S 2642 IS

To amend the Internal Revenue Code of 1986 to provide major tax simplification.

May 25, 2000

Mr. HATCH introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to provide major tax simplification.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; ETC.

(a) SHORT TITLE- This Act may be cited as the `Tax Ease and Modernization Act--Part I'.

(b) 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.

(c) TABLE OF CONTENTS- The table of contents of this Act is as follows:

Sec. 1. Short title; etc.

TITLE I--ALTERNATIVE MINIMUM TAX

Sec. 101. Repeal of alternative minimum tax on individuals.

TITLE II--SIMPLIFICATION OF CAPITAL GAINS TAX

Sec. 201. Capital gains deduction.

Sec. 202. Indexing of exclusion for capital gains on sale of principal residence.

TITLE III--SIMPLIFICATION AND EXPANSION OF THE EARNED INCOME TAX CREDIT

Sec. 301. Modification of definition of earned income.

Sec. 302. Simplification of definition of child dependent.

Sec. 303. Credit allowed for taxpayers who reside with other eligible individuals.

Sec. 304. Expansion of credit.

TITLE IV--LIMITATIONS ON ITEMIZED DEDUCTIONS AND PERSONAL EXEMPTIONS

Sec. 401. Repeal of overall limitation on itemized deductions.

Sec. 402. Repeal of phaseout of personal exemptions.

TITLE V--BUSINESS TAX SIMPLIFICATION PROVISIONS

Sec. 501. Single rate of interest on corporate and individual overpayments and underpayments.

Sec. 502. Clarification of interest netting.

Sec. 503. Expensing allowed for certain computer software.

TITLE VI--MISCELLANEOUS SIMPLIFICATION PROVISIONS

Subtitle A--Penalty and Interest Provisions

Sec. 601. Failure by individual to pay estimated tax penalty converted to interest charge on accumulated unpaid balance.

Sec. 602. Exclusion from gross income for interest on overpayments of income tax by individuals.

Sec. 603. Reductions of penalty for failure to pay tax.

Sec. 604. Abatement of interest.

Sec. 605. Annual report on abatement of penalties.

Subtitle B--Procedural Provisions

Sec. 611. Authority to correct errors by the IRS with respect to taxpayer.

Sec. 612. Modification of filing date.

Sec. 613. Waiver of addition to tax for early withdrawal from IRA.

Sec. 614. Fixed rate of interest for installment agreement.

Sec. 615. Exception to tax on early withdrawal from IRA.

Subtitle C--Small Investors Tax Simplification Act

Sec. 621. Election to use simplified method for qualified investment clubs.

Subtitle D--Other Provisions

Sec. 631. Above-the-line deduction for unreimbursed business expenses.

Sec. 632. Expensing of certain personal property used in connection with residential rental property.

Sec. 633. Inclusion of certain older foster children in definition of dependent.

Sec. 634. Exclusion for foster care payments to apply to payments by qualified placement agencies.

Sec. 635. Simplification and increase in standard deduction for dependents.

Sec. 636. 2-percent floor on miscellaneous itemized deductions not to apply to qualified professional development expenses of elementary and secondary school teachers.

TITLE I--ALTERNATIVE MINIMUM TAX

SEC. 101. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDIVIDUALS.

(a) IN GENERAL- Subsection (a) of section 55 (relating to alternative minimum tax imposed) is amended by adding at the end the following new flush sentence:

`Except in the case of a corporation, no tax shall be imposed by this section for any taxable year beginning after December 31, 2000, and the tentative minimum tax of any

taxpayer other than a corporation shall be zero for purposes of this title.'.

(b) CONFORMING AMENDMENTS-

(1) Subparagraph (B) of section 1(g)(7) is amended by adding `and' at the end of clause (i), by striking `, and' at the end of clause (ii) and inserting a period, and by striking clause (iii).

(2) Section 2(d) is amended by striking `sections 1 and 55' and inserting `section 1'.

(3) Section 5(a) is amended by striking paragraph (4).

(4) Subsection (c) of section 26 is amended by inserting before the period `; except that such amount shall be treated as being zero in the case of a taxpayer other than a corporation.'

(5) Paragraph (6) of section 29(b) is amended to read as follows:

`(6) APPLICATION WITH OTHER CREDITS- The credit allowed by subsection (a) for any taxable year shall not exceed the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and section 27. In the case of a corporation, the limitation under the preceding sentence shall be reduced (but not below zero) by the tentative minimum tax for the taxable year.'.

(6) Paragraph (3) of section 30(b) is amended to read as follows:

`(3) APPLICATION WITH OTHER CREDITS- The credit allowed by subsection (a) for any taxable year shall not exceed the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and sections 27 and 29. In the case of a corporation, the limitation under the preceding sentence shall be reduced (but not below zero) by the tentative minimum tax for the taxable year.'.

(7) Section 32 is amended by striking subsection (h).

(8) Subsection (d) of section 53 is amended to read as follows:

`(d) DEFINITIONS- For purposes of this section--

`(1) NET MINIMUM TAX- The term `net minimum tax' means the tax imposed by section 55 increased by the amount of the credit not allowed under section 29 (relating to credit for producing fuel from a nonconventional source) solely by reason of the application of the last sentence of section 29(b)(6), or not allowed under section 30 solely by reason of the application of the last sentence of section 30(b)(3).

`(2) TENTATIVE MINIMUM TAX- The term `tentative minimum tax' has the meaning given to such term by section 55(b); except that such tax shall be treated as being zero in the case of a taxpayer other than a corporation.'.

(9)(A) Subsection (b) of section 55 (relating to alternative minimum tax imposed) is amended to read as follows:

`(b) TENTATIVE MINIMUM TAX- For purposes of this part--

`(1) AMOUNT OF TENTATIVE TAX- The tentative minimum tax for the taxable year is--

`(A) 20 percent of so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount, reduced by

`(B) the alternative minimum tax foreign tax credit for the taxable year.

`(2) ALTERNATIVE MINIMUM TAXABLE INCOME- The term `alternative minimum taxable income' means the taxable income of the taxpayer for the taxable year--

`(A) determined with the adjustments provided in section 56, and

`(B) increased by the amount of the items of tax preference described in section 57.

If a taxpayer is subject to the regular tax, such taxpayer shall be subject to the tax imposed by this section (and, if the regular tax is determined by reference to an amount other than taxable income, such amount shall be treated as the taxable income of such taxpayer for purposes of the preceding sentence).'.

(B) Subsection (d) of section 55 is amended to read as follows:

`(d) EXEMPTION AMOUNT- For purposes of this section--

`(1) IN GENERAL- The term `exemption amount' means $40,000.

`(2) PHASE-OUT OF EXEMPTION AMOUNT- The exemption amount of any taxpayer shall be reduced (but not below zero) by an amount equal to 25 percent of the amount by which the alternative minimum taxable income of the taxpayer exceeds $150,000.'.

(10)(A) Paragraph (6) of section 56(a) is amended to read as follows:

`(6) ADJUSTED BASIS- The adjusted basis of any property to which paragraph (1) or (5) applies (or with respect to which there are any expenditures to which paragraph (2) applies) shall be determined on the basis of the treatment prescribed in paragraph (1), (2), or (5), whichever applies.'.

(B) Section 56 is amended by striking subsection (b).

(C) Subsection (c) of section 56 is amended by striking so much of the subsection as precedes paragraph (1), by redesignating paragraphs (1), (2), and (3) as paragraphs (8), (9), and (10), respectively, and moving them to the end of subsection (a).

(D) Paragraph (8) of section 56(a), as redesignating by subparagraph (C), is amended by striking `subsection (g)' and inserting `subsection (c)'.

(E) Section 56 is amended by striking subsection (e) and by redesignating subsections (d) and (g) as subsections (b) and (c), respectively.

(11)(A) Section 58 is repealed.

(B) Clause (i) of section 56(b)(2)(A) (as redesignated by paragraph (10)(E), is amended by inserting `, in the case of taxable years beginning before January 1, 2001,' before `section 58'.

(C) Subsection (h) of section 59 is amended--

(i) by striking `, 465, and 1366(d)' and inserting `and 465', and

(ii) by striking `56, 57, and 58' and inserting `56 and 57'.

(12)(A) Subparagraph (C) of section 59(a)(1) is amended by striking `subparagraph (A)(i) or (B)(i) of section 55(b)(1) (whichever applies)' and inserting `section 55(b)(1)(A)'.

(B) Paragraph (3) of section 59(a) is amended to read as follows:

`(3) PRE-CREDIT TENTATIVE MINIMUM TAX- For purposes of this subsection, the term `pre-credit tentative minimum tax' means the amount determined under section 55(b)(1)(A).'.

(C) Section 59 is amended by striking subsection (c).

(D) Section 59 is amended by striking subsection (j).

(13) Paragraph (7) of section 382(l) is amended by striking `section 56(d)' and inserting `section 56(b)'.

(14) Paragraph (2) of section 641(c) is amended by striking subparagraph (B) and by redesignating subparagraphs (C) and (D) as subparagraphs (B) and (C), respectively.

(15) Subsections (b) and (c) of section 666 are each amended by striking `(other than the tax imposed by section 55)'.

(16) Subsections (c)(5) and (d)(3)(B) of section 772 are each amended by striking `56, 57, and 58' and inserting `56 and 57'.

(17) Sections 847 and 848(i) are each amended by striking `section 56(g)' and inserting `section 56(c)'.

(18) Sections 871(b)(1) and 877(b) are each amended by striking `or 55'.

(19) Subsection (a) of section 897 is amended to read as follows:

`(a) GENERAL RULE- For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account--

`(1) in the case of a nonresident alien individual, under section 871(b)(1), or

`(2) in the case of a foreign corporation, under section 882(a)(1),

as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business.'.

(20) Paragraph (1) of section 962(a) is amended by striking `sections 1 and 55' and inserting `section 1'.

(21) Paragraph (1) of section 1397E(c) is amended to read as follows:

`(1) the regular tax liability (as defined in section 26(b), over'

(22) The last sentence of section 1563(a) is amended by striking `section 55(d)(3)' and inserting `section 55(d)(2)'.

(23) Subparagraph (B) of section 6015(d)(2) is amended by striking `or 55'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

(d) TRANSITIONAL RULE RELATING TO MINIMUM TAX CREDIT-

(1) IN GENERAL- The pre-effective date minimum tax credit of a taxpayer other than a corporation shall not be allowed under section 53 of the Internal Revenue Code of 1986 but shall be allowed under this subsection.

(2) PRE-EFFECTIVE DATE MINIMUM TAX CREDIT- For purposes of this subsection, the term `pre-effective date minimum tax credit' means the amount determined under section 53(b) of such Code for the first taxable year beginning after December 31, 2000.

(3) AMOUNT OF CREDIT-

(A) IN GENERAL- The pre-effective date minimum tax credit of a taxpayer other than a corporation shall be allowed ratably over the period of 10 taxable years beginning with the first taxable year beginning after December 31, 2000.

(B) LIMITATION- The credit allowable by this subsection for any taxable year shall not exceed the regular tax liability of the taxpayer for such taxable year reduced by the sum of the credits allowable under subparts A, B, D, E, and F of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986.

(C) CARRYFORWARD- If the credit allowable by this subsection exceeds the limitation imposed by subparagraph (B), such excess shall be carried to the succeeding taxable year and added to the credit allowable under this subsection for such succeeding taxable year.

(4) ACCELERATION OF CREDIT WHERE PREVIOUSLY TAXED INCOME-

(A) IN GENERAL- The credit allowed under this subsection for any taxable year shall not be less than so much of the limitation described in paragraph (3)(B) for the taxable year as is attributable to previously taxed incentive stock option gain. Proper adjustments shall be made in the amount allowed under this subsection for subsequent taxable years to take into account any increased credit allowed by reason of this paragraph.

(B) INCENTIVE STOCK OPTION GAIN- For purposes of subparagraph (A), the term `previously taxed incentive stock option gain' means the amount of gain recognized during the taxable year on account of the disposition of stock acquired by exercising an incentive stock option (as defined in section 422 of such Code) to the extent such gain does not exceed the amount of gain previously taken into account by reason of section 56(b)(3) of such Code (as in effect on the day before the date of the enactment of this Act) with respect to such option.

(5) DEFINITIONS- Terms used in this subsection which are also used in section 53 of such Code shall have the respective meanings given to such terms by such section 53.

TITLE II--SIMPLIFICATION OF CAPITAL GAINS TAX

SEC. 201. CAPITAL GAINS DEDUCTION.

(a) IN GENERAL- Part I of subchapter P of chapter 1 (relating to treatment of capital gains) is amended by adding at the end the following new section:

`SEC. 1203. CAPITAL GAINS DEDUCTION.

`If for any taxable year a taxpayer other than a corporation has a net capital gain, 50 percent of such gain shall be a deduction from gross income.'.

(b) DEDUCTION ALLOWABLE WHETHER OR NOT TAXPAYER ITEMIZES OTHER DEDUCTIONS-

(1) Subsection (b) of section 63 is amended by striking `and' at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting `, and', and by adding at the end the following new paragraph:

`(3) the deduction allowed by section 1203.'.

(2) Subsection (d) of section 63 is amended by striking `and' at the end of paragraph (1), by striking the period at the end of paragraph (2) and inserting `, and', and by adding at the end the following new paragraph:

`(3) the deduction allowed by section 1203.'.

(c) REPEAL OF TAX PREFERENCE FOR EXCLUSION ON SMALL BUSINESS STOCK- Subsection (a) of section 57 is amended by striking paragraph (7).

(d) TECHNICAL AND CONFORMING AMENDMENTS-

(1) Section 1 is amended by striking subsection (h).

(2) Subparagraph (E) of section 163(d)(4) is amended to read as follows:

`(E) COORDINATION WITH CAPITAL GAINS DEDUCTION- The net capital gain taken into account under section 1203 for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under subparagraph (B)(iii) for such year.'.

(3) Paragraph (1) of section 170(e) is amended by striking `the amount of gain' in the material following subparagraph (B)(ii) and inserting `50 percent (100 percent in the case of a corporation) of the amount of gain'.

(4) Subparagraph (B) of section 172(d)(2) is amended to read as follows:

`(B) the exclusion under section 1202 and the deduction under section 1203 shall not be allowed.'.

(5) The last sentence of section 453A(c)(3) is amended by striking all that follows `long-term capital gain,' and inserting `the maximum rate on net capital gain under section 1201 or the deduction under section 1203 (whichever is appropriate) shall be taken into account.'.

(6)(A) Section 641(c)(2)(B), as redesignated by section 101(b)(14), is amended by striking `Except as provided in section 1(h), the' and inserting `The'.

(B) Section 641(c)(2)(B), as redesignated by section 101(b)(14), is amended by inserting after clause (iii) the following new clause:

`(iv) The deduction under section 1203.'.

(7) Paragraph (4) of section 642(c) is amended to read as follows:

`(4) ADJUSTMENTS- To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain from the sale or exchange of capital assets held for more than 1 year, proper adjustment shall be made for any exclusion allowable under section 1202 and any deduction allowable under section 1203 to the estate or trust. In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income).'.

(8) Section 642 is amended by adding at the end the following new subsection:

`(j) CAPITAL GAINS DEDUCTION- The deduction under section 1203 to an estate or trust shall be computed by excluding the portion (if any) of the gains for the taxable year which is includible by the income beneficiaries under sections 652 and 662 (relating to inclusions of amounts in gross income of beneficiaries of trusts) as gain derived from the sale or exchange of capital assets.'.

(9) The last sentence of section 643(a)(3) is amended to read as follows: `The exclusion under section 1202 and the deduction under section 1203 shall not be taken into account.'.

(10) Subparagraph (C) of section 643(a)(6) is amended by inserting `(i)' before `there shall' and by inserting before the period `, and (ii) the deduction under section 1203 (relating to capital gains deduction) shall not be taken into account'.

(11) Paragraph (4) of section 691(c) is amended by striking `1(h),' and by inserting `1203,' after `1202,'.

(12) The second sentence of paragraph (2) of section 871(a) is amended by striking `section 1202' and inserting `sections 1202 and 1203'.

(13)(A) Paragraph (2) of section 904(b) is amended by striking subparagraphs (A) and (C), by redesignating subparagraph (B) as subparagraph (A), and by inserting after subparagraph (A) (as so redesignated) the following new subparagraph:

`(B) OTHER TAXPAYERS- In the case of a taxpayer other than a corporation, taxable income from sources outside the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income.'.

(B) Subparagraph (A) of section 904(b)(2), as so redesignated, is amended--

(i) by striking all that precedes clause (i) and inserting the following:

`(A) CORPORATIONS- In the case of a corporation--', and

(ii) by striking in clause (i) `in lieu of applying subparagraph (A),'.

(C) Paragraph (3) of section 904(b) is amended by striking subparagraphs (D) and (E) and inserting the following new subparagraph:

`(D) RATE DIFFERENTIAL PORTION- The rate differential portion of foreign source net capital gain, net capital gain, or the excess of net capital gain from sources within the United States over net capital gain, as the case may be, is the same proportion of such amount as the excess of the highest rate of tax specified in section 11(b) over the alternative rate of tax under section 1201(a) bears to the highest rate of tax specified in section 11(b).'.

(14) Paragraph (1) of section 1402(i) is amended by inserting `, and the deduction provided by section 1203 shall not apply' before the period at the end thereof.

(15) Paragraph (1) of section 1445(e) is amended by striking `20 percent' and inserting `19.8 percent'.

(16)(A) The second sentence of section 7518(g)(6)(A) is amended--

(i) by striking `during a taxable year to which section 1(h) or 1201(a) applies', and

(ii) by striking `20 percent' and inserting `19.8 percent'.

(B) The second sentence of section 607(h)(6)(A) of the Merchant Marine Act, 1936, is amended--

(i) by striking `during a taxable year to which section 1(h) or 1201(a) of such Code applies', and

(ii) by striking `20 percent' and inserting `19.8 percent'.

(e) CLERICAL AMENDMENT- The table of sections for part I of subchapter P of chapter 1 is amended by adding at the end the following new item:

`Sec. 1203. Capital gains deduction.'.

(f) EFFECTIVE DATES-

(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2000.

(2) WITHHOLDING- The amendments made by subsection (e)(14) shall apply only to amounts paid after December 31, 2000.

(3) REPEAL OF ELECTION- Section 311 of the Taxpayer Relief Act of 1997 is amended by striking subsection (e).

(4) COORDINATION WITH PRIOR TRANSITION RULE- Any amount treated as long-term capital gain by reason of paragraph (3) of section 1122(h)

of the Tax Reform Act of 1986 shall not be taken into account for purposes of applying section 1203 of the Internal Revenue Code of 1986 (as added by this section).

SEC. 202. INDEXING OF EXCLUSION FOR CAPITAL GAINS ON SALE OF PRINCIPAL RESIDENCE.

(a) IN GENERAL- Section 121(b)(1) (relating to limitations) is amended by striking `$250,000' and inserting `applicable amount'.

(b) APPLICABLE AMOUNT- Section 121(b) is amended by adding at the end the following new paragraph:

`(4) APPLICABLE AMOUNT-

`(A) IN GENERAL- For purposes of this section, the term `applicable amount' means $250,000.

`(B) INFLATION ADJUSTMENT-

`(i) IN GENERAL- In the case of a taxable year beginning in any calendar year after 2000, the $250,000 amount under subparagraph (a) shall be increased by an amount equal to--

`(I) such dollar amount, multiplied by

`(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting `calendar year 1999' for `calendar year 1992' in subparagraph (B) thereof.

`(ii) ROUNDING- If any amount as adjusted under clause (i) is not a multiple of $1,000, such amount shall be rounded to the next lowest multiple of $1,000.'.

(b) CONFORMING AMENDMENTS- Section 121(b)(2)(A) (relating to $500,000 limitation for certain joint returns) is amended--

(1) by striking `substituting' and all that follows through `if' and inserting `substituting an amount equal to 200 percent of the applicable amount in effect under such paragraph for the taxable year for `the applicable amount' if', and

(2) by striking `$500,000' in the heading and inserting `INCREASED'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

TITLE III--SIMPLIFICATION AND EXPANSION OF THE EARNED INCOME TAX CREDIT

SEC. 301. MODIFICATION OF DEFINITION OF EARNED INCOME.

(a) IN GENERAL- Section 32(c)(2)(A)(i) (defining earned income) is amended by striking `tips, and other employee compensation' and inserting `and tips, and other employee compensation includible in gross income for the taxable year'.

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to amounts received in taxable years beginning after December 31, 2000.

SEC. 302. SIMPLIFICATION OF DEFINITION OF CHILD DEPENDENT.

(a) REMOVAL OF SUPPORT TEST FOR CERTAIN INDIVIDUALS- Section 152(a) (relating to definition of dependent) is amended to read as follows:

`(a) GENERAL DEFINITION- For purposes of this subtitle--

`(1) DEPENDENT- The term `dependent' means--

`(A) any individual described in paragraph (2) over 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 subsection (c) as received from the taxpayer), and

`(B) any individual described in subsection (d).

`(2) INDIVIDUALS- An individual is described in this paragraph if such individual is--

`(A) a brother, sister, stepbrother, or stepsister of the taxpayer,

`(B) the father or mother of the taxpayer, or an ancestor of either,

`(C) a stepfather or stepmother of the taxpayer,

`(D) a son or daughter of a brother or sister of the taxpayer,

`(E) a brother or sister of the father or mother of the taxpayer,

`(F) a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the taxpayer, or

`(G) 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 their principal place of abode the home of the taxpayer and is a member of the taxpayer's household.'.

(b) OTHER MODIFICATIONS- Section 152(d) is amended to read as follows:

`(d) SUBSECTION (d) DEPENDENTS-

`(1) IN GENERAL- An individual is described in this subsection for the taxable year if such individual--

`(A) bears a relationship to the taxpayer described in paragraph (2), and

`(B) except in the case of an eligible foster child or as provided in subsection (e), has the same principal place of abode as the taxpayer for more than one-half of such taxable year.

`(2) RELATIONSHIP TEST- An individual bears a relationship to the taxpayer described in this paragraph if such individual is--

`(A) a son or daughter of the taxpayer, or a descendant of either, or

`(B) a stepson or stepdaughter of the taxpayer.

`(3) SPECIAL RULES-

`(A) 2 OR MORE CLAIMING DEPENDENT- Except as provided in subparagraph (B), if an individual may be claimed as a dependent by 2

or more taxpayers (but for this subparagraph) for a taxable year beginning in the same calendar year, only the taxpayer with the highest modified adjusted gross income for such taxable year shall be allowed the deduction with respect to such individual.

`(B) RELEASE OF CLAIM TO EXEMPTION- Subparagraph (A) shall not apply with respect to an individual if--

`(i) the taxpayer with the highest modified adjusted gross income under subparagraph (A), for any calendar year signs a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such taxpayer will not claim such individual as a dependent for any taxable year beginning in such calendar year, and

`(ii) such other taxpayer attaches such written declaration to such taxpayer's return for the taxable year beginning during such calendar year.'.

(c) RULES RELATING TO FOSTER CHILD- Section 152(b)(2) (relating to rules relating to general definition) is amended by striking `a foster child' and all that follows through `individual)' and inserting `an eligible foster child (as defined in section 32(c)(3)(B)(iii)) of an individual'.

(d) EXEMPTION FROM GROSS INCOME TEST- Section 151(c)(3) (relating to definition of child) is amended by striking `or stepdaughter' and inserting `stepdaughter, or a descendant of such individual'.

(e) WAIVER OF DEDUCTION FOR DIVORCED PARENTS-

(1) IN GENERAL- So much of section 152(e) as precedes paragraph (4) (relating to support test in case of child of divorced parents, etc.) is amended to read as follows:

`(e) SPECIAL RULES FOR CHILD OF DIVORCED PARENTS-

`(1) RELEASE OF CLAIM TO EXEMPTION- In the case of a child (as defined in section 151(c)(3)) of parents--

`(A) who are divorced or legally separated under a decree of divorce or separate maintenance,

`(B) who are separated under a written separation agreement, or

`(C) who live apart at all times during the last 6 months of the calendar year,

the custodial parent who is entitled to the deduction under section 151 for a taxable year with respect to such child may release such deduction to such other parent.

`(2) PROCEDURE- Such other parent may claim a child described in paragraph (1) as a dependent for the taxable year if--

`(A) the custodial parent signs a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such parent will not claim such child as a dependent for any taxable year beginning in such calendar year, and

`(B) such other parent attaches such written declaration to such taxpayer's return for the taxable year beginning during such calendar year.

`(C) CUSTODIAL PARENT- For purposes of this subsection, the term `custodial parent' means, with regard to an individual, a parent who has custody of such individual for a greater portion of the calendar year than such other parent.'.

(2) PRE-1985 INSTRUMENTS- Section 152(e) is amended by striking paragraph (5), by redesignating paragraphs (4) and (6) as paragraphs (3) and (4), respectively, and by striking `A child' and all that follows through `noncustodial parent' in paragraph (3)(A), as so redesignated, and inserting `A noncustodial parent described in paragraph (1) shall be entitled to the deduction under section 151 for a taxable year with respect to a child if'.

(3) NONCUSTODIAL PARENT- Section 152(e)(3)(A), as redesignated in paragraph (2), is amended by adding at the end the following new sentence: `For purposes of this subsection, the term `noncustodial parent' means the parent who is not the custodial parent.'.

(f) CONFORMING AMENDMENTS-

(1) Section 1(g)(5)(A) is amended by inserting `as in effect on the day before the date of the enactment of the Tax Ease and Modernization Act-Part I' after `152(e)'.

(2) Section 2(b)(1)(A)(i) is amended by striking `paragraph (2) or (4) of'.

(3) Section 2(b)(3)(B)(i) is amended by striking `paragraph (9)' and inserting `paragraph (2)(G)'.

(4) Section 21(e)(5)(A) is amended by striking `paragraph (2) or (4) of'.

(5) Section 21(e)(5) is amended in the matter following subclause (B) by inserting `as in effect on the day before the date of the enactment of the Tax Ease and Modernization Act-Part I' after `152(e)(1)'.

(6) Section 32(c)(3)(B)(ii) is amended by striking `paragraph (2) or (4) of'.

(7) Section 51(i)(1)(C) is amended by striking `152(a)(9)' and inserting `152(a)(2)(G)'.

(8) Section 152(b) is amended by striking `specified in subsection (a)' and inserting `specified in subsection (a)(2) or (d)(2)'.

(9) Section 152(c) is amended by striking `(a)' and inserting `(a)(1)'.

(10) Section 7703(b)(1) is amended by striking `paragraph (2) or (4) of'.

(11) The following provisions are each amended by striking `paragraphs (1) through (8) of section 152(a)' and inserting `subparagraphs (A) through (F) of subsection (a)(2) or subsection (d)(2) of section 152':

(A) Section 170(g)(3).

(B) Subparagraphs (A) and (B) of section 51(i)(1).

(C) The second sentence of section 213(d)(11).

(D) Section 529(e)(2)(B).

(E) Section 7702B(f)(2)(C)(iii).

(g) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

SEC. 303. CREDIT ALLOWED FOR TAXPAYERS WHO RESIDE WITH OTHER ELIGIBLE INDIVIDUALS.

(a) IN GENERAL- Section 32(c)(3)(A) (relating to definition of qualifying child) is amended by striking `and' at the end of clause (ii), by striking the period at the end of clause (iii) and inserting `, and', and by adding at the end the following new clause:

`(iv) in the case of an individual described in subclause (I) or (II) of subparagraph (B)(i), with respect to whom the taxpayer meets the identification requirements of subparagraph (D).'.

(b) CONFORMING AMENDMENT- Section 32(c)(1)(C) (relating to 2 or more eligible individuals) is amended by inserting `and the requirement of paragraph (3)(A)(iv)' after `subparagraph (B)'.

(c) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2000.

SEC. 304. EXPANSION OF CREDIT.

(a) Increased Credit Percentage for 3 or More Qualifying Children- The table in section 32(b)(1)(A) is amended--

(1) in the second item, by striking `or more', and

(2) by inserting after the second item the following new item:

-----------------------------------------

-----------------------------------------

`3 or more qualifying children 43 21.06' 

-----------------------------------------

(b) INCREASE IN PHASEOUT AMOUNTS-

(1) IN GENERAL- The table in section 32(b)(2) is amended to read as follows:

--------------------------------------------------------------------------------------------------

`In the case of an eligible individual with: The earned income amount is: The phaseout amount is: 

--------------------------------------------------------------------------------------------------

1 qualifying child                           $6,920                       $15,000                 

2 or more qualifying children                $9,720                       $15,000                 

No qualifying children                       $4,610                       $5,770.'.               

--------------------------------------------------------------------------------------------------

(2) REDUCTION IN MARRIAGE PENALTY- Paragraph (2) of section 32(b) is amended--

(A) by striking `AMOUNTS- The earned' and inserting `AMOUNTS-

`(A) IN GENERAL- Subject to subparagraph (B), the earned', and

(B) by adding at the end the following new subparagraph:

`(B) JOINT RETURNS- In the case of a joint return, the phaseout amount determined under subparagraph (A) shall be increased by $5,000.'.

(3) INFLATION ADJUSTMENT- Section 32(j)(1) (relating to inflation adjustments) is amended--

(A) by striking `subsections (b)(2)' and inserting `subsections (b)(2)(A)', and

(B) by striking `calendar year 1995' in subparagraph (A) and inserting `calendar year 1999'.

(4) ROUNDING- Section 32(j)(2)(A) (relating to rounding) is amended by striking `subsection (b)(2)' and inserting `subsection (b)(2)(A) (after being increased under subparagraph (B) thereof)'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

TITLE IV--LIMITATIONS ON ITEMIZED DEDUCTIONS AND PERSONAL EXEMPTIONS

SEC. 401. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

(a) IN GENERAL- Section 68 (relating to overall limitation on itemized deductions) is hereby repealed.

(b) CONFORMING AMENDMENTS-

(1) Subparagraph (A) of section 1(f)(6) is amended by striking `section 68(b)(2)'.

(2) Subparagraph (B) of section 773(a)(3) is amended by striking clause (i) and by redesignating clauses (ii), (iii), and (iv), as clauses (i), (ii), and (iii), respectively.

(3) The table of sections for subchapter B of chapter 1 is amended by striking the item relating to section 68.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

SEC. 402. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

(a) IN GENERAL- Subsection (d) of section 151 (relating to allowance of deductions for personal exemptions) is amended by striking paragraph (3) and by redesignating paragraph (4) as paragraph (3).

(b) CONFORMING AMENDMENTS-

(1) Paragraph (6) of section 1(f) is amended--

(A) by striking `section 151(d)(4)' in subparagraph (A) and inserting `section 151(d)(3)', and

(B) by striking `section 151(d)(4)(A)' in subparagraph (B) and inserting `section 151(d)(3)'.

(2) Paragraph (3) of section 151(d), as redesignated by subsection (a), is amended to read as follows:

`(3) INFLATION ADJUSTMENT- In the case of any taxable year beginning in a calendar year after 1989, the dollar amount contained in paragraph (1) shall be increased by an amount equal to--

`(A) such dollar amount, multiplied by

`(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting `calendar year 1988' for `calendar year 1992' in subparagraph (B) thereof.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

TITLE V--BUSINESS TAX SIMPLIFICATION PROVISIONS

SEC. 501. SINGLE RATE OF INTEREST ON CORPORATE AND INDIVIDUAL OVERPAYMENTS AND UNDERPAYMENTS.

(a) OVERPAYMENT RATE- Section 6621(a)(1) (relating to overpayment rate) is amended--

(1) by striking `(2 percentage points in the case of a corporation)' in subparagraph (B), and

(2) by striking the second sentence.

(b) UNDERPAYMENT RATE FOR LARGE CORPORATE UNDERPAYMENTS- Section 6621 (relating to determination of rate of interest) is amended by striking subsection (c) and redesignating subsection (d) as subsection (c).

(c) CONFORMING AMENDMENT- Section 6601(f) is amended by striking `6621(d)' and inserting `6621(c)'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply for purposes of determining interest for periods after December 31, 2000.

SEC. 502. CLARIFICATION OF INTEREST NETTING.

(a) IN GENERAL- Section 6621(c) (relating to elimination of interest on overlapping periods of tax overpayments and underpayments), as redesignated by section 501(b), is amended to read as follows:

`(c) ELIMINATION OF INTEREST ON OVERLAPPING PERIODS OF TAX OVERPAYMENTS AND UNDERPAYMENTS- To the extent that, for any period, there exist equivalent overpayments and underpayments by the same taxpayer of the tax imposed under this title, the net rate of interest under this section on such amounts shall be zero for such period, whether or not such overpayments or underpayments are currently outstanding.'.

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall take effect as if included in section 3301 of the Internal Revenue Service Restructuring and Reform Act of 1998.

SEC. 503. EXPENSING ALLOWED FOR CERTAIN COMPUTER SOFTWARE.

(a) IN GENERAL- Part VI of subchapter B of chapter 1 is amended by adding at the end the following new section:

`SEC. 199. EXPENSING OF COMPUTER SOFTWARE.

`(a) TREATMENT AS EXPENSES-

`(1) IN GENERAL- A taxpayer may elect to treat any computer software expenditure which is paid or incurred by the taxpayer as an expense which is not chargeable to capital account. Any expenditure which is so treated shall be allowed as a deduction for the taxable year in which it is paid or incurred.

`(2) ELECTION- An election under paragraph (1) shall be made at such time and in such manner as the Secretary prescribes by regulation.

`(b) COMPUTER SOFTWARE EXPENDITURE- For purposes of this section, the term `computer software expenditure' means an expenditure--

`(1) for computer software (within the meaning of section 197(e)(3),

`(2) for which depreciation would otherwise be allowable under section 167(f), and

`(3) which is not deductible under any provision of this title other than section 167(f) or 197.

`(c) LIMITATION- The deduction allowed under subsection (a) for any taxable year shall not exceed $20,000.

`(d) NO OTHER DEPRECIATION OR AMORTIZATION DEDUCTION ALLOWED- Except as provided in subsection (a), no depreciation or amortization deduction shall be allowable with respect to any computer software.

`(e) INFLATION ADJUSTMENT-

`(1) IN GENERAL- In the case of a taxable year beginning after 2001, the $20,000 amount under subsection (c) shall be increased by an amount equal to--

`(A) such dollar amount, multiplied by

`(B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting `calendar year 2000' for `calendar year 1992' in subparagraph (B) thereof.

`(2) ROUNDING- If any amount as adjusted under paragraph (1) is not a multiple of $100, such amount shall be rounded to the next lowest multiple of $100.'.

(b) CONFORMING AMENDMENT- The table of sections for part IV of subchapter B of chapter 1 is amended by adding at the end the following new item:

`Sec. 199. Expensing of computer software.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

TITLE VI--MISCELLANEOUS SIMPLIFICATION PROVISIONS

Subtitle A--Penalty and Interest Provisions

SEC. 601. FAILURE BY INDIVIDUAL TO PAY ESTIMATED TAX PENALTY CONVERTED TO INTEREST CHARGE ON ACCUMULATED UNPAID BALANCE.

(a) PENALTY MOVED TO INTEREST CHAPTER OF CODE- The Internal Revenue Code of 1986 is amended by redesignating section 6654 as section 6641 and by moving section 6641 (as so redesignated) from part I of subchapter A of chapter 68 to the end of subchapter E of chapter 67 (as added by subsection (e)(1) of this section).

(b) PENALTY CONVERTED TO INTEREST CHARGE- The heading and subsections (a) and (b) of section 6641 (as so redesignated) are amended to read as follows:

`SEC. 6641. INTEREST ON FAILURE BY INDIVIDUAL TO PAY ESTIMATED INCOME TAX.

`(a) IN GENERAL- Interest shall be paid on any underpayment of estimated tax by an individual for a taxable year for each day of such underpayment. The amount of such interest for any day shall be the product of the underpayment rate established under subsection (b)(2) multiplied by the amount of the underpayment.

`(b) AMOUNT OF UNDERPAYMENT; INTEREST RATE- For purposes of subsection (a)--

`(1) AMOUNT- The amount of the underpayment on any day shall be the excess of--

`(A) the sum of the required installments for the taxable year the due dates for which are on or before such day, over

`(B) the sum of the amounts (if any) of estimated tax payments made on or before such day on such required installments.

`(2) DETERMINATION OF INTEREST RATE-

`(A) IN GENERAL- The underpayment rate with respect to any day in an installment underpayment period shall be the underpayment rate established under section 6621 for the first day of the calendar quarter in which such installment underpayment period begins.

`(B) INSTALLMENT UNDERPAYMENT PERIOD- For purposes of subparagraph (A), the term `installment underpayment period' means the period beginning on the day after the due date for a required installment and ending on

the due date for the subsequent required installment (or in the case of the 4th required installment, the 15th day of the 4th month following the close of a taxable year).

`(C) DAILY RATE- The rate determined under subparagraph (A) shall be applied on a daily basis and shall be based on the assumption of 365 days in a calendar year.

`(3) TERMINATION OF ESTIMATED TAX INTEREST- No day after the end of the installment underpayment period for the 4th required installment specified in paragraph (2)(B) for a taxable year shall be treated as a day of underpayment with respect to such taxable year.'.

(c) INCREASE IN SAFE HARBOR WHERE TAX IS SMALL-

(1) IN GENERAL- Clause (i) of section 6641(d)(1)(B) (as so redesignated) is amended to read as follows:

`(i) the lesser of--

`(I) 90 percent of the tax shown on the return for the taxable year (or, if no return is filed, 90 percent of the tax for such year), or

`(II) the tax shown on the return for the taxable year (or, if no return is filed, the tax for such year) reduced (but not below zero) by $2,000, or'.

(2) CONFORMING AMENDMENT- Subsection (e) of section 6641 (as so redesignated) is amended by striking paragraph (1) and redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively.

(d) CONFORMING AMENDMENTS-

(1) Paragraphs (1) and (2) of subsection (e) (as redesignated by subsection (c)(2)) and subsection (h) of section 6641 (as so designated) are each amended by striking `addition to tax' each place it occurs and inserting `interest'.

(2) Section 167(g)(5)(D) is amended by striking `6654' and inserting `6641'.

(3) Section 460(b)(1) is amended by striking `6654' and inserting `6641'.

(4) Section 3510(b) is amended--

(A) by striking `section 6654' in paragraph (1) and inserting `section 6641',

(B) by amending paragraph (2)(B) to read as follows:

`(B) no interest would be required to be paid (but for this section) under 6641 for such taxable year by reason of the $2,000 amount specified in section 6641(d)(1)(B)(i)(II).',

(C) by striking `section 6654(d)(2)' in paragraph (3) and inserting `section 6641(d)(2)', and

(D) by striking paragraph (4).

(5) Section 6201(b)(1) is amended by striking `6654' and inserting `6641'.

(6) Section 6601(h) is amended by striking `6654' and inserting `6641'.

(7) Section 6621(b)(2)(B) is amended by striking `addition to tax under section 6654' and inserting `interest required to be paid under section 6641'.

(8) Section 6622(b) is amended--

(A) by striking `PENALTY FOR' in the heading, and

(B) by striking `addition to tax under section 6654 or 6655' and inserting `interest required to be paid under section 6641 or addition to tax under section 6655'.

(9) Section 6658(a) is amended--

(A) by striking `6654, or 6655' and inserting `or 6655, and no interest shall be required to be paid under section 6641,', and

(B) by inserting `or paying interest' after `the tax' in paragraph (2)(B)(ii).

(10) Section 6665(b) is amended--

(A) in the matter preceding paragraph (1) by striking `, 6654,', and

(B) in paragraph (2) by striking `6654 or'.

(11) Section 7203 is amended by striking `section 6654 or 6655' and inserting `section 6655 or interest required to be paid under section 6641'.

(e) CLERICAL AMENDMENTS-

(1) Chapter 67 is amended by inserting after subchapter D the following:

`Subchapter E--Interest on Failure by Individual to Pay Estimated Income Tax

`Sec. 6641. Interest on failure by individual to pay estimated income tax.'.

(2) The table of subchapters for chapter 67 is amended by adding at the end the following new items:

`Subchapter D. Notice requirements.

`Subchapter E. Interest on failure by individual to pay estimated income tax.'.

(3) The table of sections for part I of subchapter A of chapter 68 is amended by striking the item relating to section 6654.

(f) EFFECTIVE DATE- The amendments made by this section shall apply to installment payments for taxable years beginning after December 31, 2000.

SEC. 602. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF INCOME TAX BY INDIVIDUALS.

(a) IN GENERAL- Part III of subchapter B of chapter 1 (relating to items specifically excluded from gross income) is amended by redesignating section 139 as section 139A and by inserting after section 138 the following new section:

`SEC. 139. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF INCOME TAX BY INDIVIDUALS.

`(a) IN GENERAL- In the case of an individual, gross income shall not include interest paid under section 6611 on any overpayment of tax imposed by this subtitle.

`(b) EXCEPTION- Subsection (a) shall not apply in the case of a failure to claim items resulting in the overpayment on the original return if the Secretary determines that the principal purpose of such failure is to take advantage of subsection (a).

`(c) SPECIAL RULE FOR DETERMINING MODIFIED ADJUSTED GROSS INCOME- For purposes of this title, interest not included in gross income under subsection (a) shall not be treated as interest which is exempt from tax for purposes of sections 32(i)(2)(B) and 6012(d) or any computation in which interest exempt from tax under this title is added to adjusted gross income.'.

(b) CLERICAL AMENDMENT- The table of sections for part III of subchapter B of chapter 1 is amended by striking the item relating to section 139 and inserting the following new items:

`Sec. 139. Exclusion from gross income for interest on overpayments of income tax by individuals.

`Sec. 139A. Cross references to other Acts.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to interest received in calendar years beginning after the date of the enactment of this Act.

SEC. 603. REDUCTIONS OF PENALTY FOR FAILURE TO PAY TAX.

(a) REDUCTIONS OF PENALTY FOR FAILURE TO PAY TAX-

(1) REDUCTION OF PENALTY BY 50 PERCENT-

(A) IN GENERAL- Paragraphs (2) and (3) of section 6651(a) are each amended by striking `0.5' each place it appears and inserting `0.25'.

(B) CONFORMING AMENDMENT- Paragraph (1) of section 6651(d) is amended by striking `by substituting `1 percent' for `0.5 percent' and inserting `by substituting `0.5 percent' for `0.25 percent'.

(2) REDUCTION OF PENALTY TO ZERO DURING PERIOD OF INSTALLMENT AGREEMENT- Subsection (h) of section 6651 is amended by striking `by substituting `0.25' for `0.5' and inserting `by substituting `zero' for `0.25'.

(3) EFFECTIVE DATE- The amendments made by this subsection shall apply for purposes of determining additions to tax for months beginning after December 31, 2000.

(b) PROHIBITION OF FEE FOR INSTALLMENT AGREEMENTS USING AUTOMATED WITHDRAWALS-

(1) IN GENERAL- Section 6159 (relating to agreements for payment of tax liability in installments) is amended by redesignating subsection (e) as subsection (f) and by inserting after subsection (d) the following new subsection:

`(e) PROHIBITION OF FEE FOR INSTALLMENT AGREEMENTS USING AUTOMATED WITHDRAWALS- The Secretary may not charge a taxpayer a fee for entering into an agreement with the Secretary under this section only for so long as payments under such agreement are made by means of electronic transfer or by similar automated means.'.

(2) EFFECTIVE DATE- The amendments made by this subsection shall apply to installment agreements entered into more than 30 days after the date of the enactment of this Act.

SEC. 604. ABATEMENT OF INTEREST.

(a) ABATEMENT OF INTEREST IF GROSS INJUSTICE WOULD OTHERWISE RESULT- Section 6404 is amended by redesignating subsection (i) as subsection (j) and by inserting after subsection (h) the following new subsection:

`(i) ABATEMENT OF INTEREST IF GROSS INJUSTICE WOULD OTHERWISE RESULT- The Secretary may abate the assessment of all or any part of interest on any amount of tax imposed by this title for any period if the Secretary determines that--

`(1) a gross injustice would otherwise result if interest were to be charged, and

`(2) no significant aspect of the events giving rise to the accrual of the interest can be attributed to the taxpayer involved.'.

(b) ABATEMENT OF INTEREST FOR PERIODS ATTRIBUTABLE TO ANY UNREASONABLE IRS ERROR OR DELAY- Subparagraphs (A) and (B) of section 6404(e)(1) are each amended by striking `in performing a ministerial or managerial act'.

(c) ABATEMENT OF INTEREST WITH RESPECT TO ERRONEOUS REFUND CHECK WITHOUT REGARD TO SIZE OF REFUND- Paragraph (2) of section 6404(e) is amended by

striking `unless--' and all that follows and inserting `unless the taxpayer (or a related party) has in any way caused such erroneous refund.'

(d) ABATEMENT OF INTEREST TO EXTENT INTEREST IS ATTRIBUTABLE TO TAXPAYER RELIANCE ON WRITTEN STATEMENTS OF THE IRS- Subsection (f) of section 6404 is amended--

(1) in the subsection heading, by striking `PENALTY OR ADDITION' and inserting `INTEREST, PENALTY, OR ADDITION', and

(2) in paragraph (1) and in subparagraph (B) of paragraph (2), by striking `penalty or addition' and inserting `interest, penalty, or addition'.

(e) EFFECTIVE DATE- The amendments made by this section shall apply with respect to interest accruing on or after the date of the enactment of this Act.

SEC. 605. ANNUAL REPORT ON ABATEMENT OF PENALTIES.

Not later than 6 months after the close of each Federal fiscal year after fiscal year 1999, the Treasury Inspector General for Tax Administration shall submit a report to Congress on abatements of penalties under the Internal Revenue Code of 1986 during such year, including information on the reasons and criteria for such abatements.

Subtitle B--Procedural Provisions

SEC. 611. AUTHORITY TO CORRECT ERRORS BY THE IRS WITH RESPECT TO TAXPAYER.

(a) IN GENERAL- The Secretary of the Treasury shall promulgate regulations to allow the Secretary or the Secretary's delegate to provide appropriate relief to any individual taxpayer if the Secretary or delegate determines that--

(1) any action taken by an officer or employee of the Internal Revenue Service (acting in an official capacity) in connection with an assessment or collection of tax liability of a taxpayer was in error at the time of such action,

(2) no significant aspect of such error can be attributed to the taxpayer involved,

(3) with the consent of the taxpayer, such relief would be in the best interests of the taxpayer and the United States, and

(4) such action results in substantially less favorable treatment of the taxpayer with respect to the assessment or collection.

(b) APPROPRIATE RELIEF- For purposes of subsection (a), the term `appropriate relief' means any relief intended to return the taxpayer to the same position in which such taxpayer was prior to the action taken under subsection (a)(1).

(c) RELIEF OTHERWISE AVAILABLE- Subsection (a) shall not apply to any action for which relief is otherwise provided under internal revenue laws.

(d) REGULATIONS- The Secretary of the Treasury shall promulgate such regulations as necessary to carry out the purposes of this section.

(e) EFFECTIVE DATE- This section shall apply with respect to actions taken after the date of the enactment of this Act.

SEC. 612. MODIFICATION OF FILING DATE.

(a) IN GENERAL- Section 7502(a)(2) (relating to mailing requirements) is amended by--

(1) striking subparagraph (A) and inserting the following new subparagraph:

`(A) in the case of a payment, the postmark date falls within the prescribed period or on or before the prescribed date for making the payment (including any extension granted for making such payment), and', and

(2) striking `or other document, or' in subparagraph (B) and inserting `or other document was, or'.

(b) EFFECTIVE DATE- The amendments made by subsection (a) shall apply to deposits required to be made after December 31, 2000.

SEC. 613. WAIVER OF ADDITION TO TAX FOR EARLY WITHDRAWAL FROM IRA.

(a) IN GENERAL- Section 72(t) (relating to 10-percent additional tax on early distributions from qualified retirement plans) is amended by adding at the end the following new paragraph:

`(9) HARDSHIP EXCEPTION- The Secretary may waive part or all of the tax imposed under paragraph (1) to any distribution if the Secretary determines that--

`(A) adequate notice is not received by the taxpayer as required under section 402(f)(1) with respect to an eligible rollover distribution,

`(B) the taxpayer has no reason to know the information required to be contained in such notice, and

`(C) the application of such tax would result in undue hardship due to the financial condition of the taxpayer.'.

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to distributions made in taxable years beginning after December 31, 2000.

SEC. 614. FIXED RATE OF INTEREST FOR INSTALLMENT AGREEMENT.

(a) IN GENERAL- Section 6621(b)(2) (relating to period during which rate applies) is amended by adding at the end the following new subparagraph:

`(C) SPECIAL RULE FOR INSTALLMENT AGREEMENTS- In the case of an installment agreement under section 6159, the Federal short-term rate which applies with respect to any day of the installment agreement period shall be the rate determined under paragraph (1) for the first day of the calendar quarter in which such installment agreement is entered into.'.

(b) ADJUSTMENT FOR CHANGING RATES- Section 6159(b) (relating to extent to which agreements remain in effect) is amended by adding at the end the following new paragraph:

`(6) CHANGE IN INTEREST RATE- Notwithstanding section 6621(b)(2)(C), the Secretary may alter or modify such agreement with respect to the rate of interest in effect for such agreement if the Secretary determines that such rate is higher than the rate determined under section 6621(b) for the current calendar quarter.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to installment agreements entered into after December 31, 2000.

SEC. 615. EXCEPTION TO TAX ON EARLY WITHDRAWAL FROM IRA.

(a) IN GENERAL- Subparagraph (A) of section 72(t)(2) (relating to subsection not to apply to certain distributions) is amended by striking `, or' at the end of clause (vi), by striking the period at the end of clause (vii) and inserting `, or', and by adding at the end the following new clause:

`(viii) used to satisfy part or all of any liability for tax imposed under this subtitle of the person receiving such distribution.'.

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to distributions made in taxable years beginning after December 31, 2000.

Subtitle C--Small Investors Tax Simplification Act

SEC. 621. ELECTION TO USE SIMPLIFIED METHOD FOR QUALIFIED INVESTMENT CLUBS.

(a) IN GENERAL- Part I of subchapter K of chapter 1 (relating to determination of tax liability of partners and

partnerships) is amended by inserting after section 704 the following new section:

`SEC. 704A. ELECTION TO USE SIMPLIFIED METHOD FOR QUALIFIED INVESTMENT CLUBS.

`(a) IN GENERAL- Notwithstanding any other provision of this subchapter, a partner's distributive share of all items of income, gain, loss, deduction, or credit of a qualified investment club shall be determined under the simplified method.

`(b) SIMPLIFIED METHOD- For purposes of this section--

`(1) IN GENERAL- The term `simplified method' means a method pursuant to which a partnership allocates each of the items of income, gain, loss, deduction, and credit for its taxable year to its partners based on their proportionate interests on the last day of such taxable year in partnership profits.

`(2) EXCEPTION FOR DISTRIBUTIONS DURING YEAR- The partnership may take into account the partners' varying interests in partnership profits resulting from distributions during the taxable year in determining the partners' interests in partnership profits for purposes of paragraph (1).

`(c) DEFINITIONS- For purposes of this section--

`(1) QUALIFIED INVESTMENT CLUB- The term `qualified investment club' means, with respect to any taxable year, any partnership--

`(A) which is not required to be registered under the Investment Company Act of 1940,

`(B) for which no person who is registered as an investment adviser under the Investment Advisers Act of 1940 substantially participates in the management or investment decisions thereof,

`(C) all of the partners of which are qualified partners for the calendar year in which the taxable year of the partnership ends,

`(D) at least 90 percent of the gross income of which is derived from items described in section 851(b)(2),

`(E) at least 90 percent of the value of the total assets of which, at the end of each quarter of such year, consists of cash, cash items (including receivables), and securities,

`(F) the taxable year of which is the calendar year, and

`(G) for which an election under subsection (e) is in effect.

`(2) QUALIFIED PARTNER-

`(A) IN GENERAL- The term `qualified partner' means--

`(i) any individual other than a nonresident alien,

`(ii) any individual retirement plan, and

`(iii) any education individual retirement account (as defined in section 530).

`(B) LIMITATION ON CONTRIBUTIONS BY INDIVIDUALS- An individual shall not be a qualified partner for any calendar year if the aggregate contributions by such individual to qualified investment clubs (determined without regard to paragraph (1)(C)) during such calendar year exceeds $3,000 or exceeds $3,000 during any of the 5 preceding calendar years.

`(C) LIMITATION ON CONTRIBUTIONS BY TRUSTS-

`(i) IN GENERAL- A plan or account referred to in subparagraph (A) (hereafter in this subparagraph referred to as a `trust') shall not be a qualified partner for

any calendar year if the aggregate contributions to qualified investment clubs (determined without regard to paragraph (1)(C)) during such calendar year by such trust exceeds the excess of--

`(I) the product of $3,000 and the number of years before such calendar year that such trust held any asset, over

`(II) the aggregate contributions made to qualified investment clubs (as so determined) by such trust during all prior calendar years.

`(ii) AGGREGATION OF RELATED TRUSTS- For purposes of this subparagraph--

`(I) all trusts having the same beneficiary shall be treated as 1 trust, and

`(II) only the trust having the longest period described in clause (i)(I) shall be taken into account thereunder.

`(iii) FRACTIONS OF A YEAR- For purposes of clause (i)(I), a fraction of a year shall be counted as a whole year.

`(D) NO ATTRIBUTION BETWEEN INDIVIDUALS AND TRUSTS- Notwithstanding any other provision of this title, there shall be no attribution of contributions between a trust and an individual.

`(3) SECURITIES-

`(A) DEFINITION- The term `security' has the meaning given to such term by section 475(c)(2) (determined without regard to subparagraph (F) thereof).

`(B) CERTAIN RULES TO APPLY- For purposes of paragraph (1)(E), rules similar to the rules of paragraphs (4) and (5) of section 851(c), shall apply.

`(d) INFLATION ADJUSTMENT- In the case of calendar years after 2000, the $3,000 amounts contained in subsection (c)(2) shall each be increased for any calendar year after 2001 by an amount equal to--

`(1) $3,000, multiplied by

`(2) the cost-of-living adjustment under section 1(f)(3) for such calendar year, determined by substituting `calendar year 2000' for `calendar year 1992' in subparagraph (B) thereof.

Any increase under this subsection which is not a multiple of $50 shall be rounded to the nearest multiple of $50.

`(e) ELECTION- An election under this subsection shall be made on the return for the taxable year for which

it is made and shall apply to such taxable year and all subsequent taxable years for which the partnership is a qualified investment club, unless the election is revoked with the consent of the Secretary.

`(f) TERMINATION OF QUALIFIED INVESTMENT CLUB STATUS- An election under subsection (e) shall terminate as of the 1st day of any taxable year during which the partnership ceases to be a qualified investment club and, solely for purposes of section 704(c), each partner shall be treated as contributing on such first day such partner's pro rata share of the partnership's assets and liabilities on such first day to a new partnership.

`(g) INADVERTENT INVALID ELECTIONS OR TERMINATIONS- The Secretary shall provide a relief mechanism for treating a partnership as a qualified investment club in circumstances where--

`(1) an election under subsection (e) was not effective for the taxable year for which made by reason of an inadvertent failure to satisfy any requirement of subsection (c), or

`(2) there is an inadvertent termination under subsection (f) of such an election.

`(h) ELECTION AFTER TERMINATION- If an election under subsection (e) by a partnership is terminated or revoked, such partnership shall not be eligible to make an election under subsection (e) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination or revocation is effective, unless the Secretary consents to such election.

`(i) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations regarding the status of an individual or trust as a qualified partner.'.

(b) CLERICAL AMENDMENT- The table of sections for part I of subchapter K of chapter 1 is amended by inserting after the item relating to section 704 the following new item:

`Sec. 704A. Election to use simplified method for qualified investment clubs.'

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.

Subtitle D--Other Provisions

SEC. 631. ABOVE-THE-LINE DEDUCTION FOR UNREIMBURSED BUSINESS EXPENSES.

(a) IN GENERAL- Section 62(a)(2) (relating to certain trade and business deductions of employees) is amended to read as follows:

`(2) TRADE AND BUSINESS DEDUCTIONS OF EMPLOYEES- The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, whether or not such expenses are reimbursed, in connection with the performance by the taxpayer of services as an employee.'.

(b) CONFORMING AMENDMENTS-

(1) Section 62 is amended--

(A) by striking `(a) GENERAL RULE- For purposes' and inserting the following:

`For purposes', and

(B) by striking subsections (b) and (c).

(2) Section 67 is amended by striking subsection (f).

(3) Section 162(o)(1) is amended by striking `such services' the first place it occurs and all that follows and inserting `such services, the amount allowable as a deduction under this chapter for the use of a vehicle in performing such services shall be equal to the amount of such qualified reimbursements.'.

(4) Section 3402(m)(1) is amended by striking `62(a)' and inserting `62'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

SEC. 632. EXPENSING OF CERTAIN PERSONAL PROPERTY USED IN CONNECTION WITH RESIDENTIAL RENTAL PROPERTY.

(a) IN GENERAL- Section 179(d)(1) (defining section 179 property) is amended by inserting `(without regard to paragraph (2) thereof)' after `50(b)'.

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to property placed in service in taxable years beginning after December 31, 2000.

SEC. 633. INCLUSION OF CERTAIN OLDER FOSTER CHILDREN IN DEFINITION OF DEPENDENT.

(a) IN GENERAL- Section 151(c)(1)(B)(ii) (relating to additional exemption for dependents) is amended by inserting `or a foster child' after `student'.

(b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2000.

SEC. 634. EXCLUSION FOR FOSTER CARE PAYMENTS TO APPLY TO PAYMENTS BY QUALIFIED PLACEMENT AGENCIES.

(a) IN GENERAL- The matter preceding subparagraph (B) of section 131(b)(1) (defining qualified foster care payment) is amended to read as follows:

`(1) IN GENERAL- The term `qualified foster care payment' means any payment made pursuant to a foster care program of a State or political subdivision thereof--

`(A) which is paid by--

`(i) the State or political subdivision thereof, or

`(ii) a qualified foster care placement agency, and'.

(b) QUALIFIED FOSTER INDIVIDUALS TO INCLUDE INDIVIDUALS PLACED BY QUALIFIED PLACEMENT AGENCIES- Subparagraph (B) of section 131(b)(2) (defining qualified foster individual) is amended to read as follows:

`(B) a qualified foster care placement agency.'.

(c) QUALIFIED FOSTER CARE PLACEMENT AGENCY DEFINED- Subsection (b) of section 131 is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph:

`(3) QUALIFIED FOSTER CARE PLACEMENT AGENCY- The term `qualified foster care placement agency' means any placement agency which is licensed or certified by--

`(A) a State or political subdivision thereof, or

`(B) an entity designated by a State or political subdivision thereof,

for the foster care program of such State or political subdivision to make foster care payments to providers of foster care.'.

(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

SEC. 635. SIMPLIFICATION AND INCREASE IN STANDARD DEDUCTION FOR DEPENDENTS.

(a) IN GENERAL- Section 63(c)(5) (relating to limitation on basic standard deduction in the case of certain dependents) is amended by striking `exceed the greater' and all that follows through the period and inserting the following: `exceed the lesser of--

`(A) the basic standard deduction under paragraph (2) applicable to such individual for such individual's taxable year (determined without regard to this paragraph), or

`(B) the sum of $1,000 and such individual's earned income.'.

(b) ADJUSTMENTS FOR INFLATION- Section 63(c)(4)(B) (relating to adjustments for inflation) is amended--

(1) by striking `or 5(A)' in clause (i), and

(2) by amending clause (ii) to read as follows:

`(ii) `calendar year 1999' in the case of the dollar amount contained in paragraph (5)(B).'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

SEC. 636. 2-PERCENT FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS NOT TO APPLY TO QUALIFIED PROFESSIONAL DEVELOPMENT EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL TEACHERS.

(a) IN GENERAL- Section 67(b) (defining miscellaneous itemized deductions) is amended by striking `and' at the end of paragraph (11), by striking the period at the end of paragraph (12) and inserting `, and', and by adding at the end the following new paragraph:

`(13) any deduction allowable for the qualified professional development expenses paid or incurred by an eligible teacher.'.

(b) DEFINITIONS- Section 67 (relating to 2-percent floor on miscellaneous itemized deductions) is amended by adding at the end the following new subsection:

`(g) QUALIFIED PROFESSIONAL DEVELOPMENT EXPENSES OF ELIGIBLE TEACHERS- For purposes of subsection (b)(13)--

`(1) QUALIFIED PROFESSIONAL DEVELOPMENT EXPENSES-

`(A) IN GENERAL- The term `qualified professional development expenses' means expenses--

`(i) for tuition, fees, books, supplies, equipment, and transportation required for the enrollment or attendance of an individual in a qualified course of instruction, and

`(ii) with respect to which a deduction is allowable under section 162 (determined without regard to this section).

`(B) QUALIFIED COURSE OF INSTRUCTION- The term `qualified course of instruction' means a course of instruction which--

`(i) is--

`(I) directly related to the curriculum and academic subjects in which an eligible teacher provides instruction, or

`(II) designed to enhance the ability of an eligible teacher to understand and use State standards for the academic subjects in which such teacher provides instruction,

`(ii) may--

`(I) provide instruction in how to teach children with different learning styles, particularly children with disabilities and children with special learning needs (including children who are gifted and talented), or

`(II) provide instruction in how best to discipline children in the classroom and identify early and appropriate interventions to help children described in subclause (I) to learn,

`(iii) is tied to challenging State or local content standards and student performance standards,

`(iv) is tied to strategies and programs that demonstrate effectiveness in increasing student academic achievement and student performance, or substantially increasing the knowledge and teaching skills of an eligible teacher,

`(v) is of sufficient intensity and duration to have a positive and lasting impact on the performance of an eligible teacher in the classroom (which shall not include 1-day or short-term workshops and conferences), except that this clause shall not apply to an activity if such activity is 1 component described in a long-term comprehensive professional development plan established by an eligible teacher and the teacher's supervisor based upon an assessment of the needs of the teacher, the students of the teacher, and the local educational agency involved, and

`(vi) is part of a program of professional development which is approved and certified by the appropriate local educational agency as furthering the goals of the preceding clauses.

`(C) LOCAL EDUCATIONAL AGENCY- The term `local educational agency' has the meaning given such term by section 14101 of the Elementary and Secondary Education Act of 1965, as in effect on the date of the enactment of this subsection.

`(2) ELIGIBLE TEACHER-

`(A) IN GENERAL- The term `eligible teacher' means an individual who is a kindergarten through grade 12 classroom teacher in an elementary or secondary school.

`(B) ELEMENTARY OR SECONDARY SCHOOL- The terms `elementary school' and `secondary school' have the meanings given such terms by section 14101 of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 8801), as so in effect.'.

(b) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2000.

END