S 822 IS
106th CONGRESS
1st Session
S. 822
To amend the Internal Revenue Code of 1986 to impose a flat tax only
on individual taxable earned income and business taxable income, and for other
purposes.
IN THE SENATE OF THE UNITED STATES
April 15, 1999
Mr. SPECTER introduced the following bill; which was read twice and referred
to the Committee on Finance
A BILL
To amend the Internal Revenue Code of 1986 to impose a flat tax only
on individual taxable earned income and business taxable income, 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; TABLE OF CONTENTS; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE- This Act may be cited as the `Flat Tax Act of 1999'.
(b) TABLE OF CONTENTS- The table of contents for this Act is as
follows:
Sec. 1. Short title; table of contents; amendment of 1986 Code.
Sec. 2. Flat tax on individual taxable earned income and business
taxable income.
Sec. 3. Repeal of estate and gift taxes.
Sec. 4. Additional repeals.
(c) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided,
whenever in this Act an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the reference shall
be considered to be made to a section or other provision of the Internal
Revenue Code of 1986.
SEC. 2. FLAT TAX ON INDIVIDUAL TAXABLE EARNED INCOME AND BUSINESS TAXABLE
INCOME.
(a) IN GENERAL- Subchapter A of chapter 1 of subtitle A is amended to read
as follows:
`Subchapter A--Determination of Tax Liability
`Part I. Tax on individuals.
`Part II. Tax on business activities.
`PART I--TAX ON INDIVIDUALS
`Sec. 1. Tax imposed.
`Sec. 2. Standard deduction.
`Sec. 3. Deduction for cash charitable contributions.
`Sec. 4. Deduction for home acquisition indebtedness.
`Sec. 5. Definitions and special rules.
`SECTION 1. TAX IMPOSED.
`(a) IMPOSITION OF TAX- There is hereby imposed on every individual a tax
equal to 20 percent of the taxable earned income of such individual.
`(b) TAXABLE EARNED INCOME- For purposes of this section, the term
`taxable earned income' means the excess (if any) of--
`(1) the earned income received or accrued during the taxable year,
over
`(A) the standard deduction,
`(B) the deduction for cash charitable contributions, and
`(C) the deduction for home acquisition indebtedness,
`(c) EARNED INCOME- For purposes of this section--
`(1) IN GENERAL- The term `earned income' means wages, salaries, or
professional fees, and other amounts received from sources within the United
States as compensation for personal services actually rendered, but does not
include that part of compensation derived by the taxpayer for personal
services rendered by the taxpayer to a corporation which represents a
distribution of earnings or profits rather than a reasonable allowance as
compensation for the personal services actually rendered.
`(2) TAXPAYER ENGAGED IN TRADE OR BUSINESS- In the case of a taxpayer
engaged in a trade or business in which both personal services and capital
are material income-producing factors, under regulations prescribed by the
Secretary, a reasonable allowance as compensation for the personal services
rendered by the taxpayer, not in excess of 30 percent of the taxpayer's
share of the net profits of such trade or business, shall be considered as
earned income.
`SEC. 2. STANDARD DEDUCTION.
`(a) IN GENERAL- For purposes of this subtitle, the term `standard
deduction' means the sum of--
`(1) the basic standard deduction, plus
`(2) the additional standard deduction.
`(b) BASIC STANDARD DEDUCTION- For purposes of subsection (a), the basic
standard deduction is--
`(1) $17,500 in the case of--
`(B) a surviving spouse (as defined in section 5(a)),
`(2) $15,000 in the case of a head of household (as defined in section
5(b)), and
`(3) $10,000 in the case of an individual--
`(A) who is not married and who is not a surviving spouse or head of
household, or
`(B) who is a married individual filing a separate return.
`(c) ADDITIONAL STANDARD DEDUCTION- For purposes of subsection (a), the
additional standard deduction is $5,000 for each dependent (as defined in
section 5(d))--
`(1) whose earned income for the calendar year in which the taxable year
of the taxpayer begins is less than the basic standard deduction specified
in subsection (b)(3), or
`(2) who is a child of the taxpayer and who--
`(A) has not attained the age of 19 at the close of the calendar year
in which the taxable year of the taxpayer begins, or
`(B) is a student who has not attained the age of 24 at the close of
such calendar year.
`(d) INFLATION ADJUSTMENT-
`(1) IN GENERAL- In the case of any taxable year beginning in a calendar
year after 1999, each dollar amount contained in subsections (b) and (c)
shall be increased by an amount equal to--
`(A) such dollar amount, multiplied by
`(B) the cost-of-living adjustment under section 1(f)(3) for the
calendar year in which the taxable year begins, determined by substituting
`calendar year 1998' for `calendar year 1992' in subparagraph (B) of such
section.
`(2) ROUNDING- If any increase determined under paragraph (1) is not a
multiple of $50, such amount shall be rounded to the next lowest multiple of
$50.
`SEC. 3. DEDUCTION FOR CASH CHARITABLE CONTRIBUTIONS.
`(a) GENERAL RULE- For purposes of this part, there shall be allowed as a
deduction any charitable contribution (as defined in subsection (b)) not to
exceed $2,500 ($1,250, in the case of a married individual filing a separate
return), payment of which is made within the taxable year.
`(b) CHARITABLE CONTRIBUTION DEFINED- For purposes of this section, the
term `charitable contribution' means a contribution or gift of cash or its
equivalent to or for the use of the following:
`(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, 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,
`(C) no part of the net earnings of which inures to the benefit of any
private shareholder or individual, and
`(D) which is not disqualified for tax exemption under section
501(c)(3) 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.
A contribution or gift by a corporation to a trust, chest, fund, or
foundation shall be deductible by reason of this paragraph only if it is to
be used within the United States or any of its possessions exclusively for
purposes specified in subparagraph (B).
Rules similar to the rules of section 501(j) shall apply for purposes of this
paragraph.
`(3) A post or organization of war veterans, or an auxiliary unit or
society of, or trust or foundation for, any such post or
organization--
`(A) organized in the United States or any of its possessions,
and
`(B) no part of the net earnings of which inures to the benefit of any
private shareholder or individual.
`(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.
For purposes of this section, the term `charitable contribution' also
means an amount treated under subsection (d) as paid for the use of an
organization described in paragraph (2), (3), or (4).
`(c) DISALLOWANCE OF DEDUCTION IN CERTAIN CASES AND SPECIAL RULES-
`(1) SUBSTANTIATION REQUIREMENT FOR CERTAIN CONTRIBUTIONS-
`(A) GENERAL RULE- No deduction shall be allowed under subsection (a)
for any contribution of $250 or more unless the taxpayer substantiates the
contribution by a contemporaneous written acknowledgment of the
contribution by the donee organization that meets the requirements of
subparagraph (B).
`(B) CONTENT OF ACKNOWLEDGMENT- An acknowledgment meets the
requirements of this subparagraph if it includes the following
information:
`(i) The amount of cash contributed.
`(ii) Whether the donee organization provided any goods or services
in consideration, in whole or in part, for any contribution described in
clause (i).
`(iii) A description and good faith estimate of the value of any
goods or services referred to in clause (ii) or, if such goods or
services consist solely of intangible religious benefits, a statement to
that effect.
For purposes of this subparagraph, the term `intangible religious
benefit' means any intangible religious benefit which is provided by an
organization organized exclusively for religious purposes and which
generally is not sold in a commercial transaction outside the donative
context.
`(C) CONTEMPORANEOUS- For purposes of subparagraph (A), an
acknowledgment shall be considered to be contemporaneous if the taxpayer
obtains the acknowledgment on or before the earlier of--
`(i) the date on which the taxpayer files a return for the taxable
year in which the contribution was made, or
`(ii) the due date (including extensions) for filing such
return.
`(D) SUBSTANTIATION NOT REQUIRED FOR CONTRIBUTIONS REPORTED BY THE
DONEE ORGANIZATION- Subparagraph (A) shall not apply to a contribution if
the donee organization files a return, on such form and in accordance with
such regulations as the Secretary may prescribe, which includes the
information described in subparagraph (B) with respect to the
contribution.
`(E) REGULATIONS- The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes of this
paragraph, including regulations that may provide that some or all of the
requirements of this paragraph do not apply in appropriate cases.
`(2) DENIAL OF DEDUCTION WHERE CONTRIBUTION FOR LOBBYING ACTIVITIES- No
deduction shall be allowed under this section for a contribution to an
organization which conducts activities to which section 11(d)(2)(C)(i)
applies on matters of direct financial interest to the donor's trade or
business, if a principal purpose of the contribution was to avoid Federal
income tax by securing a deduction for such activities under this section
which would be disallowed by reason of section 11(d)(2)(C) if the donor had
conducted such activities directly. No deduction shall be allowed under
section 11(d) for any amount for which a deduction is disallowed under the
preceding sentence.
`(d) AMOUNTS PAID TO MAINTAIN CERTAIN STUDENTS AS MEMBERS OF TAXPAYER'S
HOUSEHOLD-
`(1) IN GENERAL- Subject to the limitations provided by paragraph (2),
amounts paid by the taxpayer to maintain an individual (other than a
dependent, as defined in section 5(d), or a relative of the taxpayer) as a
member of such taxpayer's household during the period that such individual
is--
`(A) a member of the taxpayer's household under a written agreement
between the taxpayer and an organization described in paragraph (2), (3),
or (4) of subsection (b) to implement a program of the organization to
provide educational opportunities for pupils or students in private homes,
and
`(B) a full-time pupil or student in the twelfth or any lower grade at
an educational organization located in the United States 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,
shall be treated as amounts paid for the use of the organization.
`(A) AMOUNT- Paragraph (1) shall apply to amounts paid within the
taxable year only to the extent that such amounts do not exceed $50
multiplied by the number of full calendar months during the taxable year
which fall within the period described in paragraph (1). For purposes of
the preceding sentence, if 15 or more days of a calendar month fall within
such period such month shall be considered as a full calendar
month.
`(B) COMPENSATION OR REIMBURSEMENT- Paragraph (1) shall not apply to
any amount paid by the taxpayer within the taxable year if the taxpayer
receives any money or other property as compensation or reimbursement for
maintaining the individual in the taxpayer's household during the period
described in paragraph (1).
`(3) RELATIVE DEFINED- For purposes of paragraph (1), the term `relative
of the taxpayer'
means an individual who, with respect to the taxpayer, bears any of the
relationships described in subparagraphs (A) through (H) of section 5(d)(1).
`(4) NO OTHER AMOUNT ALLOWED AS DEDUCTION- No deduction shall be allowed
under subsection (a) for any amount paid by a taxpayer to maintain an
individual as a member of the taxpayer's household under a program described
in paragraph (1)(A) except as provided in this subsection.
`(e) DENIAL OF DEDUCTION FOR CERTAIN TRAVEL EXPENSES- No deduction shall
be allowed under this section 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.
`(f) DISALLOWANCE OF DEDUCTIONS IN CERTAIN CASES- For disallowance of
deductions for contributions to or for the use of Communist controlled
organizations, see section 11(a) of the Internal Security Act of 1950 (50
U.S.C. 790).
`(g) TREATMENT OF CERTAIN AMOUNTS PAID TO OR FOR THE BENEFIT OF
INSTITUTIONS OF HIGHER EDUCATION-
`(1) IN GENERAL- For purposes of this section, 80 percent of any amount
described in paragraph (2) shall be treated as a charitable
contribution.
`(2) AMOUNT DESCRIBED- For purposes of paragraph (1), an amount is
described in this paragraph if--
`(A) the amount is paid by the taxpayer to or for the benefit of an
educational organization--
`(i) which is described in subsection (d)(1)(B), and
`(ii) which is an institution of higher education (as defined in
section 3304(f)), and
`(B) such amount would be allowable as a deduction under this section
but for the fact that 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.
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.
`(h) OTHER CROSS REFERENCES-
`(1) For treatment of certain organizations providing child care, see
section 501(k).
`(2) For charitable contributions of partners, see section 702.
`(3) For treatment of gifts for benefit of or use in connection with the
Naval Academy as gifts to or for the use of the United States, see section
6973 of title 10, United States Code.
`(4) For treatment of gifts accepted by the Secretary of State, the
Director of the International Communication Agency, or the Director of the
United States International Development Coop-eration Agency, as gifts to or
for the use of the United States, see section 25 of the State Department
Basic Authorities Act of 1956.
`(5) For treatment of gifts of money accepted by the Attorney General
for credit to the `Commissary Funds, Federal Prisons' as gifts to or for the
use of the United States, see section 4043 of title 18, United States
Code.
`(6) For charitable contributions to or for the use of Indian tribal
governments (or subdivisions of such governments), see section 7871.
`SEC. 4. DEDUCTION FOR HOME ACQUISITION INDEBTEDNESS.
`(a) GENERAL RULE- For purposes of this part, there shall be allowed as a
deduction all qualified residence interest paid or accrued within the taxable
year.
`(b) QUALIFIED RESIDENCE INTEREST DEFINED- The term `qualified residence
interest' means any interest which is paid or accrued during the taxable year
on acquisition indebtedness with respect to any qualified residence of the
taxpayer. For purposes of the preceding sentence, the determination of whether
any property is a qualified residence of the taxpayer shall be made as of the
time the interest is accrued.
`(c) ACQUISITION INDEBTEDNESS-
`(1) IN GENERAL- The term `acquisition indebtedness' means any
indebtedness which--
`(A) is incurred in acquiring, constructing, or substantially
improving any qualified residence of the taxpayer, and
`(B) is secured by such residence.
Such term also includes any indebtedness secured by such residence
resulting from the refinancing of indebtedness meeting the requirements of
the preceding sentence (or this sentence); but only to the extent the amount
of the indebtedness resulting from such refinancing does not exceed the
amount of the refinanced indebtedness.
`(2) $100,000 LIMITATION- The aggregate amount treated as acquisition
indebtedness for any period shall not exceed $100,000 ($50,000 in the case
of a married individual filing a separate return).
`(d) TREATMENT OF INDEBTEDNESS INCURRED ON OR BEFORE OCTOBER 13, 1987-
`(1) IN GENERAL- In the case of any pre-October 13, 1987,
indebtedness--
`(A) such indebtedness shall be treated as acquisition indebtedness,
and
`(B) the limitation of subsection (c)(2) shall not apply.
`(2) REDUCTION IN $100,000 LIMITATION- The limitation of subsection
(c)(2) shall be reduced (but not below zero) by the aggregate amount of
outstanding pre-October 13, 1987, indebtedness.
`(3) PRE-OCTOBER 13, 1987, INDEBTEDNESS- The term `pre-October 13, 1987,
indebtedness' means--
`(A) any indebtedness which was incurred on or before October 13,
1987, and which was secured by a qualified residence on October 13, 1987,
and at all times thereafter before the interest is paid or accrued,
or
`(B) any indebtedness which is secured by the qualified residence and
was incurred after October 13, 1987, to refinance indebtedness described
in subparagraph (A) (or refinanced indebtedness meeting the requirements
of this subparagraph) to the extent (immediately after the refinancing)
the principal amount of the indebtedness resulting from the refinancing
does not exceed the principal amount of the refinanced indebtedness
(immediately before the refinancing).
`(4) LIMITATION ON PERIOD OF REFINANCING- Subparagraph (B) of paragraph
(3) shall not apply to any indebtedness after--
`(A) the expiration of the term of the indebtedness described in
paragraph (3)(A), or
`(B) if the principal of the indebtedness described in paragraph
(3)(A) is not amortized over its term, the expiration of the term of the
first refinancing of such indebtedness (or if earlier, the date which is
30 years after the date of such first refinancing).
`(e) OTHER DEFINITIONS AND SPECIAL RULES- For purposes of this
section--
`(1) QUALIFIED RESIDENCE- For purposes of this subsection--
`(A) IN GENERAL- Except as provided in subparagraph (C), the term
`qualified residence' means the principal residence of the
taxpayer.
`(B) MARRIED INDIVIDUALS FILING SEPARATE RETURNS- If a married couple
does not file a joint return for the taxable year--
`(i) such couple shall be treated as 1 taxpayer for purposes of
subparagraph (A), and
`(ii) each individual shall be entitled to take into account 1/2 of
the principal residence unless both individuals consent in writing to 1
individual taking into account the principal residence.
`(C) PRE-OCTOBER 13, 1987, INDEBTEDNESS- In the case of any
pre-October 13, 1987, indebtedness, the term `qualified residence' has the
meaning given that term in section 163(h)(4), as in effect on the day
before the date of enactment of this subparagraph.
`(2) SPECIAL RULE FOR COOPERATIVE HOUSING CORPORATIONS- Any indebtedness
secured by stock held by the 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 such a
tenant-stockholder. If stock described in the preceding sentence may not be
used to secure indebtedness, indebtedness shall be treated as so secured if
the taxpayer establishes to the satisfaction of the Secretary that such
indebtedness was incurred to acquire such stock.
`(3) UNENFORCEABLE SECURITY INTERESTS- Indebtedness shall not fail to be
treated as secured by any property solely because, under any applicable
State or local homestead or other debtor protection law in effect on August
16, 1986, the security interest is ineffective or the enforceability of the
security interest is restricted.
`(4) SPECIAL RULES FOR ESTATES AND TRUSTS- For purposes of determining
whether any interest paid or accrued by an estate or trust is qualified
residence interest, any residence held by
such estate or trust shall be treated as a qualified residence of such estate
or trust if such estate or trust establishes that such residence is a qualified
residence of a beneficiary who has a present interest in such estate or trust or
an interest in the residuary of such estate or trust.
`SEC. 5. DEFINITIONS AND SPECIAL RULES.
`(a) DEFINITION OF SURVIVING SPOUSE-
`(1) IN GENERAL- For purposes of this part, the term `surviving spouse'
means a taxpayer--
`(A) whose spouse died during either of the taxpayer's 2 taxable years
immediately preceding the taxable year, and
`(B) who maintains as the taxpayer's 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 subsection (d)) is a son, stepson,
daughter, or stepdaughter of the taxpayer, and
`(ii) with respect to whom the taxpayer is entitled to a deduction
for the taxable year under section 2.
For purposes of this paragraph, an individual shall be considered as
maintaining a household only if over one-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 this
part a taxpayer shall not be considered to be a surviving spouse--
`(A) if the taxpayer has remarried at any time before the close of the
taxable year, or
`(B) unless, for the taxpayer's taxable year during which the
taxpayer's 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 dies 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.
`(B) Except in the case of the combat zone designated for purposes of
the Vietnam conflict, the date which is 2 years after the date designated
as the date of termination of combatant activities in that zone.
`(b) DEFINITION OF HEAD OF HOUSEHOLD-
`(1) IN GENERAL- For purposes of this part, an individual shall be
considered a head of a household if, and only if, such individual is not
married at the close of such individual's taxable year, is not a surviving
spouse (as defined in subsection (a)), and either--
`(A) maintains as such individual's 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 a
deduction for the taxable year for such person under section 2 (or would
be so entitled but for subparagraph (B) or (D) of subsection (d)(5)),
or
`(ii) any other person who is a dependent of the taxpayer, if the
taxpayer is entitled to a deduction for the taxable year for such person
under section 2, 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 deduction for the taxable year for such father
or mother under section 2.
For purposes of this paragraph, an individual shall be considered as
maintaining a household only if over one-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 such individual's
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
such taxpayer's taxable year if at any time during the taxable year such
taxpayer's spouse is a nonresident alien, and
`(D) a taxpayer shall be considered as married at the close of such
taxpayer's taxable year if such taxpayer's spouse (other than a spouse
described in subparagraph (C)) died during the taxable year.
`(3) LIMITATIONS- Notwithstanding paragraph (1), for purposes of this
part, a taxpayer shall not be considered to be a head of a household--
`(A) if at any time during the taxable year the taxpayer 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 (I) of subsection (d)(1), or
`(ii) paragraph (3) of subsection (d).
`(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).
`(1) GENERAL DEFINITION- For purposes of this part, the term `dependent'
means any of the following individuals over one-half of whose support, for
the calendar year in which the taxable year of the taxpayer begins, was
received from the taxpayer (or is treated under paragraph (3) or (5) as
received from the taxpayer):
`(A) A son or daughter of the taxpayer, or a descendant of
either.
`(B) A stepson or stepdaughter 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 stepfather or stepmother of the taxpayer.
`(F) A son or daughter of a brother or sister of the
taxpayer.
`(G) A brother or sister of the father or mother of the
taxpayer.
`(H) A son-in-law, daughter-in-law, father-in-law, mother-in-law,
brother-in-law, or sister-in-law of the taxpayer.
`(I) An individual (other than an individual who at any time during
the taxable year was the spouse, determined without regard to section
7703, of the taxpayer) who, for the taxable year of the taxpayer, has as
such individual's principal place of abode the home of the taxpayer and is
a member of the taxpayer's household.
`(2) RULES RELATING TO GENERAL DEFINITION- For purposes of this
section--
`(A) BROTHER; SISTER- The terms `brother' and `sister' include a
brother or sister by the halfblood.
`(B) CHILD- In determining whether any of the relationships specified
in paragraph (1) or subparagraph (A) of this paragraph exists, a
legally adopted child of an individual (and a child who is a member of an
individual's household, if placed with such individual by an authorized
placement agency for legal adoption by such individual), or a foster child of an
individual (if such child satisfies the requirements of paragraph (1)(I) with
respect to such individual), shall be treated as a child of such individual by
blood.
`(C) CITIZENSHIP- The term `dependent' does not include any individual
who is not a citizen or national of the United States unless such
individual is a resident of the United States or of a country contiguous
to the United States. The preceding sentence shall not exclude from the
definition of `dependent' any child of the taxpayer legally adopted by
such taxpayer, if, for the taxable year of the taxpayer, the child has as
such child's principal place of abode the home of the taxpayer and is a
member of the taxpayer's household, and if the taxpayer is a citizen or
national of the United States.
`(D) ALIMONY, ETC- A payment to a wife which is alimony or separate
maintenance shall not be treated as a payment by the wife's husband for
the support of any dependent.
`(E) UNLAWFUL ARRANGEMENTS- An individual is not a member of the
taxpayer's household if at any time during the taxable year of the
taxpayer the relationship between such individual and the taxpayer is in
violation of local law.
`(3) MULTIPLE SUPPORT AGREEMENTS- For purposes of paragraph (1), over
one-half of the support of an individual for a calendar year shall be
treated as received from the taxpayer if--
`(A) no one person contributed over one-half of such support,
`(B) over one-half of such support was received from persons each of
whom, but for the fact that such person did not contribute over one-half
of such support, would have been entitled to claim such individual as a
dependent for a taxable year beginning in such calendar year,
`(C) the taxpayer contributed over 10 percent of such support,
and
`(D) each person described in subparagraph (B) (other than the
taxpayer) who contributed over 10 percent of such support files a written
declaration (in such manner and form as the Secretary may by regulations
prescribe) that such person will not claim such individual as a dependent
for any taxable year beginning in such calendar year.
`(4) SPECIAL SUPPORT TEST IN CASE OF STUDENTS- For purposes of paragraph
(1), in the case of any individual who is--
`(A) a son, stepson, daughter, or stepdaughter of the taxpayer (within
the meaning of this subsection), and
amounts received as scholarships for study at an educational
organization described in section 3(d)(1)(B) shall not be taken into account
in determining whether such individual received more than one-half of such
individual's support from the taxpayer.
`(5) SUPPORT TEST IN CASE OF CHILD OF DIVORCED PARENTS, ETC-
`(A) CUSTODIAL PARENT GETS EXEMPTION- Except as otherwise provided in
this paragraph, if--
`(i) a child receives over one-half of such child's support during
the calendar year from such child's parents--
`(I) who are divorced or legally separated under a decree of
divorce or separate maintenance,
`(II) who are separated under a written separation agreement,
or
`(III) who live apart at all times during the last 6 months of the
calendar year, and
`(ii) such child is in the custody of 1 or both of such child's
parents for more than one-half of the calendar year,
such child shall be treated, for purposes of paragraph (1), as
receiving over one-half of such child's support during the calendar year
from the parent having custody for a greater portion of the calendar year
(hereafter in this paragraph referred to as the `custodial
parent').
`(B) EXCEPTION WHERE CUSTODIAL PARENT RELEASES CLAIM TO EXEMPTION FOR
THE YEAR- A child of parents described in subparagraph (A) shall be
treated as having received over one-half of such child's support during a
calendar year from the noncustodial parent if--
`(i) the custodial parent signs a written declaration (in such
manner and form as the Secretary may by regulations prescribe) that such
custodial parent will not claim such child as a dependent for any
taxable year beginning in such calendar year, and
`(ii) the noncustodial parent attaches such written declaration to
the noncustodial parent's return for the taxable year beginning during
such calendar year.
For purposes of this paragraph, the term `noncustodial parent' means
the parent who is not the custodial parent.
`(C) EXCEPTION FOR MULTIPLE-SUPPORT AGREEMENT- This paragraph shall
not apply in any case where over one-half of the support of the child is
treated as having been received from a taxpayer under the provisions of
paragraph (3).
`(D) EXCEPTION FOR CERTAIN PRE-1985 INSTRUMENTS-
`(i) IN GENERAL- A child of parents described in subparagraph (A)
shall be treated as having received over one-half such child's support
during a calendar year from the noncustodial parent if--
`(I) a qualified pre-1985 instrument between the parents
applicable to the taxable year beginning in such calendar year
provides that the noncustodial parent shall be entitled to any
deduction allowable under section 2 for such child, and
`(II) the noncustodial parent provides at least $600 for the
support of such child during such calendar year.
For purposes of this clause, amounts expended for the support of a
child or children shall be treated as received from the noncustodial
parent to the extent that such parent provided amounts for such
support.
`(ii) QUALIFIED PRE-1985 INSTRUMENT- For purposes of this
subparagraph, the term `qualified pre-1985 instrument' means any decree
of divorce or separate maintenance or written agreement--
`(I) which is executed before January 1, 1985,
`(II) which on such date contains the provision described in
clause (i)(I), and
`(III) which is not modified on or after such date in a
modification which expressly provides that this subparagraph shall not
apply to such decree or agreement.
`(E) SPECIAL RULE FOR SUPPORT RECEIVED FROM NEW SPOUSE OF PARENT- For
purposes of this paragraph, in the case of the remarriage of a parent,
support of a child received from the parent's spouse shall be treated as
received from the parent.
`PART II--TAX ON BUSINESS ACTIVITIES
`Sec. 11. Tax imposed on business activities.
`SEC. 11. TAX IMPOSED ON BUSINESS ACTIVITIES.
`(a) TAX IMPOSED- There is hereby imposed on every person engaged in a
business activity located in the United States a tax equal to 20 percent of
the business taxable income of such person.
`(b) LIABILITY FOR TAX- The tax imposed by this section shall be paid by
the person engaged in the business activity, whether such person is an
individual, partnership, corporation, or otherwise.
`(c) BUSINESS TAXABLE INCOME-
`(1) IN GENERAL- For purposes of this section, the term `business
taxable income' means gross active income reduced by the deductions
specified in subsection (d).
`(2) GROSS ACTIVE INCOME- For purposes of paragraph (1), the term `gross
active income' means gross income other than investment income.
`(1) IN GENERAL- The deductions specified in this subsection are--
`(A) the cost of business inputs for the business activity,
`(B) the compensation (including contributions to qualified retirement
plans but not including other fringe benefits) paid for employees
performing services in such activity, and
`(C) the cost of personal and real property used in such
activity.
`(A) IN GENERAL- For purposes of paragraph (1)(A), the term `cost of
business inputs' means--
`(i) the actual cost of goods, services, and materials, whether or
not resold during the taxable year, and
`(ii) the actual cost, if reasonable, of travel and entertainment
expenses for business purposes.
`(B) PURCHASES OF GOODS AND SERVICES EXCLUDED- Such term shall not
include purchases of goods and services provided to employees or
owners.
`(C) CERTAIN LOBBYING AND POLITICAL EXPENDITURES EXCLUDED-
`(i) IN GENERAL- Such term shall not include any amount paid or
incurred in connection with--
`(I) influencing legislation,
`(II) participation in, or intervention in, any political campaign
on behalf of (or in opposition to) any candidate for public
office,
`(III) any attempt to influence the general public, or segments
thereof, with respect to elections, legislative matters, or
referendums, or
`(IV) any direct communication with a covered executive branch
official in an attempt to influence the official actions or positions
of such official.
`(ii) EXCEPTION FOR LOCAL LEGISLATION- In the case of any
legislation of any local council or similar governing body--
`(I) clause (i)(I) shall not apply, and
`(II) such term shall include all ordinary and necessary expenses
(including, but not limited to, traveling expenses described in
subparagraph (A)(iii) and the cost of preparing testimony) paid or
incurred during the taxable year in carrying on any trade or
business--
`(aa) in direct connection with appearances before, submission of
statements to, or sending communications to the committees, or individual
members, of such council or body with respect to legislation or proposed
legislation of direct interest to the taxpayer, or
`(bb) in direct connection with communication of information between
the taxpayer and an organization of which the taxpayer is a member with respect
to any such legislation or proposed legislation which is of direct interest to
the taxpayer and to such organization, and that portion of the dues so paid or
incurred with respect to any organization of which the taxpayer is a member
which is attributable to the expenses of the activities carried on by such
organization.
`(iii) APPLICATION TO DUES OF TAX-EXEMPT ORGANIZATIONS- Such term
shall include the portion of dues or other similar amounts paid by the
taxpayer to an organization which is exempt from tax
under this subtitle which the organization notifies the taxpayer under
section 6033(e)(1)(A)(ii) is allocable to expenditures to which clause (i)
applies.
`(iv) INFLUENCING LEGISLATION- For purposes of this
subparagraph--
`(I) IN GENERAL- The term `influencing legislation' means any
attempt to influence any legislation through communication with any
member or employee of a legislative body, or with any government
official or employee who may participate in the formulation of
legislation.
`(II) LEGISLATION- The term `legislation' has the meaning given
that term in section 4911(e)(2).
`(v) OTHER SPECIAL RULES-
`(I) EXCEPTION FOR CERTAIN TAXPAYERS- In the case of any taxpayer
engaged in the trade or business of conducting activities described in
clause (i), clause (i) shall not apply to expenditures of the taxpayer
in conducting such activities directly on
behalf of another person (but shall apply to payments by such other person to
the taxpayer for conducting such activities).
`(II) DE MINIMIS EXCEPTION-
`(aa) IN GENERAL- Clause (i) shall not apply to any in-house
expenditures for any taxable year if such expenditures do not exceed $2,000. In
determining whether a taxpayer exceeds the $2,000 limit, there shall not be
taken into account overhead costs otherwise allocable to activities described in
subclauses (I) and (IV) of clause (i).
`(bb) IN-HOUSE EXPENDITURES- For purposes of provision (aa), the term
`in-house expenditures' means expenditures described in subclauses (I) and (IV)
of clause (i) other than payments by the taxpayer to a person engaged in the
trade or business of conducting activities described in clause (i) for the
conduct of such activities on behalf of the taxpayer, or dues or other similar
amounts paid or incurred by the taxpayer which are allocable to activities
described in clause (i).
`(III) EXPENSES INCURRED IN CONNECTION WITH LOBBYING AND POLITICAL
ACTIVITIES- Any amount paid or incurred for research for, or
preparation, planning, or coordination of, any activity described in
clause (i) shall be treated as paid or incurred in connection with
such activity.
`(vi) COVERED EXECUTIVE BRANCH OFFICIAL- For purposes of this
subparagraph, the term `covered executive branch official'
means--
`(II) the Vice President,
`(III) any officer or employee of the White House Office of the
Executive Office of the President, and the 2 most senior level
officers of each of the other agencies in such Executive Office,
and
`(IV) any individual serving in a position in level I of the
Executive Schedule under section 5312 of title 5, United States Code,
any other individual designated by the President as having Cabinet
level status, and any immediate deputy of such an
individual.
`(vii) SPECIAL RULE FOR INDIAN TRIBAL GOVERNMENTS- For purposes of
this subparagraph, an Indian tribal government shall be treated in the
same manner as a local council or similar governing body.
`For reporting requirements and alternative taxes related to this
subsection, see section 6033(e).
`(e) CARRYOVER OF EXCESS DEDUCTIONS-
`(1) IN GENERAL- If the aggregate deductions for any taxable year exceed
the gross active income for such taxable year, the amount of the deductions
specified in subsection (d) for the succeeding taxable year (determined
without regard to this subsection) shall be increased by the sum of--
`(B) the product of such excess and the 3-month Treasury rate for the
last month of such taxable year.
`(2) 3-MONTH TREASURY RATE- For purposes of paragraph (1), the 3-month
Treasury rate is the rate determined by the Secretary based on the average
market yield (during any 1-month period selected by the Secretary and ending
in the calendar month in which the determination is made) on outstanding
marketable obligations of the United States with remaining periods to
maturity of 3 months or less.'
(b) CONFORMING REPEALS AND REDESIGNATIONS-
(1) REPEALS- The following subchapters of chapter 1 of subtitle A and
the items relating to such subchapters in the table of subchapters for such
chapter 1 are repealed:
(A) Subchapter B (relating to computation of taxable income).
(B) Subchapter C (relating to corporate distributions and
adjustments).
(C) Subchapter D (relating to deferred compensation, etc.).
(D) Subchapter G (relating to corporations used to avoid income tax on
shareholders).
(E) Subchapter H (relating to banking institutions).
(F) Subchapter I (relating to natural resources).
(G) Subchapter J (relating to estates, trusts, beneficiaries, and
decedents).
(H) Subchapter L (relating to insurance companies).
(I) Subchapter M (relating to regulated investment companies and real
estate investment trusts).
(J) Subchapter N (relating to tax based on income from sources within
or without the United States).
(K) Subchapter O (relating to gain or loss on disposition of
property).
(L) Subchapter P (relating to capital gains and losses).
(M) Subchapter Q (relating to readjustment of tax between years and
special limitations).
(N) Subchapter S (relating to tax treatment of S corporations and
their shareholders).
(O) Subchapter T (relating to cooperatives and their
patrons).
(P) Subchapter U (relating to designation and treatment of empowerment
zones, enterprise communities, and rural development investment
areas).
(Q) Subchapter V (relating to title 11 cases).
(R) Subchapter W (relating to District of Columbia Enterprise
Zone).
(2) REDESIGNATIONS- The following subchapters of chapter 1 of subtitle A
and the items relating to such subchapters in the table of subchapters for
such chapter 1 are redesignated:
(A) Subchapter E (relating to accounting periods and methods of
accounting) as subchapter B.
(B) Subchapter F (relating to exempt organizations) as subchapter
C.
(C) Subchapter K (relating to partners and partnerships) as subchapter
D.
SEC. 3. REPEAL OF ESTATE AND GIFT TAXES.
Subtitle B (relating to estate, gift, and generation-skipping taxes) and
the item relating to such subtitle in the table of subtitles is repealed.
SEC. 4. ADDITIONAL REPEALS.
Subtitles H (relating to financing of presidential election campaigns) and
J (relating to coal industry health benefits) and the items relating to such
subtitles in the table of subtitles are repealed.
SEC. 5. EFFECTIVE DATES.
(a) IN GENERAL- Except as provided in subsection (b), the amendments made
by this Act apply to taxable years beginning after December 31, 1999.
(b) REPEAL OF ESTATE AND GIFT TAXES- The repeal made by section 3 applies
to estates of decedents dying, and transfers made, after December 31, 1999.
(c) TECHNICAL AND CONFORMING CHANGES- The Secretary of the Treasury or the
Secretary's delegate shall, as soon as practicable but in any event not later
than 90 days after the date of enactment of this Act, submit to the Committee
on Ways and Means of the House of Representatives and the Committee on Finance
of the Senate a draft of any technical and conforming changes in the Internal
Revenue Code of 1986 which are necessary to reflect throughout such Code the
changes in the substantive provisions of law made by this Act.
END