposed by
section 1401.
`(B) PARTNERSHIPS- Until such time as the SECA tax and the Federal
Insurance Contributions Acts are amended to treat partners of partnerships
as employees, if a partner designates a partnership as a principal source
of employment income for the taxable year, one-half of the partnership's
allocable portion of the SECA tax of such partner equals the FICA tax that
the employer would have been required to pay under section 3111 with
respect to such partner if the partner's self-employment income as
reported by the partnership were wages subject to the FICA tax. A partner
and partnership can agree to treat no portion of a partner's SECA tax as
allocable to the partnership.
`(C) PROPRIETORSHIP- In the case of an individual who is a proprietor
or sole owner and provider of service to a business entity, the individual
shall allocate the portion of one-half of his SECA tax not allocated
pursuant to subparagraph (B) to his business entities in accordance with
rules prescribed by the Secretary.
`(c) SPECIAL RULE- Under rules prescribed by the Secretary, an individual
subject to the self-employment tax shall pay half of the self-employment tax
on an amount of self employment income not less than the amount of the
individual's self-employment income taken into account by partnerships under
subparagraph (B) of subsection (b)(3).
`SEC. 283. CREDIT CARRYOVER.
`(a) CARRYOVER- A current-year credit that is not applied in the taxable
year in which earned shall constitute a credit carryover until applied but for
no more than 15 taxable years.
`(b) ORDER OF USE- For purposes of determining which credits are applied
under section 281, if the total credit allowable in a taxable year is less
than the sum of the current-year payroll credit and the carryover credits, the
current-year payroll credit shall be considered applied first and then credit
carryovers shall be considered applied in the order earned.
`Subchapter M--Import Tax
`Sec. 286. Imposition of tax on property.
`Sec. 287. Imposition of tax on import of services.
`Sec. 288. General rules for the import tax.
`SEC. 286. IMPOSITION OF TAX ON PROPERTY.
`(a) GENERAL RULE- There is hereby imposed a tax equal to 11 percent of
the customs value of all property entered into the United States for
consumption, use or warehousing.
`(b) LIABILITY FOR TAX- The tax imposed on the import of property by
subsection (a) shall be paid by the person entering the
property into the United States for consumption, use or warehousing. Such tax
shall be due and payable at the time of import.
`(c) IMPORTS OF PREVIOUSLY EXPORTED PROPERTY- In the case of any article
that is classified under a heading or subheading of subchapter I or II of
chapter 98 of the Tariff Schedules of the United States, the tax under this
section shall be imposed only on that portion of the customs value of such
article that is dutiable under such heading or subheading.
`(d) IMPORTS FOR PERSONAL CONSUMPTION- The import tax imposed by this
section shall not apply to any article entered into the United States duty
free under subchapters I through VII of chapter 98 of the Tariff Schedules of
the United States.
`SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES.
`(a) GENERAL RULE- There is hereby imposed a tax equal to 11 percent of
the cost of all services treated as imported into the United States during the
taxable year of the service recipient.
`(b) LIABILITY FOR THE TAX- The tax on the import of services imposed by
subsection (a) shall be paid by the person who receives the imported services.
The tax shall be payable as if it were an addition to the business tax imposed
by section 201.
`(c) IMPORTED SERVICES- For purposes of this section, services shall be
treated as imported if they are treated as imported under section 267 (general
rules on import of services) or section 270 (related to insurance).
`(d) SPECIAL RULE FOR INSURANCE- The seller of insurance that is treated
as imported under section 270 shall be liable for the collection of the tax
imposed by subsection (a) on the insurance and for paying such tax to the
Secretary. The first sentence of subsection (b) (relating to the person liable
for the tax) shall apply to insurance only to the extent that the seller of
the insurance services does not collect such tax.
`SEC. 288. GENERAL RULES FOR THE IMPORT TAX.
`(a) IMPORT TAX- `Import tax' means the tax imposed by section 286 on the
import of property and the tax imposed by section 287 on the import of
services.
`(b) NO PAYROLL TAX CREDIT- The payroll tax credit shall not be allowed
against the import tax.
`Subchapter N--Transition Rules
`Sec. 290. Amortization of transition basis.
`Sec. 291. Sales of transition basis property.
`Sec. 292. Safe harbor leases.
`Sec. 294. Section 481 adjustments.
`SEC. 290. AMORTIZATION OF TRANSITION BASIS.
`(a) TRANSITION BASIS DEDUCTION- The `transition basis deduction' for a
taxable year is the sum of the amortization allowance determined under this
section for the taxable year.
`(b) AMORTIZATION RULES- The amortization allowance for each category of
amortizable basis shall be determined by amortizing the amortizable basis of
such category ratably over the amortization period for the category beginning
January 1, 2000.
`(c) AMORTIZATION PERIOD- The amortization periods shall be determined in
accordance with the following table:
In the case of:
--The amortization period is:
Category I basis
--15 years
Category II basis
--30 years
Category III basis
--40 years
Unrecovered inventory costs
--5 years
`(1) CATEGORY I BASIS- `Category I basis' is the sum of the unrecovered
bases as of January 1, 2000, of all depreciable property placed in service
prior to January 1, 2000, and the unamortized portion of amortizable costs
incurred before January 1, 2000, if--
`(A) cost recovery or amortization began before January 1, 2000,
and
`(B) the remaining recovery period or amortization period as of
January 1, 2000, is less than 15 years.
`(2) CATEGORY II BASIS- `Category II basis' is the sum of the
unrecovered bases as of January 1, 2000, of all depreciable property placed
in service prior to January 1, 2000, and the unamortized portion of
amortizable costs incurred before January 1, 2000, if--
`(A) cost recovery or amortization began before January 1, 2000,
and
`(B) the remaining recovery period or amortization period as of
January 1, 2000, is 15 years or more.
`(3) CATEGORY III BASIS- `Category III basis' is the sum of the adjusted
basis of each asset satisfying the following requirements:
`(A) The asset was placed in service prior to January 1,
2000,
`(B) The asset was used in a business activity in 2000,
`(C) The cost of the asset was capitalized and not depreciable or
otherwise recoverable under the Internal Revenue Code of 1986,
and
`(D) The cost of the asset would have constituted deductible expenses
under the business tax if such cost had been incurred after 1999.
`(4) UNRECOVERED INVENTORY COSTS- `Unrecovered inventory costs' means
the cost of goods sold (as determined under the Internal Revenue Code of
1986) if a business entity sold all of its inventory (including inventory
being produced) on the effective date of the business tax.
`(e) Rules of Application-
`(1) Remaining recovery period-
`(A) TIME OF MEASURE- The remaining recovery period shall be
determined as of December 31, 1999, and shall include each taxable year
ending after such date in which a deduction would have been allowed under
the Internal Revenue Code of 1986.
`(B) ACCOUNTING METHOD- The remaining recovery period shall be
determined using the cost recovery method and rules applicable for
determining taxable income under the Internal Revenue Code of
1986.
`(2) DEPLETABLE ASSETS- Under rules prescribed by the Secretary, this
section shall apply to the remaining cost basis of depletable property and
to other property for which a cost recovery method other than one based on
time is used.
`SEC. 291. SALES OF TRANSITION BASIS PROPERTY.
`(a) IN GENERAL- Except as provided in subsection (b), for purposes of
determining the tax consequences of a sale, retirement, casualty or conversion
to personal use of an asset whose basis or cost is taken into account under
section 90, the amount to be amortized shall be treated as fully deducted upon
the adoption of the business tax.
`(1) IN GENERAL- In the case of a substantial sale of assets to which
the amortization rules of section 90 apply, the purchaser and seller may
jointly elect to have the purchaser assume the amortization deductions
attributable to such assets, in which case--
`(A) the seller's taxable receipts from such sale shall be reduced by
the amount of unamortized basis or cost assumed by the purchaser,
`(B) the purchaser may treat as a cost of a business purchase only the
portion of the purchase price in excess of the amount of unamortized basis
or cost assumed,
`(C) the unamortized basis or cost assumed shall continue to be
amortized in the manner amortized by the seller.
`(2) SUBSTANTIAL SALE- A sale of assets by a business entity to another
business entity is a substantial sale if--
`(A) more than 20 percent (in fair market value or in original cost)
of the assets of the seller are sold,
`(B) the total consideration for the sale exceeds $1 million or 20
percent of the taxable receipts of the seller for the taxable year
preceding the year of the sale, or
`(C) the sale satisfies other criteria established by the Secretary to
prevent distortions in gross profits resulting from asset sales.
`SEC. 292. SAFE HARBOR LEASES.
`(a) IN GENERAL- In the case of a safe harbor lease, rental payments
deemed to occur under the lease and interest payments deemed to be made under
the leases shall constitute costs of business purchases, and rental income and
interest income deemed to be earned under the lease shall constitute taxable
receipts. The transition basis deduction rules shall apply to the lessor's
adjusted basis in assets subject to a safe harbor lease.
`(b) SAFE HARBOR LEASE- `Safe harbor lease' means a sale and leaseback
transaction entered into pursuant to section 168(f)(8) of the Internal Revenue
Code, as added by the Economic Recovery Tax Act of 1981, when such provision
was in effect but only if such transaction would not be treated as a sale and
leaseback for tax purposes but for that provision.
`SEC. 293. CARRYOVERS.
`(a) NO LOSS CARRYOVERS- No deduction shall be allowed under the business
tax for net operating loss carryovers, capital loss carryovers, or any other
loss carryovers from the income tax under the Internal Revenue Code of
1986.
`(b) NO CREDIT CARRYOVERS- No credits shall be allowed under the business
tax for business credit carryovers, minimum tax credit carryovers, or any
other credit carryovers from the income tax under the Internal Revenue Code of
1986.
`SEC. 294. SECTION 481 ADJUSTMENTS.
`(a) POSITIVE NET SECTION 481 ADJUSTMENT AMOUNT- If, as of January 1,
2000, a business entity has a positive net section 481 adjustment amount, the
amount shall be applied to reduce the transition basis in accounts (for
purposes of section 290) in the following order:
`(1) First, to reduce the category I basis (but not below zero),
`(2) Second, to reduce the category II basis (but not below zero),
`(3) Third, to reduce the unrecovered inventory costs.
`(b) NEGATIVE NET SECTION 481 ADJUSTMENT AMOUNT- If, as of January 1,
2000, a business entity has a
negative net section 481 adjustment amount, the amount shall be applied to
increase category I basis for purposes of section 290.
`(c) SECTION 481 ADJUSTMENT- A business entity's net section 481
adjustment is determined by subtracting--
`(1) the sum of all additional deductions to which a business entity
would be entitled by reason of section 481 of the Internal Revenue Code of
1986 for periods beginning on or after the effective date of the business
tax with respect to changes in accounting methods made before such effective
date, from
`(2) the sum of all additional income which a business entity would
recognize by reason of section 481 of the Internal Revenue Code of 1986 for
periods beginning on or after the effective date of the business tax with
respect to changes in accounting methods made before such effective
date,
in each case assuming that the income tax under the Internal Revenue Code
of 1986 remained in effect.
`Subchapter O--Rules for Administration, Consolidated Returns
`Sec. 301. Returns, due dates, etc.
`Sec. 302. Consolidated returns.
`SEC. 301. RETURNS, DUE DATES, ETC.
`(a) IN GENERAL- Until subtitle F is amended to reflect the adoption of
this chapter, the rules of subtitle F relating to C corporations shall apply
to business entities with respect to--
`(1) returns and records;
`(2) time and place for paying tax;
`(3) assessment of taxes;
`(4) collections and liens;
`(5) abatements, credits, and refunds;
`(6) interest on underpayments and overpayments;
`(7) additions to tax and penalties;
`(8) closing agreements and compromises;
`(10) judicial proceedings;
`(11) discovery of liability and enforcement; and
`(b) INDIVIDUALS ENGAGING IN BUSINESS ACTIVITIES- Under rules prescribed
by the Secretary, individuals engaging in business activities on their own or
with their spouses shall be permitted to file their business tax returns with
their individual tax returns and shall be subject to estimated tax rules for
individual income tax returns.
`SEC. 302. CONSOLIDATED RETURNS.
`(a) IN GENERAL- Business entities may file consolidated returns of
business tax if they would have been permitted to file consolidated returns
under section 1501 of the Internal Revenue Code and such section were applied
by treating each business entity as a corporation and its owners or partners
as shareholders.
`(b) FINANCIAL INSTITUTIONS- Financial intermediation businesses may be
included in consolidated returns, but each financial intermediation business
must compute its gross profits separately.
`(c) INTERCOMPANY TRANSACTIONS- In computing the gross profits of a
consolidated group, intercompany transactions can be taken into account, or at
the election of the filer, be disregarded (except in the case of transactions
with financial intermediation businesses).
`Subchapter P--Definitions and Rules of Application
`Sec. 311. Rules of application.
`SEC. 310. DEFINITIONS.
`(a) IN GENERAL- When used in this chapter, where not otherwise distinctly
expressed or manifestly incompatible with the intent thereof--
`(1) USA INCOME TAX- `USA Income Tax' and `Simplified USA Tax' for
individuals mean the tax imposed by chapter 1.
`(2) INTERNAL REVENUE CODE OF 1986- `Internal Revenue Code of 1986'
means the Internal Revenue Code of 1986 as in effect immediately before the
enactment of the Simplified USA Tax.
`(3) UNITED STATES- `United States' means the States and the District of
Columbia.
`(b) TERMS DEFINED IN CHAPTER 2- If a term that is used but not defined in
this chapter or in section 7701 is defined in chapter 1, the definition in
chapter 1 shall apply except if manifestly incompatible with the intent of the
provision in which the term is used.
`SEC. 311. RULES OF APPLICATION.
`(a) DEFINITIONS- Any definition included in this chapter shall apply for
all purposes of this chapter unless--
`(1) such definition is limited to the purposes of a particular chapter,
section, or subsection, or
`(2) the definition clearly would not be applicable in a particular
context.
`(b) INTERPRETATIONS CONSISTENT WITH INTERNAL REVENUE CODE OF 1986- Terms
not defined in this chapter or elsewhere in this title, but defined in the
Internal Revenue Code of 1986, shall be interpreted in a manner consistent
with the Internal Revenue Code of 1986, except to the extent such
interpretation would be inconsistent with the principles and purposes of this
chapter.'
(b) The amendments made by this section shall be effective on January 1,
2000, except to the extent otherwise specifically provided in the text of such
amendments.
SEC. 302. REPEAL OF CHAPTER 6.
Chapter 6 of the Code (relating to consolidated returns) is repealed as of
January 1, 2000.
TITLE IV--DEFERRED COMPENSATION PLANS
SEC. 401. PROVISIONS SAVED.
(a) IN GENERAL- Excepts as otherwise provided in this title, the sections
contained in subchapter D of chapter 1 of the Code (relating to deferred
compensation, etc.) are hereby saved as chapter 3.
(b) LIMITATIONS ON CHAPTER 3- The following new section is inserted before
section 401 of the Code (as saved by subsection (a)):
`SEC. 400. EFFECT OF CHAPTER 3.
`(a) IN GENERAL- The provisions of chapter 3 (sections 401 through 420)
are included in this subtitle for purposes of cross-reference and for purposes
of determining whether plans are exempt from the business tax and whether
contributions to plans are deductible or excludable from gross income under
chapter 1.
`(b) EFFECT ON BUSINESS TAX DEDUCTIONS- Notwithstanding any provision to
the contrary in this chapter, no provision of this chapter shall cause any
amount to be treated as a cost of business purchase or to otherwise be
deducted from gross receipts for purposes of computing the Simplified USA for
Tax Businesses under chapter 2.
`(c) NO CREDITS- Notwithstanding any provision to the contrary in this
chapter, no provision of this chapter shall result in a tax credit against any
tax imposed by chapter 1 or chapter 2.
`(d) EFFECT OF FAILURE TO COMPLY WITH PROVISIONS- A failure to comply with
applicable provisions in this chapter could cause a plan to lose its exemption
from the business tax and, thereby subject certain business activities of the
plan to the business tax and/or result in the constructive distribution of
plan assets to plan participants.'
(c) Section 408A Susperseded by Section 30- Section 408A is repealed.
SEC. 402. CLERICAL AMENDMENTS.
(a) TABLE OF SECTIONS- The table of sections for subpart A of part 1 of
chapter 3 of the USA Tax Code (formerly subchapter D of chapter 1 of the Code)
is amended by inserting at the beginning of the table:
`CHAPTER 3--DEFERRED COMPENSATION, ETC.'
(b) Renumbering of Chapters-
(1) RENUMBER CHAPTERS- Chapters 2 and 3 of the Code are renumbered 4 and
5 respectively. Such renumbering shall be reflected in all tables and
headings in the Code.
(2) CROSS REFERENCES- Any cross reference to chapter 2 or 3 of the Code
contained in any provision of the Code that is not amended by this Act or in
any other statute shall be treated as a reference to such chapter as
renumbered by paragraph 1.
TITLE V--REPEAL OF ESTATE AND GIFT TAXES
SEC. 501. REPEAL OF GRATUITOUS TRANSFER TAXES.
Subtitle B of the Code (relating to estate and gift taxes) is repealed.
SEC 502. EFFECTIVE DATE.
Section 501 shall apply to--
(1) gifts made after December 31, 1999;
(2) the estates of decedents dying after December 31, 1999, and
(3) generating skipping transfers (within the meaning of subchapter B of
chapter 13 as in effect before its repeal by this Act) occurring after
December 31, 1999.
TITLE VI--TECHNICAL AND ADMINISTRATIVE CHANGES: EFFECTIVE
DATES
SEC. 601. USA TAX CODE.
(a) REDESIGNATION OF THE CODE- The Internal Revenue Title enacted August
16, 1954, and as heretofore and hereby
amended may be cited as the `USA Tax Code'. The USA Tax Code, as hereinafter
amended, may be cited as the `USA Tax Code, as amended'.
(b) REFERENCES IN LAWS, ETC- Except where inappropriate, any reference in
any law, Executive order, or other document--
(1) to the Internal Revenue Code of 1954 or the Internal Revenue Code of
1986 shall include a reference to the USA Tax Code or the USA Tax Code, as
amended,
(2) to the USA Tax Code or the USA Tax Code, as amended, shall include a
reference, with respect to periods before January 1, 2000, to the Internal
Revenue Code of 1954 or the Internal Revenue Code of 1986.
SEC. 602. REVISIONS TO THE CODE.
Not later than January 1, 2001, the Secretary shall submit to Congress
proposed changes in the USA Tax Code that--
(1) eliminate cross-references to the Internal Revenue Code of 1986
(except with respect to transition issues) and insert provisions similar to
the cross-referenced sections of the Internal Revenue Code of 1986,
(2) revise subtitles C through J of the USA Tax Code to fully reflect
the amendments to subtitle A of the Code made by this Act and the repeal of
subtitle B,
(3) include statutory definitions or rules in cases where the Secretary
concludes that the definitions or rules cannot or should not be addressed by
regulation,
(4) revise chapter 4 of the USA Tax Code (as renumbered by section 402
of this Act) (relating to the self-employment tax) to conform to changes
made by this Act, and
(5) revise chapter 5 of the USA Tax Code (as renumbered by section 402
of this Act) (relating to withholding on nonresident aliens and foreign
corporations) to reflect changes made in this Act.
SEC. 603. APPLICATION OF SUBTITLE F.
Until such time as subtitle F of the Code is amended to reflect the
amendments made by this Act, the provisions of subtitle F shall be treated as
generally applying to the Simplified USA Tax--
(1) without regard to specific cross references,
(2) without regard to provisions relating to partnerships, and
(3) as if the business tax under chapter 2 were the corporate income tax
and all business entities were corporations (except for purposes of
collection, in which case the owners of noncorporate entities shall be
obligated for taxes owned by the entities to the same extent as they would
if the entity owed the tax prior to the amendment of the Code).
SEC. 604. CLERICAL AMENDMENT.
The portion of the table at the beginning of the Code listing subtitles
and chapters of subtitle A is amended to read as follows:
`Subtitle A. Simplified USA Tax.
`Subtitle C. Employment taxes.
`Subtitle D. Miscellaneous excise taxes.
`Subtitle E. Alcohol, tobacco and certain other excise taxes.
`Subtitle F. Procedure and administration.
`Subtitle G. The Joint Committee on Taxation.
`Subtitle H. Financing of presidential election campaigns.
`Subtitle I. Trust Fund Code.
`Subtitle K. Group health plan requirements.
`Subtitle A--Simplified USA Tax
`Chapter 1. Simplified USA Tax for individuals.
`Chapter 2. Simplified USA Tax for businesses.
`Chapter 3. Deferred compensation plans.
`Chapter 4. Tax on self-employment income.
`Chapter 5. Withholding of tax on nonresident aliens and foreign
corporations.'
SEC. 605. EFFECTIVE DATES.
(a) IN GENERAL- Except as otherwise provided in this Act, the amendments
made by this Act shall be effective on January 1, 2000, with respect to tax
years beginning on such date.
(b) Special Rules for Businesses With 52-53 Week Year- If a business uses
a 52-53 week taxable year the amendments made by this Act shall apply to the
business with respect to its tax year beginning in the last week in December
except with respect to any transactions occurring during 1999 that were
structured to take advantage of the application of this Act to such business
at a time when this Act did not apply to other businesses or to
individuals.
END