Simplified USA Tax Act of 2006 - Repeals after 2006 income tax (including the individual and corporate alternative minimum tax) and estate and gift tax provisions of the Internal Revenue Code of 1986. Replaces such provisions with a new tax system, to be known as the Simplified USA Tax.
Establishes three income tax brackets at 15, 25 and 30% for individual taxpayers. Redefines "gross income" and allows certain exclusions from gross income, including previously-taxed benefits, tax-exempt bond interest, compensation for injuries and sickness, and gain from the sale of a principal residence. Allows tax deductions for alimony and child support, home mortgage interest, charitable contributions, certain higher education expenses, and contributions to individual retirement accounts. Allows individual taxpayers: (1) a tax credit for social security payroll taxes; and (2) a refundable tax credit based upon family size and income.
Revises rules for individual retirement accounts to allow all taxpayers to make contributions to a Roth IRA up to the amount of their adjusted gross income. Allows tax free withdrawals from Roth IRAs for any purpose after five years. Establishes new tax rules for deductible IRAs, annuities, and endowment and life insurance contracts.
Revises tax rules for business entities to: (1) establish an 8% tax rate for the first $150,000 of business profit (12% for profit in excess of $150,000): (2) allow a tax credit for payroll taxes; (3) allow current year expensing of depreciable business property; (4) exempt from taxation all export sales income and other foreign-source income; and (5) redefine concepts relating to gain or loss on the sale of an asset, basis, and nonrecognition transactions.
[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4707 Introduced in House (IH)]
109th CONGRESS
2d Session
H. R. 4707
To amend the Internal Revenue Code of 1986 to restructure and replace
the income tax system of the United States to meet national priorities,
and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
February 8, 2006
Mr. English of Pennsylvania introduced the following bill; which was
referred to the Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to restructure and replace
the income tax system of the United States to meet national priorities,
and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Simplified USA Tax
Act of 2006''.
(b) Amendment of 1986 Code.--Except as otherwise expressly
provided, whenever in this Act a reference is made to the Code or to a
section or provision of the Code, the reference shall be considered to
be made to the Internal Revenue Code of 1986 or to a section or
provision thereof.
(c) Table of Contents.--
Sec. 1. Short title; amendment of 1986 Code; table of contents.
TITLE I--FINDINGS; NEED TO REPLACE THE INCOME TAX
Sec. 101. Replacing the income tax of the United States.
TITLE II--SIMPLIFIED USA TAX FOR INDIVIDUALS
Sec. 201. Simplified USA Tax for individuals.
Sec. 202. Reorganization of the Code.
TITLE III--SIMPLIFIED USA TAX FOR BUSINESSES
Sec. 301. Repeal of present corporate income tax; new tax paid by
corporations and other businesses.
Sec. 302. Repeal of chapter 6.
TITLE IV--DEFERRED COMPENSATION PLANS
Sec. 401. Provisions saved.
Sec. 402. Clerical Amendments.
Sec. 403. Clerical Amendments.
TITLE V--REPEAL OF ESTATE AND GIFT TAXES
Sec. 501. Repeal of gratuitous transfer taxes.
Sec. 502. Effective Date.
TITLE VI--TECHNICAL AND ADMINISTRATIVE CHANGES; EFFECTIVE DATES
Sec. 601. USA Tax Code.
Sec. 602. Revisions to the Code.
Sec. 603. Application of subtitle F.
Sec. 604. Clerical amendment.
TITLE I--FINDINGS; NEED TO REPLACE THE INCOME TAX
SEC. 101. REPLACING THE INCOME TAX OF THE UNITED STATES.
(a) Findings.--The Congress finds that--
(1) the current Tax Code is irreparably flawed and must be
replaced;
(2) to enhance the liberty and protect the privacy of
individuals, the Tax Code must be made simpler and
nonintrusive, and it must be applied evenhandedly to all;
(3) to be fair and to provide for the prosperity of current
and future generation, the Tax Code must give all individuals
at all income levels an opportunity to save, invest and raise
their standard of living and that of their children; and
(4) future economic growth requires a tax system that
facilitates successful competition in the global marketplace.
(b) Main Features of Simplified USA Tax System.--
(1) Replacement of old tax system.--Chapter 1 of subtitle A
(related to income taxes) of the Code is repealed and replaced
for years beginning after 2006.
(2) Estate and gift tax repealed.
(3) New tax system.--The Simplified USA Tax consists of--
(A) a simplified tax collected from individuals,
that for years after 2006 replaces the income tax
imposed on individuals by section 1 of the Code, and
(B) a simplified tax collected from corporations
and other businesses, that for years after 2006
replaces the income tax imposed on corporations by
section 11 of the Code.
(4) Simplified usa tax on gross profits.--Corporations and
other businesses pay tax on their annual gross profits from
business conducted in the United States, except that--
(A) export revenues are excluded, and
(B) imports are taxed.
(5) Simplified usa tax on income.--Individuals pay tax on
their annual income from wages, dividends, interest, and other
financial income (including sales of property), except that--
(A) investment earnings on previously taxed income
that is placed in a Roth IRA is exempt from further
taxation,
(B) a portion of each family's income is exempt
from tax, and
(C) deductions are allowed for--
(i) education costs,
(ii) religious, charitable, and other
philanthropic donations,
(iii) home mortgage interest payments, and
(iv) contributions to qualified IRAs.
(6) Credit for fica payroll taxes paid.--The amount of tax
due is reduced by the payroll tax that is--
(A) in the case of an employee, withheld from
wages, or
(B) in the case of a corporation or other business,
paid by the employer.
(c) Concepts and Structure of New Tax System.--
(1) Guiding principles of the simplified usa tax system.--
The Simplified USA Tax is based on the following principles:
(A) National wealth and well-being depend on the
work, skill, and savings and investment of people.
(B) Businesses are people and their capital working
together.
(C) Capital makes people more productive.
(D) Everyone benefits from a growing stock of
national savings which in turn allows for a growing
stock of physical and human capital.
(E) Under the Simplified USA Tax, the deferral of
taxation on investments in human capital represents an
investment by the Federal government in the nation's
capital stock and the Federal government shares in the
return on its investment in the form of higher economic
output and revenues in the future.
(2) Single tax in 2 parts.--The Simplified USA Tax is
composed of a business tax and an individual tax which are 2
parts of a single tax system that subjects all income produced
and received to taxation once and only once. The 2 parts are as
follows:
(A) Business tax at the source of income.--Tax is
paid by corporations and other businesses which produce
and sell goods and services that are--
(i) the source of nearly all the gross
domestic product of the United States, and
(ii) the ultimate source of income received
by individuals.
(B) Individual tax on income received.--Tax is paid
by individuals when they receive wages and salaries as
compensation for gross domestic product created by
their work.
(3) Saving and investment.--The Simplified USA Tax allows
people to save and businesses to invest as follows:
(A) Fair opportunity for people to save.--
(i) Optional elimination of double
taxation.--When an individual earns income and
is taxed on that income, the individual can
save that income in a Roth IRA and not pay
income taxes on the investment earnings.
(ii) Deductible and excludable savings.--
The Simplified USA Tax continues provisions of
present law that allow--
(I) lower income individuals and
certain others to make deductible
contributions to individual retirement
accounts, and
(II) encourage employer sponsored
savings and retirement plans that defer
taxation of income through use of
401(k) plans and other qualified
retirement plans.
(B) Fair opportunity for businesses to invest.--
(i) No prepayment of tax.--When a business
invests in plant and equipment--
(I) a deduction is allowed for the
cost, and
(II) tax is deferred.
(ii) Tax on earnings and recovery of
cost.--When recovered out of business revenues,
both the cost of the investment and the
earnings on the investment are included in
gross profit subject to tax.
(iii) Expensing.--The deduction for
investment is the equivalent of allowing the
cost of plant and equipment to be expensed
instead of depreciated.
(4) Fair opportunity to compete in the global
marketplace.--The Simplified USA Tax serves the strategic
interests of the United States in international markets as
follows:
(A) Border adjustable tax.--
(i) American-made exports.--Goods and
services produced in the United States can be
sold into world markets free of tax.
(ii) Foreign-made imports.--Goods and
services imported into the United States bear a
fair and proportionate share of the tax burden
in the United States.
(iii) Leveling the international playing
field.--Border adjustments for exports and
imports are consistent with international
standards and practice.
(5) A simple and understandable tax.--The Simplified USA
Tax for individuals--
(A) is written in a simple, understandable form,
(B) contains only a few exemptions, deductions, and
credits, and can be reported on a tax return only a
small fraction the size of Form 1040.
(6) A nonintrusive, evenhanded tax.--
(A) Taxpayers are in control.--When the rules are
few and clear, taxpayers can calculate their own tax
correctly and file their own returns without fear of
mistake or of getting caught up in an argument with the
IRS.
(B) Limited role for irs.--When the rules are few
and clear, the IRS does not have the broad interpretive
power that puts taxpayers at risk of being treated
unfairly and unevenly.
(C) Restoring voluntary compliance.--When the rules
are few and clear, the IRS can concentrate on helping
taxpayers voluntarily pay their correct share of tax
revenues for public use and benefit under a tax system
that is understood and respected.
(7) Maintaining tax progressivity for individuals.--
(A) Graduated tax.--Like the tax imposed by section
1 of the current Code, the Simplified USA Tax for
individuals is a graduated tax.
(B) Family and work credits.--The Simplified USA
Tax recognizes that every family's budget includes
necessities. The Simplified USA Tax provides a family
credit for all families as well as a refundable work
credit, qualifying families to maintain a basic
standard of living.
(8) Businesses and individual share the tax burden.--
(A) Business portion of tax burden.--Corporations
and other businesses pay about the same portion of the
total tax as under the current Code.
(B) Individual portion of tax burden.--Individuals
pay about the same portion of the total tax as under
the current Code.
(9) Emphasizing personal independence and responsibility.--
(A) Reinforcing a culture of work and thrift.--
Instead of being solely a calculation of how much they
must pay to the government, the Simplified USA Tax
converts the income tax into an annual calculation of
how much people produce and contribute to the economy.
(B) Greater control and responsibility.--Because
people are not double taxed on their saving, they
have--
(i) more control over their own income and
taxes,
(ii) a greater ability to plan and provide
for their own future, and
(iii) a fair opportunity to do so.
(10) More opportunity for wage earners at lower income
levels.--
(A) Refundable credit for employee payroll tax.--
The amount of the payroll tax paid or withheld under
the Code from an employee's wages (and paid into the
Social Security and Hospital Insurance Trust Funds)
is--
(i) credited against the employee's income
tax, and
(ii) refunded to the employee to the extent
in excess of the employee's income tax.
(B) No effect on trust fund or benefits.--The
income tax credit allowed for payroll taxes deposited
in the Social Security Trust Fund does not--
(i) reduce the amount in such fund, or
(ii) reduce the payment of any person's
benefits from the fund.
TITLE II--SIMPLIFIED USA TAX FOR INDIVIDUALS
SEC. 201. SIMPLIFIED USA TAX FOR INDIVIDUALS.
(a) In General.--Chapter 1 of the Code is amended to read as
follows:
``CHAPTER 1--SIMPLIFIED USA TAX FOR INDIVIDUALS
``Subchapter A. Basic rules.
``Subchapter B. Roth IRA and other savings provisions.
``Subchapter C. Basis, business transactions, and nonrecognition
transactions.
``Subchapter D. Rules for exclusions from gross income.
``Subchapter E. Rules relating to deductions.
``Subchapter F. Special business activities.
``Subchapter G. Accounting methods.
``Subchapter H. Nonresident aliens.
``Subchapter I. Trusts and estates.
``Subchapter J. Definitions and rules of application.
``Subchapter A--Basic Rules
``Sec. 1. Simplified USA tax for individuals.
``Sec. 2. Persons liable for the Simplified USA for individuals.
``Sec. 3. Gross income.
``Sec. 4. Exclusions from gross income.
``Sec. 5. Alimony and child support deductions.
``Sec. 6. USA deductions.
``Sec. 7. Homeowner deduction.
``Sec. 8. Education deduction.
``Sec. 9. Philanthropic transfer deduction.
``Sec. 10. Limitation on deductions.
``Sec. 15. Tax rates.
``Sec. 16. Kiddie tax.
``Sec. 17. Rules for filing status and rate tables.
``Sec. 20. USA tax credits.
``Sec. 21. Family tax credit.
``Sec. 22. Work tax credit.
``Sec. 23. Payroll tax credit.
``Sec. 24. Taxes-paid tax credit.
``Sec. 25. Indexing for inflation.
``SEC. 1. SIMPLIFIED USA TAX FOR INDIVIDUALS.
``(a) Imposition of Tax.--An income tax is imposed on each
individual described in section 2. The income tax shall equal the
amount determined by applying the tax schedules in section 15 to the
taxable income of the taxpayer for the taxable year and reducing the
tax so determined by the USA tax credits for the taxable year.
``(b) Taxable Income.--`Taxable income' means adjusted gross
income, reduced by the USA deductions, including--
``(1) the homeowner deduction,
``(2) the education deduction, and
``(3) the philanthropic transfer deduction.
``(c) Adjusted Gross Income.--`Adjusted gross income' means gross
income, reduced by--
``(1) the alimony and child support deductions, and
``(2) the qualified IRA deduction.
``(d) Name.--The tax imposed by this chapter shall be known as the
`Simplified USA Tax for Individuals'.
``SEC. 2. PERSONS LIABLE FOR THE SIMPLIFIED USA TAX FOR INDIVIDUALS.
``(a) Individuals Only.--The Simplified USA Tax for Individuals
shall apply only to individuals.
``(b) Citizens and Resident Aliens.--The Simplified USA Tax for
Individuals shall apply to all citizens of the United States and to all
resident aliens of the United States. Except as specifically provided
in this chapter, the Simplified USA Tax for Individuals shall not apply
to nonresident aliens.
``(c) Nonresident Aliens.--For rules applicable to the compensation
income of nonresident aliens, see subchapter H (sections 131 and 132).
For rules on the withholding of tax on nonresident aliens, see chapter
5 (sections 1441-1464).
``(d) Taxpayer.--For purposes of this chapter, `taxpayer' means an
individual, or, in the case of a joint return, the husband and the
wife.
``SEC. 3. GROSS INCOME.
``(a) General Definition.--Except as otherwise provided in this
chapter, `gross income for the taxable year' means all income from
whatever source derived by a taxpayer during the taxable year,
including (but not limited to) the following items:
``(1) Compensation for services, including (but not limited
to)--
``(A) salaries,
``(B) wages,
``(C) commissions,
``(D) tips, and
``(E) distributions from business entities (as
defined in section 171).
``(2) Fringe benefits (except as specifically excluded by
section 4(a)), including (but not limited to)--
``(A) the cost of health, disability, life or other
similar insurance paid by an employer if the taxpayer
is indirectly or directly the beneficiary of the policy
or has the right to name the beneficiary of the policy,
``(B) employer-paid parking (unless the employee
uses the automobile parked in the space regularly on
employer business),
``(C) employer-paid educational benefits,
``(D) employer-paid housing (other than housing
provided for the convenience of the employer),
``(E) employer-paid meals (other than meals
provided for the convenience of the employer or
reimbursement for the reasonable cost of meals incurred
on overnight travel),
``(F) amounts contributed by an employer on behalf
of an employee to a group legal services plan, and
``(G) dependent care assistance received from an
employer.
``(3) Distributions from business entities (as defined in
section 171) constituting--
``(A) compensation for use of capital, including
interest, or
``(B) shares of profits (including dividends).
``(4) Interest not described in paragraph (3)(A).
``(5) Rents.
``(6) Royalties.
``(7) Alimony, child support, and separate maintenance
payments.
``(8) Includible social security benefits.
``(9) Income from the discharge of indebtedness.
``(10) Gains on the sale or disposition of assets.
``(11) Amounts stolen or embezzled.
``(12) Distributions from retirement plans and annuities
(other than USA Roth IRAs) to the extent not previously
included as income, as determined in accordance with section
33.
``(13) Amounts received through health, accident or
disability insurance to the extent that--
``(A) the cost of such insurance was paid by an
employer and not included in the employee's taxable
income and
``(B) such amounts exceed the actual medical
expenses incurred and not paid or treated as paid with
amounts otherwise excluded from income.
``(b) Definitions.--For purposes of subsection (a) and section 4--
``(1) Employer.--`Employer' includes--
``(A) in the case of a partner who provides
services for a partnership, the partnership,
``(B) in the case of a proprietor, the
proprietorship, and
``(C) in the case of an independent contractor, any
business or individual that hires the independent
contractor.
``(2) Social security benefits.--
``(A) In general.--`Social Security benefits' means
any amount received by the taxpayer by reason of
entitlement to--
``(i) a monthly benefit under title II of
the Social Security Act, or
``(ii) a tier 1 railroad retirement
benefit. The amount received by a taxpayer
shall be determined as if the Social Security
Act did not contain section 203(i) thereof.
``(B) Tier 1 railroad retirement benefit.--`Tier 1
railroad retirement benefit' means--
``(i) the amount of the annuity under the
Railroad Retirement Act of 1974 equal to the
amount of the benefit to which the taxpayer
would have been entitled under the Social
Security Act if all of the service after
December 31, 1936, of the employee (on whose
record the annuity is being paid) has been
included in the term `employment' as defined in
the Social Security Act, and
``(ii) a monthly annuity amount under
section 3(f)(3) of the Railroad Retirement Act
of 1974.
``(C) Workers' compensation substitutes.--If by
reason of section 224 of the Social Security Act or
section 3(a)(1) of the Railroad Retirement Act of 1974,
any social security benefit is reduced because of the
receipt of a benefit under a workers' compensation act,
the term `social security benefit' includes that
portion of such benefit which equals such reduction.
``(D) Effect of early payment.--If social security
benefits checks are delivered before the end of the
calendar month for which they are issued and are not
deposited until the month for which they are issued,
they will be treated as received in the month for which
they are issued.
``(3) Includible social security benefits.--`Includible
social security benefits' means the portion of social security
benefits that would be included in gross income under section
86(a) of the Internal Revenue Code of 1986, except that for
purposes of applying such section, the term `modified adjusted
gross income' means adjusted gross income (as defined in
section 1(c)), determined without regard to the inclusion of
any social security benefits.
``(c) Property Received for Services.--
``(1) In general.--If, in connection with the performance
of services, property is transferred to any person other than
the person for whom such services are performed, the excess
of--
``(A) the fair market value of such property
(determined without regard to any restriction other
than a restriction which by its terms will never lapse)
at the first time the rights of the person having the
beneficial interest in such property are transferable
or are not subject to a substantial risk of forfeiture,
whichever occurs earlier, over
``(B) the amount (if any) paid for such property,
shall be included in the gross income of the person who
performed such services in the first taxable year in
which the rights of the person having the beneficial
interest in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever
is applicable. The preceding sentence shall not apply
if such person sells or otherwise disposes of such
property in an arm's length transaction before his
rights in such property become transferable or not
subject to a substantial risk of forfeiture.
``(2) Rules and regulations.--The Secretary shall prescribe
rules and regulations similar to those applicable under section
83 of the Internal Revenue Code of 1986 for purposes of
implementing this subsection.
``SEC. 4. EXCLUSIONS FROM GROSS INCOME.
``(a) General Rule.--Gross income does not include:
``(1) Returns or benefits from previously taxed income.--
``(A) Social security benefits (as defined in
section 3(b)(2)), other than includible social security
benefits (as defined in section 3(b)(3)).
``(B) Amounts received under accident or health
benefit plans (except as provided in section 3(a)(13)).
``(C) Value of services provided pursuant to a
group legal service plan (but only if the cost of such
services was paid by the employee or paid by the
employer and included in the gross income of the
employee).
``(D) Amounts received under an insurance contract
for certain living expenses in the case of an
individual whose principal residence is damaged or
destroyed or who is denied access because of the threat
of such occurrence.
``(E) Amounts treated as recovery of basis under
any other provision of chapter 1.
``(2) Compensation for special kinds of service.--
``(A) In the case of a minister of the gospel--
``(i) the rental value of a home furnished
to him, or
``(ii) the rental allowance paid to him as
part of his compensation, to the extent used by
him to rent or provide a home.
``(B) Certain combat pay of members of the Armed
Forces of the United States (as provided in section
92).
``(C) Certain reduced uniform services retirement
pay (as defined in section 122 of the Internal Revenue
Code of 1986).
``(D) Qualified military benefits (as defined in
section 93).
``(E) Moving allowances for active military
personnel (as defined in section 217(g) of the Internal
Revenue Code of 1986).
``(F) Certain foster care payments (as defined in
section 94).
``(3) Gratuitous, charitable, and governmental transfers.--
``(A) Gifts.
``(B) Inheritances.
``(C) Supplemental security income, aid to families
with dependent children, food stamps, section 8 low-
income rental assistance, benefits under the low-income
home energy assistance program, and benefits under
other similar Federal and State assistance programs for
low-income individuals and families.
``(D) Benefits or assistance received from a
charitable organization as the result of a disaster or
by reason of financial need.
``(4) Tax-exempt bond interest.--Interest on State and
local bonds (as provided in section 91);
``(5) Compensation for injury and sickness.--
``(A) Amounts received as compensation for personal
injury or sickness (as provided in section 95).
``(B) Reimbursement and direct payments under
Medicare and Medicaid.
``(6) Benefits primarily for the convenience of the
employer and certain fringe benefits.--
``(A) Meals or lodging furnished for the
convenience of the employer (as provided in section
96).
``(B) Value of a parking space if employee uses the
car parked in the space regularly on company business.
``(C) A fringe benefit that is a no-additional-cost
service (as defined in section 97(b)), subject to rules
prohibiting discrimination in favor of the highly
compensated.
``(D) A qualified employee discount (as defined in
section 97(c)), subject to rules prohibiting
discrimination in favor of the highly compensated.
``(E) Any property or services provided to an
employee to the extent that if the employee were
treated as a business and the business paid for those
services, the employee could deduct the cost of such
property or services under the business tax.
``(F) A de minimis fringe benefit (as defined in
section 97(d)).
``(G) Transportation in a commuter highway vehicle
if such transportation is in connection with travel
between the employee's residence and place of
employment.
``(H) Any amount received directly or indirectly by
an individual from an employer for moving expenses if--
``(i) the move is associated with a change
in job locations for the same employer, and
``(ii) the expenses of such move would have
been deductible under the rules under section
217 of the Internal Revenue Code of 1986 if
paid directly by the employee.
``(I) Employer provided coverage under an accident
or health plan.
``(7) Repayable receipts.--The proceeds of borrowing or any
other amounts legally received that the taxpayer is legally
obligated to return (except that the imputed interest rules of
section 7872 may apply if there is inadequate stated interest).
``(8) Certain income earned abroad.--Certain income and
housing costs of citizens and residents of the United States
living outside the United States in accordance with the rules
under section 911 of the Internal Revenue Code of 1986.
``(9) Discharge of indebtedness.--The amount of
indebtedness discharged unless the discharge is for services,
property, or other valuable right.
``(10) Nonrecognition transactions.--Amounts to which the
nonrecognition transaction rules of section 77 apply.
``(11) Proceeds from sale of principal residence.--Amounts
excludable under section 76 (relating to certain proceeds from
the sale of the taxpayer's principal residence).
``(12) Taxable receipts of a business entity.--Amounts that
are treated as taxable receipts of a business entity under the
Simplified USA Tax for businesses and are not distributed to
the individual taxpayer.
``(13) Qualified retirement contributions.--Employer
contributions to retirement plans that are exempt from taxation
under chapter 3, including contributions pursuant to a cash or
deferred payment plan described in section 401(k).
``(b) Cross References.--
``(1) Roth iras.--For rules excluding from income earnings
on, and distributions from, Roth IRAs, see sections 30 and
408A.
``(2) Other retirement plans.--For rules excluding or
deferring from income earnings on other retirement plans, see
chapter 3.
``SEC. 5. ALIMONY AND CHILD SUPPORT DEDUCTIONS.
``(a) General Rule.--A taxpayer shall be allowed an alimony and
child support deductions for an amount equal to the alimony, child
support, or separate maintenance payments paid during the taxpayer's
taxable year.
``(b) Definition of Alimony, Child Support, and Separate
Maintenance Payments.--`Alimony, child support, and separate
maintenance payments' means any alimony, child support, or separate
maintenance payment which is includible in gross income of the
recipient under section 3.
``SEC. 6. USA DEDUCTIONS.
``In computing taxable income, an individual shall be entitled to
the following deductions:
``(1) The homeowner deduction described in section 7.
``(2) The education deduction described in section 8.
``(3) The philanthropic transfer deduction described in
section 9.
``SEC. 7. HOMEOWNER DEDUCTION.
``(a) In General.--The homeowner deduction shall equal the amount
of interest paid by the taxpayer during the taxable year on acquisition
indebtedness with respect to any qualified residence of the taxpayer.
``(b) Definitions.--
``(1) Acquisition indebtedness.--`Acquisition indebtedness'
means any indebtedness that is secured by a qualified residence
and that--
``(A) was incurred in acquiring, constructing, or
substantially improving the qualified residence, or
``(B) was incurred to refinance any indebtedness
that is described in subparagraph (A) or this
subparagraph (B) but only to the extent that the
refinancing does not exceed the amount refinanced.
The aggregate amount treated as acquisition indebtedness shall
not exceed $1,000,000 ($500,000 in the case of a married
individual filing separately).
``(2) Qualified residence.--`Qualified residence' means the
principal residence of the taxpayer and 1 other residence of
the taxpayer that is designated by the taxpayer and which--
``(A) is used by the taxpayer as a residence for
more than 14 days during such year for which such unit
is rented, and
``(B) is not rented for more than 14 days during
such year.
``(c) Cooperative Housing Corporation Tenant.--Any indebtedness
secured by stock held by a taxpayer as a tenant-stockholder in a
cooperative housing corporation shall be treated as secured by the
house or apartment which the taxpayer is entitled to occupy as a
tenant-stockholder. If such stock cannot be used to secure
indebtedness, the indebtedness will be treated as so secured if the
taxpayer establishes that such indebtedness was incurred to acquire
stock.
``SEC. 8. EDUCATION DEDUCTION.
``(a) In General.--The education deduction shall equal the sum of
the qualified educational expenses for each eligible student.
``(b) Qualified Education Expenses.--
``(1) In general.--`Qualified education expenses' means
with respect to an eligible student the lesser of--
``(A) $4,000, or
``(B) the qualified higher education expenses of
the eligible student paid by the taxpayer during the
taxable year.
``(2) Qualified higher education expenses.--
``(A) In general.--`Qualified higher education
expenses' means tuition and fees required for the
enrollment of an eligible student at an eligible
education institution. Such term shall not include
expenses with respect to any course or other education
involving sports, games, or hobbies other than as part
of a degree program.
``(B) Eligible educational institution.--`Eligible
educational institution' means--
``(i) an institution which is described in
section 481 of the Higher Education Act of 1965
(as in effect on May 15, 1998), and which is
eligible to participate in a program under
title IV of such Act, and
``(ii) in the case of a student who has
attained the age of 18 before the beginning of
the taxable year, and not graduated from high
school before the beginning of the taxable
year, an accredited school providing remedial
education.
``(3) Eligible student.--`Eligible student' means--
``(A) the taxpayer, but only if no other taxpayer
treats the taxpayer as a dependent for whom a credit is
allowed under section 21,
``(B) the taxpayer's spouse if a joint return is
filed, and
``(C) any dependent of the taxpayer for whom the
taxpayer is allowed a credit under section 21.
``(c) Limitation.--The maximum education deduction in a taxable
year is $12,000 ($6,000 in the case of married individuals filing
separate returns).
``(d) Inflation Adjustments.--The dollar amounts contained in
subsections (b)(1)(A) and (c) shall be adjusted for inflation beginning
with calendar year 2008 in accordance with section 25.
``SEC. 9. PHILANTHROPIC TRANSFER DEDUCTION.
``(a) In General.--The philanthropic transfer deduction shall equal
the amount of charitable contributions made by the taxpayer in the
taxable year, subject to the limitations in subsection (b). A deduction
shall be allowable as a deduction only if verified under regulations
prescribed by the Secretary.
``(b) Limitation on Amount.--
``(1) General rule.--A deduction for contributions to
regular charities in any taxable year shall be allowed only to
the extent that such contributions do not exceed 50 percent of
the taxpayer's adjusted gross income. Other charitable
contributions shall be allowed only to the extent that such
contributions do not exceed the lesser of--
``(A) 30 percent of the taxpayer's adjusted gross
income, or
``(B) the excess, if any, of 50 percent of the
taxpayer's adjusted gross income over the amount of
charitable contributions to regular charities.
``(2) Carryover.--If the amount of charitable contributions
made in a taxable year exceeds the amount which can be deducted
in such year, the excess shall be carried over for a period of
up to 5 years in accordance with rules to be prescribed by the
Secretary.
``(3) Regular charity.--For purposes of this subsection,
`regular charity' means an organization described in section
101, that is not a private foundation (other than a private
operating foundation) (as such terms are defined in section
102).
``(c) Charitable Contribution.--`Charitable contribution' means a
contribution or gift to or for the use of a governmental or charitable
recipient (as defined in section 101).
``(d) Contributions of Property.--
``(1) General rule.--In the case of a charitable
contribution of property, the amount of the contribution shall
equal the lesser of the fair market value of the property or
the taxpayer's basis in the property.
``(2) Fair market value deductions in certain cases.--
Notwithstanding paragraph (1), in the case of a charitable
contribution (other than a contribution to a private foundation
that is not a private operating foundation) of--
``(A) real property,
``(B) tangible property if the use by the donee is
related to its purpose or function constituting the
basis for its exemption from the business tax or in the
case of a governmental unit, to any governmental unit,
and
``(C) stocks, bonds, or other securities held for
more than one year, the amount of the charitable
contribution shall equal the fair market value of the
property.
``(3) Contributions of stock for which market quotations
are readily available.--
``(A) In general.--In the case of contributions of
qualified appreciated stock, paragraph (2) shall apply
without regard to whether the stock is contributed to a
private foundation.
``(B) Qualified appreciated stock.--`Qualified
appreciated stock' means any stock of a corporation for
which (as of the date of the contribution) market
quotations are readily available on an established
securities market, except that in the case of a donor
to a private foundation, the term does not include
stock to the extent that the amount so contributed,
when increased by prior contributions by the donor of
stock in the same corporation, exceeds 10 percent in
value of the outstanding stock of such corporation.
``(e) Other Rules.--The Secretary shall prescribe rules limiting
the availability of the philanthropic transfer deduction in certain
cases, including rules for--
``(1) contributions of property placed in trust,
``(2) contributions of partial interests in property,
``(3) contributions subject to liabilities that are
assumed,
``(4) out-of-pocket expenditures on behalf of a charity to
influence legislation,
``(5) substantiation of contributions in excess of $250,
``(6) contributions designated for lobbying activity,
``(7) amounts paid to maintain certain students as members
of taxpayer's household,
``(8) qualified conservation contributions, and
``(9) deductions for travel expenses on behalf of a charity
where there is a significant element of personal pleasure.
``SEC. 10. LIMITATION ON DEDUCTIONS.
``(a) In General.--A taxpayer's deductions shall not reduce the
taxpayer's taxable income below zero. Except as provided in section
9(b) (relating to the limitation on the philanthropic transfer
deduction), a taxpayer shall not be entitled to carry over any unused
deductions.
``(b) Deductions.--For purposes of this section, `deductions'
means--
``(1) the alimony and child support deductions,
``(2) the USA deductions, and
``(3) the qualified IRA deduction.
``SEC. 15. TAX RATES.
``(a) Married Individuals Filing Joint Returns and Surviving
Spouses.--The tax schedule for every married individual who files a
joint return with a spouse and for every surviving spouse (as defined
in section 17(a)) is--
``If taxable income is: The tax is:
Not over $40,000...............
15% of taxable income.
Over $40,000, but not over
$80,000.
$6,000, plus 25% of the excess
over $40,000.
Over $80,000...................
$16,000, plus 30% of the excess
over $80,000.
``(b) Heads of Households.--The tax schedule for every head of
household (as defined in section 17(b)) is--
``If taxable income is: The tax is:
Not over $35,000...............
15% of taxable income.
Over $35,000, but not over
$70,000.
$5,250, plus 25% of the excess
over $35,000.
Over $70,000...................
$14,000, plus 30% of the excess
over $70,000.
``(c) Unmarried Individuals.--The tax schedule for an unmarried
individual who is not a head of a household or a surviving spouse is--
``If taxable income is: The tax is:
Not over $24,000...............
15% of taxable income.
Over $24,000, but not over
$48,000.
$3,600, plus 25% of the excess
over $24,000.
Over $48,000...................
$9,600, plus 30% of the excess
over $48,000.
``(d) Married Individuals Filing Separate Returns.--The tax
schedule for a married individual filing a separate return is--
``If taxable income is: The tax is:
Not over $20,000...............
15% of taxable income.
Over $20,000, but not over
$40,000.
$3,000, plus 25% of the excess
over $20,000.
Over $40,000...................
$8,000, plus 30% of the excess
over $40,000.
``(e) Adjustments for Inflation.--Beginning with calendar year
2008, the tax schedules in subsections (a) through (d) shall be
adjusted so that inflation will not result in tax increases in
accordance with the procedures under section 25.
``(f) Maximum Rate for Investment Income.--
``(1) In general.--If a taxpayer has a net investment
income for any taxable year, the tax imposed by this section
for such taxable year shall not exceed the sum of--
``(A) a tax computed at the rates and in the same
manner as if this subsection had not been enacted on
taxable income reduced by net capital gain, or if
greater, on the lesser of--
``(i) taxable income, or
``(ii) taxable income reduced by net
capital gain, and
``(B) 15 percent of net investment income.
``(2) Net investment income.--For purposes of paragraph
(1), the term `net investment income' means the excess of--
``(A) the sum of amounts includible in gross income
which is--
``(i) a distribution from business entities
(as defined in section 171) constituting shares
of profits (including dividends), and
``(ii) gain on the sale or disposition of
any asset, over
``(B) any amount realized which is a loss on the
sale or disposition of any asset.
``(g) Definitions.--See section 17 for rules on filing status.
``SEC. 16. KIDDIE TAX.
``(a) General Rule.--If a child has a living parent and net
unearned income and the child has not attained the age of 14 before the
close of the taxable year--
``(1) the net unearned income of the child shall be
included in the taxable income of the eligible parent for
purposes of determining the parent's tax liability, or
``(2) the tax calculated under the tax rate schedules for
the child as a separate taxpayer shall not be less than the sum
of--
``(A) the tax which would have been determined
under the rate schedule if the taxable income of the
child were reduced by the net unearned income of the
child, plus
``(B) such child's share of the allocable parental
tax.
``(b) Child's Share of Allocable Parental Tax.--
``(1) Allocable parental tax.--`Allocable parental tax'
means the excess of--
``(A) the tax that would have been determined under
the rate schedules on the eligible parent's taxable
income if such income included the net unearned income
of all of the eligible parent's children to which this
section applies, over
``(B) the tax actually determined under the rate
schedules without regard to this section.
``(2) Child's share.--A child's share of the allocable
parental tax is equal to the amount that bears the same ratio
to the total allocable parental tax as the child's net unearned
income bears to the aggregate net unearned income of all
children to whom this section applies for whom the eligible
parent is the eligible parent.
``(c) Eligible Parent.--`Eligible parent' means--
``(1) both parents of the child if the parents file a joint
return,
``(2) the surviving parent of a child if the child has only
1 surviving parent,
``(3) the custodial parent if the child's parents are not
married, or
``(4) the parent with the greater taxable income if the
parents are married and filing separate returns.
``(d) Net Unearned Income.--`Net unearned income' means the excess,
if any, of--
``(1) the adjusted gross income of the child, over
``(2) the sum of--
``(A) the earned income (as defined in section
171(a)(6)) of the child, and
``(B) $2,500.
``SEC. 17. RULES FOR FILING STATUS AND RATE TABLES.
``(a) Definition of Surviving Spouse.--
``(1) In general.--`Surviving spouse' means an individual--
``(A) whose spouse died during either of his 2
calendar years immediately preceding the calendar year,
and
``(B) who maintains as his home a household which
constitutes for the taxable year the principal place of
abode (as a member of such household) of a dependent--
``(i) who is a qualifying child (as defined
in section 21) of the taxpayer, and
``(ii) for whom the taxpayer is allowed a
credit for the taxable year under section 21.
For purposes of this paragraph, an individual shall be
considered as maintaining a household only if over half of the
cost of maintaining the household during the taxable year is
furnished by such individual.
``(2) Limitations.--Notwithstanding paragraph (1), for
purposes of section 15, an individual shall not be considered
to be a surviving spouse--
``(A) if the individual has remarried at any time
before the close of the taxable year, or
``(B) unless, for the individual's taxable year
during which his spouse died, a joint return could have
been made under the provisions of section 6013 (without
regard to subsection (a)(3) thereof).
``(3) Special rule where deceased spouse was in missing
status.--If an individual was in a missing status (within the
meaning of section 6013(f)(3)) as a result of service in a
combat zone and if such individual remains in such status until
the date referred to in subparagraph (A) or (B), then, for
purposes of paragraph (1)(A), the date on which such individual
died shall be treated as the earlier of the date determined
under subparagraph (A) or the date determined under
subparagraph (B):
``(A) the date on which the determination is made
under section 556 of title 37 of the United States Code
or under section 5566 of title 5 of such Code
(whichever is applicable) that such individual died
while in such missing status, or
``(B) the date which is 2 years after the date
designated under section 92 (relating to exemption for
combat zones) as the date of termination of combatant
activities in that zone.
``(b) Definition of Head of Household.--
``(1) In general.--An individual shall be considered a head
of a household if, and only if, such individual is not married
at the close of his taxable year, is not a surviving spouse (as
defined in subsection (a)), and either--
``(A) maintains as his home a household which
constitutes for more than one-half of such taxable year
the principal place of abode, as a member of such
household, of--
``(i) a son, stepson, daughter, or
stepdaughter of the taxpayer, or a descendant
of a son or daughter of the taxpayer, but if
such son, stepson, daughter, stepdaughter, or
descendant is married at the close of the
taxpayer's taxable year, only if the taxpayer
is entitled to claim such person as a credit
for the taxable year under section 21 (or would
be so entitled but for the release of a claim
under section 152(e) of the Internal Revenue
Code of 1986 by the custodial parent),
``(ii) any other person who is a dependent
of the taxpayer, if the taxpayer is allowed a
credit for such person under section 21for the
taxable year, or
``(B) maintains a household which constitutes for
such taxable year the principal place of abode of the
father or mother of the taxpayer, if the taxpayer is
entitled to a credit under section 21 for the taxable
year for such father or mother.
For purposes of this paragraph, an individual shall be
considered as maintaining a household only if over half of the
cost of maintaining the household during the taxable year is
furnished by such individual.
``(2) Determination of status.--For purposes of this
subsection--
``(A) a legally adopted child of a person shall be
considered a child of such person by blood;
``(B) an individual who is legally separated from
his spouse under a decree of divorce or of separate
maintenance shall not be considered as married;
``(C) a taxpayer shall be considered as not married
at the close of his taxable year if at any time during
the taxable year his spouse is a nonresident alien; and
``(D) a taxpayer shall be considered as married at
the close of his taxable year if his spouse (other than
a spouse described in subparagraph (C)) died during the
taxable year.
``(3) Limitations.--Notwithstanding paragraph (1), for
purposes of this chapter, a taxpayer shall not be considered to
be a head of a household--
``(A) if at any time during the taxable year he is
a nonresident alien; or
``(B) by reason of an individual who would not be a
dependent for the taxable year but for--
``(i) subparagraph (H) of section 152(d)(2)
of the Internal Revenue Code of 1986, or
``(ii) multiple support rules prescribed by
the Secretary.
``(c) Certain Married Individuals Living Apart.--For purposes of
this part, an individual shall be treated as not married at the close
of the taxable year if such individual is so treated under the
provisions of section 7703(b).
``(d) Nonresident Aliens.--In the case of a nonresident alien
individual, the taxes imposed by section 1 shall not apply.
``SEC. 20. USA TAX CREDITS.
``(a) In General.--The USA tax credits are and shall be applied in
the following order:
``(1) The family tax credit under section 21.
``(2) The work tax credit under section 22.
``(3) The foreign tax credit as prescribed by the Secretary
under rules similar to the rules of subpart A of part III of
subchapter N of chapter 1 of the Internal Revenue Code of 1986,
but only with respect to foreign taxes on amounts that are
included in the gross income of the taxpayer.
``(4) The payroll tax credit under section 23.
``(5) The taxes-paid tax credit under section 24.
``(b) Refundable Credits.--If a taxpayer's USA tax credits (other
than the family tax credit and the foreign tax credit) for a taxable
year exceed the taxpayer's tax liability for the taxable year (after
application of the family tax credit and the foreign tax credit but
before application of the other USA tax credits), the taxpayer shall be
entitled to a refund for such excess. The taxpayer may elect in lieu of
a refund to apply such excess as a tax paid for the following taxable
year.
``SEC. 21. FAMILY TAX CREDIT.
``(a) In General.--The taxpayer shall be allowed a family tax
credit in an amount equal to the sum of--
``(1) the base family credit amount, plus
``(2) the additional family credit amount.
``(b) Base Family Credit Amount.--The base family credit amount
shall be the sum of the credit amount for each status, determined in
accordance with the following table:
``Status is: Credit amount for status is:
Married individuals filing joint return....... $3,300
Unmarried individuals with one or more $2,800
dependents.
Unmarried individuals with no dependents...... $1,650
Each dependent................................ $1,150.
``(c) Additional Family Credit Amount.--The additional family
credit amount shall be the sum of the credit amount for each dependent
of the taxpayer, determined as follows:
``(1) In the case of each qualifying child, the amount
shall be $1,500.
``(2) In the case of each qualifying relative, the amount
shall be $500.
``(d) Dependent; Qualifying Child, and Qualifying Relative
Defined.--For purposes of this section, the terms `dependent',
`qualifying child', and `qualifying relative' shall have the meaning
given such terms by section 152 of the Internal Revenue Code of 1986.
``SEC. 22. WORK TAX CREDIT.
``(a) In General.--The taxpayer shall be allowed a work tax credit
in an amount equal to taxable income reduced (but not below zero) by
the family tax credit.
``(b) Limitations.--The amount of the credit allowed under
subsection (a) shall not exceed the sum of--
``(1) the base work tax credit amount, plus
``(2) the additional work tax credit amount.
``(c) Base Work Tax Credit Amount.--For purposes of this section--
``(1) In general.--The base work credit amount with respect
to a taxpayer shall be the lesser of--
``(A) the applicable percentage of the work income
of the taxpayer, or
``(B) the base work credit dollar amount.
``(2) Applicable percentage; applicable dollar
limitation.--The applicable percentage and the applicable
dollar limitation shall be determined under the following
table:
The applicable
``In the case of a taxpayer with-- The applicable dollar
percentage is-- limitation is--
No qualifying children........... 7.65 percent......... $412
1 qualifying child............... 34 percent........... $2,120
2 or more qualifying children... 40 percent........... $3,200.
``(d) Additional Work Tax Credit Amount.--For purposes of this
section--
``(1) Taxpayer with 1 qualifying child.--In the case of a
taxpayer with 1 qualifying child, the additional work credit
amount shall be the lesser of--
``(A) 34 percent of the excess of--
``(i) work income (or modified taxable
income, if less), over
``(ii) $6,235, and
``(B) $1,450.
``(2) Taxpayer with 2 or more qualifying children.--In the
case of a taxpayer with 2 or more qualifying children, the
additional work credit amount shall be the lesser of--
``(A) 40 percent of the excess of--
``(i) work income (or modified taxable
income, if less), over
``(ii) $8,000, and
``(B) $2,600.
``(3) Phaseout.--The additional work tax credit amount
determined under paragraphs (1) and (2) shall be reduced (but
not below zero) by 12.5 percent of the excess of--
``(A) work income (or modified taxable income, if
greater), over
``(B) $17,000 (or $21,000 in the case of a joint
return).
``(e) Rules Relating to Income.--For purposes of this section--
``(1) Work income.--The term `work income' means the sum
of--
``(A) taxable wages and salaries,
``(B) self-employment income,
``(C) labor income for a statutory employee, and
``(D) at the election of the taxpayer, combat pay
excluded from income by section 4.
``(2) Modified taxable income.--The term `modified taxable
income' means taxable income increased by net investment income
(as defined by section 15), dividends, and tax-exempt bond
interest.
``(f) Dependent; Qualifying Child.--For purposes of this section,
the terms `dependent' and `qualifying child' shall have the meaning
given such terms by section 152 of the Internal Revenue Code of 1986.
``SEC. 23. PAYROLL TAX CREDIT.
``(a) In General.--A taxpayer shall be allowed a payroll tax credit
in an amount equal to the sum of--
``(1) the employee's share of the basic FICA tax,
``(2) the employee's share of the basic Tier 1 railroad
retirement tax, and
``(3) one-half of the basic SECA tax payable with respect
to the taxpayer's compensation or earnings during the taxable
year.
``(b) Definitions.--
``(1) Employee's share of the basic fica tax.--`Employee's
share of the basic FICA tax' means the old-age, survivors and
disability insurance tax imposed by section 3101(a) and the
portion of the hospital insurance tax imposed by section
3101(b) that is attributable to the wage base on which the
section 3101(a) tax is imposed.
``(2) Employee's share of the basic tier 1 railroad
retirement tax.--Employee's share of the basic Tier 1 railroad
retirement tax' means--
``(A) the portion of the tax imposed by section
3201 with respect to compensation below the applicable
base (as defined in section 3231(e)(2)); and
``(B) the portion of the tax imposed by section
3211(a)(1) on railroad employee representatives
attributable to the tax imposed by section 3101(a) and
the portion of the hospital insurance tax imposed by
section 3101(b) that is attributable to the wage base
on which the section 3101(a) tax is imposed.
``(3) Basic seca tax.--`Basic SECA tax' means the old-age,
survivors and disability insurance tax imposed by section
1401(a) on self-employment income and the portion of the
hospital insurance tax imposed by section 1401(b) on self-
employment income that is attributable to the amount of self-
employment income (as determined under section 1402(b)) on
which the section 1401(a) tax is imposed.
``(c) No Credit for Refundable Tax.--No credit shall be allowed
with respect to any FICA tax or railroad retirement tax for which a
taxpayer is entitled to a refund because of overpayment of tax on the
applicable wage base.
``SEC. 24. TAXES-PAID TAX CREDIT.
``The taxes-paid tax credit shall equal the sum of:
``(1) Wage withholding.--The amount withheld as tax under
chapter 24.
``(2) Special refunds of social security tax when wages
earned from more than 1 employer.--The amount allowable under
section 6413(c) as a special refund of taxes imposed on wages.
``(3) Overpayments of prior-year tax.--Any overpayment of a
prior tax obligation that the taxpayer or the Secretary applies
to the tax for the taxable year.
``(4) Estimated taxes.--Any estimated taxes paid by the
taxpayer with respect to the taxpayer's tax liability for the
taxable year which are treated as payment on account of income
tax for purposes of section 6315 (relating to estimated taxes).
``SEC. 25. INDEXING FOR INFLATION.
``(a) Publication of Tables and Numbers.--Not later than December
15 of 2006, and each subsequent calendar year, the Secretary shall
prescribe tables and dollar amounts which shall apply in the
immediately following calendar year in lieu of the tables and dollar
amounts that are required to be adjusted for inflation in accordance
with this section.
``(b) Method of Adjustment.--
``(1) In general.--The dollar amounts which are required to
be adjusted pursuant to this section for a calendar year shall
be the dollar amounts as stated in this chapter multiplied by
the cost of living adjustment for such calendar year, rounded
as provided in subsection (d).
``(2) Tax rate tables.--In the case of a tax rate table,
the dollar amounts to be adjusted in accordance with paragraph
(1) are the minimum and maximum dollar amounts for each rate
bracket for which a tax is imposed. The amounts setting forth
the bottom tax for each bracket shall be adjusted to the extent
necessary to reflect the adjustments in the rate brackets.
``(c) Cost-of-Living Adjustment.--
``(1) In general.--The cost-of-living adjustment for any
calendar year is the percentage (if any) by which--
``(A) the CPI for the preceding calendar year,
exceeds
``(B) the CPI for the calendar year 2006.
``(2) CPI for any calendar year.--For purposes of paragraph
(1), the CPI for any calendar year is the average of the
Consumer Price Index as of the close of the 12-month period
ending on August 31 of such calendar year.
``(3) Consumer price index.--For purposes of paragraph (2),
`Consumer Price Index' means the last Consumer Price Index for
all-urban consumers published by the Department of Labor. For
purposes of the preceding sentence, the revision of the
Consumer Price Index which is most consistent with the Consumer
Price Index for calendar year 2006 shall be used.
``(d) Rounding.--
``(1) In general.--If any increase determined under
subsection (b) is not a multiple of $50, such increase shall be
rounded to the next lowest multiple of $50.
``(2) Multiples of $25.--Paragraph (1) shall be applied by
substituting `$25' for `$50' in the case of--
``(A) amounts for married individuals filing
separately, and
``(B) any other dollar amount that is to be
adjusted for inflation if that dollar amount is less
than $1,000.
``Subchapter B--Roth IRA and Other Savings Provisions
``Sec. 30. Roth IRAs.
``Sec. 31. Deductible IRAs.
``Sec. 32. Effect of repeal of special savings provisions.
``SEC. 30. ROTH IRAS.
``(a) General Rule.--Except as provided in this section, a Roth IRA
shall be treated for purposes of this title in the same manner as an
individual retirement plan.
``(b) Roth IRA.--`Roth IRA' means an individual retirement plan (as
defined in section 7701(a)(37)) which is designated (in such manner as
the Secretary may prescribe) at the time of establishment of the plan
as a Roth IRA. Such designation shall be made in such manner as the
Secretary may prescribe.
``(c) Treatment of Contributions.--
``(1) No deduction allowed.--No deduction shall be allowed
for a contribution to a Roth IRA.
``(2) Contribution limit.--The aggregate amount of
contributions for any taxable year to all Roth IRAs maintained
for the benefit of an individual (or, in the case of
individuals filing a joint return, either spouse) shall not
exceed the taxpayer's adjusted gross income for the taxable
year.
``(3) Rollover from ira.--
``(A) Rollover contributions.--No rollover
contribution may be made to a Roth IRA unless it is a
qualified rollover contribution.
``(B) Limits.--A taxpayer shall not be allowed to
make a qualified rollover contribution to a Roth IRA
from an individual retirement plan other than a Roth
IRA during any taxable year if--
``(i) the taxpayer's adjusted gross income
for such taxable year exceeds $100,000, or
``(ii) the taxpayer is a married individual
filing a separate return.
``(C) Marital status.--Section 31(g)(4) shall apply
for purposes of this paragraph.
``(4) Contributions permitted after age 70\1/2\.--
Contributions to a Roth IRA may be made even after the
individual for whom the account is maintained has attained age
70\1/2\.
``(5) Mandatory distribution rules not to apply before
death.--Notwithstanding subsections (a)(6) and (b)(3) of
section 408 (relating to required distributions), the following
provisions shall not apply to any Roth IRA:
``(A) Section 401(a)(9)(A).
``(B) The incidental death benefit requirements of
section 401(a).
``(6) Time when contributions made.--A taxpayer shall be
deemed to have made a contribution to a Roth IRA during a year
if the contribution is made on account of such year and is made
not later than April 15 of the following year.
``(d) Exclusion From Income.--For purposes of this chapter--
``(1) General rules.--A distribution from a Roth IRA shall
not be includible in gross income.
``(2) Nonqualified distribution.--The automatic exclusion
from gross income under paragraph (1) shall not apply to any
distribution, other than a qualified special purpose
distribution if--
``(A) it is made within the 5-taxable year period
beginning with the 1st taxable year for which the
individual made a contribution to a Roth IRA (or such
individual's spouse made a contribution to a Roth IRA)
established for such individual, or
``(B) in the case of a payment or distribution
properly allocable (as determined in the manner
prescribed by the Secretary) to a qualified rollover
contribution from an individual retirement plan other
than a Roth IRA (or income allocable thereto), it is
made within the 5-taxable year period beginning with
the taxable year in which the rollover contribution was
made.
``(3) Nonqualified distributions.--In applying section 33
to any distribution from a Roth IRA described in paragraph (2),
such distribution shall be treated as made from contributions
to the Roth IRA to the extent that such distribution, when
added to all previous distributions from the Roth IRA, does not
exceed the aggregate amount of contributions to the Roth IRA.
Only distributions attributable to earnings on accounts (as
opposed to distributions of contributions) shall be included in
gross income.
``(4) Rollovers from an ira other than a roth ira.--
``(A) In general.--Notwithstanding section
408(d)(3), in the case of any distribution to which
this paragraph applies there shall be included in gross
income any amount which would be includible were it not
part of a qualified rollover contribution.
``(B) Distributions to which paragraph applies.--
This paragraph shall apply to a distribution from an
individual retirement plan (other than a Roth IRA)
maintained for the benefit of an individual which is
contributed to a Roth IRA maintained for the benefit of
such individual in a qualified rollover contribution.
``(C) Conversions.--The conversion of an individual
retirement plan (other than a Roth IRA) to a Roth IRA
shall be treated for purposes of this paragraph as a
distribution to which this paragraph applies.
``(D) Conversion of excess contributions.--If, no
later than the due date for filing the return of tax
for any taxable year (without regard to extensions), an
individual transfers, from an individual retirement
plan (other than a Roth IRA), contributions for such
taxable year (and any earnings allocable thereto) to a
Roth IRA, no such amount shall be includible in gross
income to the extent no deduction was allowed with
respect to such amount.
``(E) Additional reporting requirements.--Trustees
of Roth IRAs, trustees of individual retirement plans,
or both, whichever is appropriate, shall include such
additional information in reports required under
section 408(i) as the Secretary may require to ensure
that amounts required to be included in gross income
under subparagraph (A) are so included.
``(5) Coordination with individual retirement accounts.--
Section 408(d)(2) shall be applied separately with respect to
Roth IRAs and other individual retirement plans.
``(6) Qualified special purpose distribution.--`Qualified
special purpose distribution' means--
``(i) Distributions upon death.--Distributions made
to a beneficiary (or to the estate of the individual)
on or after the death of the individual.
``(ii) Distributions upon disability.--
Distributions attributable to the individual's being
disabled.
``(iii) Distributions to pay medical expenses.--
Distributions made to the individual for amounts paid
during the year for medical care, but only to the
extent that the amounts paid for medical care exceed
7.5 percent of the adjusted gross income of the
taxpayer (determined without regard to whether the
employee itemizes deductions for such taxable year).
``(iv) QDRO.--Any distribution to an alternate
payee pursuant to a qualified domestic relations order
(within the meaning of section 414(p)(1)).
``(v) Distributions to unemployed individuals for
health insurance premiums.--Distributions to an
individual--
``(I) if such individual has received
unemployment compensation for 12 consecutive
weeks under any Federal or State unemployment
compensation law by reason of such separation
(or in the case of a self-employed individual,
to the extent provided in regulations, if the
individual would have received unemployment
compensation but for the fact the individual
was self-employed),
``(II) if such distributions are made
during any taxable year during which such
unemployment compensation is paid or the
succeeding taxable year,
``(III) to the extent such distributions do
not exceed the amount paid during the taxable
year for insurance for the diagnosis, cure,
mitigation, treatment, or prevention of
disease, or for the purpose of affecting any
structure or function of the body (or for
transportation primarily for and essential to
such medical care) (including amounts paid as
premiums under part B of title XVIII of the
Social Security Act, relating to supplementary
medical insurance for the aged) or for any
qualified long-term care insurance contract (as
defined in section 7702B(b)) with respect to
the individual and the individual's spouse and
dependents, and
``(IV) such distributions are not made
after the individual has been employed for at
least 60 days after the separation from
employment to which clause (I) applies.
``(vi) Distributions to pay higher education
expenses.--Distributions to the extent such
distributions do not exceed the qualified higher
education expenses (as defined in section 8(a)(2)) of--
``(I) the taxpayer,
``(II) the taxpayer's spouse, or
``(III) any child or grandchild of the
taxpayer or the taxpayer's spouse.
``(vii) Distributions for first home
purchases.--Distributions which are qualified
first-time homebuyer distributions (as defined
in paragraph (6)).
``(7) Qualified first-time homebuyer distributions.--
``(A) In general.--`Qualified first-time homebuyer
distribution' means any payment or distribution
received by an individual to the extent such payment or
distribution is used by the individual before the close
of the 120th day after the day on which such payment or
distribution is received to pay qualified acquisition
costs with respect to a principal residence of a first-
time homebuyer who is such individual, the spouse of
such individual, or any child, grandchild, or ancestor
of such individual or the individual's spouse.
``(B) Lifetime dollar limitation.--The aggregate
amount of payments or distributions received by an
individual which may be treated as qualified first-time
homebuyer distributions for any taxable year shall not
exceed the excess (if any) of--
``(i) $10,000, over
``(ii) the aggregate amounts treated as
qualified first-time homebuyer distributions
with respect to such individual for all prior
taxable years.
``(C) Qualified acquisition costs.--`Qualified
acquisition costs' means the costs of acquiring,
constructing, or reconstructing a residence. Such term
includes any usual or reasonable settlement, financing,
or other closing costs.
``(D) First-time homebuyer; other definitions.--For
purposes of this paragraph--
``(i) First-time homebuyer.--`First-time
homebuyer' means any individual if such
individual (and if married, such individual's
spouse) had no present ownership interest in a
principal residence during the 2-year period
ending on the date of acquisition of the
principal residence to which this paragraph
applies, and
``(ii) Date of acquisition.--`Date of
acquisition' means the date--
``(I) on which a binding contract
to acquire the principal residence to
which subparagraph (A) applies is
entered into, or
``(II) on which construction or
reconstruction of such a principal
residence is commenced.
``(E) Special rule where delay in acquisition.--The
Secretary shall prescribe rules under which a
distribution will not be penalized if made in
anticipation of being a qualified first-time homeowner
distribution but construction delays or other
unanticipated factors delay the closing.
``(e) Qualified Rollover Contribution.--For purposes of this
section, the term qualified rollover contribution means a rollover
contribution to a Roth IRA from another such account, or from an
individual retirement plan, but only if such rollover contribution
meets the requirements of section 408(d)(3). For purposes of section
408(d)(3)(B), there shall be disregarded any qualified rollover
contribution from an individual retirement plan (other than a Roth IRA)
to a Roth IRA.
``(f) Permitted Investments.--
``(1) Investment permitted.--A Roth IRA shall not cease to
be an individual retirement account pursuant to section
408(e)(2) solely because funds from such account are used to
make a debt or equity investment in a controlled business
entity.
``(2) Loans to a controlled business entity.--
``(A) Excess return.--If funds in a Roth IRA are
loaned to a controlled business entity, any return on
such loans in excess of a fair return shall be treated
as gross income of the beneficiary that is then
deposited in the Roth IRA.
``(B) Loan.--For purposes of this section, an
amount shall be treated as loaned to a controlled
business entity only if--
``(i) the amount is treated in the books
and records of the business entity as a loan,
``(ii) the transaction is reflected in a
written note or other evidence of indebtedness,
and
``(iii) the business entity is required to
pay interest at least once per year and at the
time such loan is made it is reasonable to
expect that such interest will be paid on a
timely basis.
``(C) Fair return.--For purposes of this
subsection, a `fair return' with respect to a loan is
interest at a rate not in excess of 3 percentage points
plus the minimum rate of interest that would have to be
charged with respect to such loan to prevent it from
being a below-market loan for purposes of section 7872
(determined as if section 7872 applied to such loan).
``(3) Equity investment in a controlled business entity.--
If funds in a Roth IRA are contributed to the capital of,
applied to acquire stock or other equity interest in, or
otherwise transferred to, a controlled business entity in a
transaction that is not considered a loan for purposes of this
subsection, any return on such equity shall be treated as gross
income of the beneficiary that is then deposited in the Roth
IRA. The preceding sentence shall not apply to--
``(A) the proceeds of the sale of such equity
interest to a third party, or
``(B) the proceeds received by the Roth IRA as the
result of a complete redemption of the beneficiary's
interest in the business entity (including any
interests held through a Roth IRA).
``(4) Controlled business entity.--`Controlled business
entity' means any business entity in which the beneficiary of
the Roth IRA holds at least a 5 percent interest in the profits
and losses (after taking into account the investment through
the Roth IRA) and in which an investment would cause the Roth
IRA to cease to be an individual retirement account by reason
of section 408(e)(2) but for this subsection.
``(5) Application of section 4975.--Section 4975 shall not
apply to a loan or equity investment by a Roth IRA in a
controlled business entity.
``(6) Tax and penalty avoidance.--The Secretary shall
prescribe regulations that prohibit the provisions of this
subsection to be used to circumvent the application of
subsection (d)(2) (relating to taxable distributions). The
regulations shall not prohibit bona fide investments in
controlled business entities. The regulations shall address
loans to and investments in a controlled business entity that
are used to fund distributions or dividends from the business
entity to the account beneficiary or a member of the
beneficiary's family.
``SEC. 31. DEDUCTIBLE IRAS.
``(a) Allowance of Deduction.--The `qualified IRA deduction' shall
be an amount equal to the qualified retirement contributions of the
individual for the taxable year, except as limited by subsection (b).
``(b) Maximum Amount of Deduction.--
``(1) In general.--The amount allowable as a deduction
under subsection (a) to any individual for any taxable year
shall not exceed the lesser of--
``(A) $2,000, or
``(B) an amount equal to the compensation
includible in the individual's gross income for such
taxable year.
``(2) Special rule for employer contributions under
simplified employee pensions.--This section shall not apply
with respect to an employer contribution to a simplified
employee pension.
``(3) Grandfathered plans.--Notwithstanding paragraph (1),
the amount allowable as a deduction under subsection (a) with
respect to any contributions on behalf of an employee to a plan
described in section 501(c)(18) of the Internal Revenue Code of
1986 shall not exceed the lesser of--
``(A) $7,000, or
``(B) an amount equal to 25 percent of the
compensation (as defined in section 415(c)(3))
includible in the individual's gross income for such
taxable year.
``(4) Special rule for simple retirement accounts.--This
section shall not apply with respect to any amount contributed
to a simple retirement account established under section
408(p).
``(c) Special Rules for Certain Married Individuals.--
``(1) In general.--In the case of an individual to whom
this paragraph applies for the taxable year, the limitation of
paragraph (1) of subsection (b) shall be equal to the lesser
of--
``(A) the dollar amount in effect under subsection
(b)(1)(A) for the taxable year, or
``(B) the sum of--
``(i) the compensation includible in such
individual's gross income for the taxable year,
plus
``(ii) the compensation includible in the
gross income of such individual's spouse for
the taxable year reduced by--
``(I) the amount allowed as a
deduction under subsection (a) to such
spouse for such taxable year, and
``(II) the amount of any
contribution on behalf of such spouse
to a Roth IRA under section 30 for such
taxable year.
``(2) Individuals to whom paragraph (1) applies.--Paragraph
(1) shall apply to any individual if--
``(A) such individual files a joint return for the
taxable year, and
``(B) the amount of compensation (if any)
includible in such individual's gross income for the
taxable year is less than the compensation includible
in the gross income of such individual's spouse for the
taxable year.
``(d) Other Limitations and Restrictions.--
``(1) Beneficiary must be under age 70\1/2\.--No deduction
shall be allowed under this section with respect to any
qualified retirement contribution for the benefit of an
individual if such individual has attained age 70\1/2\ before
the close of such individual's taxable year for which the
contribution was made.
``(2) Recontributed amounts.--No deduction shall be allowed
under this section with respect to a rollover contribution
described in section 402(c), 403(a)(4), 403(b)(8), or
408(d)(3).
``(3) Amounts contributed under endowment contract.--In the
case of an endowment contract described in section 408(b), no
deduction shall be allowed under this section for that portion
of the amounts paid under the contract for the taxable year
which is properly allocable, under regulations prescribed by
the Secretary, to the cost of life insurance.
``(4) Denial of deduction for amount contributed to
inherited annuities or accounts.--No deduction shall be allowed
under this section with respect to any amount paid to an
inherited individual retirement account or individual
retirement annuity (within the meaning of section
408(d)(3)(C)(ii)).
``(e) Qualified Retirement Contribution.--For purposes of this
section, the term `qualified retirement contribution' means--
``(1) any amount paid in cash for the taxable year by or on
behalf of an individual to an individual retirement plan for
such individual's benefit, and
``(2) any amount contributed on behalf of any individual to
a plan described in section 501(c)(18) of the Internal Revenue
Code of 1986.
``(f) Other Definitions and Special Rules.--
``(1) Compensation.--For purposes of this section, the term
`compensation' includes earned income (as defined in section
401(c)(2)). The term `compensation' does not include any amount
received as a pension or annuity and does not include any
amount received as deferred compensation. The term
`compensation' shall include any alimony, child support and
separate maintenance payments includible in the individual's
gross income with respect to a divorce or separation
instrument. For purposes of this paragraph, section 401(c)(2)
shall be applied as if the term trade or business for purposes
of section 1402 included service described in subsection
(c)(6).
``(2) Married individuals.--The maximum deduction under
subsection (b) shall be computed separately for each
individual, and this section shall be applied without regard to
any community property laws.
``(3) Time when contributions deemed made.--For purposes of
this section, a taxpayer shall be deemed to have made a
contribution to an individual retirement plan during a year if
the contribution is made on account of such year and is made
not later than April 15 of the following year.
``(4) Reports.--The Secretary shall prescribe regulations
which prescribe the time and the manner in which reports to the
Secretary and plan participants shall be made by the plan
administrator of a qualified employer or government plan
receiving qualified voluntary employee contributions.
``(5) Employer payments.--For purposes of this title, any
amount paid by an employer to an individual retirement plan
shall be treated as payment of compensation to the employee
(other than a self-employed individual who is an employee
within the meaning of section 401(c)(1)) includible in his
gross income in the taxable year for which the amount was
contributed, whether or not a deduction for such payment is
allowable under this section to the employee.
``(6) Excess contributions treated as contribution made
during subsequent year for which there is an unused
limitation.--
``(A) In general.--If for the taxable year the
maximum amount allowable as a deduction under this
section for contributions to an individual retirement
plan exceeds the amount contributed, then the taxpayer
shall be treated as having made an additional
contribution for the taxable year in an amount equal to
the lesser of--
``(i) the amount of such excess, or
``(ii) the amount of the excess
contributions for such taxable year (determined
under section 4973(b)(2) without regard to
subparagraph (C) thereof).
``(B) Amount contributed.--For purposes of this
paragraph, the amount contributed--
``(i) shall be determined without regard to
this paragraph, and
``(ii) shall not include any rollover
contribution.
``(C) Special rule where excess deduction was
allowed for closed year.--Proper reduction shall be
made in the amount allowable as a deduction by reason
of this paragraph for any amount allowed as a deduction
under this section for a prior taxable year for which
the period for assessing deficiency has expired if the
amount so allowed exceeds the amount which should have
been allowed for such prior taxable year.
``(7) Election not to deduct contributions.--For election
not to deduct contributions to individual retirement plans, see
section 408(o)(2)(B)(ii).
``(g) Limitation on Deduction for Active Participants in Certain
Pension Plans.--
``(1) In general.--If (for any part of any plan year ending
with or within a taxable year) an individual is an active
participant, each of the dollar limitations contained in
subsections (b)(1)(A) and (c)(1)(A) for such taxable year shall
be reduced (but not below zero) by the amount determined under
paragraph (2).
``(2) Amount of reduction.--
``(A) In general.--The amount determined under this
paragraph with respect to any dollar limitation shall
be the amount which bears the same ratio to such
limitation as--
``(i) the excess of--
``(I) the taxpayer's adjusted gross
income for such taxable year, over
``(II) the applicable dollar
amount, bears to
``(ii) $10,000 ($20,000 in the case of a
joint return for a taxable year beginning after
December 31, 2014).
``(B) No reduction below $200 until complete phase-
out.--No dollar limitation shall be reduced below $200
under paragraph (1) unless (without regard to this
subparagraph) such limitation is reduced to zero.
``(C) Rounding.--Any amount determined under this
paragraph which is not a multiple of $10 shall be
rounded to the next lowest $10.
``(3) Adjusted gross income; applicable dollar amount.--For
purposes of this subsection--
``(A) Adjusted gross income.--Adjusted gross income
of any taxpayer shall be determined without regard to
the qualified IRA deduction.
``(B) Applicable dollar amount.--The term
`applicable dollar amount' means the following:
``(i) In the case of a taxpayer filing a
joint return:
The applicable
``For taxable years beginning in: dollar amount is:
2007.......................................... $51,000
2008.......................................... $52,000
2009.......................................... $53,000
2010.......................................... $54,000
2011.......................................... $60,000
2012.......................................... $65,000
2013.......................................... $70,000
2014.......................................... $75,000
2015 and thereafter........................... $80,000.
``(ii) In the case of any other taxpayer
(other than a married individual filing a
separate return):
The applicable
``For taxable years beginning in: dollar amount is:
2007.......................................... $31,000
2008.......................................... $32,000
2009.......................................... $33,000
2010.......................................... $34,000
2011.......................................... $40,000
2012.......................................... $45,000
2013 and thereafter........................... $50,000.
``(iii) In the case of a married individual
filing a separate return, zero.
``(4) Special rule for married individuals filing
separately and living apart.--A husband and wife who--
``(A) file separate returns for any taxable year,
and
``(B) live apart at all times during such taxable
year, shall not be treated as married individuals for
purposes of this subsection.
``(5) Active participant.--For purposes of this subsection,
the term `active participant' means, with respect to any plan
year, an individual--
``(A) who is an active participant in--
``(i) a plan described in section 401(a)
which includes a trust exempt from tax,
``(ii) an annuity plan described in section
403(a),
``(iii) a plan established for its
employees by the United States, by a State or
political subdivision thereof, or by an agency
or instrumentality of any of the foregoing,
``(iv) an annuity contract described in
section 403(b),
``(v) a simplified employee pension (within
the meaning of section 408(k)), or
``(vi) any simple retirement account
(within the meaning of section 408(p)), or
``(B) who makes deductible contributions to a trust
described in section 501(c)(18).
The determination of whether an individual is an active
participant shall be made without regard to whether or not such
individual's rights under a plan, trust, or contract are
nonforfeitable. An eligible deferred compensation plan (within
the meaning of section 457(b) of the Internal Revenue Code of
1986) shall not be treated as a plan described in subparagraph
(A)(iii).
``(6) Certain individuals not treated as active
participants.--For purposes of this subsection, any individual
described in any of the following subparagraphs shall not be
treated as an active participant for any taxable year solely
because of any participation so described:
``(A) Members of reserve components.--Participation
in a plan described in subparagraph (A)(iii) of
paragraph (5) by reason of service as a member of a
reserve component of the Armed Forces (as defined in
section 10101 of title 10, unless such individual has
served in excess of 90 days on active duty (other than
active duty for training) during the year.
``(B) Volunteer firefighters.--A volunteer
firefighter--
``(i) who is a participant in a plan
described in subparagraph (A)(iii) of paragraph
(5) based on his activity as a volunteer
firefighter, and
``(ii) whose accrued benefit as of the
beginning of the taxable year is not more than
an annual benefit of $1,800 (when expressed as
a single life annuity commencing at age 65).
``(7) Special rule for certain spouses.--In the case of an
individual who is an active participant at no time during any
plan year ending with or within the taxable year but whose
spouse is an active participant for any part of any such plan
year--
``(A) the applicable dollar amount under paragraph
(3)(B)(i) with respect to the taxpayer shall be
$150,000, and
``(B) the amount applicable under paragraph
(2)(A)(ii) shall be $10,000.
``(h) Cross Reference.--For failure to provide required reports,
see section 6652(g).
``SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVISIONS.
``(a) Education IRA's.--
``(1) In general.--An account that qualifies as an
education IRA under the Internal Revenue Code of 1986 as in
effect immediately before adoption of the Simplified USA Tax
Act shall be treated as a Roth IRA for purposes of this chapter
(including rules allowing for tax-free rollover).
``(2) No new contributions.--Neither paragraph (1) nor
section 530 of the Internal Revenue Code of 1986 shall apply to
an education IRA to which contributions are made after December
31, 2006.
``(3) Special rule.--For purposes of applying section 30 to
an account that was an educational IRA, the designated
beneficiary of such account shall be treated as described in a
subclause of clause (vi) of section 30(d)(5).
``(b) Medical Savings Accounts.--
``(1) Equivalent of deductible ira.--A medical savings
account shall be treated as an individual retirement plan other
than a Roth IRA for purposes of this chapter and chapter 3.
``(2) Special rollover rules.--
``(A) No income limit.--The income limits of
section 30(c)(3)(B) shall not apply to the rollover of
a medical savings account into a Roth IRA.
``(B) Medical distributions.--For purposes of
applying section 30 to the amount of any medical
savings account rolled over to a Roth IRA, subclause
(iii) of section 30(d)(5) shall apply without regard to
the limitation based on adjusted gross income.
``(3) Medical savings account.--`Medical savings account'
means an account established under section 220 of the Internal
Revenue Code of 1986.
``(c) Qualified State Tuition Programs.--
``(1) Education savings account programs.--No account shall
fail to qualify as a Roth IRA merely because in addition to the
beneficiary of the account, there is a `designated beneficiary'
whose education expenses the beneficiary expects to pay or have
paid with the proceeds of the account. The payment of such
expenses with the proceeds of an account shall be treated as a
distribution from the account.
``(2) Prepaid tuition certificates.--
``(A) Contribution to accounts.--An individual may
contribute prepaid tuition certificates to a Roth IRA
before January 1, 2010, without recognizing gross
income on the contribution of such certificates. For
purposes of section 30, the amount contributed shall
equal the cost of the certificates.
``(B) Purchase of prepaid tuition certificates.--A
Roth IRA account may purchase prepaid tuition
certificates without violating section 408.
``(C) Prepaid tuition certificates.--`Prepaid
tuition certificates' means credits or certificates
that entitle a designated beneficiary of such
certificates to the waiver or payment of qualified
higher education expenses of the designated
beneficiary.
``(3) Rollover of accounts.--An account to which section
529 of the Internal Revenue Code of 1986 (before adoption of
the Simplified USA Tax Act) shall be treated as a Roth IRA for
purposes of rules relating to qualified rollovers (except that
in the case of any such rollover, any contributions made to the
section 529 account after July 1, 2006, shall be treated as
contributions to the Roth IRA in the year of the rollover for
purposes of section 30(c)(2)).
``(4) Transition.--
``(A) Transition period.--Subsections (a) and (c)
of section 529 of the Internal Revenue Code of 1986
shall apply until January 1, 2010.
``(B) Transition.--The Secretary shall prescribe
rules to facilitate use of the Roth IRA rules to exempt
earnings on accounts and certificates previously
exempted under section 529 of the Internal Revenue Code
of 1986.
``(5) Qualified higher education expenses.--For purposes of
this subsection, the definition `qualified higher education
expenses' in section 529(e)(3) of the Internal Revenue Code of
1986 shall apply.
``SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE
CONTRACTS.
``(a) General Rule for Annuities.--Except as otherwise provided in
this chapter, gross income includes any amount received as an annuity
(whether for a period certain or during one or more lives) under an
annuity, endowment, or life insurance contract.
``(b) Exclusion Ratio.--
``(1) In general.--Gross income does not include that part
of any amount received as an annuity under an annuity,
endowment, or life insurance contract which bears the same
ratio to such amount as the investment in the contract (as of
the annuity starting date) bears to the expected return under
the contract (as of such date).
``(2) Exclusion limited to investment.--The portion of any
amount received as an annuity which is excluded from gross
income under paragraph (1) shall not exceed the unrecovered
investment in the contract immediately before the receipt of
such amount.
``(3) Deduction where annuity payments cease before entire
investment recovered.--
``(A) In general.--If--
``(i) after the annuity starting date,
payments as an annuity under the contract cease
by reason of the death of an annuitant, and
``(ii) as of the date of such cessation,
there is unrecovered investment in the
contract, the amount of such unrecovered
investment (in excess of any amount specified
in subsection (e)(5) which was not included in
gross income) shall be allowed as a deduction
from adjusted gross income in determining
taxable income of the annuitant for his last
taxable year.
``(B) Payments to other persons.--In the case of
any contract which provides for payments meeting the
requirements of subparagraphs (B) and (C) of subsection
(c)(2), the deduction under subparagraph (A) shall be
allowed to the person entitled to such payments for the
taxable year in which such payments are received.
``(c) Definitions.--
``(1) Investment in the contract.--For purposes of
subsection (b), the investment in the contract as of the
annuity starting date is--
``(A) the aggregate amount of premiums or other
consideration paid for the contract (including any
amounts earned on the contract which were included in
gross income and reinvested in the contract), minus
``(B) the aggregate amount received under the
contract before such date, to the extent that such
amount was excludable from gross income under this
subtitle or prior income tax laws.
``(2) Other terms used in subsection (b).--Calculations
under subsections (a) and (b) shall be made in accordance with
regulations prescribed by the Secretary, which regulations
shall generally be consistent with the section 72 of the
Internal Revenue Code of 1986.
``(d) Special Rules for Qualified Employer Retirement Plans.--
``(1) Simplified method of taxing annuity payments.--
``(A) In general.--In the case of any amount
received as an annuity under a qualified employer
retirement plan--
``(i) subsection (b) shall not apply, and
``(ii) the investment in the contract shall
be recovered as provided in this paragraph.
``(B) Method of recovering investment in
contract.--
``(i) In general.--Gross income shall not
include so much of any monthly annuity payment
under a qualified employer retirement plan as
does not exceed the amount obtained by
dividing--
``(I) the investment in the
contract (as of the annuity starting
date), by
``(II) the number of anticipated
payments determined under the table
contained in clause (iii) (or, in the
case of a contract to which subsection
(c)(3)(B) applies, the number of
monthly annuity payments under such
contract).
``(ii) Certain rules made applicable.--
Rules similar to the rules of paragraphs (2)
and (3) of subsection (b) shall apply for
purposes of this paragraph.
``(iii) Number of anticipated payments.--If
the annuity is payable over the life of a
single individual, the number of anticipated
payments shall be determined as follows:
``If the age of the annuitant
on the annuity starting
date is: The number:
Not more than 55....................................... 360
More than 55 but not more than 60...................... 310
More than 60 but not more than 65...................... 260
More than 65 but not more than 70...................... 210
More than 70........................................... 160.
``(iv) Number of anticipated payments where
more than one life.--If the annuity is payable
over the lives of more than 1 individual, the
number of anticipated payments shall be
determined as follows:
``If the combined ages of the
annuitants are: The number:
Not more than 110...................................... 410
More than 110 but not more than 120.................... 360
More than 120 but not more than 130.................... 310
More than 130 but not more than 140.................... 260
More than 140.......................................... 210.
``(C) Special rule where lump sum paid in
connection with commencement of annuity payments.--If,
in connection with the commencement of annuity payments
under any qualified employer retirement plan, the
taxpayer receives a lump sum payment--
``(i) such payment shall be taxable under
subsection (e) as if received before the
annuity starting date, and
``(ii) the investment in the contract for
purposes of this paragraph shall be determined
as if such payment had been so received.
``(D) Exception.--This paragraph shall not apply in
any case where the primary annuitant has attained age
75 on the annuity starting date unless there are fewer
than 5 years of guaranteed payments under the annuity.
``(E) Adjustment where annuity payments not on a
monthly basis.--In any case where the annuity payments
are not made on a monthly basis, appropriate
adjustments in the application of this paragraph shall
be made to take into account the period on the basis of
which such payments are made.
``(F) Qualified employer retirement plan.--For
purposes of this paragraph, the term `qualified
employer retirement plan' means any plan or contract
described in paragraph (1), (2), or (3) of section
4974(c).
``(2) Treatment of employee contributions under defined
contribution plans.--For purposes of this section, employee
contributions (and any income allocable thereto) under a
defined contribution plan may be treated as a separate
contract.
``(e) Amounts not Received as Annuities.--
``(1) Application of subsection.--
``(A) In general.--This subsection shall apply to
any amount which--
``(i) is received under an annuity,
endowment, or life insurance contract, and
``(ii) is not received as an annuity, if no
provision of this subtitle (other than this
subsection) applies with respect to such
amount.
``(B) Dividends.--For purposes of this section, any
amount received which is in the nature of a dividend or
similar distribution shall be treated as an amount not
received as an annuity.
``(2) General rule.--Any amount to which this subsection
applies--
``(A) if received on or after the annuity starting
date, shall be included in gross income, or
``(B) if received before the annuity starting
date--
``(i) shall be included in gross income to
the extent allocable to income on the contract,
and
``(ii) shall not be included in gross
income to the extent allocable to the
investment in the contract.
``(3) Allocation of amounts to income and investment.--For
purposes of paragraph (2)(B):
``(A) Any amount to which this subsection applies
shall be treated as allocable to income on the contract
to the extent that such amount does not exceed the
excess (if any) of--
``(i) the cash value of the contract
(determined without regard to any surrender
charge) immediately before the amount is
received, over
``(ii) the investment in the contract at
such time.
``(B) Any amount to which this subsection applies
shall be treated as allocable to investment in the
contract to the extent that such amount is not
allocated to income under subparagraph (A).
``(4) Special rules for application of paragraph (2)(b).--
For purposes of paragraph (2)(B):
``(A) Loans treated as distributions.--If, during
any taxable year, an individual--
``(i) receives (directly or indirectly) any
amount as a loan under any contract to which
this subsection applies, or
``(ii) assigns or pledges (or agrees to
assign or pledge) any portion of the value of
any such contract, such amount or portion shall
be treated as received under the contract as an
amount not received as an annuity. The
preceding sentence shall not apply for purposes
of determining investment in the contract,
except that the investment in the contract
shall be increased by any amount included in
gross income by reason of the amount treated as
received under the preceding sentence.
``(B) Treatment of transfers without adequate
consideration.--
``(i) In general.--If an individual who
holds an annuity contract transfers it without
full and adequate consideration, such
individual shall be treated as receiving an
amount equal to the excess of--
``(I) the cash surrender value of
such contract at the time of transfer,
over
``(II) the investment in such
contract at such time, under the
contract as an amount not received as
an annuity.
``(ii) Exception for certain transfers
between spouses or former spouses.--Clause (i)
shall not apply to any transfer to which
section 77(c) (relating to transfers of
property between spouses or incident to
divorce) applies.
``(iii) Adjustment to investment in
contract of transferee.--If under clause (i) an
amount is included in the gross income of the
transferor of an annuity contract, the
investment in the contract of the transferee in
such contract shall be increased by the amount
so included.
``(5) Retention of existing rules in certain cases.--
Paragraph (5) of section 72(e) of the Internal Revenue Code of
1986 shall apply to contracts described in subparagraph (B) of
such paragraph to the extent provided therein.
``(6) Investment in the contract.--For purposes of this
subsection, the investment in the contract as of any date is--
``(A) the aggregate amount of premiums or other
consideration paid for the contract before such date,
minus
``(B) the aggregate amount received under the
contract before such date, to the extent that such
amount was excludable from gross income under this
subtitle or prior income tax laws.
``(7) Application of paragraph (2)(b) to qualified plans.--
``(A) In general.--Notwithstanding any other
provision of this subsection, in the case of any amount
received before the annuity starting date from a trust
or contract described in paragraph (5)(D), paragraph
(2)(B) shall apply to such amounts.
``(B) Allocation of amount received.--For purposes
of paragraph (2)(B), the amount allocated to the
investment in the contract shall be the portion of the
amount described in subparagraph (A) which bears the
same ratio to such amount as the investment in the
contract bears to the account balance. The
determination under the preceding sentence shall be
made as of the time of the distribution or at such
other time as the Secretary may prescribe.
``(C) Treatment of forfeitable rights.--If an
employee does not have a nonforfeitable right to any
amount under any trust or contract to which
subparagraph (A) applies, such amount shall not be
treated as part of the account balance.
``(D) Investment in the contract before 1987.--In
the case of a plan which on May 5, 1986, permitted
withdrawal of any employee contributions before
separation from service, subparagraph (A) shall apply
only to the extent that amounts received before the
annuity starting date (when increased by amounts
previously received under the contract after December
31, 1986) exceed the investment in the contract as of
December 31, 1986.
``(8) Treatment of modified endowment contracts.--
``(A) In general.--Notwithstanding paragraph
(5)(C), in the case of any modified endowment contract
(as defined in section 7702A)--
``(i) paragraphs (2)(B) and (4)(A) shall
apply, and
``(ii) in applying paragraph (4)(A), `any
person' shall be substituted for `an
individual'.
``(B) Treatment of certain burial contracts.--
Notwithstanding subparagraph (A), paragraph (4)(A)
shall not apply to any assignment (or pledge) of a
modified endowment contract if such assignment (or
pledge) is solely to cover the payment of expenses
referred to in section 7702(e)(2)(C)(iii) and if the
maximum death benefit under such contract does not
exceed $25,000.
``(9) Anti-abuse rules.--
``(A) In general.--For purposes of determining the
amount includible in gross income under this
subsection--
``(i) all modified endowment contracts
issued by the same company to the same
policyholder during any calendar year shall be
treated as 1 modified endowment contract, and
``(ii) all annuity contracts issued by the
same company to the same policyholder during
any calendar year shall be treated as 1 annuity
contract.
The preceding sentence shall not apply to any contract
described in paragraph (5)(D).
``(B) Regulatory authority.--The Secretary may by
regulations prescribe such additional rules as may be
necessary or appropriate to prevent avoidance of the
purposes of this subsection through serial purchases of
contracts or otherwise.
``(f) Special Rules for Computing Employees' Contributions.--In
computing, for purposes of subsection (c)(1)(A), the aggregate amount
of premiums or other consideration paid for the contract, and for
purposes of subsection (e)(6), the aggregate premiums or other
consideration paid, amounts contributed by the employer shall be
included, but only to the extent that--
``(1) such amounts were includible in the gross income of
the employee under this subtitle or prior income tax laws; or
``(2) if such amounts had been paid directly to the
employee at the time they were contributed, they would not have
been includible in the gross income of the employee under the
law applicable at the time of such contribution.
``(g) Rules for Transferee Where Transfer Was for Value.--Where any
contract (or any interest therein) is transferred (by assignment or
otherwise) for a valuable consideration, to the extent that the
contract (or interest therein) does not, in the hands of the
transferee, have a basis which is determined by reference to the basis
in the hands of the transferor, then--
``(1) for purposes of this section, only the actual value
of such consideration, plus the amount of the premiums and
other consideration paid by the transferee after the transfer,
shall be taken into account in computing the aggregate amount
of the premiums or other consideration paid for the contract;
``(2) for purposes of subsection (c)(1)(B), there shall be
taken into account only the aggregate amount received under the
contract by the transferee before the annuity starting date, to
the extent that such amount was excludable from gross income
under this subtitle or prior income tax laws; and
``(3) the annuity starting date is January 1, 1954, or the
first day of the first period for which the transferee received
an amount under the contract as an annuity, whichever is the
later.
``(h) Option to Receive Annuity in Lieu of Lump Sum.--If--
``(1) a contract provides for payment of a lump sum in full
discharge of an obligation under the contract, subject to an
option to receive an annuity in lieu of such lump sum;
``(2) the option is exercised within 60 days after the day
on which such lump sum first became payable; and
``(3) part or all of such lump sum would (but for this
subsection) be includible in gross income by reason of
subsection (e)(1), then, for purposes of this subtitle, no part
of such lump sum shall be considered as includible in gross
income at the time such lump sum first became payable.
``(i) Interest.--Notwithstanding any other provision of this
section, if any amount is held under an agreement to pay interest
thereon, the interest payments shall be included in gross income.
``(j) Face-Amount Certificates.--For purposes of this section, the
term `endowment contract' includes a face-amount certificate, as
defined in section 2(a)(15) of the Investment Company Act of 1940 (15
U.S.C., sec. 80a-2), issued after December 31, 1954.
``(k) Special Rules Applicable to Employee Annuities and
Distributions Under Employee Plans.--
``(1) Computation of consideration paid by the employee.--
In computing--
``(A) the aggregate amount of premiums or other
consideration paid for the contract for purposes of
subsection (c)(1)(A) (relating to the investment in the
contract), and
``(B) the aggregate premiums or other consideration
paid for purposes of subsection (e)(6) (relating to
certain amounts not received as an annuity), any amount
allowed as a deduction with respect to the contract
under section 404 which was paid while the employee was
an employee within the meaning of section 401(c)(1)
shall be treated as consideration contributed by the
employer, and there shall not be taken into account any
portion of the premiums or other consideration for the
contract paid while the employee was an owner-employee
which is properly allocable (as determined under
regulations prescribed by the Secretary) to the cost of
life, accident, health, or other insurance.
``(2) Life insurance contracts.--
``(A) This paragraph shall apply to any life
insurance contract--
``(i) purchased as a part of a plan
described in section 403(a), or
``(ii) purchased by a trust described in
section 401(a) which is exempt from tax if the
proceeds of such contract are payable directly
or indirectly to a participant in such trust or
to a beneficiary of such participant.
``(B) Any contribution to a plan described in
subparagraph (A)(i) or a trust described in
subparagraph (A)(ii) which is allowed as a deduction
under section 404, and any income of a trust described
in subparagraph (A)(ii), which is determined in
accordance with regulations prescribed by the Secretary
to have been applied to purchase the life insurance
protection under a contract described in subparagraph
(A), is includible in the gross income of the
participant for the taxable year when so applied.
``(C) In the case of the death of an individual
insured under a contract described in subparagraph (A),
an amount equal to the cash surrender value of the
contract immediately before the death of the insured
shall be treated as a payment under such plan or a
distribution by such trust, and the excess of the
amount payable by reason of the death of the insured
over such cash surrender value shall not be includible
in gross income under this section and shall be treated
as provided in section 101.
``(3) Penalties applicable to certain amounts received by
5-percent owners.--
``(A) This paragraph applies to amounts which are
received from a qualified trust described in section
401(a) or under a plan described in section 403(a) at
any time by an individual who is, or has been, a 5-
percent owner, or by a successor of such an individual,
but only to the extent such amounts are determined,
under regulations prescribed by the Secretary, to
exceed the benefits provided for such individual under
the plan formula.
``(B) If a person receives an amount to which this
paragraph applies, his tax under this chapter for the
taxable year in which such amount is received shall be
increased by an amount equal to 10 percent of the
portion of the amount so received which is includible
in his gross income for such taxable year.
``(C) For purposes of this paragraph, the term `5-
percent owner' means any individual who, at any time
during the 5 plan years preceding the plan year ending
in the taxable year in which the amount is received, is
a 5-percent owner (as defined in section 416(i)(1)(B).
``(4) Owner-employee defined.--For purposes of this
subsection, the term `owner-employee' has the meaning assigned
to it by section 401(c)(3) and includes an individual for whose
benefit an individual retirement account or annuity described
in section 408(a) or (b) is maintained. For purposes of the
preceding sentence, the term `owner-employee' shall include an
employee within the meaning of section 401(c)(1).
``(5) Meaning of disabled.--For purposes of this section,
an individual shall be considered to be disabled if he is
unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long-
continued and indefinite duration. An individual shall not be
considered to be disabled unless he furnishes proof of the
existence thereof in such form and manner as the Secretary may
require.
``(6) Determination of investment in the contract in the
case of qualified domestic relations orders.--Under regulations
prescribed by the Secretary, in the case of a distribution or
payment made to an alternate payee who is the spouse or former
spouse of the participant pursuant to a qualified domestic
relations order (as defined in section 414(p)), the investment
in the contract as of the date prescribed in such regulations
shall be allocated on a pro rata basis between the present
value of such distribution or payment and the present value of
all other benefits payable with respect to the participant to
which such order relates.
``(l) Annuities Under Retired Serviceman's Family Protection Plan
or Survivor Benefit Plan.--Subsection (b) shall not apply in the case
of amounts received after December 31, 1965, as an annuity under
chapter 73 of title 10 of the United States Code, but all such amounts
shall be excluded from gross income until there has been so excluded
(under section 122(b)(1) of the Internal Revenue Code of 1986, section
93, or this section, including amounts excluded before January 1, 1966)
an amount equal to the consideration for the contract (as defined by
section 122(b)(2) of the Internal Revenue Code of 1986). Thereafter all
amounts so received shall be included in gross income.
``(m) Special Rules for Distributions From Qualified Plans to Which
Employee Made Deductible Contributions.--
``(1) Treatment of contributions.--For purposes of this
section and sections 402 and 403, notwithstanding section
414(h), any deductible employee contribution made to a
qualified employer plan or government plan shall be treated as
an amount contributed by the employer which is not includible
in the gross income of the employee.
``(2) Amounts constructively received.--
``(A) In general.--For purposes of this subsection,
rules similar to the rules provided by subsection (n)
(other than the exception contained in paragraph (2)
thereof) shall apply.
``(B) Purchase of life insurance.--To the extent
any amount of accumulated deductible employee
contributions of an employee are applied to the
purchase of life insurance contracts, such amount shall
be treated as distributed to the employee in the year
so applied.
``(3) Special rule for treatment of rollover amounts.--For
purposes of sections 402(c), 403(a)(4), and 408(d)(3), the
Secretary shall prescribe regulations providing for such
allocations of amounts attributable to accumulated deductible
employee contributions, and for such other rules, as may be
necessary to insure that such accumulated deductible employee
contributions do not become eligible for additional tax
benefits (or freed from limitations) through the use of
rollovers.
``(4) Ordering rules.--Unless the plan specifies otherwise,
any distribution from such plan shall not be treated as being
made from the accumulated deductible employee contributions,
until all other amounts to the credit of the employee have been
distributed.
``(n) Loans Treated as Distributions.--For purposes of this
section--
``(1) Treatment as distributions.--
``(A) Loans.--If during any taxable year a
participant or beneficiary receives (directly or
indirectly) any amount as a loan from a qualified
employer plan, such amount shall be treated as having
been received by such individual as a distribution
under such plan.
``(B) Assignments or pledges.--If during any
taxable year a participant or beneficiary assigns (or
agrees to assign) or pledges (or agrees to pledge) any
portion of his interest in a qualified employer plan,
such portion shall be treated as having been received
by such individual as a loan from such plan.
``(2) Exception for certain loans.--
``(A) General rule.--Paragraph (1) shall not apply
to any loan to the extent that such loan (when added to
the outstanding balance of all other loans from such
plan whether made on, before, or after August 13,
1982), does not exceed the lesser of--
``(i) $50,000, reduced by the excess (if
any) of--
``(I) the highest outstanding
balance of loans from the plan during
the 1-year period ending on the day
before the date on which such loan was
made, over
``(II) the outstanding balance of
loans from the plan on the date on
which such loan was made, or
``(ii) the greater of (I) one-half of the
present value of the nonforfeitable accrued
benefit of the employee under the plan, or (II)
$10,000.
for purposes of clause (ii), the present value of the
nonforfeitable accrued benefit shall be determined
without regard to any accumulated deductible employee
contributions (as defined in subsection (m)(5)(B)).
``(B) Requirement that loan be repayable within 5
years.--
``(i) In general.--Subparagraph (A) shall
not apply to any loan unless such loan, by its
terms, is required to be repaid within 5 years.
``(ii) Exception for home loans.--Clause
(i) shall not apply to any loan used to acquire
any dwelling unit which within a reasonable
time is to be used (determined at the time the
loan is made) as the principal residence of the
participant.
``(C) Requirement of level amortization.--Except as
provided in regulations, this paragraph shall not apply
to any loan unless substantially level amortization of
such loan (with payments not less frequently than
quarterly) is required over the term of the loan.
``(D) Related employers and related plans.--For
purposes of this paragraph--
``(i) the rules of subsections (b), (c),
and (m) of section 414 shall apply, and
``(ii) all plans of an employer (determined
after the application of such subsections)
shall be treated as 1 plan.
``(o) 10-Percent Penalty for Premature Distributions From Annuity
Contracts.--
``(1) Imposition of penalty.--If any taxpayer receives any
amount under an annuity contract, the taxpayer's tax under this
chapter for the taxable year in which such amount is received
shall be increased by an amount equal to 10 percent of the
portion of such amount which is includible in gross income.
``(2) Subsection not to apply to certain distributions.--
Paragraph (1) shall not apply to any distribution--
``(A) made on or after the date on which the
taxpayer attains age 59\1/2\,
``(B) made on or after the death of the holder (or,
where the holder is not an individual, the death of the
primary annuitant),
``(C) attributable to the taxpayer's becoming
disabled within the meaning of subsection (k)(5),
``(D) which is a part of a series of substantially
equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and his designated
beneficiary,
``(E) from a plan, contract, account, trust, or
annuity described in section 72(e)(5)(D) of the
Internal Revenue Code of 1986,
``(F) allocable to investment in the contract
before August 14, 1982,
``(G) under a qualified funding asset,
``(H) to which subsection (r) applies (without
regard to paragraph (2) thereof),
``(I) under an immediate annuity contract, or
``(J) which is purchased by an employer upon the
termination of a plan described in section 401(a) or
403(a) and which is held by the employer until such
time as the employee separates from service.
``(3) Change in substantially equal payments.--If--
``(A) paragraph (1) does not apply to a
distribution by reason of paragraph (2)(D), and
``(B) the series of payments under such paragraph
are subsequently modified (other than by reason of
death or disability)--
``(i) before the close of the 5-year period
beginning on the date of the first payment and
after the taxpayer attains age 59\1/2\, or
``(ii) before the taxpayer attains age
59\1/2\, the taxpayer's tax for the 1st taxable
year in which such modification occurs shall be
increased by an amount, determined under
regulations, equal to the tax which (but for
paragraph (2)(D)) would have been imposed, plus
interest for the deferral period (within the
meaning of subsection (r)(4)(B)).
``(p) Certain Railroad Retirement Benefits Treated as Received
Under Employer Plans.--
``(1) In general.--Notwithstanding any other provision of
law, any benefit provided under the Railroad Retirement Act of
1974 (other than a tier 1 railroad retirement benefit) shall be
treated for purposes of this title as a benefit provided under
an employer plan which meets the requirements of section
401(a).
``(2) Tier 2 taxes treated as contributions.--For purposes
of paragraph (1)--
``(A) In general.--
``(i) the tier 2 portion of the tax imposed
by section 3201 (relating to tax on employees)
shall be treated as an employee contribution,
``(ii) the tier 2 portion of the tax
imposed by section 3211 (relating to tax on
employee representatives) shall be treated as
an employee contribution, and
``(iii) the tier 2 portion of the tax
imposed by section 3221 (relating to tax on
employers) shall be treated as an employer
contribution.
``(B) Tier 2 portion.--For purposes of subparagraph
(A)--
``(i) After 1984.--With respect to
compensation paid after 1984, the tier 2
portion shall be the taxes imposed by sections
3201(b), 3211(a)(2), and 3221(b).
``(ii) Before 1985.--With respect to
compensation paid before 1985, see section
72(r) of Internal Revenue Code of 1986 for the
definition of tier 2 portion.
``(C) Contributions not allocable to supplemental
annuity or windfall benefits.--For purposes of
paragraph (1), no amount treated as an employee
contribution under this paragraph shall be allocated
to--
``(i) any supplemental annuity paid under
section 2(b) of the Railroad Retirement Act of
1974, or
``(ii) any benefit paid under section 3(h),
4(e), or 4(h) of such Act.
``(3) Tier 1 railroad retirement benefit.--For purposes of
paragraph (1), the term `tier 1 railroad retirement benefit'
has the meaning given such term by section 3(b)(2)(B).
``(q) Required Distributions Where Holder Dies Before Entire
Interest Is Distributed.--
``(1) In general.--A contract shall not be treated as an
annuity contract for purposes of this chapter unless it
provides that--
``(A) if any holder of such contract dies on or
after the annuity starting date and before the entire
interest in such contract has been distributed, the
remaining portion of such interest will be distributed
at least as rapidly as under the method of
distributions being used as of the date of his death,
and
``(B) if any holder of such contract dies before
the annuity starting date, the entire interest in such
contract will be distributed within 5 years after the
death of such holder.
``(2) Exception for certain amounts payable over life of
beneficiary.--If--
``(A) any portion of the holder's interest is
payable to (or for the benefit of) a designated
beneficiary,
``(B) such portion will be distributed (in
accordance with regulations) over the life of such
designated beneficiary (or over a period not extending
beyond the life expectancy of such beneficiary), and
``(C) such distributions begin not later than 1
year after the date of the holder's death or such later
date as the Secretary may by regulations prescribe,
then for purposes of paragraph (1), the portion
referred to in subparagraph (A) shall be treated as
distributed on the day on which such distributions
begin.
``(3) Special rule where surviving spouse beneficiary.--If
the designated beneficiary referred to in paragraph (2)(A) is
the surviving spouse of the holder of the contract, paragraphs
(1) and (2) shall be applied by treating such spouse as the
holder of such contract.
``(4) Designated beneficiary.--For purposes of this
subsection, the term `designated beneficiary' means any
individual designated a beneficiary by the holder of the
contract.
``(5) Exception for certain annuity contracts.--This
subsection shall not apply to any annuity contract--
``(A) which is provided--
``(i) under a plan described in section
401(a) which includes a trust exempt from tax
under section 501, or
``(ii) under a plan described in section
403(a),
``(B) which is described in section 403(b),
``(C) which is an individual retirement annuity or
provided under an individual retirement account or
annuity, or
``(D) which is a qualified funding asset.
``(6) Special rule where holder is corporation or other
non-individual.--
``(A) In general.--For purposes of this subsection,
if the holder of the contract is not an individual, the
primary annuitant shall be treated as the holder of the
contract.
``(B) Primary annuitant.--For purposes of
subparagraph (A), the term `primary annuitant' means
the individual, the events in the life of whom are of
primary importance in affecting the timing or amount of
the payout under the contract.
``(7) Treatment of changes in primary annuitant where
holder of contract is not an individual.--For purposes of this
subsection, in the case of a holder of an annuity contract
which is not an individual, if there is a change in a primary
annuitant (as defined in paragraph (6)(B)), such change shall
be treated as the death of the holder.
``(r) 10-Percent Additional Tax on Early Distributions From
Qualified Retirement Plans.--
``(1) Imposition of additional tax.--If any taxpayer
receives any amount from a qualified retirement plan (as
defined in section 4974(c)), the taxpayer's tax under this
chapter for the taxable year in which such amount is received
shall be increased by an amount equal to 10 percent of the
portion of such amount which is includible in gross income.
``(2) Subsection not to apply to certain distributions.--
Except as provided in paragraphs (3) and (4), paragraph (1)
shall not apply to any of the following distributions:
``(A) In general.--Distributions which are--
``(i) made on or after the date on which
the employee attains age 59\1/2\,
``(ii) made to a beneficiary (or to the
estate of the employee) on or after the death
of the employee,
``(iii) attributable to the employee's
being disabled within the meaning of subsection
72(m)(7) of the Internal Revenue Code of 1986,
``(iv) part of a series of substantially
equal periodic payments (not less frequently
than annually) made for the life (or life
expectancy) of the employee or the joint lives
(or joint life expectancies) of such employee
and his designated beneficiary,
``(v) made to an employee after separation
from service after attainment of age 55,
``(vi) dividends paid with respect to stock
of a corporation which are described in section
404(k), or
``(vii) made from a Roth IRA (other than a
distribution described in section 30(d)(2)).
``(B) Medical expenses.--Distributions made to the
employee (other than distributions described in
subparagraph (A), (C), or (D)) to the extent such
distributions do not exceed the amount allowable as a
deduction under section 31 to the employee for amounts
paid during the taxable year for medical care
(determined without regard to whether the employee
itemizes deductions for such taxable year).
``(C) Payments to alternate payees pursuant to
qualified domestic relations orders.--Any distribution
to an alternate payee pursuant to a qualified domestic
relations order (within the meaning of section
414(p)(1)).
``(D) Distributions to unemployed individuals for
health insurance premiums.--
``(i) In general.--Distributions from an
individual retirement plan to an individual
after separation from employment--
``(I) if such individual has
received unemployment compensation for
12 consecutive weeks under any Federal
or State unemployment compensation law
by reason of such separation,
``(II) if such distributions are
made during any taxable year during
which such unemployment compensation is
paid or the succeeding taxable year,
and
``(III) to the extent such
distributions do not exceed the amount
paid during the taxable year for
insurance described in section
213(d)(1)(D) of the Internal Revenue
Code of 1986 with respect to the
individual and the individual's spouse
and dependents.
``(ii) Distributions after reemployment.--
Clause (i) shall not apply to any distribution
made after the individual has been employed for
at least 60 days after the separation from
employment to which clause (i) applies.
``(iii) Self-employed individuals.--To the
extent provided in regulations, a self-employed
individual shall be treated as meeting the
requirements of clause (i)(I) if, under Federal
or State law, the individual would have
received unemployment compensation but for the
fact the individual was self-employed.
``(E) Distributions from individual retirement
plans for higher education expenses.--Distributions to
an individual from an individual retirement plan to the
extent such distributions do not exceed the qualified
higher education expenses (as defined in paragraph (7))
of the taxpayer for the taxable year. Distributions
shall not be taken into account under the preceding
sentence if such distributions are described in
subparagraph (A), (C), or (D) or to the extent
paragraph (1) does not apply to such distributions by
reason of subparagraph (B).
``(F) Distributions from certain plans for first
home purchases.--Distributions to an individual from an
individual retirement plan which are qualified first-
time homebuyer distributions (as defined in paragraph
(8)). Distributions shall not be taken into account
under the preceding sentence if such distributions are
described in subparagraph (A), (C), (D), or (E) or to
the extent paragraph (1) does not apply to such
distributions by reason of subparagraph (B).
``(3) Limitations.--
``(A) Certain exceptions not to apply to individual
retirement plans.--Subparagraphs (A)(v), and (C) of
paragraph (2) shall not apply to distributions from an
individual retirement plan.
``(B) Periodic payments under qualified plans must
begin after separation.--Paragraph (2)(A)(iv) shall not
apply to any amount paid from a trust described in
section 401(a) which is exempt from tax under section
501(a) or from a contract described in section
72(e)(5)(D)(ii) of the Internal Revenue Code of 1986
unless the series of payments begins after the employee
separates from service.
``(4) Change in substantially equal payments.--
``(A) In general.--If--
``(i) paragraph (1) does not apply to a
distribution by reason of paragraph (2)(A)(iv),
and
``(ii) the series of payments under such
paragraph are subsequently modified (other than
by reason of death or disability)--
``(I) before the close of the 5-
year period beginning with the date of
the first payment and after the
employee attains age 59\1/2\, or
``(II) before the employee attains
age 59\1/2\, the taxpayer's tax for the
1st taxable year in which such
modification occurs shall be increased
by an amount, determined under
regulations, equal to the tax which
(but for paragraph (2)(A)(iv)) would
have been imposed, plus interest for
the deferral period.
``(B) Deferral period.--For purposes of this
paragraph, the term `deferral period' means the period
beginning with the taxable year in which (without
regard to paragraph (2)(A)(iv)) the distribution would
have been includible in gross income and ending with
the taxable year in which the modification described in
subparagraph (A) occurs.
``(5) Employee.--For purposes of this subsection, the term
`employee' includes any participant, and in the case of an
individual retirement plan, the individual for whose benefit
such plan was established.
``(6) Special rules for simple retirement accounts.--In the
case of any amount received from a simple retirement account
(within the meaning of section 408(p) during the 2-year period
beginning on the date such individual first participated in any
qualified salary reduction arrangement maintained by the
individual's employer under section 408(p)(2), paragraph (1)
shall be applied by substituting `25 percent' for `10 percent'.
``(7) Qualified higher education expenses.--For purposes of
paragraph (2)(E)--
``(A) In general.--The term `qualified higher
education expenses' means qualified higher education
expenses (as defined in section 8(b)(2)) for education
furnished to--
``(i) the taxpayer,
``(ii) the taxpayer's spouse, or
``(iii) any child or grandchild of the
taxpayer or the taxpayer's spouse, at an
eligible educational institution (as defined in
section 8(b)(2)(B)).
``(B) Coordination with other provisions.--For
purposes of this subsection, section 30 and section 32,
qualified higher education expenses in any taxable year
shall be treated as first paid with distributions under
section 32, next with distributions to which section
30(d)(5)(v) (relating to early withdrawals from Roth
IRAs to pay higher education expenses) applies, and
finally from withdrawals to which this subsection
applies.
``(8) Qualified first-time homebuyer distributions.--For
purposes of this subsection, the term `qualified first-time
homebuyer distribution' has the meaning given to it in section
30(d)(6) and the limits contained in such section shall apply
on a combined basis to this subsection and section 30.
Qualified acquisition costs (as defined in section 30(d)(6))
taken into account for purposes of section 30(d)(5)(vi) shall
not also be taken into account separately for purposes of this
subsection. A taxpayer may elect to treat distributions from an
account other than Roth IRAs to which this subsection applies
as a qualified first-time homeowner distribution before
determining whether a distribution from a Roth IRA is a
qualified first-time homeowner distribution.
``(s) 10-Percent Additional Tax for Taxable Distributions From
Modified Endowment Contracts.--
``(1) Imposition of additional tax.--If any taxpayer
receives any amount under a modified endowment contract (as
defined in section 7702A), the taxpayer's tax under this
chapter for the taxable year in which such amount is received
shall be increased by an amount equal to 10 percent of the
portion of such amount which is includible in gross income.
``(2) Subsection not to apply to certain distributions.--
Paragraph (1) shall not apply to any distribution--
``(A) made on or after the date on which the
taxpayer attains age 59\1/2\,
``(B) which is attributable to the taxpayer's
becoming disabled (within the meaning of subsection
(m)(7)), or
``(C) which is part of a series of substantially
equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life
expectancies) of such taxpayer and his beneficiary.
``Subchapter C--Basis, Business Transactions and Nonrecognition
Transactions
``Sec. 71. Gain or loss on the sale of an asset.
``Sec. 72. Basis.
``Sec. 73. Basis in business entities.
``Sec. 74. Gratuitous transfers.
``Sec. 75. Transactions involving business entities.
``Sec. 76. Rollover on residence sale.
``Sec. 77. Other nonrecognition transactions.
``Sec. 78. Wash sales and straddles.
``SEC. 71. GAIN OR LOSS ON THE SALE OF AN ASSET.
``(a) In General.--Except as otherwise provided in this chapter,
the amount of gross income to be recognized on the sale, exchange, or
other disposition of property equals the excess of--
``(1) the amount realized from the disposition, over
``(2) the taxpayer's adjusted basis in the property.
``(b) Amount Realized.--The amount realized from the disposition of
property shall be the sum of money received plus the fair market value
of the property (other than money) received. See section 122(c) for the
treatment of installment sales.
``(c) Nonrecognition Transaction.--Subsection (a) shall not apply
to nonrecognition transactions described in this chapter.
``(d) Contracts Marked to Market.--
``(1) In general.--Under regulations prescribed by the
Secretary, a markable contract held by the taxpayer at the end
of the year shall be treated as sold and reacquired for its
fair market value on the last business day of the taxable year.
The regulations shall adopt principles and definitions similar
to those that applied under section 1256 of the Internal
Revenue Code of 1986.
``(2) Markable contract.--For purposes of this subsection,
`markable contract' means--
``(A) any regulated futures contract,
``(B) any foreign currency contract,
``(C) any nonequity option,
``(D) any dealer equity option
as such terms were defined for purposes of section 1256 of the
Internal Revenue Code of 1986.
``SEC. 72. BASIS.
``(a) Basis, Sale, or Exchange.--Except to the extent inconsistent
with provisions of this chapter, adjusted basis and the existence of a
sale or exchange shall be determined in accordance with principles
applicable under the Internal Revenue Code of 1986.
``(b) Definition of Basis.--For purposes of this chapter, `basis'
means the adjusted basis of property. The adjusted basis of property is
generally its cost, as adjusted for actions or transactions that
increase or decrease the basis of property. Except as provided in
section 73 (relating to business entities and basis in business
entities), the taxpayer's adjusted basis on January 1, 2007, in an
asset acquired before that date, shall be its adjusted basis as of
December 31, 2006, as determined under the Internal Revenue Code of
1986.
``SEC. 73. BASIS IN BUSINESS ENTITIES.
``(a) Rules for All Business Entities.--
``(1) In general.--A taxpayer's basis in an interest in a
business entity shall equal--
``(A) the cost of acquiring the interest,
``(B) increased by the amount of cash and basis of
any property contributed to the entity, and
``(C) decreased by the portion of any liquidating
distributions from the entity that are treated as
returns of capital in accordance with rules prescribed
by the Secretary.
``(2) Initial basis.--Except as otherwise provided in this
section, a taxpayer's basis on January 1, 2007, or any interest
in a business entity held as of December 31, 2006, shall be the
basis of such interest as of December 31, 2006, as determined
under the Internal Revenue Code of 1986.
``(3) Cross references.--See section 75 for rules relating
to the effect of certain business transactions on a taxpayer's
basis.
``(4) Special rule for contribution of personal use
property.--If a taxpayer contributes personal-use property (as
defined in section 210(b)(3)(B)), the taxpayer's basis in the
property shall not be increased by an amount in excess of the
fair market value of the property contributed.
``(b) Special Rules for Partnership Interests.--
``(1) Initial basis in old partnerships.--A partner's basis
in a partnership interest as of January 1, 2007, equals--
``(A) the partner's basis in the partnership as of
the end of the taxable year ending on December 31, 2006
minus
``(B) the amount of the partner's share of the
indebtedness of the partnership taken into account in
determining such basis.
``(2) Negative basis.--If the amount determined under
paragraph (1) is negative, the taxpayer has a negative basis in
the partnership and such negative basis shall increase the gain
on the sale or disposition of the partnership interest (except
to the extent such negative basis has been adjusted by reason
of capital contributions).
``(3) Adjustment to basis.--Except as otherwise provided in
this section, a partner's basis in a partnership interest shall
be determined in accordance with the general principles of this
chapter applicable to an individual's basis in an interest in a
business entity. A partner's basis in a partnership shall not
be adjusted by reason of any--
``(A) distribution from the partnership (except to
the extent such distribution is treated as distribution
of basis in accordance with the general principles of
this chapter applicable to an individual's basis in an
interest in a business entity),
``(B) income, earnings, or loss of the partnership,
or
``(C) any change in the partner's share of the
partnership's indebtedness.
``(4) Special rule for transition distributions.--
``(A) Effect of transition distribution.--A
transition distribution from partnership to a partner
shall--
``(i) reduce the partner's basis in the
partnership, and
``(ii) not be included in gross income.
``(B) Definition.--A `transition distribution' is a
distribution by a business entity to an individual made
during the first three months of 2006 but only to the
extent that such distribution, when added to all other
distributions of the entity to the individual after
March 31, 2006, does not exceed the amount of taxable
income allocated by the entity to the individual during
the taxable year of the entity ending on December 31,
2006.
``(5) Partnership.--For purposes of this section,
`partnership' includes a limited liability company that was
taxable as a partnership under the Internal Revenue Code of
1986.
``(c) Special Rules for Shares of S Corporations.--Rules similar to
those contained in subsection (b) shall apply with respect to the basis
of stock of a corporation that was treated as an S corporation under
the Internal Revenue Code of 1986.
``(d) Special Rules for Proprietorships.--
``(1) Old proprietorship.--A proprietor's basis in any
business activity conducted before January 1, 2007, which is
treated as a business activity as of such date equals--
``(A) the proprietor's adjusted basis in the assets
of such business entity as of the end of the taxable
year ending on December 31, 2006, minus
``(B) the balance of any indebtedness the interest
on which the proprietor had treated as business
interest under section 163(h)(2)(A) of the Internal
Revenue Code of 1986.
``(2) Negative basis.--If the amount determined under
paragraph (1) is negative, the proprietor has a negative basis
in the proprietorship and such negative basis shall increase
the gain on the sale or disposition of the entity (except to
the extent such negative basis has been adjusted by reason of
capital contributions).
``(3) Adjustment to basis.--Except as otherwise provided in
this section, a proprietor's basis in a proprietorship shall be
determined in accordance with the general principles of this
chapter applicable to an individual's basis in an interest in a
business entity.
``(4) Proprietorship.--`Proprietorship' includes--
``(A) any family business that is not a
partnership, and
``(B) any business activity conducted by a taxpayer
other than as an employee if such activity constitutes
a business entity.
``(e) Anti-Avoidance Rule.--
``(1) In general.--If a pass-through entity's distributions
to an individual in its taxable year or taxable years ending in
2006 exceeds 125 percent of the individual's distributive share
of income for such period, the amount of such excess
distribution shall be treated as a cash distribution to the
partner on January 1, 2007, and shall not reduce the partner's
basis in his partnership interest.
``(2) Pass through entity.--`Pass through entity' means a
partnership, proprietorship, or S corporation.
``SEC. 74. GRATUITOUS TRANSFERS.
``(a) In General.--If after December 31, 2006, a taxpayer receives
any property by gift, inheritance, or other gratuitous transfer, the
taxpayer's basis in the property shall be the lesser of--
``(1) the fair market value of the property at the time of
transfer, or
``(2) the transferee's basis in the property at the time of
transfer.
``(b) Proof Required.--A taxpayer's basis in an asset received by
gift, inheritance, or other gratuitous transfer shall be presumed to be
zero unless the taxpayer can demonstrate to the satisfaction of the
Secretary the basis claimed by the taxpayer.
``SEC. 75. DISTRIBUTIONS FROM BUSINESS ENTITIES.
``(a) In General.--Except as otherwise provided in this section or
in regulations issued by the Secretary in accordance with this
section--
``(1) Cash distributions.--Distributions of cash by a
business entity with respect to its equity ownership shall be
treated as dividends and included in gross income.
``(2) Distributions of property.--If a business entity
distributes property (other than stock or other equity
ownership described in paragraph (3) in connection with a
merger, acquisition or reorganization), the fair market value
of the property received shall be treated as a dividend and
included in gross income.
``(3) Distributions of stock or other equity ownership.--If
a taxpayer receives with respect to its ownership interest in a
business entity stock or other ownership interests in such
business entity (as reorganized) or in another business entity
that is controlled by such business entity or is acquiring or
merging with such business entity, no gain or loss shall be
recognized on the distribution.
``(b) Basis in Business Divisions.--In the case of a spin-off,
split-off, or split-up of a business entity in which a taxpayer has
basis, the taxpayer's basis in the original business entity shall be
allocated among the new and surviving entities in accordance with the
relative fair market values of the taxpayer's interests in those
entities. If interests in the entities are publicly traded, fair market
values shall be based on public trading prices. In other cases, the
Secretary shall accept any reasonable allocation made by the taxpayer
if the taxpayer notifies the Secretary of the allocation in an
attachment to its tax return for the taxable year of the transaction.
``(c) Distributions Constituting Return of Basis.--
``(1) Complete liquidations.--
``(A) In general.--In the case of a distribution in
complete liquidation of a business entity, a taxpayer
shall be treated as receiving cash and assets of the
entity in exchange for the taxpayer's equity in the
business entity. In such case, the taxpayer shall
recognize gain to the extent that the sum of the cash
and fair market value of assets received exceeds the
taxpayer's basis in its interest in the business entity
or shall recognize loss to the extent that the basis
exceeds the fair market value of cash and assets
received.
``(B) Distribution of equity interests.--In the
case of a complete liquidation in which at least 90
percent of the value of assets and cash distributed to
an equity holder is equity interests in other business
entities controlled by the distributing entity--
``(i) subparagraph (A) shall not apply,
``(ii) paragraph (3) of subsection (a)
shall apply,
``(iii) the cash and fair market value of
assets other than equity interests in
controlled entities shall be applied to reduce
the taxpayer's basis in the distributing entity
and gain will be recognized only to the extent
that the cash and such fair market value
exceeds the taxpayer's basis in the
distributing entity, and
``(iv) the taxpayer's remaining basis shall
be allocated among the distributed equity
interests in controlled entities in accordance
with the relative fair market values of such
interests.
``(C) Distribution of business property.--Under
regulations prescribed by the Secretary, rules similar
to those that applied to partnerships under the
Internal Revenue Code of 1986 shall apply in lieu of
subparagraph (A) to distributions that include property
used in a trade or business if such property is
contributed to a new business entity within 180 days of
the distribution.
``(2) Transition rules.--See subsections (b) and (d) of
section 73 for transition rules relating to partnerships and
proprietorships.
``(d) Definitions and Special Rules.--
``(1) Certain rules of application.--
``(A) Principles applicable to internal revenue
code.--This section shall be applied without regard
to--
``(i) continuity of business interest,
``(ii) continuity of ownership interest,
``(iii) requirements of section 355 of the
Internal Revenue Code of 1986 for spin-offs,
split-offs and split-ups,
``(iv) business purposes for a corporate
reorganization or restructuring (except if the
transaction is potentially abusive), and
``(v) except as provided in paragraph (3),
rules treating dividends as returns of capital
because of the absence of earnings and profits.
``(B) Constructive receipt.--If a taxpayer is given
the choice of receiving cash or an equity interest in a
business entity, the taxpayer will be treated for
purposes of this section as if he received the cash and
purchased the equity interest.
``(C) Debt versus equity.--The principles
distinguishing debt and equity that applied prior to
the adopt of the Simplified USA Tax generally shall
apply for purposes of applying this section. An
investment in a business entity shall not be considered
debt unless--
``(i) it is reflected in the books and
records of the business entity as debt, and
``(ii) there is written evidence of the
investment that treats such investment as
indebtedness.
``(2) Control.--For purposes of this section, `control' of
a business entity means--
``(A) ownership of more than 50 percent of the
voting power held by equity holders of such entity, or
``(B) ownership of rights to more than 50 percent
of the periodic distributions that the business entity
may make to its equity holders and 50 percent of the
distributions if the business entity were liquidated.
``(3) Regulations.--
``(A) Significant downsizing and partial
liquidations.--The Secretary is authorized to issue
regulations under which distributions resulting from a
significant downsizing of a business entity will be
treated in part as return of equity holders' capital.
``(B) Assumption and release of liability.--The
Secretary shall prescribe regulations addressing the
consequences of a distributee's assumption of the
liabilities of the distributor.
``SEC. 76. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
``(a) Exclusion.--Gross income shall not include gain from the sale
or exchange of property if, during the 5-year period ending on the date
of the sale or exchange, such property has been owned and used by the
taxpayer as the taxpayer's principal residence for periods aggregating
2 years or more.
``(b) Limitations.--
``(1) In general.--The amount of gain excluded from gross
income under subsection (a) with respect to any sale or
exchange shall not exceed $250,000.
``(2) $500,000 limitation for certain joint returns.--
Paragraph (1) shall be applied by substituting `$500,000' for
`$250,000' if--
``(A) a husband and wife make a joint return for
the taxable year of the sale or exchange of the
property,
``(B) either spouse meets the ownership
requirements of subsection (a) with respect to such
property,
``(C) both spouses meet the use requirements of
subsection (a) with respect to such property, and
``(D) neither spouse is ineligible for the benefits
of subsection (a) with respect to such property by
reason of paragraph (3).
``(3) Application to only 1 sale or exchange every 2
years.--
``(A) In general.--Subsection (a) shall not apply
to any sale or exchange by the taxpayer if, during the
2-year period ending on the date of such sale or
exchange, there was any other sale or exchange by the
taxpayer to which subsection (a) applied.
``(B) Pre-may 7, 1997, sales not taken into
account.--Subparagraph (A) shall be applied without
regard to any sale or exchange before May 7, 1997.
``(c) Exclusion for Taxpayers Failing to Meet Certain
Requirements.--
``(1) In general.--In the case of a sale or exchange to
which this subsection applies, the ownership and use
requirements of subsection (a) shall not apply and subsection
(b)(3) shall not apply; but the amount of gain excluded from
gross income under subsection (a) with respect to such sale or
exchange shall not exceed--
``(A) the amount which bears the same ratio to the
amount which would be so excluded under this section if
such requirements had been met, as
``(B) the shorter of--
``(i) the aggregate periods, during the 5-
year period ending on the date of such sale or
exchange, such property has been owned and used
by the taxpayer as the taxpayer's principal
residence, or
``(ii) the period after the date of the
most recent prior sale or exchange by the
taxpayer to which subsection (a) applied and
before the date of such sale or exchange,
bears to 2 years.
``(2) Sales and exchanges to which subsection applies.--
This subsection shall apply to any sale or exchange if--
``(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by reason
of--
``(i) a failure to meet the ownership and
use requirements of subsection (a), or
``(ii) subsection (b)(3), and
``(B) such sale or exchange is by reason of a
change in place of employment, health, or, to the
extent provided in regulations, unforeseen
circumstances.
``(d) Special Rules.--
``(1) Joint returns.--If a husband and wife make a joint
return for the taxable year of the sale or exchange of the
property, subsections (a) and (c) shall apply if either spouse
meets the ownership and use requirements of subsection (a) with
respect to such property.
``(2) Property of deceased spouse.--For purposes of this
section, in the case of an unmarried individual whose spouse is
deceased on the date of the sale or exchange of property, the
period such unmarried individual owned and used such property
shall include the period such deceased spouse owned and used
such property before death.
``(3) Property owned by spouse or former spouse.--For
purposes of this section--
``(A) Property transferred to individual from
spouse or former spouse.--In the case of an individual
holding property transferred to such individual by such
individual's spouse or former spouse in a transaction
incident to divorce, the period such individual owns
such property shall include the period the transferor
owned the property.
``(B) Property used by former spouse pursuant to
divorce decree, etc.--Solely for purposes of this
section, an individual shall be treated as using
property as such individual's principal residence
during any period of ownership while such individual's
spouse or former spouse is granted use of the property
under a divorce or separation instrument.
``(4) Tenant-stockholder in cooperative housing
corporation.--For purposes of this section, if the taxpayer
holds stock as a tenant-stockholder in a cooperative housing
corporation--
``(A) the holding requirements of subsection (a)
shall be applied to the holding of such stock, and
``(B) the use requirements of subsection (a) shall
be applied to the house or apartment which the taxpayer
was entitled to occupy as such stockholder.
``(5) Involuntary conversions.--For purposes of this
section, the destruction, theft, seizure, requisition, or
condemnation of property shall be treated as the sale of such
property.
``(6) Determination of use during periods of out-of-
residence care.--In the case of a taxpayer who--
``(A) becomes physically or mentally incapable of
self-care, and
``(B) owns property and uses such property as the
taxpayer's principal residence during the 5-year period
described in subsection (a) for periods aggregating at
least 1 year, then the taxpayer shall be treated as
using such property as the taxpayer's principal
residence during any time during such 5-year period in
which the taxpayer owns the property and resides in any
facility (including a nursing home) licensed by a State
or political subdivision to care for an individual in
the taxpayer's condition.
``(7) Sales of remainder interests.--For purposes of this
section--
``(A) In general.--At the election of the taxpayer,
this section shall not fail to apply to the sale or
exchange of an interest in a principal residence by
reason of such interest being a remainder interest in
such residence, but this section shall not apply to any
other interest in such residence which is sold or
exchanged separately.
``(B) Exception for sales to related parties.--
Subparagraph (A) shall not apply to any sale to, or
exchange with, a related party (as defined in section
171).
``(e) Denial of Exclusion for Expatriates.--This section shall not
apply to any sale or exchange by an individual if rules relating to
expatriation to avoid tax apply to such individual.
``(f) Election to Have Section Not Apply.--This section shall not
apply to any sale or exchange with respect to which the taxpayer elects
not to have this section apply.
``(g) Residences Acquired in Rollovers Under Section 1034.--For
purposes of this section, in the case of property the acquisition of
which by the taxpayer resulted under section 1034 of the Internal
Revenue Code of 1986 (as in effect on the day before the date of the
enactment of the Taxpayer Relief Act of 1997) in the nonrecognition of
any part of the gain realized on the sale or exchange of another
residence, in determining the period for which the taxpayer has owned
and used such property as the taxpayer's principal residence, there
shall be included the aggregate periods for which such other residence
(and each prior residence taken into account in determining the holding
period of such property) had been so owned and used.
``SEC. 77. OTHER NONRECOGNITION TRANSACTIONS.
``(a) Involuntary Conversions.--Under regulations prescribed by the
Secretary, the involuntary conversion of property held by an individual
shall not result in gross income to the individual to the extent that
the individual receives property in exchange for the involuntarily
converted property. To the extent that income is not recognized under
this subsection, the taxpayer's basis in the converted property shall
carry over to the new property.
``(b) Certain Reacquisitions of Real Property.--Under regulations
prescribed by the Secretary, gross income shall not be recognized in
the case of certain reacquisitions of real property. The regulations
shall adopt principles similar to those under section 1038 of the
Internal Revenue Code of 1986.
``(c) Transfers of Property Between Spouses or Incident to
Divorce.--
``(1) General rule.--Gross income shall not be recognized
on the transfer of property from an individual to (or in trust
for the benefit of)--
``(A) a spouse, or
``(B) a former spouse, but only if the transfer is
incident to divorce.
``(2) Transfer treated as a gift.--Any transfer described
in paragraph (1) shall be treated as a gift.
``(d) Certain Exchanges of Insurance Policies.--Under regulations
prescribed by the Secretary, gross income shall not be recognized on
the exchange of insurance policies or another life insurance policy or
an annuity contract or the exchange of annuity contracts. The
regulations shall adopt principles similar to those under section 1035
of the Internal Revenue Code of 1986.
``(e) Certain Exchanges of United States Obligations.--When so
provided by regulations promulgated by the Secretary in connection with
the issue of obligations of the United States, no gain or loss shall be
recognized on the surrender to the United States of obligations of the
United States issued under chapter 31 of title 31 in exchange solely
for other obligations issued under such chapter.
``SEC. 78. WASH SALES AND STRADDLES.
``(a) Losses From Wash Sales of Stock or Securities.--Under
regulations prescribed by the Secretary, no loss shall be recognized on
the wash sale of stock or securities. The regulations shall adopt
principles similar to those under section 1091 of the Internal Revenue
Code of 1986.
``(b) Straddles.--Under regulations prescribed by the Secretary,
the loss that can be taken into account from 1 or more straddle
positions shall be limited. The regulations shall adopt principles
similar to those under section 1038 of the Internal Revenue Code of
1986.
``SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANSACTIONS.
``(a) No Loss on Personal Use Property.--No loss shall be
recognized on the sale or exchange of personal use property (as defined
in section 210(b)(3)(B)).
``(b) Limitation on Net Capital Loss.--
``(1) In general.--Losses from sales or exchanges of
capital assets in a taxable year shall be allowed only to the
extent of the gains from such sales or exchanges, plus $3,000
($1,500 in the case of a married individual filing a separate
return).
``(2) Capital loss carryovers.--Under regulations
prescribed by the Secretary, any loss not allowed by reason of
paragraph (1) shall be carried over to the following taxable
year and treated as a capital loss incurred in such year. There
shall be no limit on the number of years that a capital loss
can be carried forward.
``(3) Capital assets.--Under regulations prescribed by the
Secretary, the principles of the Internal Revenue Code of 1986
(including, without limitation, sections 1234 (relating to
options), 1234A (relating to gains or losses from certain
terminations), 1253 (relating to franchises and trademarks) and
1258 (gain from certain financial transactions) shall apply for
purposes of determining what is a capital asset and whether an
event is to be treated as a sale or exchange of capital assets,
except to the extent inconsistent with principles of this
chapter.
``(4) Recapture.--If a taxpayer claimed depreciation,
amortization or other cost recovery deductions under the
Internal Revenue Code of 1986 with respect to property which is
subsequently sold or exchanged in a transaction that is not
treated as transaction of a business entity, the amount of gain
on the exchange of such property which is treated as gain from
the sale or exchange of a capital asset shall be reduced (but
not below zero) by the amount of such deductions claimed with
respect to the property.
``Subchapter D--Rules for Exclusions From Gross Income
``Sec. 91. Interest on tax-exempt bonds.
``Sec. 92. Combat pay.
``Sec. 93. Qualified military benefits.
``Sec. 94. Qualified foster care payments.
``Sec. 95. Compensation for injury and sickness.
``Sec. 96. Meals or lodging for convenience of employer.
``Sec. 97. Certain fringe benefits.
``SEC. 91. INTEREST ON TAX-EXEMPT BONDS.
``(a) Exclusion.--Except as provided in subsection (b), gross
income does not include interest on any State or local bond.
``(b) Exceptions.--Subsection (a) shall not apply to--
``(1) Private activity bond which is not a qualified
bond.--Any private activity bond which is not a qualified bond
(within the meaning of paragraph (3) of subsection (c)).
``(2) Arbitrage bond.--Any arbitrage bond.
``(3) Bond not in registered form, etc.--Any bond unless
such bond meets the applicable requirements set forth in
regulations.
``(c) definitions--For purposes of this section--
``(1) State or local bond.--`State or local bond' means an
obligation of a State or political subdivision thereof.
``(2) State.--`State' includes the District of Columbia and
any possession of the United States.
``(3) Qualified bond.--`Qualified bond' means any private
activity bond if--
``(A) In general.--Such bond is--
``(i) an exempt facility bond,
``(ii) a qualified mortgage bond,
``(iii) a qualified veterans' mortgage
bond,
``(iv) a qualified small issue bond,
``(v) a qualified student loan bond,
``(vi) a qualified 253(c)(3) bond.
``(B) Volume cap.--Such bond is issued as part of
an issue which meets the applicable volume cap
requirements set forth in regulations.
``(C) Other requirements.--Such bond meets the
applicable requirements set forth in regulations.
``(d) Regulations.--
``(1) Statutory regulations.--The Secretary shall publish
as regulations governing the application of this section the
text of part IV of subchapter B of chapter 1 of the Internal
Revenue Code of 1986 (sections 141 through 149) with only such
changes as are required to conform cross references.
``(2) Other regulations.--The Secretary shall have the
authority to promulgate such other regulations as he deems
necessary or proper to implement this section, except that no
such regulations shall conflict with the regulations mandated
by paragraph (1) except as provided in this subtitle.
``SEC. 92. COMBAT PAY.
``(a) Enlisted Personnel.--Gross income does not include
compensation received for active service as a member below the grade of
commissioned officer in the Armed Forces of the United States for any
month during any part of which such member--
``(1) served in a combat zone, or
``(2) was hospitalized as a result of wounds, disease, or
injury incurred while serving in a combat zone; but this
paragraph shall not apply for any month beginning more than 2
years after the date of the termination of combatant activities
in such zone.
``(b) Commissioned Officers.--Gross income does not include so much
of the compensation as does not exceed $500 received for active service
as a commissioned officer in the Armed Forces of the United States for
any month during any part of which such officer--
``(1) served in a combat zone, or
``(2) was hospitalized as a result of wounds, disease, or
injury incurred while serving in a combat zone; but this
paragraph shall not apply for any month beginning more than 2
years after the date of the termination of combatant activities
in such zone.
``(c) Definitions.--For purposes of this section--
``(1) `Commissioned officer' does not include a
commissioned warrant officer.
``(2) `Combat zone' means any area which the President of
the United States by Executive Order designates, for purposes
of this section or corresponding provisions of prior income tax
laws, an area in which Armed Forces of the United States are or
have (after June 24, 1950) engaged in combat.
``(3) Service is performed in a combat zone only if
performed on or after the date designated by the President by
Executive Order as the date of the commencing of combatant
activities in such zone, and on or before the date designated
by the President by Executive Order as the date of the
termination of combatant activities in such zone; except that
June 25, 1950, shall be considered the date of the commencing
of combatant activities in the combat zone designated in
Executive Order 10195.
``(4) The term `compensation' does not include pensions and
retirement pay.
``SEC. 93. QUALIFIED MILITARY BENEFIT.
``(a) In General.--`Qualified military benefit' means any allowance
or in-kind benefit (other than personal use of a vehicle) which--
``(1) is received by any member or former member of the
uniformed service of the United States or any dependent of such
member by reason of such member's status or service as a member
of such uniformed services, and
``(2) was excludable from gross income on September 9,
1986, under any provision of law, regulation, or administrative
practice which was in effect on such date (other than a
provision of this title).
``(b) No Other Benefit to Be Excludable as Provided by This
Title.--Notwithstanding any other provision of law, no benefit shall be
treated as a qualified military benefit unless such benefit--
``(1) is a benefit described in subsection (a), or
``(2) is excludable from gross income under this title
without regard to any provision of law which is not contained
in this title and which is not contained in a revenue Act.
``(c) Limitations on Modifications.--
``(1) In general.--Except as provided in paragraph (2), no
modification or adjustment of any qualified military benefit
after September 9, 1986, shall be taken into account.
``(2) Exception for certain adjustments to cash benefits.--
Paragraph (1) shall not apply to any adjustment to any
qualified military benefit payable in cash which--
``(A) is pursuant to a provision of law or
regulation (as in effect on September 9, 1986), and
``(B) is determined by reference to any fluctuation
in cost, price, currency, or other similar index.
``SEC. 94. QUALIFIED FOSTER CARE PAYMENTS.
``(a) Qualified Foster Care Payment Defined.--
``(1) In general.--`Qualified foster care payment' means
any amount--
``(A) which is paid by a state or political
subdivision thereof or by a placement agency which is
described in section 253(c)(3) and exempt from tax
under section 253(a), and
``(B) which is--
``(i) paid to the foster care provider for
caring for a qualified foster individual in the
foster care provider's home, or
``(ii) a difficulty of care payment.
``(2) Qualified foster individual.--`Qualified foster
individual' means any individual who is living in a foster
family home in which such individual was placed by--
``(A) an agency of a State or a political
subdivision thereof, or
``(B) in the case of an individual who has not
attained age 19, an organization which is licensed by a
State (or political subdivision thereof) as a placement
agency and which is described in section 253(c)(3) and
exempt from tax under section 253(a).
``(3) Limitation based on number of individuals over the
age of 18.--In the case of any foster home in which there is a
qualified foster care individual who has attained age 19,
foster care payments (other than difficulty of care payments)
for any period to which such payments relate shall not be
excludable from gross income under subsection (a) to the extent
such payments are made for more than 5 such qualified foster
individuals.
``(b) Difficulty of Care Payments.--For purposes of this section--
``(1) Difficulty of care payments.--`Difficulty of care
payments' means payments to individuals which are not described
in subsection (a)(1)(B)(i), and which--
``(A) are compensation for providing the additional
care of a qualified foster individual which is--
``(i) required by reason of a physical,
mental, or emotional handicap of such
individual with respect to which the State has
determined that there is a need for additional
compensation, and
``(ii) provided in the home of the foster
care provider, and
``(B) are designated by the payor as compensation
described in subparagraph (A).
``(2) Limitation based on number of individuals.--In the
case of any foster home, difficulty of care payments for any
period to which such payments relate shall not be excludable
from gross income under subsection (a) to the extent such
payments are made for more than--
``(A) 10 qualified foster individuals who have not
attained age 19, and
``(B) 5 qualified foster individuals not described
in subparagraph (A).
``SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS.
``(a) In General.--Gross income does not include--
``(1) amounts received under workers' compensation acts as
compensation for personal injuries or sickness;
``(2) the amount of any damages received (whether by suit
or agreement and whether as lump sums or as periodic payments)
on account of personal injuries or sickness;
``(3) amounts received through accident or health insurance
for medical care;
``(4) amounts received through accident or health insurance
for personal injuries or sickness (other than for medical
care), but only to the extent such amounts (A) are not
attributable to contributions by the employer which were not
includible in the gross income of the employee, and are (B) not
paid by the employer;
``(5) amounts received as pension, annuity, or similar
allowance for personal injuries or sickness resulting from
active service in the armed forces of any country or in the
Coast and Geodetic Survey or the Public Health Service, or as a
disability annuity payable under the provisions of section 808
of the Foreign Service Act of 1980; and
``(6) amounts received by an individual as disability
income attributable to injuries incurred as a direct result of
a violent attack which the Secretary of State determines to be
a terrorist attack and which occurred while such individual was
an employee of the United States engaged in the performance of
his official duties outside the United States.
Paragraph (2) shall not apply to any punitive damages in
connection with a case not involving physical injury or
physical sickness.
``(b) Termination of Application of Subsection (a)(4) in Certain
Cases.--
``(1) In general.--Subsection (a)(4) shall not apply in the
case of an individual who is not described in paragraph (2).
``(2) Individuals to whom subsection (a)(4) continues to
apply.--An individual is described in this paragraph if--
``(A) on or before September 24, 1975, he was
entitled to receive any amount described in subsection
(a)(4),
``(B) on September 24, 1975, he was a member of any
organization (or reserve component thereof) referred to
in subsection (a)(4) or under a binding written
commitment to become such a member,
``(C) he receives an amount described in subsection
(a)(4) by reason of a combat-related injury, or
``(D) on application therefore, he would be
entitled to receive disability compensation from the
Veterans' Administration.
``(3) Special rules for combat-related injuries.--For
purposes of this subsection, the term `combat-related injury'
means personal injury or sickness--
``(A) which is incurred--
``(i) as a direct result of armed conflict,
``(ii) while engaged in extrahazardous
service, or
``(iii) under conditions simulating war; or
``(B) which is caused by an instrumentality of war.
In the case of an individual who is not described in
subparagraph (A) or (B) of paragraph (2), except as provided in
paragraph (4), the only amounts taken into account under
subsection (a)(4) shall be the amounts which he receives by
reason of a combat-related injury.
``(4) Amount excluded to be not less than veterans'
disability compensation.--In the case of any individual
described in paragraph (2), the amounts excludable under
subsection (a)(4) for any period with respect to any individual
shall not be less than the maximum amount which such
individual, on application therefor, would be entitled to
receive as disability compensation from the Veterans'
Administration.
``SEC. 96. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE
EMPLOYER.
``(a) Meals and Lodging Furnished to Employee, His Spouse, and His
Dependents, Pursuant to Employment.--There shall be excluded from gross
income of an employee the value of any meals or lodging furnished to
him, his spouse, or any of his dependents by or on behalf of his
employer for the convenience of the employer, but only if--
``(1) in the case of meals, the meals are furnished on the
business premises of the employer, or
``(2) in the case of lodging, the employee is required to
accept such lodging on the business premises of his employer as
a condition of his employment.
``(b) Special Rules.--For the purposes of subsection (a)--
``(1) Provisions of employment contract or state statute
not to be determinative.--In determining whether meals or
lodging are furnished for the convenience of the employer, the
provisions of an employment contract or of a State statute
fixing terms of employment shall not be determinative of
whether the meals or lodging are intended as compensation.
``(2) Certain factors not taken into account with respect
to meals.--In determining whether meals are furnished for the
convenience of the employer, the fact that a charge is made for
such meals, and the fact that the employee may accept or
decline such meals, shall not be taken into account.
``(3) Certain fixed charges for meals.--
``(A) In general.--If--
``(i) an employee is required to pay on a
periodic basis a fixed charge for his meals,
and
``(ii) such meals are furnished by the
employer for the convenience of the employer,
there shall be excluded from the employee's
gross income an amount equal to such fixed
charge.
``(B) Application of subparagraph (a).--
Subparagraph (A) shall apply--
``(i) whether the employee pays the fixed
charge out of his stated compensation or out of
his own funds, and
``(ii) only if the employee is required to
make the payment whether he accepts or declines
the meals.
``(c) Employees Living in Certain Camps.--
``(1) In general.--In the case of an individual who is
furnished lodging in a camp located in a foreign country by or
on behalf of his employer, such camp shall be considered to be
part of the business premises of the employer.
``(2) Camp.--For purposes of this section, a camp
constitutes lodging which is--
``(A) provided by or on behalf of the employer for
the convenience of the employer because the place at
which such individual renders services is in a remote
area where satisfactory housing is not available on the
open market,
``(B) located, as near as practicable, in the
vicinity of the place at which such individual renders
services, and
``(C) furnished in a common area (or enclave) which
is not available to the public and which normally
accommodates 10 or more employees.
``(d) Lodging Furnished by Certain Educational Institutions to
Employees.--
``(1) In general.--In the case of an employee of an
educational institution, gross income shall not include the
value of qualified campus lodging furnished to such employee
during the taxable year.
``(2) Exception in cases of inadequate rent.--Paragraph (1)
shall not apply to the extent of the excess of--
``(A) the lesser of--
``(i) 5 percent of the appraised value of
the qualified campus lodging, or
``(ii) the average of the rentals paid by
individuals (other than employees or students
of the educational institution) during such
calendar year for lodging provided by the
educational institution which is comparable to
the qualified campus lodging provided to the
employee, over
``(B) the rent paid by the employee for the
qualified campus lodging during such calendar year.
The appraised value under subparagraph (A)(i) shall be
determined as of the close of the calendar year in which the
taxable year begins, or, in the case of a rental period not
greater than 1 year, at any time during the calendar year in
which such period begins.
``(3) Qualified campus lodging.--For purposes of this
subsection, the term `qualified campus lodging' means lodging
to which subsection (a) does not apply and which is--
``(A) located on, or in the proximity of, a campus
of the educational institution, and
``(B) furnished to the employee, his spouse, and
any of his dependents by or on behalf of such
institution for use as a residence.
``(4) Educational institution.--For purposes of this
paragraph, the term `educational institution' means an eligible
educational institution as defined in section 8(b)(2)(B).
``SEC. 97. CERTAIN FRINGE BENEFITS.
``(a) Purpose.--This section includes definitions and rules
applicable to the exclusion from gross income for certain fringe
benefits.
``(b) No-Additional-Cost Service Defined.--`No-additional-cost
service' means any service provided by an employer to an employee for
use by such employee if--
``(1) such service is offered for sale to customers in the
ordinary course of the line of business of the employer in
which the employee is performing services, and
``(2) the employer incurs no substantial additional cost
(including forgone revenue) in providing such service to the
employee (determined without regard to any amount paid by the
employee for such service).
``(c) Qualified Employee Discount Defined.--
``(1) Qualified employee discount.--The term `qualified
employee discount' means any employee discount with respect to
qualified property or services to the extent such discount does
not exceed--
``(A) in the case of property, the gross profit
percentage of the price at which the property is being
offered by the employer to customers, or
``(B) in the case of services, 20 percent of the
price at which the services are being offered by the
employer to customers.
``(2) Gross profit percentage.--
``(A) In general.--`Gross profit percentage' means
the percent which--
``(i) the excess of the aggregate sales
price of property sold by the employer to
customers over the aggregate cost of such
property to the employer, is of
``(ii) the aggregate sales price of such
property.
``(B) Determination of gross profit percentage.--
Gross profit percentage shall be determined on the
basis of--
``(i) all property offered to customers in
the ordinary course of the line of business of
the employer in which the employee is
performing services (or a reasonable
classification of property selected by the
employer), and
``(ii) the employer's experience during a
representative period.
``(3) Employee discount defined.--`Employee discount' means
the amount by which--
``(A) the price at which the property or services
are provided by the employer to an employee for use by
such employee, is less than
``(B) the price at which such property or services
are being offered by the employer to customers.
``(4) Qualified property or services.--`Qualified property
or services' means any property (other than real property and
other than personal property of a kind held for investment) or
services which are offered for sale to customers in the
ordinary course of the line of business of the employer in
which the employee is performing services.
``(c) De Minimis Fringe Defined.--
``(1) In general.--`De minimis fringe' means any property
or service the value of which is (after taking into account the
frequency with which similar fringes are provided by the
employer to the employer's employees) so small as to make
accounting for it unreasonable or administratively
impracticable.
``(2) Treatment of certain eating facilities.--The
operation by an employer of any eating facility for employees
shall be treated as a de minimis fringe if--
``(A) such facility is located on or near the
business premises of the employer, and
``(B) revenue derived from such facility normally
equals or exceeds the direct operating costs of such
facility.
The preceding sentence shall apply with respect to any highly
compensated employee only if access to the facility is
available on substantially the same terms to each member of a
group of employees which is defined under a reasonable
classification set up by the employer which does not
discriminate in favor of highly compensated employees.
``(3) On-premises gyms and other athletic facilities.--
``(A) In general.--De minimis fringe benefits
include the provision of on-premises athletic facility
by an employer to its employees.
``(B) On-premises athletic facility.--For purposes
of this paragraph, `on-premises athletic facility'
means any gym or other athletic facility--
``(i) which is located on the premises of
the employer,
``(ii) which is operated by the employer,
and
``(iii) substantially all the use of which
is by employees of the employer, their spouses,
and their dependent children.
``(d) Certain Educational Training Benefits.--Amounts paid or
expenses incurred by the employer for education or training provided to
the employee shall be excluded from gross income under section 4 if
(and only if) such amounts or expenses are ordinary and necessary
business expenses and are not for an advanced degree or to qualify an
employee for a new line of work.
``(e) Regulations.--The Secretary shall prescribe regulations under
this section, including regulations that continue certain rules
contained in section 132 to the Internal Revenue Code of 1986 related
to the fringe benefits described in this section.
``Subchapter E--Rules Relating to Deductions
``Sec. 101. Charitable, etc. organizations.
``Sec. 102. Private foundations.
``SEC. 101. CHARITABLE, ETC. ORGANIZATIONS.
``(a) Purpose.--This section provides definitions for purposes of
determining the philanthropic transfer deduction and for other purposes
of this chapter and chapter 2.
``(b) Regular Charity.--
``(1) In general.--
``(A) Regular charity.--`Regular charity' means--
``(i) a church or a convention or
association of churches,
``(ii) an educational organization which
normally maintains a regular faculty and
curriculum and normally has a regularly
enrolled body of pupils or students in
attendance at the place where its educational
activities are regularly carried on,
``(iii) an organization the principal
purpose or functions of which are the providing
of medical or hospital care or medical
education or medical research, if the
organization is a hospital, or if the
organization is a medical research organization
directly engaged in the continuous active
conduct of medical research in conjunction with
a hospital,
``(iv) an organization which normally
receives a substantial part of its support
(exclusive of income received in the exercise
or performance by such organization of its
charitable, educational, or other purpose or
function constituting the basis for its
exemption under section 253(a)) from the United
States or any State or political subdivision
thereof or from direct or indirect
contributions from the general public, and
which is organized and operated exclusively to
receive, hold, invest, and administer property
and to make expenditures to or for the benefit
of a college or university which is an
organization referred to in clause (ii) of this
subparagraph and which is an agency or
instrumentality of a State or political
subdivision thereof, or which is owned or
operated by a State or political subdivision
thereof or by an agency or instrumentality of
one or more States or political subdivisions,
``(v) a governmental unit referred to in
subsection (c)(1),
``(vi) an organization referred to in
subsection (c)(2) which normally receives a
substantial part of its support (exclusive of
income received in the exercise or performance
by such organization of its charitable,
educational, or other purpose or function
constituting the basis for its exemption under
section 253(a)) from a governmental unit
referred to in subsection (c)(1) or from direct
or indirect contributions from the general
public,
``(vii) a private foundation described in
subparagraph (C), or
``(viii) an organization described in
section 102(a) (2) or (3).
``(B) Special rule for medical research
organizations.--For purposes of determining whether a
contribution is to a regular charity, a medical
research organization shall not be treated as described
in clause (iii) of paragraph (2) unless during the
calendar year in which the contribution is made such
organization is committed to spend such contributions
for such research before January 1 of the fifth
calendar year which begins after the date such
contribution is made,
``(C) Certain private foundations.--The private
foundations referred to in subparagraph (A)(vii) and
subsection (e)(1)(B) are--
``(i) a private operating foundation (as
defined in section 4942(j)(3)),
``(ii) any other private foundation (as
defined in section 102(a)) which, not later
than the 15th day of the third month after the
close of the foundation's taxable year in which
contributions are received, makes qualifying
distributions (as defined in section 4942(g),
without regard to paragraph (3) thereof), which
are treated, after the application of section
4942(g)(3), as distributions out of corpus (in
accordance with section 4942(h)) in an amount
equal to 100 percent of such contributions, and
with respect to which the taxpayer obtains
adequate records or other sufficient evidence
from the foundation showing that the foundation
made such qualifying distributions, and
``(iii) a private foundation all of the
contributions to which are pooled in a common
fund and which would be described in section
102(a)(3) but for the right of any substantial
contributor (hereafter in this clause called
`donor') or his spouse to designate annually
the recipients, from among organizations
described in paragraph (1) of section 102(a),
of the income attributable to the donor's
contribution to the fund and to direct (by deed
or by will) the payment, to an organization
described in such paragraph (1), of the corpus
in the common fund attributable to the donor's
contribution; but this clause shall apply only
if all of the income of the common fund is
required to be (and is) distributed to one or
more organizations described in such paragraph
(1) not later than the 15th day of the third
month after the close of the taxable year in
which the income is realized by the fund and
only if all of the corpus attributable to any
donor's contribution to the fund is required to
be (and is) distributed to one or more of such
organizations not later than one year after his
death or after the death of his surviving
spouse if she has the right to designate the
recipients of such corpus.
``(2) References.--Any reference in other law or in legal
documents to an organization described in a clause of section
170(b)(1)(A) of the Internal Revenue Code of 1986 shall
constitute a reference to an organization described in the same
clause of section 101(b)(1)(A).
``(c) Charity.--For purposes of determining the deductibility of a
philanthropic transfer, `charitable contribution' means a contribution
or gift for the use of--
``(1) A State, a possession of the United States, or any
political subdivision of any of the foregoing, or the United
States or the District of Columbia, but only if the
contribution or gift is made for exclusively public purposes.
``(2) A corporation, trust, or community chest, fund, or
foundation--
``(A) created or organized in the United States or
in any possession thereof, or under the law of the
United States, any State, the District of Columbia, or
any possession of the United States,
``(B) organized and operated exclusively for
religious, charitable, scientific, literary, or
educational purposes (but only if no part of its
activities involve the provision of athletic facilities
or equipment) or for the prevention of cruelty to
children or animals,
``(C) no part of the net earnings of which inures
to the benefit of any private shareholder or
individual, and
``(D) which qualifies for exemption from the
business tax under section 253(c) and is not
disqualified for tax exemption by reason of attempting
to influence legislation, and which does not
participate in, or intervene in (including the
publishing or distributing of statements), any
political campaign on behalf of (or in opposition to)
any candidate for public office.
``(3) [intentionally deleted]
``(4) In the case of a contribution or gift by an
individual, a domestic fraternal society, order, or
association, operating under the lodge system, but only if such
contribution or gift is to be used exclusively for religious,
charitable, scientific, literary, or educational purposes, or
for the prevention of cruelty to children or animals.
``(5) A cemetery company owned and operated exclusively for
the benefit of its members, or any corporation chartered solely
for burial purposes as a cemetery corporation and not permitted
by its charter to engage in any business not necessarily
incident to that purpose, if such company or corporation is not
operated for profit and no part of the net earnings of such
company or corporation inures to the benefit of any private
shareholder or individual.
``(d) Rules for Subsection (c).--
``(1) Limitations.--A contribution or gift by a corporation
to a trust, chest, fund, or foundation shall be deductible by
reason of subsection (c)(2)(B) only if it is to be used within
the United States or any of its possessions exclusively for
purposes specified in subparagraph (B).
``(2) References.--Any reference in other law or in legal
documents to an organization described in a paragraph of
section 170(c) of the Internal Revenue Code of 1986 shall
constitute a reference to an organization described in the same
paragraph number of section 101(c) if an organization is
described in such paragraph.
``(e) Qualified Conservation Contribution.--
``(1) In general.--`Qualified conservation contribution'
means a contribution--
``(A) of a qualified real property interest,
``(B) to a qualified organization,
``(C) exclusively for conservation purposes.
``(2) Qualified real property interest.--`Qualified real
property interest' means any of the following interests in real
property:
``(A) the entire interest of the donor other than a
qualified mineral interest,
``(B) a remainder interest, and
``(C) a restriction (granted in perpetuity) on the
use which may be made of the real property.
``(3) Qualified organization.--For purposes of paragraph
(1), the term `qualified organization' means an organization
which--
``(A) is described in clause (v) or (vi) of
subsection (b)(1)(A), or
``(B) is described in section 253(c)(3) and--
``(i) meets the requirements of section
102(a)(2), or
``(ii) meets the requirements of section
102(a)(3) and is controlled by an organization
described in subparagraph (A) or in clause (i)
of this subparagraph.
``(4) Conservation purpose defined.--
``(A) In general.--For purposes of this subsection,
the term `conservation purpose' means--
``(i) the preservation of land areas for
outdoor recreation by, or the education of, the
general public,
``(ii) the protection of a relatively
natural habitat of fish, wildlife, or plants,
or similar ecosystem,
``(iii) the preservation of open space
(including farmland and forest land) where such
preservation is--
``(I) for the scenic enjoyment of
the general public, or
``(II) pursuant to a clearly
delineated Federal, State, or local
governmental conservation policy, and
will yield a significant public
benefit, or
``(iv) the preservation of an historically
important land area or a certified historic
structure.
``(B) Certified historic structure.--For purposes
of subparagraph (A)(iv), the term `certified historic
structure' means any building, structure, or land area
which--
``(i) is listed in the National Register,
or
``(ii) is located in a registered historic
district and is certified by the Secretary of
the Interior to the Secretary as being of
historic significance to the district.
A building, structure, or land area satisfies the
preceding sentence if it satisfies such sentence either
at the time of the transfer or on the due date
(including extensions) for filing the transferor's
return under this chapter for the taxable year in which
the transfer is made.
``(5) Exclusively for conservation purposes.--For purposes
of this subsection--
``(A) Conservation purpose must be protected.--A
contribution shall not be treated as exclusively for
conservation purposes unless the conservation purpose
is protected in perpetuity.
``(B) No surface mining permitted.--
``(i) In general.--Except as provided in
clause (ii), in the case of a contribution of
any interest where there is a retention of a
qualified mineral interest, subparagraph (A)
shall not be treated as met if at any time
there may be extraction or removal of minerals
by any surface mining method.
``(ii) Special rule.--With respect to any
contribution of property in which the ownership
of the surface estate and mineral interests
were separated before June 13, 1976, and remain
so separated, subparagraph (A) shall be treated
as met if the probability of surface mining
occurring on such property is so remote as to
be negligible.
``(6) Qualified mineral interest.--For purposes of this
subsection, the term `qualified mineral interest' means--
``(A) subsurface oil, gas, or other minerals, and
``(B) the right to access to such minerals.
``(f) Denial of Deduction for Certain Travel Expenses.--No
deduction shall be allowed under section 211 for traveling expenses
(including amounts expended for meals and lodging) while away from
home, whether paid directly or by reimbursement, unless there is no
significant element of personal pleasure, recreation, or vacation in
such travel.
``(g) Treatment of Certain Amounts Paid to or for the Benefit of
Institutions of Higher Education.--For purposes of section 9, if as the
result of a contribution to or for the benefit of an educational
organization--
``(1) which is described in subsection (b)(1)(A)(ii), and
``(2) which is an institution of higher education (as
defined in section 3304(f))
the taxpayer receives (directly or indirectly) as a result of paying
such amount the right to purchase tickets for seating at an athletic
event in an athletic stadium of such institution, 80 percent of such
contribution shall be treated as a charitable contribution (but only if
such amount would be allowable as a deduction but for the fact that the
taxpayer received the right to purchase tickets). If any portion of a
payment is for the purchase of such tickets, such portion and the
remaining portion (if any) of such payment shall be treated as separate
amounts for purposes of this subsection.
``Subchapter F--Special Business Activities
``Sec. 111. Rules for rental of real estate.
``SEC. 111. RULES FOR RENTAL OF REAL ESTATE.
``(a) In General.--Except as provided in subsection (b)--
``(1) the activity of rental of real estate is a business
activity to which the Simplified USA Tax for businesses under
chapter 2 applies,
``(2) a taxpayer shall not be entitled to any deductions
under this chapter with respect to rental property, and
``(3) a taxpayer shall recognize gross income only with
respect to distributions from the rental activity.
``(b) Insubstantial Rental Activity.--
``(1) Not rental property.--If an individual or individuals
own property, such individual or individuals and their families
use the property on more than 14 days during the taxable year
for nonbusiness purposes, the property is rented for no more
than 14 days during the taxable year, and the total rental
received by the individuals with respect to such property does
not exceed $10,000, the property shall not be considered rental
property or used in the activity of rental of real estate
during the taxable year for purposes of subsection (a) and the
Simplified USA Tax for businesses under chapter 2.
``(2) Rents from nonrental property.--Any rent from
property described in paragraph (1) shall be included in gross
income for purposes of the Simplified USA Income Tax.
``(c) Use for a Nonbusiness Purpose.--For purposes of this section,
`use for a nonbusiness purpose' means use other than--
``(1) use for which fair rent is paid,
``(2) use in connection with the preparation of the
property for rental, or
``(3) use that serves a clear business purpose.
Use during any part of a day shall constitute use for that day.
``Subchapter G--Accounting Methods and Periods
``Sec. 121. Taxable year.
``Sec. 122. Cash method of accounting; installment sales.
``SEC. 121. TAXABLE YEAR.
``(a) In General.--The taxable year for all individuals subject to
tax under this chapter shall be the calendar year except as provided in
subsection (b).
``(b) Short Taxable Years.--
``(1) Birth.--An individual's taxable year in the year of
his birth shall begin on the date of his birth.
``(2) Death.--An individual's taxable year in the year of
his death shall end on the date of his death.
``SEC. 122. CASH METHOD OF ACCOUNTING; INSTALLMENT SALES.
``(a) In General.--All individuals shall determine their income and
deductions using the cash receipts and disbursement method.
``(b) OID Rules.--
``(1) In general.--Original issue discount shall not be
included in gross income until received.
``(2) Previously recognized oid.--Original issue discount
included in income under the Internal Revenue Code of 1986
shall increase the adjusted basis of the instrument to which
the original issue discount related and shall not again be
included in income when received.
``(c) Installment Sales.--
``(1) In general.--Taxpayers shall take into account income
from installment sales when received.
``(2) Regulations.--The Secretary shall promulgate
regulations implementing paragraph (1). Such regulations shall
generally follow the principles of sections 453, 453A and 453B
of the Internal Revenue Code of 1986, except to the extent such
principles are inconsistent with other provisions of this
chapter.
``(d) Constructive Receipt.--Income shall be treated as received
when constructively received.
``(e) Effect of Change of Accounting Method.--Rules similar to
those under section 226 shall apply to ensure that a taxpayer does not
deduct the same expense twice or include the same item in income twice.
``Subchapter H--Nonresident Aliens
``Sec. 131. Tax on nonresident alien individuals.
``Sec. 132. Tax treatment of certain community income of nonresident
aliens.
``SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS.
``(a) Nonbusiness Income.--
``(1) Income other than certain gains.--There is hereby
imposed for each taxable year a tax of 30 percent of the amount
received from sources within the United States by a nonresident
alien individual as--
``(A) interest (other than portfolio interest (as
defined in subsection (b)(2)), deposit interest (as
defined in subsection (b)(3)) and original issue
discount, dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations, emoluments,
and other fixed or determinable annual periodical
gains, profits and income,
``(B) gains from the disposal of timber, coal, or
iron ore with a retained economic interest,
``(C) in the case of the sale of an original
discount obligation or payment on an original issue
discount obligation, the interest accrued while the
individual was a nonresident alien, and
``(D) includible social security benefits (as
defined in section 3(b)(2)).
``(2) Capital gains of certain aliens.--In the case of a
nonresident alien individual present in the United States for a
period or periods aggregating 183 days or more during the
taxable year, there is hereby imposed a tax of 30 percent of
the amount by which the gains, derived from sources within the
United States, from the sale or exchange at any time during
such year exceeds his losses, allocable to sources within the
United States, from the sale or exchange at any time during
such year of capital assets.
``(3) Tax does not apply to business income.--The taxes
imposed by this section shall not apply to the income of any
business entity, except to the extent such income is
distributed as compensation, dividends, or interest.
``(b) Special Rules and Definitions.--
``(1) Certain annuities.--The taxes imposed by subsection
(a) shall not apply to any amount received as an annuity under
a qualified annuity plan described in section 403(a)(1), or
from a qualified trust described in section 401(a) and exempt
under section 253(a) if--
``(A) all of the personal services by reason of
which the annuity is payable were either--
``(i) personal services performed outside
the United States by an individual who, at the
time of performance of such personal services,
was a nonresident alien, or
``(ii) personal services by a nonresident
alien temporarily present in the United States
for a period or periods not exceeding 90 days
during a taxable year, whose compensation for
such services did not exceed $3,000, and who
performed such services for--
``(I) a nonresident alien
individual, foreign partnership, or
foreign corporation, not engaged in a
trade or business within the United
States, or
``(II) for an office or place of
business maintained in a foreign
country or in a possession of the
United States by an individual who is a
citizen or resident of the United
States or by a domestic partnership or
a domestic corporation, and
``(B) at the time the first amount is paid as
annuity under the annuity plan or by the trust, 90
percent or more of the employees for whom contributions
or benefits are provided under such plan are citizens
or residents of the United States.
``(2) Portfolio interest.--
``(A) In general.--`Portfolio interest' means--
``(i) interest on obligations in registered
form if the United States person who would
otherwise be required to withhold tax on such
interest under section 1441(a) receives a
statement that the beneficial owner of the
obligation is not a United States person, and
``(ii) interest on obligations in
nonregistered form if appropriate precautions
are taken to ensure that such obligations will
be sold only to persons who are not United
States persons and such interest is paid
outside the United States.
``(B) Exceptions.--Under rules to be prescribed by
the Secretary, portfolio interest does not include--
``(i) interest received by a 10-percent
equity owner, or
``(ii) contingent interest.
``(3) Deposit interest.--`Deposit interest' means interest
on deposits which are--
``(A) deposits with persons carrying on a banking
business (including savings and loans), and
``(B) amounts held by an insurance company under an
agreement to pay interest thereon.
``(4) Other exceptions.--The taxes imposed by subsection
(a) shall not apply to--
``(A) a percentage of any dividend paid by a
business entity, 80 percent of whose gross receipts are
not taken into account under chapter 1 because they are
from outside the United States, equal to the percentage
of gross receipts not so taken into account,
``(B) gambling winnings (except to the extent that
the Secretary determines by regulation that the
collection of the tax is administratively feasible),
``(C) compensation paid by a foreign employer to a
nonresident alien individual for the period he is
temporarily present in the United States as a
nonimmigrant under subparagraph (F) or (J) of section
101(a)(15) of the Immigration and Nationality Act, as
amended,
``(D) interest from a series E or series H savings
bond if the individual acquired the bond while a
resident of the Ryuku Islands or the Trust Territory of
the Pacific Islands, or
``(E) amounts earned or payable to any person who
is a bona fide resident of Puerto Rico, Guam, American
Samoa, or the Northern Mariana Islands (and, therefore,
is subject to the tax imposed by subchapter A).
``(c) Expatriation to Avoid Tax.--
``(1) In general.--A nonresident alien individual who at
any time within the 10-year period immediately preceding the
close of the taxable year lost United States citizenship shall
be taxable in the manner described in paragraph (2) unless none
of the principal purposes of losing citizenship was avoidance
of tax under subchapter A or subtitle B.
``(2) Alternative tax.--A nonresident alien individual
described in paragraph (1) shall be subject to tax on the items
taxable under subsection (a) as determined without regard to
exceptions listed or based on definitions contained in
subsection (b) using the rate schedule for single individuals
under section 215. If the taxes determined under subsection (a)
are greater than the tax determined under this subsection, the
greater tax shall apply.
``SEC. 132. TAX TREATMENT OF CERTAIN COMMUNITY INCOME OF NONRESIDENT
ALIENS.
``(a) General Rule.--In the case of a married couple one or both of
whom are nonresident alien individuals and who have community income
for the taxable year, such community income shall be treated as
follows:
``(1) Compensation income shall be treated as income of the
spouse who rendered the services,
``(2) Partnership distributions shall be treated as the
related distributive shares of partnership income would be
treated under section 1402(a)(5),
``(3) Community income which is derived from the separate
property of a spouse shall be treated as income of that spouse,
and
``(4) All other such community income shall be treated as
provided in the applicable community property law.
``(b) Exception Where Election Under Section 6013(g) Is in
Effect.--Subsection (a) shall not apply if an election under subsection
(g) or (h) of section 6013 (relating to election to treat nonresident
alien individuals as residents of the United States) is in effect.
``SEC. 133. RELATIONSHIP WITH TREATIES.
``(a) Statement of Policy.--It is the intention of the USA Tax Code
to promote a worldwide tax system in which each nation taxes--
``(1) under an individual tax, only the income of
individuals who are residents or citizens of that nation, and
``(2) under a business tax only the business activity in
such nation.
``(b) Effect of Treaties.--No tax shall be imposed under section
131(a) on income that is exempt from tax by reason of a treaty between
the nation of which the nonresident alien is a citizen or resident and
the United States. If any such treaty requires that a lower rate of tax
be imposed on some or all of the items of income subject to tax under
section 331(a), such lower rate shall apply to such items in the case
of persons to whom such treaty applies.
``(c) Effect of Unilateral Action by Foreign Nation.--No tax shall
be imposed under section 331(a) on nonresident aliens who are citizens
or residents of another nation if--
``(1) such nation exempts from its income and withholding
taxes nonresident alien individuals who are residents or
citizens of the United States,
``(2) such nation has entered into a tax information
sharing agreement with the United States, and
``(3) the Secretary certifies that the preceding two
requirements have been satisfied.
``Subchapter I--Trusts and Estates
``Sec. 140. Prepayment of tax by trusts and estates.
``Sec. 141. Application of tax.
``Sec. 142. Special rules for credits and deductions.
``Sec. 143. Definitions and rules applicable to subchapter I.
``Sec. 144. Deduction for trusts distributing current income only.
``Sec. 145. Inclusion of amounts in gross income of beneficiaries of
trusts distributing current income only.
``Sec. 146. Deduction for estates and trusts accumulating income or
distributing corpus.
``Sec. 147. Inclusion of amounts in gross income of beneficiaries of
estates and trusts accumulating income or
distributing corpus.
``Sec. 148. Special rules applicable to sections 146 and 147.
``Sec. 149. Charitable remainder trusts.
``Sec. 150. Definitions applicable to excess distribution rules.
``Sec. 151. Accumulation distribution allocated to preceding years.
``Sec. 152. Treatment of amounts deemed distributed by trust in
preceding years.
``Sec. 153. Trust income, deductions, and credits attributable to
grantors and others as substantial owners.
``Sec. 154. Definitions and rules.
``Sec. 155. Reversionary interests.
``Sec. 156. Power to control beneficial enjoyment.
``Sec. 157. Administrative powers.
``Sec. 158. Power to revoke.
``Sec. 159. Income for benefit of grantor.
``Sec. 160. Person other than grantor treated as substantial owner.
``Sec. 161. Foreign trusts having one or more United States
beneficiaries.
``Sec. 162. Limitation on charitable deduction.
``Sec. 163. Income of an estate or trust in case of divorce, etc.
``Sec. 164. Recognition of gain on certain transfers to certain foreign
persons and estates.
``Sec. 165. Treatment of funeral trusts.
``Sec. 166. Income in respect of a decedent.
``SEC. 140. PREPAYMENT OF TAX BY TRUSTS AND ESTATES.
``(a) Prepayment of Tax.--A trust or estate shall prepay the
Simplified USA Tax for individuals in accordance with the provisions of
this subchapter.
``(b) Imposition of Tax.--There is hereby imposed a tax on the
taxable income of trusts and estates (as determined in accordance with
this subchapter) a tax determined as follows:
``If taxable income is: The tax is:
Not over $1,600................
15% of taxable income.
Over $1,600, but not over
$3,800.
$240, plus 25% of the excess
over $1,600.
Over $3,800....................
$790, plus 30% of the excess
over $3,800.
``(c) Inflation Adjustment.--The schedule in subsection (b) shall
be adjusted for inflation in accordance with section 25.
``(d) Business Activities.--
``(1) Tax on business activity determined at business
level.--If a trust engages in business activity (as defined in
section 206(b)), it shall be considered a business entity with
respect to such activities for purposes of the business tax
under chapter 2. The business entity shall be considered an
asset of the trust.
``(2) Business entity as sole beneficiary.--If the only
beneficiaries of a trust are business entities, no tax shall be
imposed on such trust under this subchapter.
``SEC. 141. APPLICATION OF TAX.
``(a) In General.--The tax imposed by section 140 shall apply to
the taxable income of estates or of any kind of property held in trust,
including--
``(1) income accumulated in trust for the benefit of unborn
or unascertained persons or persons with contingent interests,
and income accumulated or held for future distribution under
the terms of the will or trust;
``(2) income which is to be distributed currently by the
fiduciary to the beneficiaries, and income collected by a
guardian of an infant which is to be held or distributed as the
court may direct;
``(3) income received by estates of deceased persons during
the period of administration or settlement of the estate; and
``(4) income which, in the discretion of the fiduciary, may
be either distributed to the beneficiaries or accumulated.
``(b) Computation and Payment.--The taxable income of an estate or
trust shall be computed in the same manner as in the case of an
individual, except as otherwise provided in this subchapter. The tax
shall be computed on such taxable income and shall be paid by the
fiduciary. For purposes of this subsection, a foreign trust or foreign
estate shall be treated as a nonresident alien individual who is not
present in the United States at any time.
``(c) Exclusion of Includible Gain From Taxable Income.--The
taxable income of a trust does not include the amount of any includible
gain as defined in section 144(b) reduced by any deductions properly
allocable thereto.
``SEC. 142. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.
``(a) USA Deduction and Family and Work Credits.--
``(1) No deduction or allowance.--A trust or estate shall
not be allowed any USA Deductions or a family or work credit.
``(2) Special deduction.--For purposes of determining
taxable income, trusts and estates shall be entitled to the
following deductions from gross income--
``(A) Estate.--An estate shall be allowed a
deduction of $600.
``(B) Distributing trust.--A trust which, under its
governing instrument, is required to distribute all of
its income currently shall be allowed a deduction of
$300.
``(C) Other trusts.--Trusts not described in
subparagraph (B) shall be allowed a deduction of $100.
``(b) Deduction for Amounts Paid or Permanently Set Aside for a
Charitable Purpose.--
``(1) General rule.--In the case of an estate or trust,
there shall be allowed as a deduction in computing its taxable
income (in lieu of the philanthropic transfer deduction) any
amount of the gross income, without limitation, which pursuant
to the terms of the governing instrument is, during the taxable
year, paid for a purpose specified in section 101(c)
(determined without regard to section 101(c)(2)(A)). If a
charitable contribution is paid after the close of such taxable
year and on or before the last day of the year following the
close of such taxable year, then the trustee or administrator
may elect to treat such contribution as paid during such
taxable year. The election shall be made at such time and in
such manner as the Secretary prescribes by regulations.
``(2) Pooled income funds.--In the case of a pooled income
fund (as defined in paragraph (3)), there shall also be allowed
as a deduction in computing its taxable income any amount of
the gross income attributable to gain from the sale of a
capital asset held for more than 1 year, without limitation,
which pursuant to the terms of the governing instrument is,
during the taxable year, permanently set aside for a purpose
specified in section 101(c).
``(3) Definition of pooled income fund.--For purposes of
paragraph (2), a pooled income fund is a trust--
``(A) to which each donor transfers property,
contributing an irrevocable remainder interest in such
property to or for the use of an organization described
in section 101(b)(1)(A) (other than in clauses (vii) or
(viii)), and retaining an income interest for the life
of one or more beneficiaries (living at the time of
such transfer),
``(B) in which the property transferred by each
donor is commingled with property transferred by other
donors who have made or make similar transfers,
``(C) which cannot have investments in securities
which are exempt from taxes imposed by this subtitle,
``(D) which includes only amounts received from
transfers which meet the requirements of this
paragraph,
``(E) which is maintained by the organization to
which the remainder interest is contributed and of
which no donor or beneficiary of an income interest is
a trustee, and
``(F) from which each beneficiary of an income
interest receives income, for each year for which he is
entitled to receive the income interest referred to in
subparagraph (A), determined by the rate of return
earned by the trust for such year.
For purposes of determining the amount of any charitable
contribution allowable by reason of a transfer of property to a
pooled fund, the value of the income interest shall be
determined on the basis of the highest rate of return earned by
the fund for any of the 3 taxable years immediately preceding
the taxable year of the fund in which the transfer is made. In
the case of funds in existence less than 3 taxable years
preceding the taxable year of the fund in which a transfer is
made the rate of return shall be deemed to be 6 percent per
annum, except that the Secretary may prescribe a different rate
of return.
``(c) Unused Loss Carryovers.--If on the termination of an estate
or trust, the estate or trust has a loss carryover then such carryover
shall be allowed as a deduction, in accordance with regulations
prescribed by the Secretary, to the beneficiaries succeeding to the
property of the estate or trust.
``(d) Certain Distributions by Cemetery Perpetual Care Funds.--In
the case of a cemetery perpetual care fund which--
``(1) was created pursuant to local law by a taxable
cemetery corporation for the care and maintenance of cemetery
property, and
``(2) is treated for the taxable year as a trust for
purposes of this subchapter, any amount distributed by such
fund for the care and maintenance of gravesites which have been
purchased from the cemetery corporation before the beginning of
the taxable year of the trust and with respect to which there
is an obligation to furnish care and maintenance shall be
considered to be a distribution solely for purposes of sections
144 and 146, but only to the extent that the aggregate amount
so distributed during the taxable year does not exceed $5
multiplied by the aggregate number of such gravesites.
``SEC. 143. DEFINITIONS AND RULES APPLICABLE TO SUBCHAPTER I.
``For purposes of this subchapter--
``(a) Distributable Net Income.--`Distributable net income' means,
with respect to any taxable year, the taxable income of the estate or
trust computed with the following modifications--
``(1) No deduction shall be taken under sections 144 and
146 (relating to additional deductions).
``(2) No deduction shall be taken under section 142(a)(2)
(relating to deduction for personal exemptions).
``(3) Gains from the sale or exchange of capital assets
shall be excluded to the extent that such gains are allocated
to corpus and are not (A) paid, credited, or required to be
distributed to any beneficiary during the taxable year, or (B)
paid, permanently set aside, or to be used for the purposes
specified in section 142(b). Losses from the sale or exchange
of capital assets shall be excluded, except to the extent such
losses are taken into account in determining the amount of
gains from the sale or exchange of capital assets which are
paid, credited, or required to be distributed to any
beneficiary during the taxable year.
``(4) For purposes only of rules under section __, there
shall be excluded those items of gross income constituting
extraordinary dividends or taxable stock dividends which the
fiduciary, acting in good faith, does not pay or credit to any
beneficiary by reason of his determination that such dividends
are allocable to corpus under the terms of the governing
instrument and applicable local law.
``(5) There shall be included any tax-exempt interest.
``(6) In the case of a foreign trust--
``(A) There shall be included the amounts of gross
income from sources without the United States, reduced
by any amounts which would be deductible in respect of
disbursements allocable to such income but for the
provisions of section 265(a)(1) (relating to
disallowance of certain deductions).
``(B) Gross income from sources within the United
States shall be determined without regard to section
894 (relating to income exempt under treaty).
``(C) Paragraph (3) shall not apply to a foreign
trust. In the case of such a trust, there shall be
included gains from the sale or exchange of capital
assets, reduced by losses from such sales or exchanges
to the extent such losses do not exceed gains from such
sales or exchanges.
If the estate or trust is allowed a deduction under section 142(b), the
amount of the modifications specified in paragraphs (5) and (6) shall
be reduced to the extent that the amount of income which is paid,
permanently set aside, or to be used for the purposes specified in
section 142(b) is deemed to consist of items specified in those
paragraphs. For this purpose, such amount shall (in the absence of
specific provisions in the governing instrument) be deemed to consist
of the same proportion of each class of items of income of the estate
or trust as the total of each class bears to the total of all classes.
``(b) Income.--`Income', when not preceded by the words `taxable',
`distributable net', `undistributed net', or `gross', means the amount
of income of the estate or trust for the taxable year determined under
the terms of the governing instrument and applicable local law. Items
of gross income constituting extraordinary dividends or taxable stock
dividends which the fiduciary, acting in good faith, determines to be
allocable to corpus under the terms of the governing instrument and
applicable local law shall not be considered income.
``(c) Beneficiary.--`Beneficiary' includes heir, legatee, devisee.
``(d) Treatment of Property Distributed in Kind.--
``(1) Basis of beneficiary.--The basis of any property
received by a beneficiary in a distribution from an estate or
trust shall be--
``(A) the adjusted basis of such property in the
hands of the estate or trust immediately before the
distribution, adjusted for
``(B) any gain or loss recognized to the estate or
trust on the distribution.
``(2) Amount of distribution.--In the case of any
distribution of property (other than cash), the amount taken
into account under sections 146(a)(2) and 147(a)(2) shall be
the lesser of--
``(A) the basis of such property in the hands of
the beneficiary (as determined under paragraph (1)), or
``(B) the fair market value of such property.
``(3) Election to recognize gain.--
``(A) In general.--In the case of any distribution
of property (other than cash) to which an election
under this paragraph applies--
``(i) paragraph (2) shall not apply,
``(ii) gain or loss shall be recognized by
the estate or trust in the same manner as if
such property had been sold to the distributee
at its fair market value, and
``(iii) the amount taken into account under
sections 146(a)(2) and 147(a)(2) shall be the
fair market value of such property.
``(B) Election.--Any election under this paragraph
shall apply to all distributions made by the estate or
trust during a taxable year and shall be made on the
return of such estate or trust for such taxable year.
Any such election, once made, may be revoked only with the
consent of the Secretary.
``(4) Exception for distributions described in section
148(a).--This subsection shall not apply to any distribution
described in section 148(a).
``(e) Treatment of Multiple Trusts.--For purposes of this
subchapter, under regulations prescribed by the Secretary, 2 or more
trusts shall be treated as 1 trust if--
``(1) such trusts have substantially the same grantor or
grantors and substantially the same primary beneficiary or
beneficiaries, and
``(2) a principal purpose of such trusts is the avoidance
of the tax imposed by this chapter.
For purposes of the preceding sentence, a husband and wife shall be
treated as 1 person.
``(f) Certain Payments of Estimated Tax Treated as Paid by
Beneficiary.--Under rules prescribed by the Secretary, a trustee may
elect to treat any portion of a payment of estimated tax made by such
trust for any taxable year of the trust as a payment made by a
beneficiary of such trust. This rule shall also apply in the case of a
taxable year reasonably expected to be the last taxable year of an
estate.
``(g) Foreign Trusts and Foreign Income.--The Secretary shall
prescribe special rules for foreign trusts and foreign income of
trusts. Those rules should generally be consistent with the rules under
subchapter J of chapter 1 of the Internal Revenue Code of 1986, except
that they shall take into account the principles of the Simplified USA
Tax.
``(h) Certain Revocable Trusts Treated as Part of Estate.--
``(1) In general.--If both the executor (if any) of an
estate and the trustee of a qualified revocable trust elect the
treatment provided in this section, such trust shall be treated
and taxed as part of such estate (and not as a separate trust)
for all taxable years of the estate ending after the date of
the decedent's death and before the applicable date.
``(2) Qualified revocable trust.--For purposes of this
subsection, `qualified revocable trust' means any trust (or
portion thereof) which was treated under section 158 as owned
by the decedent of the estate referred to in paragraph (1) by
reason of a power in the grantor (determined without regard to
section 154(e).
``(3) Applicable date.--For purposes of this subsection,
`applicable date' means--
``(A) if no return of tax imposed by chapter 11 is
required to be filed, the date which is 2 years after
the date of the decedent's death, and
``(B) if such a return is required to be filed, the
date which is 6 months after the date of the final
determination of the liability for tax imposed by
chapter 11.
``(4) Election.--The election under this subsection shall
be made not later than the time prescribed for filing the
return of tax imposed by this chapter for the first taxable
year of the estate (determined with regard to extensions) and,
once made, shall be irrevocable.
``SEC. 144. DEDUCTION FOR TRUSTS DISTRIBUTING CURRENT INCOME ONLY.
``(a) Deduction.--In the case of any trust the terms of which--
``(1) provide that all of its income is required to be
distributed currently, and
``(2) do not provide that any amounts are to be paid,
permanently set aside, or used for the purposes specified in
section 142(b) (relating to deduction for charitable, etc.,
purposes), there shall be allowed as a deduction in computing
the taxable income of the trust the amount of the income for
the taxable year which is required to be distributed currently.
This section shall not apply in any taxable year in which the
trust distributes amounts other than amounts of income
described in paragraph (1).
``(b) Limitation on Deduction.--If the amount of income required to
be distributed currently exceeds the distributable net income of the
trust for the taxable year, the deduction shall be limited to the
amount of the distributable net income. For this purpose, the
computation of distributable net income shall not include items of
income which are not included in the gross income of the trust and the
deductions allocable thereto.
``SEC. 145. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF
TRUSTS DISTRIBUTING CURRENT INCOME ONLY.
``(a) Inclusion.--Subject to subsection (b), the amount of income
for the taxable year required to be distributed currently by a trust
described in section 144 shall be included in the gross income of the
beneficiaries to whom the income is required to be distributed, whether
distributed or not. If such amount exceeds the distributable net
income, there shall be included in the gross income of each beneficiary
an amount which bears the same ratio to distributable net income as the
amount of income required to be distributed to such beneficiary bears
to the amount of income required to be distributed to all
beneficiaries.
``(b) Character of Amounts.--The amounts specified in subsection
(a) shall have the same character in the hands of the beneficiary as in
the hands of the trust. For this purpose, the amounts shall be treated
as consisting of the same proportion of each class of items entering
into the computation of distributable net income of the trust as the
total of each class bears to the total distributable net income of the
trust, unless the terms of the trust specifically allocate different
classes of income to different beneficiaries. In the application of the
preceding sentence, the items of deduction entering into the
computation of distributable net income shall be allocated among the
items of distributable net income in accordance with regulations
prescribed by the Secretary.
``SEC. 146. DEDUCTION FOR ESTATES AND TRUSTS ACCUMULATING INCOME OR
DISTRIBUTING CORPUS.
``(a) Deduction.--In any taxable year there shall be allowed as a
deduction in computing the taxable income of an estate or trust (other
than a trust described in section 144), the sum of--
``(1) any amount of income for such taxable year required
to be distributed currently (including any amount required to
be distributed which may be paid out of income or corpus to the
extent such amount is paid out of income for such taxable
year); and
``(2) any other amounts properly paid or credited or
required to be distributed for such taxable year;
but such deduction shall not exceed the distributable net
income of the estate or trust.
``(b) Character of Amounts Distributed.--The amount determined
under subsection (a) shall be treated as consisting of the same
proportion of each class of items entering into the computation of
distributable net income of the estate or trust as the total of each
class bears to the total distributable net income of the estate or
trust in the absence of the allocation of different classes of income
under the specific terms of the governing instrument. In the
application of the preceding sentence, the items of deduction entering
into the computation of distributable net income (including the
deduction allowed under section 142(b)) shall be allocated among the
items of distributable net income in accordance with regulations
prescribed by the Secretary.
``(c) Limitation on Deduction.--No deduction shall be allowed under
subsection (a) in respect of any portion of the amount allowed as a
deduction under that subsection (without regard to this subsection)
which is treated under subsection (b) as consisting of any item of
distributable net income which is not included in the gross income of
the estate or trust.
``SEC. 147. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF
ESTATES AND TRUSTS ACCUMULATING INCOME OR DISTRIBUTING
CORPUS.
``(a) Inclusion.--Subject to subsection (b), there shall be
included in the gross income of a beneficiary to whom an amount
specified in section 146(a) is paid, credited, or required to be
distributed (by an estate or trust described in section 146), the sum
of the following amounts:
``(1) Amounts required to be distributed currently.--The
amount of income for the taxable year required to be
distributed currently to such beneficiary, whether distributed
or not. If the amount of income required to be distributed
currently to all beneficiaries exceeds the distributable net
income (computed without the deduction allowed by section
142(b), relating to deduction for charitable, etc., purposes)
of the estate or trust, then, in lieu of the amount provided in
the preceding sentence, there shall be included in the gross
income of the beneficiary an amount which bears the same ratio
to distributable net income (as so computed) as the amount of
income required to be distributed currently to such beneficiary
bears to the amount required to be distributed currently to all
beneficiaries. For purposes of this section, the phrase `the
amount of income for the taxable year required to be
distributed currently' includes any amount required to be paid
out of income or corpus to the extent such amount is paid out
of income for such taxable year.
``(2) Other amounts distributed.--All other amounts
properly paid, credited, or required to be distributed to such
beneficiary for the taxable year. If the sum of--
``(A) the amount of income for the taxable year
required to be distributed currently to all
beneficiaries, and
``(B) all other amounts properly paid, credited, or
required to be distributed to all beneficiaries
exceeds the distributable net income of the estate or trust,
then, in lieu of the amount provided in the preceding sentence,
there shall be included in the gross income of the beneficiary
an amount which bears the same ratio to distributable net
income (reduced by the amounts specified in (A)) as the other
amounts properly paid, credited or required to be distributed
to the beneficiary bear to the other amounts properly paid,
credited, or required to be distributed to all beneficiaries.
``(b) Character of Amounts.--The amounts determined under
subsection (a) shall have the same character in the hands of the
beneficiary as in the hands of the estate or trust. For this purpose,
the amounts shall be treated as consisting of the same proportion of
each class of items entering into the computation of distributable net
income as the total of each class bears to the total distributable net
income of the estate or trust unless the terms of the governing
instrument specifically allocate different classes of income to
different beneficiaries. In the application of the preceding sentence,
the items of deduction entering into the computation of distributable
net income (including the deduction allowed under section 142(b)) shall
be allocated among the items of distributable net income in accordance
with regulations prescribed by the Secretary. In the application of
this subsection to the amount determined under paragraph (1) of
subsection (a), distributable net income shall be computed without
regard to any portion of the deduction under section 142(b) which is
not attributable to income of the taxable year.
``SEC. 148. SPECIAL RULES APPLICABLE TO SECTIONS 146 AND 147.
``(a) Exclusions.--There shall not be included as amounts falling
within section 146(a) or 147(a)--
``(1) Gifts, bequests, etc.--Any amount which, under the
terms of the governing instrument, is properly paid or credited
as a gift or bequest of a specific sum of money or of specific
property and which is paid or credited all at once or in not
more than 3 installments. For this purpose an amount which can
be paid or credited only from the income of the estate or trust
shall not be considered as a gift or bequest of a specific sum
of money.
``(2) Charitable, etc., distributions.--Any amount paid or
permanently set aside or otherwise qualifying for the deduction
provided in section 142(b) (computed without regard to sections
508(d), 162, and 4948(c)(4)).
``(3) Denial of double deduction.--Any amount paid,
credited, or distributed in the taxable year, if section 144 or
section 146 applied to such amount for a preceding taxable year
of an estate or trust because credited or required to be
distributed in such preceding taxable year.
``(b) Distributions in First Sixty-Five Days of Taxable Year.--
``(1) General rule.--If within the first 65 days of any
taxable year of an estate or a trust, an amount is properly
paid or credited, such amount shall be considered paid or
credited on the last day of the preceding taxable year.
``(2) Limitation.--Paragraph (1) shall apply with respect
to any taxable year of an estate or a trust only if the
executor of such estate or the fiduciary of such trust (as the
case may be) elects, in such manner and at such time as the
Secretary prescribes by regulations, to have paragraph (1)
apply for such taxable year.
``(c) Separate Shares Treated as Separate Estates or Trusts.--For
the sole purpose of determining the amount of distributable net income
in the application of sections 146 and 147, in the case of a single
trust having more than one beneficiary, substantially separate and
independent shares of different beneficiaries in the trust shall be
treated as separate trusts. Rules similar to the rules of the preceding
provisions of this subsection shall apply to treat substantially
separate and independent shares of different beneficiaries in an estate
having more than 1 beneficiary as separate estates. The existence of
such substantially separate and independent shares and the manner of
treatment as separate trusts or estates, including the application of
sections 150 through 152, shall be determined in accordance with
regulations prescribed by the Secretary.
``SEC. 149. CHARITABLE REMAINDER TRUSTS.
``(a) General Rule.--Notwithstanding any other provision of this
subchapter, the provisions of this section shall, in accordance with
regulations prescribed by the Secretary, apply in the case of a
charitable remainder annuity trust and a charitable remainder unitrust.
``(b) Character of Distributions.--Amounts distributed by a
charitable remainder annuity trust or by a charitable remainder
unitrust shall be considered as having the following characteristics in
the hands of a beneficiary to whom is paid the annuity described in
subsection (d)(1)(A) or the payment described in subsection (d)(2)(A):
``(1) First, as amounts of income (other than gains, and
amounts treated as gains, from the sale or other disposition of
capital assets) includible in gross income to the extent of
such income of the trust for the year and such undistributed
income of the trust for prior years;
``(2) Second, as a capital gain to the extent of the
capital gain of the trust for the year and the undistributed
capital gain of the trust for prior years;
``(3) Third, as other income to the extent of such income
of the trust for the year and such undistributed income of the
trust for prior years; and
``(4) Fourth, as a distribution of trust corpus.
For purposes of this section, the trust shall determine the amount of
its undistributed capital gain on a cumulative net basis.
``(c) Exemption From Income Taxes.--A charitable remainder annuity
trust and a charitable remainder unitrust shall, for any taxable year,
not be subject to any tax imposed by this chapter. Any such trust shall
be liable for tax on its unrelated business taxable income (within the
meaning of section 255).
``(d) Definitions.--
``(1) Charitable remainder annuity trust.--For purposes of
this section, a charitable remainder annuity trust is a trust--
``(A) from which a sum certain (which is not less
than 5 percent nor more than 50 percent of the initial
net fair market value of all property placed in trust)
is to be paid, not less often than annually, to one or
more persons (at least one of which is not an
organization described in section 101(c) and, in the
case of individuals, only to an individual who is
living at the time of the creation of the trust) for a
term of years (not in excess of 20 years) or for the
life or lives of such individual or individuals,
``(B) from which no amount other than the payments
described in subparagraph (A) and other than qualified
gratuitous transfers described in subparagraph (C) may
be paid to or for the use of any person other than an
organization described in section 101(c),
``(C) following the termination of the payments
described in subparagraph (A), the remainder interest
in the trust is to be transferred to, or for the use
of, an organization described in section 101(c) or is
to be retained by the trust for such a use or, to the
extent the remainder interest is in qualified employer
securities (as defined in subsection (g)(4)), all or
part of such securities are to be transferred to an
employee stock ownership plan (as defined in section
4975(e)(7) in a qualified gratuitous transfer (as
defined by subsection (g)).
``(D) the value (determined under section 7520) of
such remainder interest is at least 10 percent of the
initial net fair market value of all property placed in
the trust.
``(2) Charitable remainder unitrust.--For purposes of this
section, a charitable remainder unitrust is a trust--
``(A) from which a fixed percentage (which is not
less than 5 percent nor more than 50 percent) of the
net fair market value of its assets, valued annually,
is to be paid, not less often than annually, to one or
more persons (at least one of which is not an
organization described in section 101(c) and, in the
case of individuals, only to an individual who is
living at the time of the creation of the trust) for a
term of years (not in excess of 20 years) or for the
life or lives of such individual or individuals,
``(B) from which no amount other than the payments
described in subparagraph (A) and other than qualified
gratuitous transfers described in subparagraph (C) may
be paid to or for the use of any person other than an
organization described in section 101(c),
``(C) following the termination of the payments
described in subparagraph (A), the remainder interest
in the trust is to be transferred to, or for the use
of, an organization described in section 101(c) or is
to be retained by the trust for such a use or, to the
extent the remainder interest is in qualified employer
securities (as defined in subsection (g)(4)), all or
part of such securities are to be transferred to an
employee stock ownership plan (as defined in section
4975(e)(7) in a qualified gratuitous transfer (as
defined by subsection (g)).
``(D) with respect to each contribution of property
to the trust, the value (determined under section 7520
of such remainder interest in such property is at least
10 percent of the net fair market value of such
property as of the date such property is contributed to
the trust.
``(3) Exception.--Notwithstanding the provisions of
paragraphs (2)(A) and (B), the trust instrument may provide
that the trustee shall pay the income beneficiary for any
year--
``(A) the amount of the trust income, if such
amount is less than the amount required to be
distributed under paragraph (2)(A), and
``(B) any amount of the trust income which is in
excess of the amount required to be distributed under
paragraph (2)(A), to the extent that (by reason of
subparagraph (A)) the aggregate of the amounts paid in
prior years was less than the aggregate of such
required amounts.
``(4) Severance of certain additional contributions.--If--
``(A) any contribution is made to a trust which
before the contribution is a charitable remainder
unitrust, and
``(B) such contribution would (but for this
paragraph) result in such trust ceasing to be a
charitable unitrust by reason of paragraph (2)(D), such
contribution shall be treated as a transfer to a
separate trust under regulations prescribed by the
Secretary.
``(e) Valuation for Purposes of Charitable Contribution.--For
purposes of determining the amount of any charitable contribution, the
remainder interest of a charitable remainder annuity trust or
charitable remainder unitrust shall be computed on the basis that an
amount equal to 5 percent of the net fair market value of its assets
(or a greater amount, if required under the terms of the trust
instrument) is to be distributed each year.
``(f) Certain Contingencies Permitted.--
``(1) General rule.--If a trust would, but for a qualified
contingency, meet the requirements of paragraph (1)(A) or
(2)(A) of subsection (d), such trust shall be treated as
meeting such requirements.
``(2) Value determined without regard to qualified
contingency.--For purposes of determining the amount of any
charitable contribution (or the actuarial value of any
interest), a qualified contingency shall not be taken into
account.
``(3) Qualified contingency.--For purposes of this
subsection, the term `qualified contingency' means any
provision of a trust which provides that, upon the happening of
a contingency, the payments described in paragraph (1)(A) or
(2)(A) of subsection (d) (as the case may be) will terminate
not later than such payments would otherwise terminate under
the trust.
``(g) Qualified Gratuitous Transfer of Qualified Employer
Securities.--
``(1) In general.--For purposes of this section, the term
`qualified gratuitous transfer' means a transfer of qualified
employer securities to an employee stock ownership plan (as
defined in section 4975(e)(7) but only to the extent that--
``(A) the securities transferred previously passed
from a decedent dying before January 1, 2005, to a
trust described in paragraph (1) or (2) of subsection
(d),
``(B) no deduction under section 404 is allowable
with respect to such transfer,
``(C) such plan contains the provisions required by
paragraph (3),
``(D) such plan treats such securities as being
attributable to employer contributions but without
regard to the limitations otherwise applicable to such
contributions under section 404, and
``(E) the employer whose employees are covered by
the plan described in this paragraph files with the
Secretary a verified written statement consenting to
the application of sections 4978 and 4979A with respect
to such employer.
``(2) Exception.--The term `qualified gratuitous transfer'
shall not include a transfer of qualified employer securities
to an employee stock ownership plan unless--
``(A) such plan was in existence on August 1, 1996,
``(B) at the time of the transfer, the decedent and
members of the decedent's family (within the meaning of
section 171(a)(6)(D)) own (directly or through
constructive ownership rules) no more than 10 percent
of the value of the stock of the corporation referred
to in paragraph (4), and
``(C) immediately after the transfer, such plan
owns (after the application of section 318(a)(4) at
least 60 percent of the value of the outstanding stock
of the corporation.
``(3) Plan requirements.--A plan contains the provisions
required by this paragraph if such plan provides that--
``(A) the qualified employer securities so
transferred are allocated to plan participants in a
manner consistent with section 401(a)(4),
``(B) plan participants are entitled to direct the
plan as to the manner in which such securities which
are entitled to vote and are allocated to the account
of such participant are to be voted,
``(C) an independent trustee votes the securities
so transferred which are not allocated to plan
participants,
``(D) each participant who is entitled to a
distribution from the plan has the rights described in
subparagraphs (A) and (B) of section 409(h)(1),
``(E) such securities are held in a suspense
account under the plan to be allocated each year, up to
the limitations under section 415(c), after first
allocating all other annual additions for the
limitation year, up to the limitations under sections
415 (c) and (e), and
``(F) on termination of the plan, all securities so
transferred which are not allocated to plan
participants as of such termination are to be
transferred to, or for the use of, an organization
described in section 101(c). For purposes of the
preceding sentence, the term `independent trustee'
means any trustee who is not a member of the family
(within the meaning of section 171(a)(6)(D)) of the
decedent or a 5-percent shareholder. A plan shall not
fail to be treated as meeting the requirements of
section 401(a) by reason of meeting the requirements of
this subsection.
``(4) Qualified employer securities.--For purposes of this
section, the term `qualified employer securities' means
employer securities (as defined in section 409(l)) which are
issued by a domestic corporation--
``(A) which has no outstanding stock which is
readily tradable on an established securities market,
and
``(B) which has only 1 class of stock.
``(5) Treatment of securities allocated by employee stock
ownership plan to persons related to decedent or 5-percent
shareholders.--
``(A) In general.--If any portion of the assets of
the plan attributable to securities acquired by the
plan in a qualified gratuitous transfer are allocated
to the account of--
``(i) any person who is related to the
decedent (within the meaning of section
171(a)(5) or a member of the decedent's family
(within the meaning of section 171(a)(6)(D), or
``(ii) any person who, at the time of such
allocation or at any time during the 1-year
period ending on the date of the acquisition of
qualified employer securities by the plan, is a
5-percent shareholder of the employer
maintaining the plan, the plan shall be treated
as having distributed (at the time of such
allocation) to such person or shareholder the
amount so allocated.
``(B) 5-percent shareholder.--For purposes of
subparagraph (A), the term `5-percent shareholder'
means any person who owns (directly or through the
application of constructive ownership rules) more than
5 percent of the outstanding stock of the corporation
which issued such qualified employer securities or of
any corporation which is a member of the same
controlled group of corporations (within the meaning of
section 409(l)(4)) as such corporation.
``(C) Cross reference.--For excise tax on
allocations described in subparagraph (A), see section
4979A.
``(6) Tax on failure to transfer unallocated securities to
charity on termination of plan.--If the requirements of
paragraph (3)(F) are not met with respect to any securities,
there is hereby imposed a tax on the employer maintaining the
plan in an amount equal to the sum of--
``(A) the amount of the increase in the tax which
would be imposed by chapter 11 if such securities were
not transferred as described in paragraph (1), and
``(B) interest on such amount at the underpayment
rate under section 6621 (and compounded daily) from the
due date for filing the return of the tax imposed by
chapter 11.
``SEC. 150. DEFINITIONS APPLICABLE TO EXCESS DISTRIBUTION RULES.
``(a) Undistributed Net Income.--For purposes of sections 150
through 152, the term `undistributed net income' for any taxable year
means the amount by which the distributable net income of the trust for
such taxable year exceeds the sum of--
``(1) the amounts for such taxable year specified in
paragraphs (1) and (2) of section 146(a), and
``(2) the amount of taxes imposed on the trust attributable
to such distributable net income.
``(b) Accumulation Distribution.--For purposes of sections 150
through 152, except as provided in subsection (c), the term
`accumulation distribution' means, for any taxable year of the trust,
the amount by which--
``(1) the amounts specified in paragraph (2) of section
146(a) for such taxable year, exceed
``(2) distributable net income for such year reduced (but
not below zero) by the amounts specified in paragraph (1) of
section 146(a).
For purposes of section 152 (other than subsection (c) thereof,
relating to multiple trusts), the amounts specified in paragraph (2) of
section 146(a) shall not include amounts properly paid, credited, or
required to be distributed to a beneficiary from a trust (other than a
foreign trust) as income accumulated before the birth of such
beneficiary or before such beneficiary attains the age of 21. If the
amounts properly paid, credited, or required to be distributed by the
trust for the taxable year do not exceed the income of the trust for
such year, there shall be no accumulation distribution for such year.
``(c) Exception for Accumulation Distributions From Certain
Domestic Trusts.--For purposes of sections 150 through 152--
``(1) In general.--In the case of a qualified trust, any
distribution in any taxable year beginning after the date of
the enactment of this subsection shall be computed without
regard to any undistributed net income.
``(2) Qualified trust.--For purposes of this subsection,
the term `qualified trust' means any trust other than--
``(A) a foreign trust (or, except as provided in
regulations, a domestic trust which at any time was a
foreign trust), or
``(B) a trust created before March 1, 1984, unless
it is established that the trust would not be
aggregated with other trusts under section 143(f) if
such section applied to such trust.
``(d) Taxes Imposed on the Trust.--For purposes of sections 150
through 152--
``(1) In general.--The term `taxes imposed on the trust'
means the amount of the taxes which are imposed for any taxable
year of the trust under this chapter (without regard to
sections 150 through 152) and which, under regulations
prescribed by the Secretary, are properly allocable to the
undistributed portions of distributable net income and gains in
excess of losses from sales or exchanges of capital assets. The
amount determined in the preceding sentence shall be reduced by
any amount of such taxes deemed distributed under section
151(b) and (c) to any beneficiary.
``(2) Foreign trusts.--In the case of any foreign trust,
the term `taxes imposed on the trust' includes the amount,
reduced as provided in the last sentence of paragraph (1), of
any income, war profits, and excess profits taxes imposed by
any foreign country or possession of the United States on such
foreign trust which, as determined under paragraph (1), are so
properly allocable. Under rules or regulations prescribed by
the Secretary, in the case of any foreign trust of which the
settlor or another person would be treated as owner of any
portion of the trust but for section 154(f), the term `taxes
imposed on the trust' includes the allocable amount of any
income, war profits, and excess profits taxes imposed by any
foreign country or possession of the United States on the
settlor or such other person in respect of trust income.
``SEC. 151. ACCUMULATION DISTRIBUTION ALLOCATED TO PRECEDING YEARS.
``(a) Amount Allocated.--In the case of a trust which is subject to
sections 146 through 149, the amount of the accumulation distribution
of such trust for a taxable year shall be deemed to be an amount within
the meaning of paragraph (2) of section 146(a) distributed on the last
day of each of the preceding taxable years, commencing with the
earliest of such years, to the extent that such amount exceeds the
total of any undistributed net income for all earlier preceding taxable
years. The amount deemed to be distributed in any such preceding
taxable year under the preceding sentence shall not exceed the
undistributed net income for such preceding taxable year. For purposes
of this subsection, undistributed net income for each of such preceding
taxable years shall be computed without regard to such accumulation
distribution and without regard to any accumulation distribution
determined for any succeeding taxable year.
``(b) Total Taxes Deemed Distributed.--If any portion of an
accumulation distribution for any taxable year is deemed under
subsection (a) to be an amount within the meaning of paragraph (2) of
section 146(a) distributed on the last day of any preceding taxable
year, and such portion of such distribution is not less than the
undistributed net income for such preceding taxable year, the trust
shall be deemed to have distributed on the last day of such preceding
taxable year an additional amount within the meaning of paragraph (2)
of section 146(a). Such additional amount shall be equal to the taxes
imposed on the trust for such preceding taxable year attributable to
the undistributed net income. For purposes of this subsection, the
undistributed net income and the taxes imposed on the trust for such
preceding taxable year attributable to such undistributed net income
shall be computed without regard to such accumulation distribution and
without regard to any accumulation distribution determined for any
succeeding taxable year.
``(c) Pro Rata Portion of Taxes Deemed Distributed.--If any portion
of an accumulation distribution for any taxable year is deemed under
subsection (a) to be an amount within the meaning of paragraph (2) of
section 146(a) distributed on the last day of any preceding taxable
year and such portion of the accumulation distribution is less than the
undistributed net income for such preceding taxable year, the trust
shall be deemed to have distributed on the last day of such preceding
taxable year an additional amount within the meaning of paragraph (2)
of section 146(a). Such additional amount shall be equal to the taxes
imposed on the trust for such taxable year attributable to the
undistributed net income multiplied by the ratio of the portion of the
accumulation distribution to the undistributed net income of the trust
for such year. For purposes of this subsection, the undistributed net
income and the taxes imposed on the trust for such preceding taxable
year attributable to such undistributed net income shall be computed
without regard to the accumulation distribution and without regard to
any accumulation distribution determined for any succeeding taxable
year.
``(d) Rule When Information Is not Available.--If adequate records
are not available to determine the proper application of this
subchapter to an amount distributed by a trust, such amount shall be
deemed to be an accumulation distribution consisting of undistributed
net income earned during the earliest preceding taxable year of the
trust in which it can be established that the trust was in existence.
``(e) Denial of Refund to Trusts and Beneficiaries.--No refund or
credit shall be allowed to a trust or a beneficiary of such trust for
any preceding taxable year by reason of a distribution deemed to have
been made by such trust in such year under this section.
``SEC. 152. TREATMENT OF AMOUNTS DEEMED DISTRIBUTED BY TRUST IN
PRECEDING YEARS.
``(a) General Rule.--The total of the amounts which are treated
under section 151 as having been distributed by a trust in a preceding
taxable year shall be included in the income of a beneficiary of the
trust when paid, credited, or required to be distributed to the extent
that such total would have been included in the income of such
beneficiary under section 147(a)(2) (and, with respect to any tax-
exempt interest to which section 103 applies, under section 147(b)) if
such total had been paid to such beneficiary on the last day of such
preceding taxable year. The tax imposed by this subtitle on a
beneficiary for a taxable year in which any such amount is included in
his income shall be determined only as provided in this section and
shall consist of the sum of--
``(1) a partial tax computed on the taxable income reduced
by an amount equal to the total of such amounts, at the rate
and in the manner as if this section had not been enacted,
``(2) a partial tax determined as provided in subsection
(b) of this section, and
``(3) in the case of a foreign trust, the interest charge
determined as provided in section 152.
``(b) Tax on Distribution.--
``(1) In general.--The partial tax imposed by subsection
(a)(2) shall be determined.
``(A) by determining the number of preceding
taxable years of the trust on the last day of which an
amount is deemed under section 151(a) to have been
distributed,
``(B) by taking from the 5 taxable years
immediately preceding the year of the accumulation
distribution the 1 taxable year for which the
beneficiary's taxable income was the highest and the 1
taxable year for which his taxable income was the
lowest,
``(C) by adding to the beneficiary's taxable income
for each of the 3 taxable years remaining after the
application of subparagraph (B) an amount determined by
dividing the amount deemed distributed under section
151 and required to be included in income under
subsection (a) by the number of preceding taxable years
determined under subparagraph (A), and
``(D) by determining the average increase in tax
for the 3 taxable years referred to in subparagraph (C)
resulting from the application of such subparagraph.
The partial tax imposed by subsection (a)(2) shall be the
excess (if any) of the average increase in tax determined under
subparagraph (D), multiplied by the number of preceding taxable
years determined under subparagraph (A), over the amount of
taxes (other than the amount of taxes described in section
150(d)(2)) deemed distributed to the beneficiary under sections
151 (b) and (c).
``(2) Treatment of loss years.--For purposes of paragraph
(1), the taxable income of the beneficiary for any taxable year
shall be deemed to be not less than zero.
``(3) Certain preceding taxable years not taken into
account.--For purposes of paragraph (1), if the amount of the
undistributed net income deemed distributed in any preceding
taxable year of the trust is less than 25 percent of the amount
of the accumulation distribution divided by the number of
preceding taxable years to which the accumulation distribution
is allocated under section 151(a), the number of preceding
taxable years of the trust with respect to which an amount is
deemed distributed to a beneficiary under section 151(a) shall
be determined without regard to such year.
``(4) Effect of other accumulation distributions.--In
computing the partial tax under paragraph (1) for any
beneficiary, the income of such beneficiary for each of his
prior taxable years shall include amounts previously deemed
distributed to such beneficiary in such year under section 151
as a result of prior accumulation distributions (whether from
the same or another trust).
``(5) Multiple distributions in the same taxable year.--In
the case of accumulation distributions made from more than one
trust which are includible in the income of a beneficiary in
the same taxable year, the distributions shall be deemed to
have been made consecutively in whichever order the beneficiary
shall determine. Generation-skipping transfer bears to the
total accumulation distribution.
``(c) Special Rule for Multiple Trusts.--
``(1) In general.--If, in the same prior taxable year of
the beneficiary in which any part of the accumulation
distribution from a trust (hereinafter in this paragraph
referred to as `third trust') is deemed under section 151(a) to
have been distributed to such beneficiary, some part of prior
distributions by each of 2 or more other trusts is deemed under
section 151(a) to have been distributed to such beneficiary,
then subsections (b) and (c) of section 151 shall not apply
with respect to such part of the accumulation distribution from
such third trust.
``(2) Accumulation distributions from trust not taken into
account unless they equal or exceed $1,000.--For purposes of
paragraph (1), an accumulation distribution from a trust to a
beneficiary shall be taken into account only if such
distribution, when added to any prior accumulation
distributions from such trust which are deemed under section
151(a) to have been distributed to such beneficiary for the
same prior taxable year of the beneficiary, equals or exceeds
$1,000.
``SEC. 153. TRUST INCOME, DEDUCTIONS, AND CREDITS ATTRIBUTABLE TO
GRANTORS AND OTHERS AS SUBSTANTIAL OWNERS.
``Where it is specified in sections 153 through 161 that the
grantor or another person shall be treated as the owner of any portion
of a trust, there shall then be included in computing the taxable
income and credits of the grantor or the other person those items of
income, deductions, and credits against tax of the trust which are
attributable to that portion of the trust to the extent that such items
would be taken into account under this chapter in computing taxable
income or credits against the tax of an individual. Any remaining
portion of the trust shall be subject to sections 140 through 152. No
items of a trust shall be included in computing the taxable income and
credits of the grantor or of any other person solely on the grounds of
his dominion and control over the trust under section 61 (relating to
definition of gross income) or any other provision of this title,
except as specified in this subpart.
``SEC. 154. DEFINITIONS AND RULES.
``(a) Adverse Party.--For purposes of sections 153 through 160,
`adverse party' means any person having a substantial beneficial
interest in the trust which would be adversely affected by the exercise
or nonexercise of the power which he possesses respecting the trust. A
person having a general power of appointment over the trust property
shall be deemed to have a beneficial interest in the trust.
``(b) Nonadverse Party.--For purposes of sections 153 through 160,
`nonadverse party' means any person who is not an adverse party.
``(c) Related or Subordinate Party.--For purposes of sections 153
through 161, `related or subordinate party' means any nonadverse party
who is--
``(1) the grantor's spouse if living with the grantor;
``(2) any one of the following: The grantor's father,
mother, issue, brother or sister; an employee of the grantor; a
corporation or any employee of a corporation in which the stock
holdings of the grantor and the trust are significant from the
viewpoint of voting control; a subordinate employee of a
corporation in which the grantor is an executive.
For purposes of subsection (f) and sections 156 and 157, a related or
subordinate party shall be presumed to be subservient to the grantor in
respect of the exercise or nonexercise of the powers conferred on him
unless such party is shown not to be subservient by a preponderance of
the evidence.
``(d) Rule Where Power Is Subject to Condition Precedent.--A person
shall be considered to have a power described in sections 153 through
161 even though the exercise of the power is subject to a precedent
giving of notice or takes effect only on the expiration of a certain
period after the exercise of the power.
``(e) Grantor Treated as Holding Any Power or Interest of Grantor's
Spouse.--
``(1) In general.--For purposes of sections 153 through
160, a grantor shall be treated as holding any power or
interest held by--
``(A) any individual who was the spouse of the
grantor at the time of the creation of such power or
interest, or
``(B) any individual who became the spouse of the
grantor after the creation of such power or interest,
but only with respect to periods after such individual
became the spouse of the grantor.
``(2) Marital status.--For purposes of paragraph (1)(A), an
individual legally separated from his spouse under a decree of
divorce or of separate maintenance shall not be considered as
married.
``(f) Rules not to Result in Foreign Ownership.--
``(1) In general.--Notwithstanding any other provision in
sections 153 through 160, sections 153 through 160 shall apply
only to the extent such application results in an amount (if
any) being currently taken into account (directly or through 1
or more entities) under this chapter in computing the income of
a citizen or resident of the United States or a domestic
corporation.
``(2) Exceptions.--
``(A) Certain revocable and irrevocable trusts.--
Paragraph (1) shall not apply to any portion of a trust
if--
``(i) the power to revest absolutely in the
grantor title to the trust property to which
such portion is attributable is exercisable
solely by the grantor without the approval or
consent of any other person or with the consent
of a related or subordinate party who is
subservient to the grantor, or
``(ii) the only amounts distributable from
such portion (whether income or corpus) during
the lifetime of the grantor are amounts
distributable to the grantor or the spouse of
the grantor.
``(B) Compensatory trusts.--Except as provided in
regulations, paragraph (1) shall not apply to any
portion of a trust distributions from which are taxable
as compensation for services rendered.
``(3) Special rules.--Except as otherwise provided in
regulations prescribed by the Secretary, a controlled foreign
corporation shall be treated as a domestic corporation for
purposes of paragraph (1).
``(4) Recharacterization of purported gifts.--In the case
of any transfer directly or indirectly from a partnership or
foreign corporation which the transferee treats as a gift or
bequest, the Secretary may recharacterize such transfer in such
circumstances as the Secretary determines to be appropriate to
prevent the avoidance of the purposes of this subsection.
``(5) Special rule where grantor is foreign person.--If--
``(A) but for this subsection, a foreign person
would be treated as the owner of any portion of a
trust, and
``(B) such trust has a beneficiary who is a United
States person, such beneficiary shall be treated as the
grantor of such portion to the extent such beneficiary
has made (directly or indirectly) transfers of property
(other than in a sale for full and adequate
consideration) to such foreign person.
``(6) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this subsection, including regulations providing
that paragraph (1) shall not apply in appropriate cases.
``SEC. 155. REVERSIONARY INTERESTS.
``(a) General Rule.--The grantor shall be treated as the owner of
any portion of a trust in which he has a reversionary interest in
either the corpus or the income therefrom, if, as of the inception of
that portion of the trust, the value of such interest exceeds 5 percent
of the value of such portion.
``(b) Reversionary Interest Taking Effect at Death of Minor Lineal
Descendant Beneficiary.--In the case of any beneficiary who--
``(1) is a lineal descendant of the grantor, and
``(2) holds all of the present interests in any portion of
a trust, the grantor shall not be treated under subsection (a)
as the owner of such portion solely by reason of a reversionary
interest in such portion which takes effect upon the death of
such beneficiary before such beneficiary attains age 21.
``(c) Special Rule for Determining Value of Reversionary
Interest.--For purposes of subsection (a), the value of the grantor's
reversionary interest shall be determined by assuming the maximum
exercise of discretion in favor of the grantor.
``(d) Postponement of Date Specified for Reacquisition.--Any
postponement of the date specified for the reacquisition of possession
or enjoyment of the reversionary interest shall be treated as a new
transfer in trust commencing with the date on which the postponement is
effective and terminating with the date prescribed by the postponement.
However, income for any period shall not be included in the income of
the grantor by reason of the preceding sentence if such income would
not be so includible in the absence of such postponement.
``SEC. 156. POWER TO CONTROL BENEFICIAL ENJOYMENT.
``(a) General Rule.--The grantor shall be treated as the owner of
any portion of a trust in respect of which the beneficial enjoyment of
the corpus or the income therefrom is subject to a power of
disposition, exercisable by the grantor or a nonadverse party, or both,
without the approval or consent of any adverse party.
``(b) Exceptions for Certain Powers.--Subsection (a) shall not
apply to the following powers regardless of by whom held:
``(1) Power to apply income to support of a dependent.--A
power described in section 159(b) to the extent that the
grantor would not be subject to tax under that section.
``(2) Power affecting beneficial enjoyment only after
occurrence of event.--A power, the exercise of which can only
affect the beneficial enjoyment of the income for a period
commencing after the occurrence of an event such that a grantor
would not be treated as the owner under section 155 if the
power were a reversionary interest; but the grantor may be
treated as the owner after the occurrence of the event unless
the power is relinquished.
``(3) Power exercisable only by will.--A power exercisable
only by will, other than a power in the grantor to appoint by
will the income of the trust where the income is accumulated
for such disposition by the grantor or may be so accumulated in
the discretion of the grantor or a nonadverse party, or both,
without the approval or consent of any adverse party.
``(4) Power to allocate among charitable beneficiaries.--A
power to determine the beneficial enjoyment of the corpus or
the income therefrom if the corpus or income is irrevocably
payable for a purpose specified in section 101(c) (relating to
definition of charitable contributions) or to an employee stock
ownership plan (as defined in section 4975(e)(7)) in a
qualified gratuitous transfer (as defined in section
149(g)(1)).
``(5) Power to distribute corpus.--A power to distribute
corpus either--
``(A) to or for a beneficiary or beneficiaries or
to or for a class of beneficiaries (whether or not
income beneficiaries) provided that the power is
limited by a reasonably definite standard which is set
forth in the trust instrument; or
``(B) to or for any current income beneficiary,
provided that the distribution of corpus must be
chargeable against the proportionate share of corpus
held in trust for the payment of income to the
beneficiary as if the corpus constituted a separate
trust.
A power does not fall within the powers described in this
paragraph if any person has a power to add to the beneficiary
or beneficiaries or to a class of beneficiaries designated to
receive the income or corpus, except where such action is to
provide for after-born or after-adopted children.
``(6) Power to withhold income temporarily.--A power to
distribute or apply income to or for any current income
beneficiary or to accumulate the income for him, provided that
any accumulated income must ultimately be payable--
``(A) to the beneficiary from whom distribution or
application is withheld, to his estate, or to his
appointees (or persons named as alternate takers in
default of appointment) provided that such beneficiary
possesses a power of appointment which does not exclude
from the class of possible appointees any person other
than the beneficiary, his estate, his creditors, or the
creditors of his estate, or
``(B) on termination of the trust, or in
conjunction with a distribution of corpus which is
augmented by such accumulated income, to the current
income beneficiaries in shares which have been
irrevocably specified in the trust instrument.
Accumulated income shall be considered so payable although it
is provided that if any beneficiary does not survive a date of
distribution which could reasonably have been expected to occur
within the beneficiary's lifetime, the share of the deceased
beneficiary is to be paid to his appointees or to one or more
designated alternate takers (other than the grantor or the
grantor's estate) whose shares have been irrevocably specified.
A power does not fall within the powers described in this
paragraph if any person has a power to add to the beneficiary
or beneficiaries or to a class of beneficiaries designated to
receive the income or corpus except where such action is to
provide for after-born or after-adopted children.
``(7) Power to withhold income during disability of a
beneficiary.--A power exercisable only during--
``(A) the existence of a legal disability of any
current income beneficiary, or
``(B) the period during which any income
beneficiary shall be under the age of 21 years, to
distribute or apply income to or for such beneficiary
or to accumulate and add the income to corpus. A power
does not fall within the powers described in this
paragraph if any person has a power to add to the
beneficiary or beneficiaries or to a class of
beneficiaries designated to receive the income or
corpus, except where such action is to provide for
after-born or after-adopted children.
``(8) Power to allocate between corpus and income.--A power
to allocate receipts and disbursements as between corpus and
income, even though expressed in broad language.
``(c) Exception for Certain Powers of Independent Trustees.--
Subsection (a) shall not apply to a power solely exercisable (without
the approval or consent of any other person) by a trustee or trustees,
none of whom is the grantor, and no more than half of whom are related
or subordinate parties who are subservient to the wishes of the
grantor--
``(1) to distribute, apportion, or accumulate income to or
for a beneficiary or beneficiaries, or to, for, or within a
class of beneficiaries; or
``(2) to pay out corpus to or for a beneficiary or
beneficiaries or to or for a class of beneficiaries (whether or
not income beneficiaries).
A power does not fall within the powers described in this subsection if
any person has a power to add to the beneficiary or beneficiaries or to
a class of beneficiaries designated to receive the income or corpus,
except where such action is to provide for after-born or after-adopted
children. For periods during which an individual is the spouse of the
grantor (within the meaning of section 154(e)(2)), any reference in
this subsection to the grantor shall be treated as including a
reference to such individual.
``(d) Power to Allocate Income if Limited by a Standard.--
Subsection (a) shall not apply to a power solely exercisable (without
the approval or consent of any other person) by a trustee or trustees,
none of whom is the grantor or spouse living with the grantor, to
distribute, apportion, or accumulate income to or for a beneficiary or
beneficiaries, or to, for, or within a class of beneficiaries, whether
or not the conditions of paragraph (6) or (7) of subsection (b) are
satisfied, if such power is limited by a reasonably definite external
standard which is set forth in the trust instrument. A power does not
fall within the powers described in this subsection if any person has a
power to add to the beneficiary or beneficiaries or to a class of
beneficiaries designated to receive the income or corpus except where
such action is to provide for after-born or after-adopted children.
``SEC. 157. ADMINISTRATIVE POWERS.
``The grantor shall be treated as the owner of any portion of a
trust in respect of which--
``(1) Power to deal for less than adequate and full
consideration.--A power exercisable by the grantor or a
nonadverse party, or both, without the approval or consent of
any adverse party enables the grantor or any person to
purchase, exchange, or otherwise deal with or dispose of the
corpus or the income therefrom for less than an adequate
consideration in money or money's worth.
``(2) Power to borrow without adequate interest or
security.--A power exercisable by the grantor or a nonadverse
party, or both, enables the grantor to borrow the corpus or
income, directly or indirectly, without adequate interest or
without adequate security except where a trustee (other than
the grantor) is authorized under a general lending power to
make loans to any person without regard to interest or
security.
``(3) Borrowing of the trust funds.--The grantor has
directly or indirectly borrowed the corpus or income and has
not completely repaid the loan, including any interest, before
the beginning of the taxable year. The preceding sentence shall
not apply to a loan which provides for adequate interest and
adequate security, if such loan is made by a trustee other than
the grantor and other than a related or subordinate trustee
subservient to the grantor. For periods during which an
individual is the spouse of the grantor (within the meaning of
section 154(e)(2)), any reference in this paragraph to the
grantor shall be treated as including a reference to such
individual.
``(4) General powers of administration.--A power of
administration is exercisable in a nonfiduciary capacity by any
person without the approval or consent of any person in a
fiduciary capacity. For purposes of this paragraph, the term
`power of administration' means any one or more of the
following powers: (A) a power to vote or direct the voting of
stock or other securities of a corporation in which the
holdings of the grantor and the trust are significant from the
viewpoint of voting control; (B) a power to control the
investment of the trust funds either by directing investments
or reinvestments, or by vetoing proposed investments or
reinvestments, to the extent that the trust funds consist of
stocks or securities of corporations in which the holdings of
the grantor and the trust are significant from the viewpoint of
voting control; or (C) a power to reacquire the trust corpus by
substituting other property of an equivalent value.
``SEC. 158. POWER TO REVOKE.
``(a) General Rule.--The grantor shall be treated as the owner of
any portion of a trust, whether or not he is treated as such owner
under any other provision of this part, where at any time the power to
revest in the grantor title to such portion is exercisable by the
grantor or a non-adverse party, or both.
``(b) Power Affecting Beneficial Enjoyment Only After Occurrence of
Event.--Subsection (a) shall not apply to a power the exercise of which
can only affect the beneficial enjoyment of the income for a period
commencing after the occurrence of an event such that a grantor would
not be treated as the owner under section 155 if the power were a
reversionary interest. But the grantor may be treated as the owner
after the occurrence of such event unless the power is relinquished.
``SEC. 159. INCOME FOR BENEFIT OF GRANTOR.
``(a) General Rule.--The grantor shall be treated as the owner of
any portion of a trust, whether or not he is treated as such owner
under section 156, whose income without the approval or consent of any
adverse party is, or, in the discretion of the grantor or a nonadverse
party, or both, may be--
``(1) distributed to the grantor or the grantor's spouse;
``(2) held or accumulated for future distribution to the
grantor or the grantor's spouse; or
``(3) applied to the payment of premiums on policies of
insurance on the life of the grantor or the grantor's spouse
(except policies of insurance irrevocably payable for a purpose
specified in section 101(c) (relating to definition of
charitable contributions)).
This subsection shall not apply to a power the exercise of which can
only affect the beneficial enjoyment of the income for a period
commencing after the occurrence of an event such that the grantor would
not be treated as the owner under section 153 if the power were a
reversionary interest; but the grantor may be treated as the owner
after the occurrence of the event unless the power is relinquished.
``(b) Obligations of Support.--Income of a trust shall not be
considered taxable to the grantor under subsection (a) or any other
provision of this chapter merely because such income in the discretion
of another person, the trustee, or the grantor acting as trustee or co-
trustee, may be applied or distributed for the support or maintenance
of a beneficiary (other than the grantor's spouse) whom the grantor is
legally obligated to support or maintain, except to the extent that
such income is so applied or distributed. In cases where the amounts so
applied or distributed are paid out of corpus or out of other than
income for the taxable year, such amounts shall be considered to be an
amount paid or credited within the meaning of paragraph (2) of section
146(a) and shall be taxed to the grantor under section 147.
``SEC. 160. PERSON OTHER THAN GRANTOR TREATED AS SUBSTANTIAL OWNER.
``(a) General Rule.--A person other than the grantor shall be
treated as the owner of any portion of a trust with respect to which:
``(1) such person has a power exercisable solely by himself
to vest the corpus or the income therefrom in himself, or
``(2) such person has previously partially released or
otherwise modified such a power and after the release or
modification retains such control as would, within the
principles of sections 153 to 159, inclusive, subject a grantor
of a trust to treatment as the owner thereof.
``(b) Exception Where Grantor Is Taxable.--Subsection (a) shall not
apply with respect to a power over income, as originally granted or
thereafter modified, if the grantor of the trust or a transferor (to
whom section 161 applies) is otherwise treated as the owner under
sections 153 through 159 or section 161.
``(c) Obligations of Support.--Subsection (a) shall not apply to a
power which enables such person, in the capacity of trustee or
cotrustee, merely to apply the income of the trust to the support or
maintenance of a person whom the holder of the power is obligated to
support or maintain except to the extent that such income is so
applied. In cases where the amounts so applied or distributed are paid
out of corpus or out of other than income of the taxable year, such
amounts shall be considered to be an amount paid or credited within the
meaning of paragraph (2) of section 146(a) and shall be taxed to the
holder of the power under section 147.
``(d) Effect of Renunciation or Disclaimer.--Subsection (a) shall
not apply with respect to a power which has been renounced or
disclaimed within a reasonable time after the holder of the power first
became aware of its existence.
``SEC. 161. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES
BENEFICIARIES.
``(a) Transferor Treated as Owner.--
``(1) In general.--A United States person who directly or
indirectly transfers property to a foreign trust (other than a
trust described in section 6048(a)(3)(B)(ii)) shall be treated
as the owner for his taxable year of the portion of such trust
attributable to such property if for such year there is a
United States beneficiary of any portion of such trust.
``(2) Exceptions.--Paragraph (1) shall not apply--
``(A) Transfers by reason of death.--To any
transfer by reason of the death of the transferor.
``(B) Transfers at fair market value.--To any
transfer of property to a trust in exchange for
consideration of at least the fair market value of the
transferred property. For purposes of the preceding
sentence, consideration other than cash shall be taken
into account at its fair market value.
``(3) Certain obligations not taken into account under fair
market value exception.--
``(A) In general.--In determining whether paragraph
(2)(B) applies to any transfer by a person described in
clause (ii) or (iii) of subparagraph (C), there shall
not be taken into account--
``(i) except as provided in regulations,
any obligation of a person described in
subparagraph (C), and
``(ii) to the extent provided in
regulations, any obligation which is guaranteed
by a person described in subparagraph (C).
``(B) Treatment of principal payments on
obligation.--Principal payments by the trust on any
obligation referred to in subparagraph (A) shall be
taken into account on and after the date of the payment
in determining the portion of the trust attributable to
the property transferred.
``(C) Persons described.--The persons described in
this subparagraph are--
``(i) the trust,
``(ii) any grantor, owner, or beneficiary
of the trust, and
``(iii) any person who is related (within
the meaning of section 143(i)(2)(B) to any
grantor, owner, or beneficiary of the trust.
``(4) Special rules applicable to foreign grantor who later
becomes a united states person.--
``(A) In general.--If a nonresident alien
individual has a residency starting date within 5 years
after directly or indirectly transferring property to a
foreign trust, this section and section 6048 shall be
applied as if such individual transferred to such trust
on the residency starting date an amount equal to the
portion of such trust attributable to the property
transferred by such individual to such trust in such
transfer.
``(B) Treatment of undistributed income.--For
purposes of this section, undistributed net income for
periods before such individual's residency starting
date shall be taken into account in determining the
portion of the trust which is attributable to property
transferred by such individual to such trust but shall
not otherwise be taken into account.
``(C) Residency starting date.--For purposes of
this paragraph, an individual's residency starting date
is the residency starting date determined under section
7701(b)(2)(A).
``(5) Outbound trust migrations.--If--
``(A) an individual who is a citizen or resident of
the United States transferred property to a trust which
was not a foreign trust, and
``(B) such trust becomes a foreign trust while such
individual is alive, then this section and section 6048
shall be applied as if such individual transferred to
such trust on the date such trust becomes a foreign
trust an amount equal to the portion of such trust
attributable to the property previously transferred by
such individual to such trust. A rule similar to the
rule of paragraph (4)(B) shall apply for purposes of
this paragraph.
``(b) Trusts Acquiring United States Beneficiaries.--If--
``(1) subsection (a) applies to a trust for the
transferor's taxable year, and
``(2) subsection (a) would have applied to the trust for
his immediately preceding taxable year but for the fact that
for such preceding taxable year there was no United States
beneficiary for any portion of the trust, then, for purposes of
this chapter, the transferor shall be treated as having income
for the taxable year (in addition to his other income for such
year) equal to the undistributed net income (at the close of
such immediately preceding taxable year) attributable to the
portion of the trust referred to in subsection (a).
``(c) Trusts Treated as Having a United States Beneficiary.--
``(1) In general.--For purposes of this section, a trust
shall be treated as having a United States beneficiary for the
taxable year unless--
``(A) under the terms of the trust, no part of the
income or corpus of the trust may be paid or
accumulated during the taxable year to or for the
benefit of a United States person, and
``(B) if the trust were terminated at any time
during the taxable year, no part of the income or
corpus of such trust could be paid to or for the
benefit of a United States person.
``(2) Attribution of ownership.--For purposes of paragraph
(1), an amount shall be treated as paid or accumulated to or
for the benefit of a United States person if such amount is
paid to or accumulated for a foreign corporation, foreign
partnership, or foreign trust or estate, and--
``(A) in the case of a foreign corporation, such
corporation is a controlled foreign corporation,
``(B) in the case of a foreign partnership, a
United States person is a partner of such partnership,
or
``(C) in the case of a foreign trust or estate,
such trust or estate has a United States beneficiary
(within the meaning of paragraph (1)).
``(3) Certain united states beneficiaries disregarded.--A
beneficiary shall not be treated as a United States person in
applying this section with respect to any transfer of property
to foreign trust if such beneficiary first became a United
States person more than 5 years after the date of such
transfer.
``(d) Regulations.--The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out the purposes of this
section.
``SEC. 162. LIMITATION ON CHARITABLE DEDUCTION.
``In computing the deduction allowable under section 142(c) to a
trust, no amount otherwise allowable under section 142(c) as a
deduction shall be allowed as a deduction with respect to income of the
taxable year which is allocable to unrelated business income for such
year.
``SEC. 163. INCOME OF AN ESTATE OR TRUST IN CASE OF DIVORCE, ETC.
``(a) Inclusion in Gross Income of Wife.--There shall be included
in the gross income of a wife who is divorced or legally separated
under a decree of divorce or of separate maintenance (or who is
separated from her husband under a written separation agreement) the
amount of the income of any trust which such wife is entitled to
receive and which, except for this section, would be includible in the
gross income of her husband, and such amount shall not, despite any
other provision of this subtitle, be includible in the gross income of
such husband. This subsection shall not apply to that part of any such
income of the trust which the terms of the decree, written separation
agreement, or trust instrument fix, in terms of an amount of money or a
portion of such income, as a sum which is payable for the support of
minor children of such husband. In case such income is less than the
amount specified in the decree, agreement, or instrument, for the
purpose of applying the preceding sentence, such income, to the extent
of such sum payable for such support, shall be considered a payment for
such support.
``(b) Wife Considered a Beneficiary.--For purposes of computing the
taxable income of the estate or trust and the taxable income of a wife
to whom subsection (a) applies, such wife shall be considered as the
beneficiary.
``(c) Cross Reference.--For definitions of `husband' and `wife', as
used in this section, see section 7701(a)(17).
``SEC. 164. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CERTAIN FOREIGN
TRUSTS AND ESTATES.
``(a) In General.--Except as provided in regulations, in the case
of any transfer of property by a United States person to a foreign
estate or trust, for purposes of this subtitle, such transfer shall be
treated as a sale or exchange for an amount equal to the fair market
value of the property transferred, and the transferor shall recognize
as gain the excess of--
``(1) the fair market value of the property so transferred,
over
``(2) the adjusted basis (for purposes of determining gain)
of such property in the hands of the transferor.
``(b) Exception.--Subsection (a) shall not apply to a transfer to a
trust by a United States person to the extent that any person is
treated as the owner of such trust under section 153.
``(c) Treatment of Trusts Which Become Foreign Trusts.--If a trust
which is not a foreign trust becomes a foreign trust, such trust shall
be treated for purposes of this section as having transferred,
immediately before becoming a foreign trust, all of its assets to a
foreign trust.
``SEC. 165. TREATMENT OF FUNERAL TRUSTS.
``(a) In General.--In the case of a qualified funeral trust,
sections 144 through 161 shall not apply, and no deduction shall be
allowed by section 142(b).
``(b) Qualified Funeral Trust.--`Qualified funeral trust' means any
trust (other than a foreign trust) if--
``(1) the trust arises as a result of a contract with a
person engaged in the trade or business of providing funeral or
burial services or property necessary to provide such services,
``(2) the sole purpose of the trust is to hold, invest, and
reinvest funds in the trust and to use such funds solely to
make payments for such services or property for the benefit of
the beneficiaries of the trust,
``(3) the only beneficiaries of such trust are individuals
with respect to whom such services or property are to be
provided at their death under contracts described in paragraph
(1),
``(4) the only contributions to the trust are contributions
by or for the benefit of such beneficiaries,
``(5) the trustee elects the application of this
subsection, and
``(6) the trust would (but for the election described in
paragraph (5)) be treated as owned under sections 153 through
161 by the purchasers of the contracts described in paragraph
(1).
``(c) Dollar Limitation on Contributions.--
``(1) In general.--Any trust which accepts aggregate
contributions by or for the benefit of an individual in excess
of $7,000 shall not be a qualified funeral trust.
``(2) Related trusts.--For purposes of paragraph (1), all
trusts having trustees which are related persons shall be
treated as 1 trust. For purposes of the preceding sentence,
persons are related if--
``(A) the relationship between such persons is
described in section 171(a)(5), or
``(B) the Secretary determines that treating such
persons as related is necessary to prevent avoidance of
the purposes of this section.
``(3) Inflation adjustment.--In the case of any contract
referred to in subsection (b)(1) which is entered into during
any calendar year after 2007, the dollar amount referred to in
paragraph (1) shall be adjusted for inflation in accordance
with section 25.
``(d) Application of Rate Schedule.--Section 140(b) shall be
applied to each qualified funeral trust by treating each beneficiary's
interest in each such trust as a separate trust.
``(e) Treatment of Amounts Refunded to Purchaser on Cancellation.--
No gain or loss shall be recognized to a purchaser of a contract
described in subsection (b)(1) by reason of any payment from such trust
to such purchaser by reason of cancellation of such contract. If any
payment referred to in the preceding sentence consists of property
other than money, the basis of such property in the hands of such
purchaser shall be the same as the trust's basis in such property
immediately before the payment.
``(f) Simplified Reporting.--The Secretary may prescribe rules for
simplified reporting of all trusts having a single trustee.
``SEC. 166. INCOME IN RESPECT OF A DECEDENT.
``(a) Inclusion in Gross Income.--
``(1) General use.--The amount of all items of gross income
in respect of a decedent which are not properly includible in
respect of a taxable period in which falls the date of his
death, or a prior period, shall be included in gross income,
for the taxable year when received, of--
``(A) the estate of the decedent, if the right to
receive the amount is acquired by the decedent's
estate,
``(B) the person who, by reason of the death of the
decedent, acquires the right to receive the amount, if
the right to receive the amount is not acquired by the
decedent's estate from the decedent,
``(C) the person who acquires from the decedent the
right to receive the amount by bequest, devise or
inheritance, if the amount is received after a
distribution by the decedent's estate of such right.
``(2) Definition.--The Secretary shall prescribe
regulations on the treatment of income from sales of rights to
receive income and installment sales.
``(b) The amount of any homeowner deduction or foreign tax credit
in respect of a decedent which is not properly allowable to the
decedent with respect to the taxable period in which falls the date of
his death, or a prior period, shall be allowed in accordance with
regulations that reflect the principles of section 691(b) of the
Internal Revenue Code of 1986.
``Subchapter II--Definitions and Rules of Application
``Sec. 171. Definitions.
``Sec. 172. Rules of application.
``SEC. 171. DEFINITIONS.
``(a) In General.--When used in this chapter, where not otherwise
distinctly expressed or manifestly incompatible with the intent
thereof--
``(1) Business entity.--The definition of `business entity'
in section 206 (relating to the business tax) shall apply.
``(2) Business tax.--`Business tax' and `Simplified USA Tax
for businesses' mean the tax imposed by section 201 and, to the
extent required by the context, the provisions of chapter 2.
``(3) Internal revenue code of 1986.--`Internal Revenue
Code of 1986' means the Internal Revenue Code of 1986 as in
effect immediately before the enactment of the Simplified USA
Tax Act of 2006.
``(4) United states.--`United States' means the States and
the District of Columbia.
``(5) Related party.--`Related party' means--
``(A) Members of a family, as defined in paragraph
(6)(D);
``(B) An individual and a business entity more than
50 percent in value of which is owned, directly or
indirectly, by or for such individual (applying rules
of constructive ownership);
``(C) Two business entities that are eligible to
file a consolidated return under chapter 2;
``(D) A grantor and a fiduciary of any trust;
``(E) A fiduciary of a trust and a fiduciary of
another trust, if the same person is a grantor of both
trusts;
``(F) A fiduciary of a trust and a beneficiary of
such trust;
``(G) A fiduciary of a trust and a beneficiary of
another trust, if the same person is a grantor of both
trusts;
``(H) A fiduciary of a trust and a corporation more
than 50 percent in value of the outstanding stock of
which is owned, directly or indirectly, by or for the
trust or by or for a person who is a grantor of the
trust;
``(I) A person and an organization to which section
251 (relating to certain educational and charitable
organizations which are exempt from tax) applies and
which is controlled directly or indirectly by such
person or (if such person is an individual) by members
of the family of such individual;
``(J) Two business entities if the same persons own
more than 50 percent of the value of each (applying
rules of constructive ownership), with value measured
by--
``(i) the value of the outstanding stock in
the case of a corporation,
``(ii) the capital interest or the profits
interest, whichever is greater, in the case of
a partnership or limited liability company;
``(K) Except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.
``(6) Constructive ownership.--For purposes of determining,
in applying paragraph (5), the ownership of a business entity--
``(A) Stock or other equity interest owned,
directly or indirectly, by or for a corporation,
partnership, estate, or trust shall be considered as
being owned proportionately by or for its shareholders,
partners, or beneficiaries;
``(B) An individual shall be considered as owning
the stock or other equity interest owned, directly or
indirectly, by or for his family;
``(C) An individual owning (otherwise than by the
application of subparagraph (B)) any stock in a
corporation or other equity interest in another form of
business entity shall be considered as owning the stock
owned, directly or indirectly, by or for his partner;
``(D) The family of an individual shall include
only his brothers and sisters (whether by the whole or
half blood), spouse, ancestors, and lineal descendants;
and
``(E) Stock or other equity interest constructively
owned by a person by reason of the application of
subparagraph (A) shall, for the purpose of applying
subparagraph (A), (B), or (C), be treated as actually
owned by such person, but stock or other equity
interest constructively owned by an individual by
reason of the application of subparagraph (B) or (C)
shall not be treated as owned by him for the purpose of
again applying either of such paragraphs in order to
make another the constructive owner of such stock or
equity interest.
``(7) Earned income.--
``(A) In general.--`Earned income' means--
``(i) wages, salaries, tips, and other
employee compensation, plus
``(ii) the amount of the taxpayer's net
earnings from self-employment for the taxable
year (within the meaning of section 1402(a)).
``(B) Special rules.--For purposes of subparagraph
(A)--
``(i) the earned income of an individual
shall be computed without regard to any
community property laws,
``(ii) no amount received as a pension or
annuity shall be taken into account,
``(iii) no income of nonresident alien
individuals not connected with United States
business shall be taken into account, and
``(iv) no amount received for services
provided by an individual while the individual
is an inmate at a penal institution shall be
taken into account.
``(b) Terms Defined in Chapter 1.--If a term that is used but not
defined in this chapter or in section 7701 is defined in chapter 2, the
definition in chapter 2 shall apply except if manifestly incompatible
with the intent of the provision in which the term is used.
``SEC. 172. RULES OF APPLICATION.
``(a) Definitions.--Any definition included in this chapter shall
apply for all purposes of this chapter unless--
``(1) such definition is limited to the purposes of a
particular chapter, section, or subsection, or
``(2) the definition clearly would not be applicable in a
particular context.
``(b) Interpretations Consistent With Internal Revenue Code of
1986.--Terms not defined in this chapter or elsewhere in this title,
but defined in the Internal Revenue Code of 1986, shall be interpreted
in a manner consistent with the Internal Revenue Code of 1986, except
to the extent such interpretation would be inconsistent with the
principles and purposes of this chapter.''
(c) Exemption From Prohibited Transaction Tax.--Section 4975(g) of
the Code is amended by--
(1) striking ``or'' at the end of paragraph (2),
(2) deleting the period at the end of paragraph (3) and
inserting ``; or'',
(3) and inserting the following new paragraph (4):
``(4) to a Roth IRA in the case of a loan to or equity
investment in a controlled business entity as permitted by
section 30(f)).''
TITLE III--SIMPLIFIED USA TAX FOR BUSINESSES
SEC. 301. REPEAL OF CORPORATE INCOME TAX; NEW TAX PAID BY CORPORATIONS
AND OTHER BUSINESSES.
(a) In General.--Chapter 2 of the Internal Revenue Code is
renumbered chapter 3 and following new chapter is inserted after
chapter 1:
``CHAPTER 2--SIMPLIFIED USA TAX FOR BUSINESSES
``Subchapter A. Imposition of tax.
``Subchapter B. Basic rules for business tax.
``Subchapter C. Capital contributions, mergers, acquisitions, and
distributions.
``Subchapter D. Accounting methods.
``Subchapter E. Land and rental property.
``Subchapter F. Insurance and financial products.
``Subchapter G. Financial intermediation and financial institutions.
``Subchapter H. Tax-exempt organizations.
``Subchapter I. Cooperatives.
``Subchapter J. Sourcing rules.
``Subchapter K. Business conducted in a possession.
``Subchapter L. Payroll tax credit.
``Subchapter M. Import tax.
``Subchapter N. Transition rules.
``Subchapter O. Rules for administration, consolidated returns.
``Subchapter P. Definitions and rules of applications.
``Subchapter A--Imposition of Tax
``Sec. 201. Tax imposed.
``SEC. 201. TAX IMPOSED.
``(a) Taxable Business Activity.--A tax is imposed on the sale of
goods and services in the United States by a business entity. The
amount of the tax equals the amount by which--
``(1) the business tax exceeds,
``(2) the payroll tax credit.
``(b) Business Tax Imposed.--
``(1) In general.--The `business tax' imposed on a business
entity that sells or leases property or sells services in the
United States equals the sum of--
``(A) 8 percent of the portion of the gross profits
of the business entity for the taxable year that does
not exceed $150,000, and
``(B) 12 percent of such portion of the gross
profits of the business entity for the taxable year
that exceeds $150,000.
``(2) Limitation on application of benefits of graduated
rate schedule.--The Secretary shall prescribe rules under which
the gross profits of business entities under common control are
aggregated for purposes of applying the benefit of the lower
rate described in subparagraph (A) of paragraph (1). Such rules
shall be similar to rules applicable under sections 1551 and
1561 of the Internal Revenue Code of 1986.
``(c) Payroll Tax Credit.--The `payroll tax credit' is a credit for
the social security, railroad retirement and hospital insurance taxes
paid by an employer, as determined in accordance with subchapter L
(sections 281 through 283).
``(d) Import Tax.--For rules relating to the import tax imposed by
this chapter, see subchapter M (sections 286 through 288).
``Subchapter B--Basic Rules for Business Tax
``Sec. 202. Gross profits.
``Sec. 203. Taxable receipts.
``Sec. 204. Deductible amounts.
``Sec. 205. Cost of business purchases.
``Sec. 206. Business entity and business activity.
``Sec. 207. Loss carryover deduction.
``SEC. 202. GROSS PROFITS.
```Gross profits' means for a taxable year of a business entity the
amount by which--
``(1) the taxable receipts of the business entity for the
taxable year exceed,
``(2) the deductible amounts for the business entity for
the taxable year.
``SEC. 203. TAXABLE RECEIPTS.
``(a) In General.--`Taxable receipts' means all receipts from the
sale of property, use of property, and performance of services in the
United States.
``(b) Games of Chance.--Amounts received for playing games of
chance by business entities engaging in the activity of providing such
games shall be treated as receipts from the sale of property or
services.
``(c) In-Kind Receipts.--The taxable receipts attributable to the
receipt of property, use of property or services in whole or partial
exchange for property, use of property or services equal the fair
market value of the services or property received.
``(d) Taxes.--Taxable receipts do not include any excise tax, sales
tax, custom duty, or other separately stated levy imposed by a Federal,
State, or local government received by a business entity in connection
with the sale of property or services or the use of property.
``(e) Financial Receipts.--
``(1) In general.--Except as provided in subchapter G
(relating to financial intermediation and financial
institutions), taxable receipts do not include financial
receipts.
``(2) Financial receipts.--`Financial receipts' include--
``(A) interest,
``(B) dividends and other distributions by a
business entity,
``(C) proceeds from the sale of stock, other
ownership interests in business entities, or other
financial instruments (as defined in section
242(b)(3)),
``(D) proceeds from life insurance policies,
``(E) proceeds from annuities,
``(F) proceeds from currency hedging or exchanges,
and
``(G) proceeds from other financial transactions.
``(f) Cross References.--
``(1) Financial intermediation.--See subchapters F and G
for rules relating to financial intermediation.
``(2) Exports, sales in the united states.--See subchapter
J for the exclusion from gross receipts for export sales and
for rules on sales of property and services in the United
States.
``(3) Land.--See subchapter E for rules relating to certain
sales of land.
``(4) Insurance proceeds.--See section 237 for rules on the
inclusion of certain insurance proceeds in taxable receipts.
``SEC. 204. DEDUCTIBLE AMOUNTS.
``(a) In General.--`Deductible amounts' for a business entity in a
taxable year include--
``(1) the cost of business purchases in the taxable year
(as determined under section 205),
``(2) such entity's loss carryover deduction (as determined
under section 207) , and
``(3) the transition basis deduction (as determined under
section 290).
``(b) Financial Intermediation.--See subchapters F and G for
special rules for business entities engaging in financial
intermediation.
``SEC. 205. COST OF BUSINESS PURCHASES.
``(a) Business Purchases.--
``(1) In general.--`Business purchases' means the
acquisition of--
``(A) property,
``(B) the use of property, or
``(C) services
in the United States for use in a business activity.
``(2) Examples.--Business purchases include (without
limitation) the--
``(A) purchase or rental of real property,
``(B) purchase or rental of capital equipment,
``(C) purchase of supplies and inventory,
``(D) purchase of services from independent
contractors,
``(E) purchase of financial intermediation services
(as determined in accordance with section 236),
``(F) purchase of a business loss policy (as
determined in accordance with section 237), and
``(G) imports for use in a business activity.
``(3) Exclusions.--Business purchases do not include--
``(A) payments for use of money or capital, such as
interest or dividends (except to the extent that a
portion so paid is a fee for financial intermediation
services),
``(B) premiums for life insurance,
``(C) the acquisition of savings assets or other
financial instruments (as defined in section
242(b)(3)).
``(D) property acquired outside the United States
(but such property shall be taken into account as an
import if imported),
``(E) services performed outside the United States
(unless treated as imported into the United States),
``(F) compensation expenses for an individual
(other than amounts paid to an individual in his
capacity as a business entity), or
``(G) taxes (except as provided in subsection
(b)(2) relating to product taxes).
``(4) Compensation expenses.--`Compensation expenses'
means--
``(A) wages, salaries or other cash payable for
services,
``(B) any taxes imposed on the recipient that are
withheld by the business entity,
``(C) the cost of property purchased to provide
employees with compensation (other than property
incidental to the provision of fringe benefits that are
excluded from income under the individual tax),
``(D) the cost of fringe benefits which are
includible in an employee's, partner's, or proprietor's
income under the Simplified USA Income Tax (or are
excluded solely because they constitute employee
savings), including (without limitation)--
``(i) contributions to retirement and
severance benefit plans,
``(ii) premiums for the cost of life,
health, accident, disability and other
insurance policies for which the service
provider, members of his family, or persons
designated by him or members of his family are
the beneficiaries,
``(iii) rental of parking spaces or parking
fees (unless the parking space is used for a
vehicle that is regularly used in a business
activity);
``(iv) employer paid educational benefits;
``(v) employer paid housing (other than
housing provided for the convenience of the
employer); and
``(vi) employer paid meals (other than
meals provided for the convenience of the
employer).
``(b) Cost of Business Purchases.--
``(1) In general.--The `cost of a business purchase' is the
amount paid or to be paid for the business purchase.
``(2) Taxes.--
``(A) In general.--The `cost of business purchases'
includes any product taxes paid with respect to the
property or services purchased.
``(B) Product tax.--`Product tax' means any excise
tax, sales or use tax, custom duty, or other separately
stated levy imposed by a Federal, State, or local
government on the production, severance or consumption
of property or on the provision of services, whether or
not separately stated, and including any such taxes
that are technically imposed on the seller of property
or services.
``(C) Taxes not product taxes.--Product taxes do
not include--
``(i) the import tax,
``(ii) state and local property taxes,
``(iii) franchise or income taxes,
``(iv) payroll taxes and self-employment
taxes, or
``(v) the business tax.
``(3) Imports.--In the case of an import by a business
entity, the cost of the import is the import price for purposes
of the import tax. The import tax is not part of the cost of
the import.
``(c) Property and Services Acquired for Property.--If a business
entity receives property or services from a business entity in whole or
partial exchange for property or services, the property or services
acquired shall be treated as if they were purchased for an amount equal
to the fair market value of the services or property received. For
purposes of this section, property includes stock and other equity
interests in business other than stock or an equity interest in the
business entity acquiring the property or services. See section 210(b)
for rules on property or services received in exchange for an equity
interest in the recipient.
``(d) Gambling Payments.--In the case of a business involving
gambling, lotteries, or other games of chance, business purchases
include amounts paid to winners.
``(e) Savings Assets.--`Savings assets' means stocks, bonds,
securities, certificates of deposits, investments in partnerships and
limited liability companies, shares of mutual funds, life insurance
policies, annuities, and other similar savings or investment assets.
``(f) Cross References.--
``(1) Financial intermediation and insurance.--For rules
relating to fees for financial intermediation services and
insurance, see subchapter F.
``(2) Land.--For special rules relating to the acquisition
of land, see subchapter E.
``(3) Rental real estate.--For special rules relating to
the rental of real estate previously occupied by an owner of
the real estate, see section 232.
``(4) Outside the united states.--For special rules
relating to services performed outside the United States but
used inside the United States and international services, see
subchapter J.
``SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY.
``(a) Business Entity.--For purposes of the business tax, `business
entity' means any corporation, unincorporated association, partnership,
limited liability company, proprietorship, independent contractor,
individual, or any other person engaging in business activity in the
United States. An individual shall be considered a business entity only
with respect to the individual's business activities.
``(b) Business Activity.--`Business activity' means the sale of
property or services, the leasing of property, the development of
property or services for subsequent sale or use in producing property
or services for subsequent sale. `Business activity' does not include
casual or occasional sales of property used by an individual (other
than in a business activity), such as the sale by an individual of a
vehicle used by the individual.
``(c) Exception for Certain Employees.--
``(1) In general.--`Business activity' does not include--
``(A) the performance of services by an employee
for an employer that is a business entity with respect
to the activity in which the employee is engaged, or
``(B) the performance of regular domestic household
services (including babysitting, housecleaning, and
lawn cutting) by an employee of an employer that is an
individual or family.
``(2) Employee defined.--For purposes of this subsection,
`employee' includes an individual partner who provides services
to a partnership or an individual member who provides services
to a limited liability company, or a proprietor with respect to
compensation for services from his proprietorship.
``SEC. 207. LOSS CARRYOVER DEDUCTION.
``(a) Deduction.--The `loss carryover deduction' for a taxable year
is the lesser of--
``(1) the business entity's gross profits for the taxable
year (determined without the loss carryover deduction), or
``(2) the amount of the loss carryover to the taxable year.
``(b) Loss Carryover.--
``(1) General rule.--A loss for any taxable year shall be a
loss carryover to each of the 215 taxable years following the
taxable year of the loss.
``(2) Loss carryovers to a taxable year.--The loss
carryover to a taxable year is the sum of the loss carryovers
from all prior taxable years beginning on or after January 1,
2007, that can be carried over to the taxable year.
``(3) Reduction of loss carryovers as a result of the
deduction.--A business entity's loss carryovers shall be
reduced each year by the amount of the loss carryover deduction
for the year. Loss carryovers shall be reduced in the order
that they arose.
``(c) Loss for Taxable Year.--A business entity's loss (if any) for
the taxable year equals the excess (if any) of--
``(1) the sum of--
``(A) the cost of business purchases for the
taxable year, and
``(B) the transition basis adjustment for the
taxable year, over
``(2) taxable receipts for the taxable year.
``(d) Special Rules.--
``(1) Consolidated returns.--In the case of a consolidated
return, the loss for a taxable year shall be determined on a
consolidated group basis. In the case of a deconsolidation, the
loss carryovers from the consolidated group shall be allocated
in accordance with rules to be prescribed by the Secretary.
``(2) Loss carryovers of acquired business entity.--
``(A) In general.--If a business entity acquires
another business entity in a transaction that is
considered the acquisition of a business entity and the
two entities file a consolidated return or if two
business entities merge, the loss carryovers will
survive and can be applied against the taxable receipts
attributable to the business activities carried on (or
in the case of a merger formerly carried on) by either
entity.
``(B) Asset acquisition.--If a business entity
acquires all or substantially all of the assets of
another entity in a transaction that is considered an
asset acquisition rather than the acquisition of a
business entity, the acquirer will be treated as if it
acquired the loss carryovers of the selling entity. For
purposes of this rule, the assets of a business entity
include ownership interests in other business entities.
``(C) Substantially all.--For purposes of this
paragraph `substantially all' means more than 80
percent of the fair market value of a business entity's
net assets. Under rules prescribed by the Secretary,
the parties to a transaction may elect to treat
acquisitions in excess of 70 percent of the fair market
value of a business entity's net assets as acquisitions
of `substantially all' of a business entity's net
assets.
``Subchapter C--Capital Contributions, Mergers, Acquisitions, and
Distributions
``Sec. 210. Contributions to a business entity.
``Sec. 211. Distributions of property.
``Sec. 212. Asset acquisitions.
``Sec. 213. Mergers and stock acquisitions.
``Sec. 214. Spin-offs, split-off, etc.
``Sec. 215. Allocation of certain tax attributes.
``SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.
``(a) By Business Entity.--
``(1) Cash.--If a business entity contributes cash to a
business entity of which it is or becomes a partial or full
owner, the amount contributed is not a deductible amount to the
contributor or a taxable receipt to the recipient.
``(2) Property or services.--If a business entity
contributes property or services to a business entity of which
it is or becomes a partial or full owner, the transaction will
not result in taxable receipts to the contributor or a
deduction for a business purchase for the recipient and will
not constitute a sale resulting in taxable receipts to the
contributor.
``(b) By Individual.--
``(1) Cash.--If an individual contributes cash to a
business entity, the cash received is not a taxable receipt.
``(2) New property.--If an individual contributes to a
business entity property that the individual purchased for the
business entity but which was not used by any person after its
purchase, the property shall be considered purchased by such
business entity from the person from which the individual
purchased the property.
``(3) Personal use property.--
``(A) In general.--If an individual contributes
personal use property to a business entity in which the
individual has an ownership interest or for which the
individual receives an ownership interest, the business
entity shall not be permitted to deduct the value of
the property received as a business expense. The
business entity will have a tax basis in the
contributed property equal to the contributor's basis.
``(B) Personal use property.--`Personal use
property' means any property used by an individual at
any time other than in a business activity.
``(4) Services.--If an individual contributes services to a
business entity in which the individual has an ownership
interest or receives an ownership interest, the business entity
shall not be permitted to deduct the value of the services
received (or the value of the equity interest provided to the
services provider).
``SEC. 211. DISTRIBUTIONS OF PROPERTY.
``(a) Distributions Other Than to Controlling Business.--If a
business entity distributes all or a portion of its assets to its
owners (other than a controlling business entity), the business entity
will be treated as if it sold the assets to its owners at fair market
value. The fair market value will be determined by the distributing
corporation and those determinations, unless unreasonable, will be
binding on the recipients.
``(b) Distributions to a Controlling Business.--If a business
entity distributes all or a portion of its assets to a controlling
business, the controlling business will assume the distributing
entity's tax attributes with respect to the assets and neither entity
will have taxable receipts or a deduction as a result of the
transaction.
``(c) Distribution of Personal Use Property.--If personal use
property is distributed to the individual who contributed the personal
use property to a business entity, the fair market value of the
property for purposes of paragraph (a) shall equal the basis of the
property plus any enhancement in value of the property attributable to
business purchases with respect to the property.
``(d) Controlling Business Entity.--A business entity is a
`controlling business entity' with respect to another business entity
if it owns directly or indirectly more than 50 percent of the profits
or capital interest in the other business entity.
``(e) Application of This Section.--This section applies to both
liquidating and nonliquidating distributions. Property shall be treated
as distributed if the property is used for a nonbusiness purpose (as
defined in section 232) for more than an insubstantial period of time
during a taxable year. See section 232 for rules relating to certain
rental property.
``SEC. 212. ASSET ACQUISITIONS.
``(a) In General.--If a business entity transfers some or all of
its assets, the consideration received for such assets shall be
allocated among the assets transferred in the same manner as was
required by section 1060 of the Internal Revenue Code of 1986. If the
transferee and transferor agree in writing on the allocation of any
consideration, or as to the fair market value of any of the assets,
such agreement shall be binding on both the transferor and transferee
unless the Secretary determines that such allocation (or fair market
value) is not appropriate.
``(b) Tax Consequences.--The tax consequences of an asset
acquisition shall be determined in accordance with the rules of this
chapter and shall be dependent upon allocations made under subsection
(a). In general, consideration allocable to savings assets, such as
stock in another business entity, would not be included in taxable
receipts of the transferor and would not be a business purchase of the
purchaser, but consideration allocable to the sale of tangible property
and intangible property (other than savings assets) will constitute
taxable receipts of the seller and a business purchase of the
purchaser.
``(c) Election to Treat Asset Acquisition as a Stock Acquisition.--
In the case of the sale of substantially all of the assets of a
business entity or substantially all of the assets of a line of
business or a separately standing business of a business entity, the
transferee and transferor can jointly elect to treat the acquisition as
if it were an acquisition of the stock of a business entity holding the
assets so transferred. In such case, the rules of section 213 shall
apply.
``(d) Authority to Require Allocation Agreement and Notice to the
Secretary.--If the Secretary determines that certain types of asset
acquisitions have significant possibilities of tax avoidance, the
Secretary may require--
``(1) parties to such types of acquisitions to enter into
agreements allocating consideration,
``(2) parties to acquisitions involving certain kinds of
assets to enter into agreements allocating part of the
consideration to those assets, or
``(3) parties to certain acquisitions to report information
to the Secretary.
``(e) Asset Acquisition Rules Do Not Apply if Consideration
Includes Equity in Purchaser.--
``(1) In general.--If a business entity issues its own
equity or equity in a subsidiary or other controlled entity as
part of the consideration for the transfer of assets to it, the
transaction shall not be treated as an asset acquisition and
the rules of section 10 shall apply.
``(2) Equity.--For purposes of this subsection, equity
means--
``(A) stock, in the case of a corporation,
``(B) partnership or similar interest, in the case
of a partnership or limited liability company, and
``(C) an ownership interest or interest in profits
in the case of any other business entity.
``SEC. 213. MERGERS AND STOCK ACQUISITIONS.
``(a) Mergers.--A merger of one business entity into another or two
businesses entities into a third business entity or any other similar
transaction shall have no direct consequences under the business tax.
The surviving entity shall assume the tax attributes of the merged
corporations, including any loss carryovers and credit carryovers.
``(b) Stock Acquisition.--The acquisition of all or substantially
all of the ownership interest in one business entity either for cash or
in exchange for ownership in the acquiring entity or an entity
controlled by the acquired entity shall have no direct consequences
under the business tax.
``SEC. 214. SPIN-OFFS, SPLIT-OFFS, ETC.
``A spin-off, split-off or split-up of a business entity shall have
no direct tax consequences under the business tax.
``SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES.
``The Secretary shall prescribe rules for allocation of loss
carryovers and payroll tax credit carryovers in cases of substantial
shifts of assets from one business entity to another business entity.
Under such rules, a portion of a business entity's carryovers may be
deemed transferred when assets are transferred.
``Subchapter D--Accounting Method Rules
``Sec. 220. General accounting rules.
``Sec. 221. Use of the cash method of accounting.
``Sec. 222. Taxable year.
``Sec. 223. Long-term contracts.
``Sec. 224. Post-sale price adjustments and refunds.
``Sec. 225. Bad debts.
``Sec. 226. Transition rules.
``SEC. 220. GENERAL ACCOUNTING RULES.
``(a) In General.--Except as provided in section 221, a business
entity shall use an accrual method of accounting for purposes of
determining the timing of recognition of taxable receipts and deduction
of business purchases. All business purchases shall be deducted when
incurred (in the case of a business entity using the accrual method of
accounting) or when paid (in case of a business entity using the cash
method of accounting) without regard to whether the business purchases
are for or relate to--
``(1) inventory,
``(2) assets with a useful life of more than one year, or
``(3) property that will be used to produce other property.
``(b) Economic Performance.--For purposes of determining whether an
amount has been incurred, the all events test shall not be treated as
met any earlier than when economic performance with respect to such
item occurs.
``(c) Consistent Accounting Methods.--Except as otherwise expressly
provided in this chapter, a business entity shall secure the consent of
the Secretary before changing the method of accounting by which it
determines gross profits. This provision shall not apply to changes
required by the adoption of the business tax.
``SEC. 221. USE OF THE CASH METHOD OF ACCOUNTING.
``(a) In General.--A business entity that was permitted to use and
used the cash method of accounting under the Internal Revenue Code of
1986 shall be permitted to continue to use the cash method of
accounting.
``(b) New Business Entities.--A new business entity shall be
permitted to use the cash method of accounting if permitted to under
regulations prescribed by the Secretary.
``(c) Change or Expansion of Business.--Subsection (a) shall cease
to apply to a business entity that changes or expands its business such
that under regulations prescribed by the Secretary it is no longer
eligible to use the cash method of accounting.
``(d) Regulations.--
``(1) Use of cash method.--The Secretary shall prescribe
regulations defining which business entities may use the cash
method of accounting. In general, those regulations shall be
consistent with the rules under sections 447 and 448 of the
Internal Revenue Code of 1986, except that all corporations
shall be treated as C corporations were treated under those
sections. The regulations shall not require a business entity
described in subsection (a) to convert to the accrual method
prior to January 1, 2008.
``(2) Change in accounting method.--The Secretary shall
prescribe regulations to prevent double counting of taxable
receipts and deductible expenses in the case of a change in
accounting method.
``SEC. 222. TAXABLE YEAR.
``(a) Computation of Gross Profits.--Gross profits shall be
computed on the basis of a business entity's taxable year.
``(b) Taxable Year.--`Taxable year' means--
``(1) the taxpayer's annual accounting period, if it is a
calendar year or a fiscal year;
``(2) the calendar year, if subsection (g) applies; or
``(3) the period for which the return is made if the return
is made for a period of less than 12 months.
``(c) Annual Accounting Period.--`Annual accounting period' means
the annual period on the basis of which the business entity regularly
keeps its books.
``(d) Calendar Year.--`Calendar year' means a period of 12 months
ending on December 31.
``(e) Fiscal Year.--`Fiscal year' means a period of 12 months
ending on the last day of any month other than December. In the case of
any business entity that has made the election provided by subsection
(f), the term means the annual period (varying from 52 to 53 weeks) so
elected.
``(f) Election of 52-53 Week Year.--
``(1) General rule.--A business entity which, in keeping
its books, regularly computes its income or profits on a basis
of an annual period which varies from 52 to 53 weeks and ends
always on the same day of the week and ends always--
``(A) on whatever date such same day of the week
last occurs in a calendar month, or
``(B) on whatever date such same day of the week
falls which is nearest to the last day of a calendar
month, may elect to compute its gross profits on the
basis of such annual period.
``(2) Regulations.--The Secretary shall prescribe such
regulations as he deems necessary for the application of this
subsection, including regulations relating to the application
of effective dates to taxpayers using a 52-53 week year.
``(g) Calendar Year Required.--
``(1) No accounting period.--A business entity's taxable
year shall be the calendar year if the business entity does not
have an annual accounting period or has an annual accounting
period that does not qualify as a fiscal year.
``(2) New business entity.--The taxable year of a business
entity that begins business activity after December 31, 2006,
shall be the calendar year (or a 52-53 week fiscal year ending
in December) unless the business entity can demonstrate a
business reason for selecting an accounting period other than
the calendar year.
``(h) Transition Rule for Business Entities With a Fiscal Year.--
``(1) In general.--A business entity with a taxable year
that is not the calendar year shall have a short taxable year
ending on December 31, 2006, and a subsequent taxable year
beginning on January 1, 2007, and ending on the day immediately
preceding the beginning of the business entity's next fiscal
year.
``(2) Business entities with 52-53 week year ending in
december.--
``(A) In general.--If a business entity has a 52-53
week taxable year (under the Internal Revenue Code of
1986) that ends in December 2006, it may elect to begin
its first taxable year for the business tax on the
first day immediately following the last day of such
taxable year.
``(B) No election.--If a business entity that has a
52-53 week taxable year that ends in December 2006,
does not make the election under subparagraph (A) or is
prohibited from making such election by subparagraph
(C), the business entity's taxable year under the
Internal Revenue Code of 1986 that would end in
December 2006 shall end on December 31, 2006.
``(C) Anti-abuse rule.--Subparagraph (A) shall not
apply to any taxpayer that enters into business
transactions in 2006 following the scheduled end of its
fiscal year with business entities that are not subject
to the business tax at the time of such transactions if
such transactions deviate from the normal course of
business in order to achieve some tax benefit.
``SEC. 223. LONG-TERM CONTRACTS.
``(a) In General.--In the case of a long-term contract--
``(1) Contractor expenses.--The contractor shall be
entitled to deduct its business purchases when paid or
incurred.
``(2) Contractor receipts.--The contractor shall recognize
taxable receipts--
``(A) in the case of a project in which the
acquirer has no ownership interest in the project until
delivery--
``(i) upon delivery of the project, in the
case of an accrual basis contractor, or
``(ii) upon the later of delivery of the
project or the receipt of payment, in the case
of cash-basis contractor.
``(B) in the case of a project in which the
acquirer obtains an ownership interest as the project
is constructed--
``(i) when the contractor has the right to
payments, in the case of an accrual basis
contractor, or
``(ii) upon the later of when the
contractor receives the cash or has the right
to payments, in the case of a cash basis
contractor.
``(3) Acquirer expenses.--The acquirer that is a business
entity shall be entitled to deduct its costs of the business
purchase--
``(A) in the case of a cash-basis acquirer, at such
time as a cash basis contractor would be required to
treat the amounts paid as taxable receipts, or
``(B) in the case of an accrual-basis acquirer, at
such time as an accrual basis contractor would be
required to treat the amounts paid or due as taxable
receipts.
``(b) Right to Payments.--
``(1) In general.--A contractor shall be treated as having
a right to payments with respect to a project at any time to
the extent that the contractor would not be required to return
payments received (or would be entitled to collect payments not
yet received) if the project were terminated at such time by
the contractor.
``(2) Contractual provisions.--If a long-term contract
includes a procedure for paying the contractor as work is
completed (for example, by reason of a draw down from a trust
account), the contractual provisions shall generally govern
when a contractor has a right to payment.
``(3) Percentage completion method of accounting.--If a
long-term contract does not include a mechanism for paying the
contractor as work is completed, the percentage-of-completion
method of accounting shall be used to determine the timing of
taxable receipts of the contractor and business purchases of
the acquirer.
``(c) Long-Term Contract.--
``(1) In general.--`Long-term contract' means--
``(A) any contract that covers service or
production through parts of two different calendar
years if the contract includes a formal deposit and
draw-down mechanism, and
``(B) any contract for the manufacture, building,
installation, or construction of property if such
contract is not completed within the taxable year of
the contractor in which such contract is entered into.
``(2) Exception.--A contract for the manufacture of
property shall not be treated as a long-term contract unless
such contract involves the manufacture of--
``(A) any unique item of a type which is not
normally included in the finished goods inventory of
the taxpayer, or
``(B) any item which normally requires more than 12
calendar months to complete.
``(d) Consistency.--The Secretary may require business entities to
file statements containing such information with respect to long-term
contracts as the Secretary may prescribe to ensure consistency in
reporting.
``(e) Foreign Contracts.--This section shall not be construed to
permit a deduction for a business purchase for the cost of property
produced outside the United States pursuant to a long-term contract at
any time prior to the import of such property into the United States.
``SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS.
``(a) Receipt of Price Adjustment.--In the case of a post-sale
price adjustment attributable to a business purchase which was taken
into account in computing gross profits for a prior taxable year, the
amount of such adjustment shall be treated as a reduction or increase,
as the case may be, in the cost of business purchases for the taxable
year in which the adjustment is made or incurred.
``(b) Issuance of Price Adjustment.--In the case of a post-sale
price adjustment attributable to a sale the receipts from which were
taken into account in determining taxable receipts for a prior taxable
year, the amount of such adjustment shall be treated as a reduction or
increase, as the case may be, in taxable receipts for the taxable year
in which the adjustment is made or incurred.
``(c) Post-Sale Price Adjustment.--`Post-sale price adjustment'
means a refund, rebate, or other price allowance attributable to a sale
of property or services or an upward adjustment in price that was not
previously taken into account under the business entity's method of
accounting.
``SEC. 225. BAD DEBTS.
``(a) Seller.--If an amount owed to an accrual basis business
entity for property or services sold--
``(1) was taken into account as a taxable receipt in a
prior taxable year, and
``(2) becomes wholly or partially uncollectible during the
taxable year, then the seller shall treat the amount as a
reduction in taxable receipts for the taxable year in which it
becomes wholly or partially uncollectible.
``(b) Notice Requirement.--No reduction shall be allowed under
subsection (a) unless the seller notifies the purchaser of the amount
which the seller has treated as wholly or partially uncollectible.
``(c) Subsequent Collection.--If an amount which was treated as
uncollectible under subsection (a) is subsequently collected, it shall
be treated as a taxable receipt when collected.
``(d) Purchaser.--If a purchaser receives notice under subsection
(b) from a seller and the purchaser has treated the amount labeled
uncollectible as a business purchase in a prior taxable year, then the
purchaser shall treat such amount as a reduction in the cost of
business purchases in the taxable year to which the notice relates. If
the purchaser subsequently repays such amount, the repayment shall
constitute the cost of a business purchase.
``SEC. 226. TRANSITION RULES.
``(a) No Double Deductions.--A business entity shall not be
entitled to treat as a `cost of business purchase' any amount that the
business entity deducted in computing taxable income under the income
tax in effect prior the effective date of the business tax.
``(b) No Double Inclusion.--A business entity shall not be required
to include in taxable receipts any receipt that the business entity
took into account in computing taxable income under the income tax in
effect prior to the effect date of the business tax.
``(c) No Loss of Deduction.--An expense which--
``(1) a business entity would have been able to deduct as a
cost of a business purchase in an accounting period before the
effective date of the business tax if the business tax had been
in effect in such period, and
``(2) the business entity would have been able to deduct as
an expense in computing taxable income in a period after the
business tax is effective if the income tax had continued in
effect, shall be treated as a cost of a business purchase
incurred or paid at the time that it would have been paid or
incurred under the income tax if the income tax had continued
in effect. This subsection shall not apply to any amount which
is to be taken into account under subchapter N (relating to
amortization of transition basis, inventory costs, and safe
harbor leases), any amounts which would have been deducted
under the income tax through loss carryover deductions, or any
deductions deferred by the uniform capitalization rules under
section 263A of the Internal Revenue Code of 1986.
``(d) All Taxable Receipts Taxed.--A receipt which--
``(1) a business entity would have been required to treat
as a taxable receipt in an accounting period before the
effective date of the business tax if the business tax had been
in effect in such period, and
``(2) the business entity would have been required to
include in gross income in a period after the business tax is
effective if the income tax had continued in effect
shall be treated as a taxable receipt at the time that it would have
been included in income if the income tax had continued in effect.
``Subchapter E--Land and Rental Property
``Sec. 230. No deduction for land purchased for nonbusiness use.
``Sec. 231. Taxable receipts for land held for nonbusiness use.
``Sec. 232. Certain rental property.
``SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR NONBUSINESS USE.
``(a) In General.--The acquisition of unimproved land shall not
constitute a business purchase if the unimproved land is not acquired
to be used in a business activity or if the land is acquired for--
``(1) speculation,
``(2) development (including subdivision), or
``(3) temporary leasing or other use not commensurate with
the value of the land,
``(4) indefinite future use in a business activity, or
``(5) use in compensating employees.
``(b) Future Use in Business Activity.--Unimproved land will not be
considered held for `indefinite future use in a business activity' if
promptly upon acquisition, the purchaser or the lessee begins
construction of improvements on the land (other than improvements, such
as paving or sewage lines, intended for indefinite future development)
that will be used in a business activity. Such improvement must be
commensurate with the value of the land.
``(c) Unimproved Land.--`Unimproved land' means--
``(1) land with no buildings on it,
``(2) land with improvements if the value of the
improvements is relatively small in comparison to the value of
the land and it is anticipated that the improvements will be
demolished and not used,
``(3) land in excess of the amount reasonably needed for
the buildings located on it.
``(d) Conversion to Business Use.--If the acquisition of land is
not treated as a business purchase by reason of subsection (a) and the
land is subsequently used in a manner for which it could have been
treated as a business purchase, the cost of the land will be treated as
a business purchase when the improvements on the land are placed in
service (or in the case of construction for sale, substantially
completed and advertised for sale).
``SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD FOR NONBUSINESS
USE.
``(a) Tax Basis.--A business entity shall have a tax basis in land
equal to the cost of the land if such cost is not deductible by reason
of section 230(a) and the land has not been converted to business use
for purposes of section 230(d).
``(b) Taxable Receipts of a Land Sale.--The taxable receipts from
the sale of land (or portion thereof) in which a business entity has a
tax basis by reason of subsection (a) shall be the amount by which the
proceeds exceed the basis of such land (or portion thereof).
``SEC. 232. CERTAIN RENTAL PROPERTY.
``(a) In General.--Except as provided in subsection (b), the
activity of rental of real estate is a business activity to which the
business tax applies.
``(b) Not Rental Property.--Subsection (a) shall not apply to
property described in section 111(b)(1) (relating to property owned by
individuals and used for at least 14 days for a nonbusiness purpose and
rented for no more than 14 days during the taxable year).
``(c) Rental Property Becomes Nonrental Property.--If property
which is considered rental property for purposes of subsection (a) in
one taxable year ceases to be rental property (by reason of subsection
(b)) in the following taxable year, the property (and any associated
debt) shall be treated as distributed by the business entity to its
owners. Section 211(a) shall apply to such distribution.
``Subchapter F--Insurance and Financial Products
``Sec. 235. General rules.
``Sec. 236. Fees for financial intermediation services.
``Sec. 237. Deductible insurance premiums.
``Sec. 238. Nondeductible insurance premiums.
``Sec. 239. Certain implicit fees for financial intermediate services.
``SEC. 235. GENERAL RULES.
``(a) Taxable Receipts.--Except in the case of a financial
intermediation business, taxable receipts do not include financial
receipts (as defined in section 203(e)(2)).
``(b) Business Purchases.--Except in the case of a financial
intermediation business, business purchases do not include the cost of
financial instruments (as defined in section 242(b)(3)) or payments for
use of money or capital, other than fees for financial intermediation
services.
``SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERVICES.
``(a) Business Purchase.--Business purchases include explicit fees
and implicit fees for financial intermediation services (except to the
extent that such fees are for services treated as performed outside the
United States and not imported into the United States or for services
treated as exported.).
``(b) Financial Intermediation Services.--The definition of
`financial intermediation service' in section 241 applies for purposes
of this section.
``(c) Explicit Fees.--
``(1) In general.--`Explicit fees for financial
intermediation services' means separately stated fees for
services provided by a business entity in the financial
intermediation business. Explicit fees do not include fees for
use of money or capital.
``(2) Examples.--Explicit fees for financial intermediation
services include (without limitation)--
``(A) separately listed maintenance and service
charges of providers of financial intermediation
services,
``(B) loan documentation fees,
``(C) brokerage fees,
``(D) loan origination fees,
``(E) underwriting fees,
``(F) trustees' fees, and
``(G) fees for credit checks.
``(3) Exclusions.--Explicit fees for financial
intermediation services do not include prepaid interest and
other fees for use of money or capital even if such fees are
separately stated or are labeled as service fees.
``(d) Implicit Fees.--
``(1) Implicit fees attributable to borrowing.--
``(A) In general.--Implicit fees attributable to
borrowing from banks and other financial institutions
shall include the portion of interest payments that the
Secretary designates as constituting service fees.
``(B) Timing.--Implicit fees determined under this
paragraph shall not be deductible in any taxable year
prior to the taxable year in which the interest is
paid. If the amount of the interest to which implicit
fees relate was deducted as original issue discount
under the Internal Revenue Code of 1986, the implicit
fees with respect to such interest shall not constitute
a deductible business purchase.
``(C) Designation by secretary.--
``(i) Estimate of differential.--The
Secretary shall estimate for each calendar year
the difference between the cost of funds for
banks and the rates of interest (including
discount points) charged to the most credit-
worthy depositors of banks. The determinations
shall be made separately for--
``(I) loans with terms of not more
than 3 years,
``(II) loans with terms of over 3
but not over 9 years, and
``(III) loans with terms of over 9
years.
``(ii) Designation of implicit fees.--The
Secretary shall designate the differences
determined under clause (i) as the portion of
interest expense on loans from banks and other
financial institutions that constitutes an
implicit fee for term loans originated during
the following calendar year for the respective
periods listed in subclauses (I) through (III)
of clause (i). The difference determined for
loans described in subclause (I) of clause (i)
shall apply to determine the implicit fee
portion of interest on demand loans outstanding
during the following calendar year.
``(iii) Historical determination.--The
Secretary shall make an historical
determination in accordance with the principles
of this subparagraph to designate the portion
of interest on term loans made before January
1, 2006, that will constitute implicit fees.
``(2) Implicit fees for other financial intermediation
activity.--Implicit fees for financial intermediation services
include the portion of the fees or other charges paid to a
provider of financial intermediation services (other than
lending) as such provider designates in accordance with section
39.
``SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS.
``(a) In General.--The cost of insurance premiums on business loss
policies that insure risks in the United States constitute costs of
business purchases. Proceeds from such policies constitute taxable
receipts.
``(b) Business Loss Policy.--A `business loss policy' is an
insurance policy--
``(1) owned by a business entity,
``(2) the beneficiary of which is the business entity or
another business entity doing business with the owner of the
policy,
``(3) that has no inside buildup or other savings
component,
``(4) that covers losses on a loss incurred or claims made
basis during the term of the policy,
``(5) that has a term of not more than 2 years,
``(6) that is not a direct or indirect form of
compensation, and
``(7) that covers direct losses of the business, such as--
``(A) damage to or theft of property used in
business activity,
``(B) tort claims against the business,
``(C) loss of use of business premises or services,
``(D) malpractice, or
``(E) alleged or actual breach of fiduciary
obligations.
``SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS.
``(a) Nondeductibility.--The cost of insurance policies that are
not business loss policies are not deductible costs of business
purchases.
``(b) Proceeds of Nondeductible Policies.--Insurance proceeds from
policies described in subsection (a) do not constitute taxable
receipts.
``(c) Application of This Section to Certain Insurance.--This
section shall apply to life insurance policies.
``SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL INTERMEDIATION
SERVICES.
``(a) Deductibility of Fees.--If a financial intermediation
business (as defined in section 241(b)) elects to determine implicit
fees for financial intermediation services pursuant to this section and
notify its business customers of their share of the implicit fees in
accordance with this section, a business entity which receives such
notice may treat the amount reported in the notice as an implicit fee
for financial intermediation services in the calendar year to which
such notice relates.
``(b) Allocation and Reporting.--
``(1) In general.--A financial intermediation business
may--
``(A) allocate fees received for services for which
no separately stated fees (or implicit fees for
borrowing determined under section 236(d)(1)) are
charged among recipients of such services on a
reasonable and consistent basis, and
``(B) report to each recipient not later than
February 15th of each year the amount so allocated to
it with respect to the immediately preceding calendar
year.
``(2) Maximum fees allocated.--The maximum amount that may
be allocated by a financial intermediation business for a
calendar is the excess of--
``(A) the gross profits of the financial
intermediation business for the calendar year (as
reasonably estimated by the financial intermediation
business), over
``(B) the explicit fees for financial
intermediation services received by the financial
intermediation business.
``(3) Reasonable allocation.--An allocation will not be
considered reasonable unless it takes into account and
allocates fees to--
``(A) both services provided to business entities
and services provided to individuals (other than in a
business capacity), and
``(B) both persons who receive money from the
financial intermediation business and persons who pay
money to the financial intermediation business (even
though amounts allocated to the former do not
constitute implicit fees).
``(4) Regulations.--The Secretary shall prescribe
regulations relating to the allocations under this subsection,
including regulations addressing--
``(A) rules for timing of deductions of implicit
fees paid by fiscal year recipients,
``(B) subsequent year adjustments if a financial
intermediation business allocates too much in a
calendar year,
``(C) rules for advance approval from the Secretary
for allocation procedures, and
``(D) safe-harbor alternatives to the allocation
procedures described in this subsection.
``(c) Not Applicable to Lending Services.--This section shall not
apply to lending services.
``Subchapter G--Financial Intermediation and Financial Institutions
``Sec. 241. Activities constituting a financial intermediation
business.
``Sec. 242. General rule for taxation.
``Sec. 243. Special rule for banks.
``Sec. 244. Insurance companies.
``Sec. 245. Financial pass-through entities.
``Sec. 246. Financial intermediation by other businesses.
``SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL INTERMEDIATION
BUSINESS.
``(a) Financial Intermediation Business.--The providing of
financial intermediation services shall be considered a business
activity. The gross profit of a business entity providing financial
intermediation services shall be determined by taking into account the
rules of this subchapter.
``(b) Separate Business Activity.--The provision of financial
intermediation services for unrelated persons shall be considered a
separate business activity and a business shall be considered a
separate entity with respect to such activity. An entity engaging in
such business is referred to in this chapter as a `financial
intermediation business'.
``(c) Financial Intermediation by a Business.--Section 246 shall
apply to a business that provides financial intermediation services for
itself and related parties but generally does not provide such services
for unrelated parties.
``(d) Definitions.--
``(1) Financial intermediation services.--`Financial
intermediation services' include--
``(A) lending services,
``(B) insurance services,
``(C) market-making and dealer services, and
``(D) any other service provided as business
activity in which a person acts as an intermediary in--
``(i) the transfer of property, services,
or financial assets, liabilities, risks or
instruments (or income or expense derived
therefrom) between two or more persons, or
``(ii) the pooling of economic risk among
other persons
and derives all or a portion of such person's gross
receipts from streams of income or expense, discounts,
or other financial flows associated with the matter
with respect to which such person is acting as an
intermediary.
``(2) Lending services.--`Lending services' means the
regular making of loans and providing credit to, or taking
deposits from customers, but does not include an installment or
delayed payment arrangement provided by a seller of property or
services under which additional charges or fees are imposed by
the seller for the late payment.
``(3) Market-making or dealer services.--`Market-making or
dealer services' means services provided by a person who--
``(A) regularly purchases financial instruments
from or sells financial instruments to customers in the
ordinary course of a trade or business,
``(B) regularly offers to enter into, assume,
offset, assign, or otherwise terminate positions in
financial instruments with customers in the ordinary
course of a trade or business.
``SEC. 242. GENERAL RULE FOR TAXATION.
``(a) In General.--In the case of a financial intermediation
business, gross profits shall be computed by--
``(1) substituting financial receipts for taxable receipts,
and
``(2) including financial expenses as business purchases.
``(b) Definitions.--
``(1) Financial receipts.--`Financial receipts' means all
receipts other than amounts received as contributions to
capital.
``(2) Financial expenses.--`Financial expenses' include--
``(A) payments for principal and interest that is
properly allocable to the provision of financial
intermediation services,
``(B) the cost of and payments under financial
instruments (other than financial instruments in the
person subject to the tax imposed under this chapter
and any person related to such person),
``(C) claims and cash surrender values paid in
connection with insurance or reinsurance services, and
``(D) amounts paid for reinsurance.
``(3) Financial instrument.--`Financial instrument' means
any--
``(A) share of stock in a corporation,
``(B) equity ownership in any widely held or
publicly traded partnership, trust, or other business
entity,
``(C) note, bond, debenture, or other evidence of
indebtedness,
``(D) interest rate, currency, or equity notional
principal contract,
``(E) evidence or interest in, or a derivative
financial instrument in, any financial instrument
described in subparagraph (A), (B), (C), or (D), or any
currency, including any option, forward contract, short
position, and any similar financial instrument in such
a financial instrument or currency, and
``(F) a position which--
``(i) is not a financial instrument
described in subparagraph (A), (B), (C), (D) or
(E),
``(ii) is a hedge with respect to such a
financial instrument, and
``(iii) is clearly identified in the
dealer's records as being described in this
subparagraph before the close of the day on
which it was acquired or entered into.
``(c) International Matters.--For purposes of this section in the
case of a financial intermediation business with activity in and
outside the United States--
``(1) Inclusion regardless of source.--
``(A) Financial receipts shall be determined
without regard to whether they are received for
property or service provided in or outside the United
States, except that financial receipts do not include
amounts that--
``(i) are not taxable receipts (as
determined without regard to this section), but
``(ii) would have been taxable receipts (as
determined without regard to this section) if
they had been received for services or property
in the United States.
``(B) Financial expenses shall be determined
without regard to whether they are received for
property or services acquired in or outside the United
States.
``(2) Allocation.--Under regulations prescribed by the
Secretary, gross profits (as determined without regard to this
paragraph) shall be reduced by the amount of financial
intermediation gross profit attributable to financial
intermediation activity provided outside the United States.
``(3) Gross profit attributable to financial intermediation
activity.--`Gross profits attributable to financial
intermediation activity' means the excess of--
``(A) gross profits as determined under this
section (but without regard to paragraph (2)), over
``(B) gross profits as determined without regard to
this subchapter.
``SEC. 243. SPECIAL RULES FOR BANKS.
``(a) In General.--In the case of a bank, gross profits shall be
determined in accordance with section 242, except that--
``(1) Financial receipts.--Financial receipts shall include
only--
``(A) taxable receipts (as determined without
regard to this subchapter),
``(B) interest on loans made or acquired by the
bank,
``(C) gain on the sale of loans,
``(D) discount points received, and
``(E) any explicit fees for financial or fiduciary
services not included in subparagraphs (A) through (E).
``(2) Financial expenses.--Financial expenses shall include
only--
``(A) interest paid to depositors and on other
funds borrowed by the bank, and
``(B) reasonable additions to reserves for bad
debts.
``(3) Foreclosure property.--Gross profits shall properly
take into account proceeds from the operation or sale of
foreclosure property.
``(b) Bank.--
``(1) In general.--`Bank' means a bank or trust company
incorporated and doing business under the laws of the United
States, the District of Columbia, or any State, a substantial
part of the business of which consists of receiving deposits
and making loans and discounts, or of exercising fiduciary
powers similar to those exercised by national banks under the
authority of the Comptroller of the Currency, and which is
subject by law to supervision and examination by State or
Federal authority having supervision over banking institutions
or credit unions. Such term includes domestic building and loan
associations and credit unions.
``(2) Other activities.--If a bank is engaged in
significant amounts of activities other than those described in
paragraph (1), the bank shall be considered as a separate
business entity with respect to such other activity.
``SEC. 244. INSURANCE COMPANIES.
``(a) In General.--In the case of companies providing insurance
services, gross profits shall be determined in accordance with section
242, except--
``(1) subsection (c) of section 242 (relating to
international operations) shall not apply, and
``(2) the rules of subchapter J (sourcing rules) shall
apply to determine financial receipts and financial expenses.
``(b) Result Inconsistent With Statutory Intent.--If an insurance
company determines that the application of subsection (a) produces
results inconsistent with the territorial approach of the business tax,
it may apply to the Secretary for permission to apply section 242(c) in
lieu of subsection (a).
``SEC. 245. FINANCIAL PASS-THROUGH ENTITIES.
``(a) In General.--In the case of a financial pass-thru entity,
gross profits shall be determined in accordance with section 242,
except--
``(1) financial receipts shall include contributions to
capital,
``(2) financial expenses shall include--
``(A) distributions to persons holding interests in
the pass-thru entity,
``(B) investments in related entities (including
wholly owned entities) engaging in real estate
investment.
``(b) Pass-Thru Entity.--
``(1) In general.--`Pass-thru entity' means a business
entity that is intended to serve as a conduit. The Secretary
shall prescribe regulations defining pass-thru entity. Such
term shall include--
``(A) entities that would qualify as regulated
investment companies under the Internal Revenue Code of
1986,
``(B) entities that would qualify as real estate
investment trusts under the Internal Revenue Code of
1986,
``(C) entities that would qualify as REMICs under
the Internal Revenue Code of 1986, and
``(D) partnerships whose purposes are to invest the
funds of the partners in financial instruments,
distribute or reinvest the income from such
investments, and distribute or reinvest the proceeds
from the sale of such instruments.
``(2) Engagement in business activity.--An entity will not
qualify as a pass-thru entity if it engages in more than an
insubstantial amount of rental or other business activity
(other than investing in and selling financial instruments).
The preceding sentence will not apply if the business entity
treats the business activity as engaged in by a separate
business entity (separately subject to tax under this chapter).
``SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSINESSES.
``(a) In General.--If a business entity that is not regularly in
the business of providing financial intermediation services to
unrelated parties engages in significant financial intermediation
activity, its gross profits shall be increased by its gross profits
from financial intermediation activity (determined as if such activity
were activity of a pass-thru entity that paid all costs of such
financial intermediation activity including--
``(1) compensation for persons engaging in such activity,
``(2) equipment involved in such activity, and
``(3) office space for persons involved in such activity).
``(b) Proxy.--A business entity to which subsection (a) applies
will be treated as satisfying the requirements of that subsection if it
increases its gross receipts by the portion of employee compensation
properly allocable to the provision of financial intermediation
services.
``(c) Significant Financial Intermediation.--A business will be
considered as engaging in substantial financial intermediation if--
``(1) more than 5 percent of the compensation paid by the
business to its employees is for employees whose primary
activity is the management of the business's investments in
financial instruments, or
``(2) at all times during the taxable year and the
immediately preceding full taxable year, more than 10 percent
of its assets are financial instruments other than--
``(A) equity interests in business entities in
which it holds more than 50 percent in value of the
outstanding equity,
``(B) equity interests in joint ventures in which
the company is actively participating,
``(C) purchase money loans to its customers, and
``(D) business loans and equity investments that
serve a direct business purpose.
``Subchapter H--Tax-exempt Organizations
``Sec. 251. Exemption for governmental entities.
``Sec. 252. Taxable activity of governmental entities.
``Sec. 253. Tax-exempt organizations.
``Sec. 254. Special rules for (c)(3) organizations.
``Sec. 255. Tax on unrelated business activity.
``Sec. 256. Unrelated business activity.
``SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES.
``(a) States.--Except as provided in section 252, a state,
political subdivision thereof and the District of Columbia shall be
exempt from taxation under this chapter on any gross profits derived
from the exercise of any essential governmental function.
``(b) Possessions.--The government of any possession of the United
States shall be exempt from taxation under this chapter on any gross
profits earned by the possession.
``SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTITIES.
``(a) Certain Activities Taxable.--A governmental entity shall be
considered a business and subject to tax on any business activity of a
type frequently provided by business entities subject to tax under this
chapter.
``(b) Certain Activities Treated as Essential Government
Functions.--Subsection (a) shall not apply to the following activities,
which shall be treated as essential government functions:
``(1) Provision of mass transportation services.
``(2) Provision of public utility services.
``SEC. 253. TAX-EXEMPT ORGANIZATIONS.
``(a) Exemption From Taxation.--An organization described in
subsection (c) or (d) shall be exempt from taxation under this chapter.
``(b) Tax on Unrelated Business Activity.--An organization exempt
from taxation under subsection (a) shall be subject to tax to the
extent provided in sections 255 and 256, but shall be considered a tax-
exempt organization for purposes of any law that refers to tax-exempt
organizations.
``(c) List of Exempt Organizations.--The following organizations
are referred to in subsection (a):
``(1) Instrumentality of the united states.--Any
corporation organized under Act of Congress which is an
instrumentality of the United States but only if such
corporation--
``(A) is exempt from Federal income taxes--
``(i) under such Act as amended and
supplemented before July 18, 1984, or
``(ii) under this title without regard to
any provision of law which is not contained in
this title and which is not contained in a
revenue Act, or
``(B) is described in subsection (h).
``(2) Title holding companies.--Corporations organized for
the exclusive purpose of holding title to property, collecting
income therefrom, and turning over the entire amount thereof,
less expenses, to an organization which itself is exempt under
this section. Rules similar to the rules of subparagraph (G) of
paragraph (25) shall apply for purposes of this paragraph.
``(3) Charitable, educational and religious
organizations.--Corporations, and any community chest, fund, or
foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international
amateur sports competition (but only if no part of its
activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or
animals, no part of the net earnings of which inures to the
benefit of any private shareholder or individual, no
substantial part of the activities of which is carrying on
propaganda, or otherwise attempting, to influence legislation
(except as otherwise provided in subsection (g)), and which
does not participate in, or intervene in (including the
publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for
public office.
``(4) Social welfare organizations, etc.--
``(A) Civic leagues or organizations not organized
for profit but operated exclusively for the promotion
of social welfare, or local associations of employees,
the membership of which is limited to the employees of
a designated person or persons in a particular
municipality, and the net earnings of which are devoted
exclusively to charitable, educational, or recreational
purposes.
``(B) Subparagraph (A) shall not apply to an entity
unless no part of the net earnings of such entity
inures to the benefit of any private shareholder or
individual.
``(5) Labor and agricultural organizations.--Labor,
agricultural, or horticultural organizations.
``(6) Trade associations.--Business leagues, chambers of
commerce, real-estate boards, boards of trade, or professional
football leagues (whether or not administering a pension fund
for football players) not organized for profit and no part of
the net earnings of which inures to the benefit of any private
shareholder or individual.
``(7) Social clubs.--Clubs organized for pleasure,
recreation, and other nonprofitable purposes, substantially all
of the activities of which are for such purposes and no part of
the net earnings of which inures to the benefit of any private
shareholder.
``(8) Certain fraternal societies.--Fraternal beneficiary
societies, orders, or associations--
``(A) operating under the lodge system or for the
exclusive benefit of the members of a fraternity itself
operating under the lodge system, and
``(B) providing for the payment of life, sick,
accident, or other benefits to the members of such
society, order, or association or their dependents.
``(9) Veba's.--Voluntary employees' beneficiary
associations providing for the payment of life, sick, accident,
or other benefits to the members of such association or their
dependents or designated beneficiaries, if no part of the net
earnings of such association inures (other than through such
payments) to the benefit of any private shareholder or
individual.
``(10) Other fraternal organizations.--Domestic fraternal
societies, orders, or associations, operating under the lodge
system--
``(A) the net earnings of which are devoted
exclusively to religious, charitable, scientific,
literary, educational, and fraternal purposes, and
``(B) which do not provide for the payment of life,
sick, accident, or other benefits.
``(11) Local teachers' retirement funds.--Teachers'
retirement fund associations of a purely local character, if--
``(A) no part of their net earnings inures (other
than through payment of retirement benefits) to the
benefit of any private shareholder or individual, and
``(B) the income consists solely of amounts
received from public taxation, amounts received from
assessments on the teaching salaries of members, and
income in respect of investments.
``(12) Certain cooperatives.--
``(A) Benevolent life insurance associations of a
purely local character, mutual ditch or irrigation
companies, mutual or cooperative telephone companies,
or like organizations; but only if 85 percent or more
of the income consists of amounts collected from
members for the sole purpose of meeting losses and
expenses.
``(B) In the case of a mutual or cooperative
telephone company, subparagraph (A) shall be applied
without taking into account any income received or
accrued--
``(i) from a nonmember telephone company
for the performance of communication services
which involve members of the mutual or
cooperative telephone company,
``(ii) from qualified pole rentals,
``(iii) from the sale of display listings
in a directory furnished to the members of the
mutual or cooperative telephone company, or
``(iv) from the prepayment of a loan under
section 306A, 306B, or 311 of the Rural
Electrification Act of 1936 (as in effect on
January 1, 1987).
``(C) In the case of a mutual or cooperative
electric company, subparagraph (A) shall be applied
without taking into account any income received or
accrued--
``(i) from qualified pole rentals, or
``(ii) from the prepayment of a loan under
section 306A, 306B, or 311 of the Rural
Electrification Act of 1936 (as in effect on
January 1, 1987).
``(D) For purposes of this paragraph, the term
`qualified pole rental' means any rental of a pole (or
other structure used to support wires) if such pole (or
other structure)--
``(i) is used by the telephone or electric
company to support one or more wires which are
used by such company in providing telephone or
electric services to its members, and
``(ii) is used pursuant to the rental to
support one or more wires (in addition to the
wires described in clause (i)) for use in
connection with the transmission by wire of
electricity or of telephone or other
communications.
For purposes of the preceding sentence, the term
`rental' includes any sale of the right to use the pole
(or other structure).
``(13) Nonprofit cemeteries.--Cemetery companies owned and
operated exclusively for the benefit of their members or which
are not operated for profit; and any corporation chartered
solely for the purpose of the disposal of bodies by burial or
cremation which is not permitted by its charter to engage in
any business not necessarily incident to that purpose and no
part of the net earnings of which inures to the benefit of any
private shareholder or individual.
``(14) Grandfathered mutual financial institutions.--
``(A) Credit unions without capital stock organized
and operated for mutual purposes and without profit,
but only if organized before July 1, 2006.
``(B) Certain corporations or associations
organized before September 1, 1957, and described in
subparagraphs (B) or (C) of section 501(c)(14) of the
Internal Revenue Code of 1986.
``(15) Grandfathered small insurance companies.--Insurance
companies organized before July 1, 2006, and described in
section 501(c)(15) of the Internal Revenue Code of 1986.
``(16) Crop financing associations.--Corporations organized
by an association subject to part IV of this subchapter or
members thereof, for the purpose of financing the ordinary crop
operations of such members or other producers, and operated in
conjunction with such association. Exemption shall not be
denied any such corporation because it has capital stock, if
the dividend rate of such stock is fixed at not to exceed the
legal rate of interest in the State of incorporation or 8
percent per annum, whichever is greater, on the value of the
consideration for which the stock was issued, and if
substantially all such stock (other than nonvoting preferred
stock, the owners of which are not entitled or permitted to
participate, directly or indirectly, in the profits of the
corporation, on dissolution or otherwise, beyond the fixed
dividends) is owned by such association, or members thereof;
nor shall exemption be denied any such corporation because
there is accumulated and maintained by it a reserve required by
State law or a reasonable reserve for any necessary purpose.
``(17) Supplemental employment benefit trust.--
``(A) A trust or trusts forming part of a plan
providing for the payment of supplemental unemployment
compensation benefits, if--
``(i) under the plan, it is impossible, at
any time prior to the satisfaction of all
liabilities, with respect to employees under
the plan, for any part of the corpus or income
to be (within the taxable year or thereafter)
used for, or diverted to, any purpose other
than the providing of supplemental unemployment
compensation benefits,
``(ii) such benefits are payable to
employees under a classification which is set
forth in the plan and which is found by the
Secretary not to be discriminatory in favor of
employees who are highly compensated employees
(within the meaning of section 414(q)), and
``(iii) such benefits do not discriminate
in favor of employees who are highly
compensated employees (within the meaning of
section 414(q). A plan shall not be considered
discriminatory within the meaning of this
clause merely because the benefits received
under the plan bear a uniform relationship to
the total compensation, or the basic or regular
rate of compensation, of the employees covered
by the plan.
``(B) Rules similar to those contained in
subparagraphs (B) through (E) of section 501(c)(7) of
the Internal Revenue Code of 1986 shall apply to
subparagraph (A).
``(18) Grandfathered trusts.--A trust or trusts created
before June 25, 1959, and described in section 501(c)(18) of
the Internal Revenue Code of 1986.
``(19) Certain veterans' organizations.--A post or
organization of past or present members of the Armed Forces of
the United States, or an auxiliary unit or society of, or a
trust or foundation for, any such post or organization--
``(A) organized in the United States or any of its
possessions,
``(B) at least 75 percent of the members of which
are past or present members of the Armed Forces of the
United States and substantially all of the other
members of which are individuals who are cadets or are
spouses, widows, or widowers of past or present members
of the Armed Forces of the United States or of cadets,
and
``(C) no part of the net earnings of which inures
to the benefit of any private shareholder or
individual.
``(20) Legal service plan trusts.--An organization or trust
created or organized in the United States, the exclusive
function of which is to form part of a qualified group legal
services plan or plans.
``(21) Black lung act trusts.--A trust or trusts
established in writing, created or organized in the United
States, and contributed to by any person (except an insurance
company) if--
``(A) the purpose of such trust or trusts is
exclusively--
``(i) to satisfy, in whole or in part, the
liability of such person for, or with respect
to, claims for compensation for disability or
death due to pneumoconiosis under Black Lung
Acts,
``(ii) to pay premiums for insurance
exclusively covering such liability,
``(iii) to pay administrative and other
incidental expenses of such trust in connection
with the operation of the trust and the
processing of claims against such person under
Black Lung Acts, and
``(iv) to pay accident or health benefits
for retired miners and their spouses and
dependents (including administrative and other
incidental expenses of such trust in connection
therewith) or premiums for insurance
exclusively covering such benefits; and
``(B) such trusts meets requirements similar to
those contained in section 501(c)(21) of the Internal
Revenue Code of 1986.
``(22) Multiemployer erisa trust.--A trust created or
organized in the United States and established in writing by
the plan sponsors of multiemployer plans if--
``(A) the purpose of such trust is exclusively--
``(i) to pay any amount described in
section 4223(c) or (h) of the Employee
Retirement Income Security Act of 1974, and
``(ii) to pay reasonable and necessary
administrative expenses in connection with the
establishment and operation of the trust and
the processing of claims against the trust,
``(B) no part of the assets of the trust may be
used for, or diverted to, any purpose other than--
``(i) the purposes described in
subparagraph (A), or
``(ii) prudent investment in securities,
obligations, or time or demand deposits,
``(C) such trust meets the requirements of
paragraphs (2), (3), and (4) of section 4223(b),
4223(h), or, if applicable, section 4223(c) of the
Employee Retirement Income Security Act of 1974, and
``(D) the trust instrument provides that, on
dissolution of the trust, assets of the trust may not
be paid other than to plans which have participated in
the plan or, in the case of a trust established under
section 4223(h) of such Act, to plans with respect to
which employers have participated in the fund.
``(23) Grandfathered veterans' insurance organization.--Any
association organized before 1880 more than 75 percent of the
members of which are present or past members of the Armed
Forces and a principal purpose of which is to provide insurance
and other benefits to veterans or their dependents.
``(24) ERISA trust.--A trust described in section 4049 of
the Employee Retirement Income Security Act of 1974 (as in
effect on the date of the enactment of the Single-Employer
Pension Plan Amendments Act of 1986).
``(25) Real title holding corporation or trust.--
``(A) Any corporation or trust which--
``(i) has no more than 35 shareholders or
beneficiaries,
``(ii) has only 1 class of stock or
beneficial interest, and
``(iii) is organized for the exclusive
purposes of--
``(I) acquiring real property and
holding title to, and collecting income
from, such property, and
``(II) remitting the entire amount
of income from such property (less
expenses) to 1 or more organizations
described in subparagraph (C) which are
shareholders of such corporation or
beneficiaries of such trust.
For purposes of clause (iii), the term `real property'
shall not include any interest as a tenant in common
(or similar interest) and shall not include any
indirect interest.
``(B) A corporation or trust shall be described in
subparagraph (A) without regard to whether the
corporation or trust is organized by 1 or more
organizations described in subparagraph (C).
``(C) An organization is described in this
subparagraph if such organization is--
``(i) a qualified pension, profit sharing,
or stock bonus plan that meets the requirements
of section 401(a),
``(ii) a governmental plan (within the
meaning of section 414(d)),
``(iii) the United States, any State or
political subdivision thereof, or any agency or
instrumentality of any of the foregoing, or
``(iv) any organization described in
paragraph (3).
``(D) A corporation or trust shall in no event be
treated as described in subparagraph (A) unless such
corporation or trust permits its shareholders or
beneficiaries--
``(i) to dismiss the corporation's or
trust's investment adviser, following
reasonable notice, upon a vote of the
shareholders or beneficiaries holding a
majority of interest in the corporation or
trust, and
``(ii) to terminate their interest in the
corporation or trust by either, or both, of the
following alternatives, as determined by the
corporation or trust:
``(I) by selling or exchanging
their stock in the corporation or
interest in the trust (subject to any
Federal or State securities law) to any
organization described in subparagraph
(C) so long as the sale or exchange
does not increase the number of
shareholders or beneficiaries in such
corporation or trust above 35, or
``(II) by having their stock or
interest redeemed by the corporation or
trust after the shareholder or
beneficiary has provided 90 days notice
to such corporation or trust.
``(E)(i) For purposes of this paragraph--
``(I) a corporation which is a qualified
subsidiary shall not be treated as a separate
corporation, and
``(II) all assets, liabilities, and items
of income, deduction, and credit of a qualified
subsidiary shall be treated as assets,
liabilities, and such items (as the case may
be) of the corporation or trust described in
subparagraph (A).
``(ii) For purposes of this subparagraph, the term
`qualified subsidiary' means any corporation if, at all
times during the period such corporation was in
existence, 100 percent of the stock of such corporation
is held by the corporation or trust described in
subparagraph (A).
``(iii) For purposes of this subtitle, if any
corporation which was a qualified subsidiary ceases to
meet the requirements of clause (ii), such corporation
shall be treated as a new corporation acquiring all of
its assets (and assuming all of its liabilities)
immediately before such cessation from the corporation
or trust described in subparagraph (A) in exchange for
its stock.
``(F) For purposes of subparagraph (A), the term
`real property' includes any personal property which is
leased under, or in connection with, a lease of real
property, but only if the rent attributable to such
personal property for the taxable year does not exceed
15 percent of the total rent for the taxable year
attributable to both the real and personal property
leased under, or in connection with, such lease.
``(G)(i) An organization shall not be treated as
failing to be described in this paragraph merely by
reason of the receipt of any otherwise disqualifying
income which is incidentally derived from the holding
of real property.
``(ii) Clause (i) shall not apply if the amount of
gross income described in such clause exceeds 10
percent of the organization's gross income for the
taxable year unless the organization establishes to the
satisfaction of the Secretary that the receipt of gross
income described in clause (i) in excess of such
limitation was inadvertent and reasonable steps are
being taken to correct the circumstances giving rise to
such income.
``(26) State established medical care insurer.--Any
membership organization if--
``(A) such organization is established by a State
exclusively to provide coverage for medical care on a
not-for-profit basis to individuals described in
subparagraph (B) through--
``(i) insurance issued by the organization,
or
``(ii) a health maintenance organization
under an arrangement with the organization,
``(B) the only individuals receiving such coverage
through the organization are individuals--
``(i) who are residents of such State, and
``(ii) who, by reason of the existence or
history of a medical condition--
``(I) are unable to acquire medical
care coverage for such condition
through insurance or from a health
maintenance organization, or
``(II) are able to acquire such
coverage only at a rate which is
substantially in excess of the rate for
such coverage through the membership
organization,
``(C) the composition of the membership in such
organization is specified by such State, and
``(D) no part of the net earnings of the
organization inures to the benefit of any private
shareholder or individual. A spouse and any qualifying
child) of an individual described in subparagraph (B)
(without regard to this sentence) shall be treated as
described in subparagraph (B).
``(27) Grandfathered workers compensation organization.--
Any membership organization established before June 1, 1996, by
a State exclusively to reimburse its members for losses arising
under workmen's compensation acts, and described in section
501(c)(27) of the Internal Revenue Code of 1986.
``(d) Religious and Apostolic Organizations.--The following
organizations are referred to in subsection (a): Religious or apostolic
associations or corporations, if such associations or corporations have
a common treasury or community treasury, even if such associations or
corporations engage in business for the common benefit of the members,
but only if such activity is treated as unrelated business activity.
``(e) Cooperative Hospital Service Organizations.--For purposes of
this chapter, an organization shall be treated as an organization
organized and operated exclusively for charitable purposes, if--
``(1) such organization is organized and operated solely--
``(A) to perform, on a centralized basis, one or
more of the following services which, if performed on
its own behalf by a hospital which is an organization
described in subsection (c)(3) and exempt from taxation
under subsection (a), would constitute activities in
exercising or performing the purpose or function
constituting the basis for its exemption: data
processing, purchasing (including the purchasing of
insurance on a group basis), warehousing, billing and
collection, food, clinical, industrial engineering,
laboratory, printing, communications, record center,
and personnel (including selection, testing, training,
and education of personnel) services; and
``(B) to perform such services solely for two or
more hospitals each of which is--
``(i) an organization described in
subsection (c)(3) which is exempt from taxation
under subsection (a),
``(ii) a constituent part of an
organization described in subsection (c)(3)
which is exempt from taxation under subsection
(a) and which, if organized and operated as a
separate entity, would constitute an
organization described in subsection (c)(3), or
``(iii) owned and operated by the United
States, a State, the District of Columbia, or a
possession of the United States, or a political
subdivision or an agency or instrumentality of
any of the foregoing;
``(2) such organization is organized and operated on a
cooperative basis and allocates or pays, within 8\1/2\ months
after the close of its taxable year, all net earnings to
patrons on the basis of services performed for them; and
``(3) if such organization has capital stock, all of such
stock outstanding is owned by its patrons.
For purposes of this title, any organization which, by reason of the
preceding sentence, is an organization described in subsection (c)(3)
and exempt from taxation under subsection (a), shall be treated as a
hospital and as an organization referred to in section
101(b)(1)(A)(iii).
``(f) Cooperative Service Organizations of Operating Educational
Organizations.--For purposes of this chapter, if an organization is--
``(1) organized and operated solely to hold, commingle, and
collectively invest and reinvest (including arranging for and
supervising the performance by independent contractors of
investment services related thereto) in stocks and securities,
the moneys contributed thereto by each of the members of such
organization, and to collect income therefrom and turn over the
entire amount thereof, less expenses, to such members,
``(2) organized and controlled by one or more such members,
and
``(3) comprised solely of members that are organizations
described in clause (ii) or (iv) of section 101(b)(1)(A)--
``(A) which are exempt from taxation under
subsection (a), or
``(B) the gross profits of which are excluded from
taxation under section 251(a), then such organization
shall be treated as an organization organized and
operated exclusively for charitable purposes.
``(g) Expenditures by Public Charities to Influence Legislation.--
``(1) General rule.--In the case of an organization to
which this subsection applies, exemption from taxation under
subsection (a) shall be denied because a substantial part of
the activities of such organization consists of carrying on
propaganda, or otherwise attempting, to influence legislation,
but only if such organization normally--
``(A) makes lobbying expenditures in excess of the
lobbying ceiling amount for such organization for each
taxable year, or
``(B) makes grass roots expenditures in excess of
the grass roots ceiling amount for such organization
for each taxable year.
``(2) Definitions.--For purposes of this subsection--
``(A) Lobbying expenditures.--`Lobbying
expenditures' means expenditures for the purpose of
influencing legislation (as defined in section
4911(d)).
``(B) Lobbying ceiling amount.--The lobbying
ceiling amount for any organization for any taxable
year is 150 percent of the lobbying nontaxable amount
for such organization for such taxable year, determined
under section 4911.
``(C) Grass roots expenditures.--`Grass roots
expenditures' means expenditures for the purpose of
influencing legislation (as defined in section 4911(d)
without regard to paragraph (1)(B) thereof).
``(D) Grass roots ceiling amount.--The grass roots
ceiling amount for any organization for any taxable
year is 150 percent of the grass roots nontaxable
amount for such organization for such taxable year,
determined under section 4911.
``(3) Organizations to which this subsection applies.--This
subsection shall apply to any organization which has elected
(in such manner and at such time as the Secretary may
prescribe) to have the provisions of this subsection apply to
such organization and which, for the taxable year which
includes the date the election is made, is described in
subsection (c)(3) and is not described in paragraph (4) and is
not a private foundation.
``(4) Disqualified organizations.--This subsection does not
apply to--
``(A) a church,
``(B) an integrated auxiliary of a church or of a
convention or association of churches, or
``(C) a member of an affiliated group of
organizations (within the meaning of section
4911(f)(2)) if one or more members of such group is
described in subparagraph (A) or (B).
``(5) Years for which election is effective.--An election
by an organization under this subsection shall be effective for
all taxable years of such organization which--
``(A) end after the date the election is made, and
``(B) begin before the date the election is revoked
by such organization (under regulations prescribed by
the Secretary).
``(6) No effect on certain organizations.--With respect to
any organization for a taxable year for which--
``(A) such organization is described in paragraph
(5), or
``(B) an election under this subsection is not in
effect for such organization, nothing in this
subsection or in section 4911 shall be construed to
affect the interpretation of the phrase, `no
substantial part of the activities of which is carrying
on propaganda, or otherwise attempting, to influence
legislation,' under subsection (c)(3).
``(h) Government Corporations Exempt Under Subsection (c)(1).--For
purposes of subsection (c)(1), the following organizations are
described in this subsection:
``(1) The Central Liquidity Facility established under
title III of the Federal Credit Union Act (12 U.S.C. 1795 et
seq.).
``(2) The Resolution Trust Corporation established under
section 21A of the Federal Home Loan Bank Act.
``(3) The Resolution Funding Corporation established under
section 21B of the Federal Home Loan Bank Act.
``(i) Certain Educational Organizations.--An organization shall not
be eligible for exemption as an educational organization under
subsection (c)(3) if a substantial amount of its activities and funds
are devoted to--
``(1) conducting seminars and other similar programs,
``(2) conducting research to educate Congress or the
general public about public policy issues,
``(3) producing books and pamphlets, or
``(4) a combination of the foregoing.
``SEC. 254. SPECIAL RULES FOR (C)(3) ORGANIZATIONS.
``(a) New Organizations Must Notify Secretary.--Except as provided
in subsection (c), an organization shall not be treated as an
organization described in section 253(c)(3)--
``(1) unless that it has given notice to the Secretary, in
such manner as the Secretary may prescribe, that it is applying
for recognition of such status, or
``(2) for any period before giving of such notice, if such
notice is given after the time prescribed by the Secretary by
regulations for giving notice under this subsection.
``(b) Presumption That Organizations Are Private Foundations.--
Except as provided in subsection (c), any organization described in
section 253(c)(3) and which does not notify the Secretary, at such time
and in such manner as the Secretary may by regulations prescribe, that
it is not a private foundation (as defined in section 102) shall be
presumed to be a private foundation.
``(c) Exceptions.--Subsections (a) and (b) shall not apply to--
``(1) organizations organized before October 10, 1969;
``(2) organizations which obtained recognition of tax-
exempt status under section 501(c)(3) of the Internal Revenue
Code of 1986 (in the case of subsection (a) only);
``(3) organizations which were determined not to be private
foundations under the Internal Revenue Code of 1986;
``(4) churches, their integrated auxiliaries, and
conventions and associations of churches;
``(5) any organization that is not a private foundation and
the gross receipts of which in each taxable year are not more
than $25,000, or
``(6) such other classes of organizations which the
Secretary may exempt.
``SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY.
``(a) In General.--Each organization described in subsection (b)
shall be subject to the Simplified USA Tax for businesses under section
201 on its gross profits from its unrelated business activity.
``(b) Organizations Subject to Tax.--This section shall apply to--
``(1) organizations exempt from the business tax under
section 253(a), other than instrumentalities of the United
States described in section 253(c)(1).
``(2) colleges and universities which are instrumentalities
of any government and corporations owned by one or more such
colleges or universities.
``SEC. 256. UNRELATED BUSINESS ACTIVITY.
``(a) In General.--`Unrelated business activity' means any trade or
business the conduct of which is not substantially related (aside from
the need of such organization for income or funds or the use it makes
of the profits derived) to the exercise or performance by such
organization of its charitable, educational, or other purpose or
function constituting the basis for its exemption under section 253,
except that such term does not include any trade or business--
``(1) in which substantially all the work in carrying on
such trade or business is performed for the organization
without compensation; or
``(2) which is carried on, in the case of an organization
described in section 253(c)(3) or in the case of a college or
university described in section 255(b), by the organization
primarily for the convenience of its members, students,
patients, officers, or employees, which is the selling by the
organization of items of work-related clothes and equipment and
items normally sold through vending machines, through food
dispensing facilities, or by snack bars, for the convenience of
its members at their usual places of employment; or
``(3) which is the selling of merchandise, substantially
all of which has been received by the organization as gifts or
contributions.
``(b) Advertising, etc., Activities.--For purposes of this section,
`trade or business' includes any activity which is carried on for the
production of income from the sale of goods or the performance of
services. For purposes of the preceding sentence, an activity does not
lose identity as a trade or business merely because it is carried on
within a larger aggregate of similar activities or within a larger
complex of other endeavors which may, or may not, be related to the
exempt purposes of the organization. Where an activity carried on for
profit constitutes an unrelated trade or business, no part of such
trade or business shall be excluded from such classification merely
because it does not result in profit.
``(c) Trade or Business.--
``(1) Certain business activities.--An activity shall not
be considered a `trade or business' solely because the activity
is a business activity (such as certain passive rental
activity) that would be subject to the business tax if
conducted by a business entity other than a tax-exempt
organization.
``(2) Regulations.--The Secretary shall prescribe
regulations defining a `trade or business.' Such regulations
shall be consistent with the provisions under sections 511
through 513 of the Internal Revenue Code of 1986, except to the
extent such provisions are inconsistent with other principles
of the business tax. The regulations shall include exclusions
from the definition of `trade or business' similar to those
contained in section 513 of the Internal Revenue Code for--
``(A) certain bingo games,
``(B) certain hospital services, and
``(C) certain public entertainment activity at
fairs and expositions by an organization which
regularly conducts, as one of its substantial exempt
purposes, an agricultural or educational fair or
exhibition.
``(3) Trade shows.--The conduct of trade shows and
conventions shall not be excluded from the definition of trade
or business.
``Subchapter I--Cooperatives
``Sec. 260. Patronage dividends of cooperatives.
``SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES.
``(a) Patronage Dividends Paid by Supply Cooperatives.--A qualified
patronage dividend paid by a supply cooperative to a patron shall be
treated as if it is a refund of a portion of the amounts paid by the
patron for goods, services, or use of capital. In general, if the
supply cooperative included the amount received from the patron in
taxable receipts, the dividend shall reduce taxable receipts in the
year incurred. If the recipient of the dividend is a business entity
which deducted the cost of business purchases to which the dividend
related, the recipient will reduce its cost of business purchases by
the amount of the dividend in the year the dividend is paid or
incurred.
``(b) Patronage Dividends Paid by Marketing Cooperatives.--A
qualified patronage dividend paid to a patron by a marketing
cooperative shall be treated as an upward price adjustment in the
amount received by the patron for its goods marketed by the
cooperative. In general, the cooperative will increase its cost of
business purchases by the amount of the qualified patronage dividend
and the recipient will increase its taxable receipts by the amount of
the qualified patronage dividend.
``(c) Dividend Treatment.--Only the portion of a patronage dividend
that is not a qualified patronage dividend shall be treated as a
dividend under this chapter and chapter 2.
``(d) Definitions.--
``(1) Qualified patronage dividend.--A `qualified patronage
dividend' is that part of a patronage dividend that is
attributable to the patron's allocable share of patronage
earnings of a marketing cooperative or a supply cooperative.
``(2) Supply cooperative.--A `supply cooperative' is a
cooperative that sells goods or service to patrons and provided
patronage dividends with respect to the quantity of purchases
of the patrons.
``(3) Marketing cooperative.--A `marketing cooperative' is
a cooperative that sells goods produced by its members and
provides patronage dividends to the members based on the
quantities of goods sold or provided for sale.
``(e) Special Rules.--
``(1) Notices of allocation and per-unit retain
certificates.--Except as provided in paragraph (2), a notice of
allocation, per-unit retain certificate, or other similar
document shall not be treated as a patronage dividend until it
is redeemed in cash or property.
``(2) Opportunity to receive cash.--If a patron is given an
opportunity to receive a patronage dividend in cash, but
instead chooses to accept a per-unit retain certificate or a
qualified notice of allocation, the patron will be treated as
receiving cash and simultaneously contributing to the capital
of the cooperative.
``(3) Application limited to qualified cooperatives.--Under
rules to be prescribed by the Secretary, this section shall
apply only to cooperatives to which one of the following
provisions of the Internal Revenue Code of 1986 would have
applied:
``(A) Section 501(c)(12) (relating to cooperative
telephone companies and similar organizations).
``(B) Section 501(c)(14) (relating to certain
cooperative banks).
``(C) Section 521 (relating to farm cooperatives).
``(D) Section 1381 (relating to cooperatives
generally).
``(4) Regulations.--The Secretary shall prescribe
regulations for the application of this section. The
regulations shall generally be consistent with subchapter T of
chapter 1 of the Internal Revenue Code of 1986 except to the
extent that such rules are inconsistent with provisions of this
chapter.
``Subchapter J--Sourcing Rules
``Sec. 265. Exports of property or services.
``Sec. 266. Imports of property or services.
``Sec. 267. Import or export of services.
``Sec. 268. International transportation services.
``Sec. 269. International communications.
``Sec. 270. Insurance.
``SEC. 265. EXPORTS OF PROPERTY OR SERVICES.
``(a) General Rule.--Taxable receipts do not include amounts
received by the exporter thereof for property or services exported from
the United States for use or consumption outside the United States.
``(b) Export Through Nonbusiness Entity.--For purposes of
subsection (a), if property or services are sold to a governmental
entity or a tax-exempt organization for export and are exported other
than in an activity of such entity which is subject to the business
tax, then the seller of such property or services is deemed to be the
exporter thereof.
``(c) Export of Services.--See section 267 for rules for
determining whether services are exported or imported.
``SEC. 266. IMPORTS OF PROPERTY OR SERVICES.
``(a) In General.--The import of property or services for
consumption in the United States shall constitute a business purchase
if such property or service is to be used in a business activity in the
United States. Property being held for sale or retail by a business
entity that is in the business of selling goods shall be considered
held for `use in a business activity'.
``(b) Amount of Business Purchase.--
``(1) In general.--The cost of business purchases with
respect to the import of property or services for use or
consumption in the United States is the customs value, price or
other amount used for purposes of determining the import tax
under section 286 or section 287.
``(2) Import tax.--The cost of business purchases does not
include any import tax paid. No deduction shall be allowed with
respect to property or service imported by a business entity
unless the import tax is paid with respect to such import.
``SEC. 267. IMPORT OR EXPORT OF SERVICES.
``(a) In General.--Except as otherwise provided in this subchapter
or in rules prescribed under subchapter G (relating to financial
intermediation business), services shall not be treated as imported or
exported from the location in which they are performed.
``(b) Import of Services.--A business entity shall be treated as
importing a service if--
``(1) the entire benefit of the service will be realized in
the United States, and
``(2) the benefit will be realized in connection with the
United States business activities of the business entity.
``(c) Export of Services.--A business will be treated as exporting
a service if--
``(1) the entire benefit of the service will be realized
outside of the United States, and
``(2) the benefit will be realized solely in connection
with the activities of the purchaser occurring outside the
United States.
``(d) Services Acquired From Service Provider That Provides
Services In and Outside the United States.--
``(1) In general.--If a business entity acquires services
from a service provider that provides services both in and
outside the United States and the service provider shows on the
invoice where the services are provided--
``(A) the business entity shall treat the services
as provided where stated on the invoice, and
``(B) the service provider shall treat as taxable
receipts any services listed as provided in the United
States.
``(2) No invoice.--If a business entity acquires services
from a service provider that provides services both in and
outside the United States and the service provider does not
show on an invoice where such services are provided--
``(A) the business entity shall treat the services
as if provided in the location to which payment is
sent, and
``(B) the service provider shall treat as taxable
receipts any payments received in the United States.
``(e) Special Rules Prevail.--See sections 268 and 269 for special
rule relating to transportation and communication services.
``SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES.
``(a) Transportation of Property.--
``(1) Taxable receipts.--
``(A) Exports.--Taxable receipts do not include
receipts from the transportation of property exported
from the United States.
``(B) Imports.--Taxable receipts include receipts
from transportation of property imported into the
United States only if such costs are not taken into
account in determining the import tax.
``(C) Presumptions.--The Secretary shall prescribe
regulations describing situations in which a
transporter of property must presume that no import tax
has been paid on the cost of its services.
``(2) Business purchases.--
``(A) Exports.--Business purchases do not include
amounts paid or incurred for the cost of transportation
of property exported from the United States.
``(B) Imports.--Amounts paid or incurred for
transportation of goods imported into the United
States, shall constitute a cost of business purchase
only to the extent that they are taken into account in
determining the customs value for purposes of section
286(a) (relating to the import tax).
``(b) Transportation of Passengers.--
``(1) Taxable receipts.--Taxable receipts--
``(A) include receipts from the transportation of
passengers from the United States to a destination
outside the United States, but
``(B) do not include receipts from the
transportation of passengers from outside the United
States to a destination in the United States.
``(2) Business purchases.--Business purchases--
``(A) include amounts paid or incurred in a
business activity for the transportation of passengers
from the United States to a destination outside the
United States, but
``(B) do not include amounts paid or incurred for
transportation of passengers from outside the United
States to a destination in the United States.
``(3) Simplifying rules.--The Secretary may provide rules
that simplify this subsection, including rules under which--
``(A) half of receipts attributable to
transportation to or from the United States are treated
as taxable receipts,
``(B) half of the cost for business trips to and
from the United States are treated as business
purchases, and
``(C) all transportation expenses of a business
entity that has no regular business outside the United
States are treated as business purchases.
``SEC. 269. INTERNATIONAL COMMUNICATIONS.
``(a) In General.--For purposes of section 266, communications
services shall be treated as provided at the point of origin of the
communications and shall not be treated as imported or exported.
``(b) Communications Services.--Communications services include--
``(1) telephone communications services,
``(2) courier services (except in the case of
transportation of property that is imported or exported),
``(3) satellite transmission services,
``(4) telegraph services,
``(5) facsimile transmission services, and
``(6) other similar services.
``SEC. 270. INSURANCE.
``(a) In General.--Insurance services will be treated as provided
at the location of the insurance company providing the services. Except
as the Secretary may prescribe by regulations, insurance companies will
be treated as providing services at the location to which insurance
payments are made.
``(b) Insured Risks in the United States.--If insurance services
are provided outside the United States and the insured risk is located
in the United States--
``(1) the insurance service shall be treated as imported,
``(2) the insurance premiums shall be subject to the import
tax, and
``(3) payments of insurance benefits shall not be treated
as imported.
``(c) Insured Risk Outside the United States.--If insurance
services are provided inside the United States and the insured risk is
located outside the United States--
``(1) insurance services shall be treated as exported,
``(2) payments of insurance benefits shall be treated as
payments for services outside the United States, and shall not
be deducted as business purchases.
``(d) Insurance Services.--Insurance services means the provision
of insurance and services related to insurance other than insurance
that is treated as a savings asset.
``SEC. 271. BANKING SERVICES.
``The Secretary shall prescribe regulations on the location of
banking services and the extent to which such services are to be
treated as imported or exported.
``Subchapter K--Business Conducted in a Possession
``Sec. 276. Treatment of possessions.
``SEC. 276. TREATMENT OF POSSESSIONS.
``(a) In General.--For purposes of the business tax imposed by this
chapter, the U.S. possessions shall not be treated as part of the
United States.
``(b) Effect on Payroll Tax Credit.--A business entity may not
claim a payroll tax credit with respect to any payroll taxes paid with
respect to income of residents of the U.S. possessions.
``(c) Possession.--For purposes of this subchapter, `U.S.
possession' or `possession' means a possession of the United States and
includes the Commonwealth of Puerto Rico and the Virgin Islands.
``Subchapter L--Payroll Tax Credit
``Sec. 281. Amount of credit.
``Sec. 282. Current-year payroll tax credit.
``Sec. 283. Credit carryover.
``SEC. 281. AMOUNT OF CREDIT.
``(a) Amount of Credit.--The payroll tax credit for a business
entity for a taxable year is the lesser of--
``(1) the sum of--
``(A) the current-year payroll tax credit, and
``(B) the credit carryovers to the taxable year, or
``(2) the business entity's business tax for the taxable
year (determined without regard to the payroll tax credit).
``(b) Consolidated Returns.--In the case of business entities
filing consolidated returns, the amount of the credit shall be
determined using the combined payroll tax credits and credit carryovers
of the business entities and the combined business tax of the business
entities.
``SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT.
``(a) In General.--The `current-year payroll tax credit' is an
amount equal to the sum of--
``(1) the employer's share of the FICA tax imposed on wages
of its employees during the taxable year,
``(2) the employer's share of the tier 1 railroad
retirement tax for its employees during the taxable year,
``(3) one-half of the allocable portion of the SECA tax
imposed on individuals (other than independent contractors and
other business entities) who provide services to the business
entity.
``(b) Definitions.--
``(1) Employer's share of the fica tax.--`Employer's share
of the FICA tax' means the old-age, survivors, disability and
hospital insurance taxes imposed by section 3111.
``(2) Employer's share of the tier 1 railroad retirement
tax.--`Employer's share of the tier 1 railroad retirement tax'
means--
``(A) the tier 1 railroad retirement tax imposed by
section 3221(a), and
``(B) the portion of the tax imposed by section
3211(a)(1) on employee representatives attributable to
the tax imposed by section 3111.
``(3) One-half of the allocable portion of the seca tax.--
``(A) SECA tax.--`SECA tax' means the self-
employment tax imposed by section 1401.
``(B) Partnerships.--Until such time as the SECA
tax and the Federal Insurance Contributions Acts are
amended to treat partners of partnerships as employees,
if a partner designates a partnership as a principal
source of employment income for the taxable year, one-
half of the partnership's allocable portion of the SECA
tax of such partner equals the FICA tax that the
employer would have been required to pay under section
3111 with respect to such partner if the partner's
self-employment income as reported by the partnership
were wages subject to the FICA tax. A partner and
partnership can agree to treat no portion of a
partner's SECA tax as allocable to the partnership.
``(C) Proprietorship.--In the case of an individual
who is a proprietor or sole owner and provider of
service to a business entity, the individual shall
allocate the portion of one-half of his SECA tax not
allocated pursuant to subparagraph (B) to his business
entities in accordance with rules prescribed by the
Secretary.
``(c) Special Rule.--Under rules prescribed by the Secretary, an
individual subject to the self-employment tax shall pay half of the
self-employment tax on an amount of self employment income not less
than the amount of the individual's self-employment income taken into
account by partnerships under subparagraph (B) of subsection (b)(3).
``SEC. 283. CREDIT CARRYOVER.
``(a) Carryover.--A current-year credit that is not applied in the
taxable year in which earned shall constitute a credit carryover until
applied but for no more than 15 taxable years.
``(b) Order of Use.--For purposes of determining which credits are
applied under section 281, if the total credit allowable in a taxable
year is less than the sum of the current-year payroll credit and the
carryover credits, the current-year payroll credit shall be considered
applied first and then credit carryovers shall be considered applied in
the order earned.
``Subchapter M--Import Tax
``Sec. 286. Imposition of tax on property.
``Sec. 287. Imposition of tax on import of services.
``Sec. 288. General rules for the import tax.
``SEC. 286. IMPOSITION OF TAX ON PROPERTY.
``(a) General Rule.--There is hereby imposed a tax equal to 11
percent of the customs value of all property entered into the United
States for consumption, use or warehousing.
``(b) Liability for Tax.--The tax imposed on the import of property
by subsection (a) shall be paid by the person entering the property
into the United States for consumption, use or warehousing. Such tax
shall be due and payable at the time of import.
``(c) Imports of Previously Exported Property.--In the case of any
article that is classified under a heading or subheading of subchapter
I or II of chapter 98 of the Tariff Schedules of the United States, the
tax under this section shall be imposed only on that portion of the
customs value of such article that is dutiable under such heading or
subheading.
``(d) Imports for Personal Consumption.--The import tax imposed by
this section shall not apply to any article entered into the United
States duty free under subchapters I through VII of chapter 98 of the
Tariff Schedules of the United States.
``(e) Exception for Certain Commodities and Products.--The import
tax imposed by this section shall not apply to petroleum, petroleum
products or such commodities or products as the President shall by
Executive Order determine to be in short supply and vital to national
security.
``SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES.
``(a) General Rule.--There is hereby imposed a tax equal to 11
percent of the cost of all services treated as imported into the United
States during the taxable year of the service recipient.
``(b) Liability for the Tax.--The tax on the import of services
imposed by subsection (a) shall be paid by the person who receives the
imported services. The tax shall be payable as if it were an addition
to the business tax imposed by section 201.
``(c) Imported Services.--For purposes of this section, services
shall be treated as imported if they are treated as imported under
section 267 (general rules on import of services) or section 270
(related to insurance).
``(d) Special Rule for Insurance.--The seller of insurance that is
treated as imported under section 270 shall be liable for the
collection of the tax imposed by subsection (a) on the insurance and
for paying such tax to the Secretary. The first sentence of subsection
(b) (relating to the person liable for the tax) shall apply to
insurance only to the extent that the seller of the insurance services
does not collect such tax.
``SEC. 288. GENERAL RULES FOR THE IMPORT TAX.
``(a) Import Tax.--`Import tax' means the tax imposed by section
286 on the import of property and the tax imposed by section 287 on the
import of services.
``(b) No Payroll Tax Credit.--The payroll tax credit shall not be
allowed against the import tax.
``Subchapter N--Transition Rules
``Sec. 290. Amortization of transition basis.
``Sec. 291. Sales of transition basis property.
``Sec. 292. Safe harbor leases.
``Sec. 293. Carryovers.
``Sec. 294. Section 481 adjustments.
``SEC. 290. AMORTIZATION OF TRANSITION BASIS.
``(a) Transition Basis Deduction.--The `transition basis deduction'
for a taxable year is the sum of the amortization allowance determined
under this section for the taxable year.
``(b) Amortization Rules.--The amortization allowance for each
category of amortizable basis shall be determined by amortizing the
amortizable basis of such category ratably over the amortization period
for the category beginning January 1, 2007.
``(c) Amortization Period.--The amortization periods shall be
determined in accordance with the following table:
``In the case of: The amortization period is:
Category I basis.............................. 15 years
Category II basis............................. 30 years
Category III basis............................ 40 years
Unrecovered inventory costs................... 5 years.
``(d) Categories.--
``(1) Category i basis.--`Category I basis' is the sum of
the unrecovered bases as of January 1, 2007, of all depreciable
property placed in service prior to January 1, 2007, and the
unamortized portion of amortizable costs incurred before
January 1, 2007, if--
``(A) cost recovery or amortization began before
January 1, 2007, and
``(B) the remaining recovery period or amortization
period as of January 1, 2007, is less than 15 years.
``(2) Category ii basis.--`Category II basis' is the sum of
the unrecovered bases as of January 1, 2007, of all depreciable
property placed in service prior to January 1, 2007, and the
unamortized portion of amortizable costs incurred before
January 1, 2007, if--
``(A) cost recovery or amortization began before
January 1, 2007, and
``(B) the remaining recovery period or amortization
period as of January 1, 2007, is 15 years or more.
``(3) Category iii basis.--`Category III basis' is the sum
of the adjusted basis of each asset satisfying the following
requirements:
``(A) The asset was placed in service prior to
January 1, 2007.
``(B) The asset was used in a business activity in
2007.
``(C) The cost of the asset was capitalized and not
depreciable or otherwise recoverable under the Internal
Revenue Code of 1986.
``(D) The cost of the asset would have constituted
deductible expenses under the business tax if such cost
had been incurred after 2006.
``(4) Unrecovered inventory costs.--`Unrecovered inventory
costs' means the cost of goods sold (as determined under the
Internal Revenue Code of 1986) if a business entity sold all of
its inventory (including inventory being produced) on the
effective date of the business tax.
``(e) Rules of Application.--
``(1) Remaining recovery period.--
``(A) Time of measure.--The remaining recovery
period shall be determined as of December 31, 2006, and
shall include each taxable year ending after such date
in which a deduction would have been allowed under the
Internal Revenue Code of 1986.
``(B) Accounting method.--The remaining recovery
period shall be determined using the cost recovery
method and rules applicable for determining taxable
income under the Internal Revenue Code of 1986.
``(2) Depletable assets.--Under rules prescribed by the
Secretary, this section shall apply to the remaining cost basis
of depletable property and to other property for which a cost
recovery method other than one based on time is used.
``SEC. 291. SALES OF TRANSITION BASIS PROPERTY.
``(a) In General.--Except as provided in subsection (b), for
purposes of determining the tax consequences of a sale, retirement,
casualty or conversion to personal use of an asset whose basis or cost
is taken into account under section 90, the amount to be amortized
shall be treated as fully deducted upon the adoption of the business
tax.
``(b) Substantial Sales.--
``(1) In general.--In the case of a substantial sale of
assets to which the amortization rules of section 90 apply, the
purchaser and seller may jointly elect to have the purchaser
assume the amortization deductions attributable to such assets,
in which case--
``(A) the seller's taxable receipts from such sale
shall be reduced by the amount of unamortized basis or
cost assumed by the purchaser,
``(B) the purchaser may treat as a cost of a
business purchase only the portion of the purchase
price in excess of the amount of unamortized basis or
cost assumed,
``(C) the unamortized basis or cost assumed shall
continue to be amortized in the manner amortized by the
seller.
``(2) Substantial sale.--A sale of assets by a business
entity to another business entity is a substantial sale if--
``(A) more than 20 percent (in fair market value or
in original cost) of the assets of the seller are sold,
``(B) the total consideration for the sale exceeds
$1 million or 20 percent of the taxable receipts of the
seller for the taxable year preceding the year of the
sale, or
``(C) the sale satisfies other criteria established
by the Secretary to prevent distortions in gross
profits resulting from asset sales.
``SEC. 292. SAFE HARBOR LEASES.
``(a) In General.--In the case of a safe harbor lease, rental
payments deemed to occur under the lease and interest payments deemed
to be made under the leases shall constitute costs of business
purchases, and rental income and interest income deemed to be earned
under the lease shall constitute taxable receipts. The transition basis
deduction rules shall apply to the lessor's adjusted basis in assets
subject to a safe harbor lease.
``(b) Safe Harbor Lease.--`Safe harbor lease' means a sale and
leaseback transaction entered into pursuant to section 168(f)(8) of the
Internal Revenue Code, as added by the Economic Recovery Tax Act of
1981, when such provision was in effect but only if such transaction
would not be treated as a sale and leaseback for tax purposes but for
that provision.
``SEC. 293. CARRYOVERS.
``(a) No Loss Carryovers.--No deduction shall be allowed under the
business tax for net operating loss carryovers, capital loss
carryovers, or any other loss carryovers from the income tax under the
Internal Revenue Code of 1986.
``(b) No Credit Carryovers.--No credits shall be allowed under the
business tax for business credit carryovers, minimum tax credit
carryovers, or any other credit carryovers from the income tax under
the Internal Revenue Code of 1986.
``SEC. 294. SECTION 481 ADJUSTMENTS.
``(a) Positive Net Section 481 Adjustment Amount.--If, as of
January 1, 2007, a business entity has a positive net section 481
adjustment amount, the amount shall be applied to reduce the transition
basis in accounts (for purposes of section 290) in the following order:
``(1) First, to reduce the category I basis (but not below
zero),
``(2) Second, to reduce the category II basis (but not
below zero),
``(3) Third, to reduce the unrecovered inventory costs.
``(b) Negative Net Section 481 Adjustment Amount.--If, as of
January 1, 2007, a business entity has a negative net section 481
adjustment amount, the amount shall be applied to increase category I
basis for purposes of section 290.
``(c) Section 481 Adjustment.--A business entity's net section 481
adjustment is determined by subtracting--
``(1) the sum of all additional deductions to which a
business entity would be entitled by reason of section 481 of
the Internal Revenue Code of 1986 for periods beginning on or
after the effective date of the business tax with respect to
changes in accounting methods made before such effective date,
from
``(2) the sum of all additional income which a business
entity would recognize by reason of section 481 of the Internal
Revenue Code of 1986 for periods beginning on or after the
effective date of the business tax with respect to changes in
accounting methods made before such effective date, in each
case assuming that the income tax under the Internal Revenue
Code of 1986 remained in effect.
``Subchapter O--Rules for Administration, Consolidated Returns
``Sec. 301. Returns, due dates, etc.
``Sec. 302. Consolidated returns.
``SEC. 301. RETURNS, DUE DATES, ETC.
``(a) In General.--Until subtitle F is amended to reflect the
adoption of this chapter, the rules of subtitle F relating to C
corporations shall apply to business entities with respect to--
``(1) returns and records;
``(2) time and place for paying tax;
``(3) assessment of taxes;
``(4) collections and liens;
``(5) abatements, credits, and refunds;
``(6) interest on underpayments and overpayments;
``(7) additions to tax and penalties;
``(8) closing agreements and compromises;
``(9) crimes;
``(10) judicial proceedings;
``(11) discovery of liability and enforcement; and
``(12) estimated taxes.
``(b) Individuals Engaging in Business Activities.--Under rules
prescribed by the Secretary, individuals engaging in business
activities on their own or with their spouses shall be permitted to
file their business tax returns with their individual tax returns and
shall be subject to estimated tax rules for individual income tax
returns.
``SEC. 302. CONSOLIDATED RETURNS.
``(a) In General.--Business entities may file consolidated returns
of business tax if they would have been permitted to file consolidated
returns under section 1501 of the Internal Revenue Code and such
section were applied by treating each business entity as a corporation
and its owners or partners as shareholders.
``(b) Financial Institutions.--Financial intermediation businesses
may be included in consolidated returns, but each financial
intermediation business must compute its gross profits separately.
``(c) Intercompany Transactions.--In computing the gross profits of
a consolidated group, intercompany transactions can be taken into
account, or at the election of the filer, be disregarded (except in the
case of transactions with financial intermediation businesses).
``Subchapter P--Definitions and Rules of Application
``Sec. 310. Definitions.
``Sec. 311. Rules of application.
``SEC. 310. DEFINITIONS.
``(a) In General.--When used in this chapter, where not otherwise
distinctly expressed or manifestly incompatible with the intent
thereof--
``(1) USA income tax.--`USA Income Tax' and `Simplified USA
Tax' for individuals mean the tax imposed by chapter 1.
``(2) Internal revenue code of 1986.--`Internal Revenue
Code of 1986' means the Internal Revenue Code of 1986 as in
effect immediately before the enactment of the Simplified USA
Tax.
``(3) United states.--`United States' means the States and
the District of Columbia.
``(b) Terms Defined in Chapter 2.--If a term that is used but not
defined in this chapter or in section 7701 is defined in chapter 1, the
definition in chapter 1 shall apply except if manifestly incompatible
with the intent of the provision in which the term is used.
``SEC. 311. RULES OF APPLICATION.
``(a) Definitions.--Any definition included in this chapter shall
apply for all purposes of this chapter unless--
``(1) such definition is limited to the purposes of a
particular chapter, section, or subsection, or
``(2) the definition clearly would not be applicable in a
particular context.
``(b) Interpretations Consistent With Internal Revenue Code of
1986.--Terms not defined in this chapter or elsewhere in this title,
but defined in the Internal Revenue Code of 1986, shall be interpreted
in a manner consistent with the Internal Revenue Code of 1986, except
to the extent such interpretation would be inconsistent with the
principles and purposes of this chapter.''
(b) The amendments made by this section shall be effective on
January 1, 2007, except to the extent otherwise specifically provided
in the text of such amendments.
SEC. 302. REPEAL OF CHAPTER 6.
Chapter 6 of the Code (relating to consolidated returns) is
repealed as of January 1, 2007.
TITLE IV--DEFERRED COMPENSATION PLANS
SEC. 401. PROVISIONS SAVED.
(a) In General.--Except as otherwise provided in this title, the
sections contained in subchapter D of chapter 1 of the Code (relating
to deferred compensation, etc.) are hereby saved as chapter 3.
(b) Limitations on Chapter 3.--The following new section is
inserted before section 401 of the Code (as saved by subsection (a)):
``SEC. 400. EFFECT OF CHAPTER 3.
``(a) In General.--The provisions of chapter 3 (sections 401
through 420) are included in this subtitle for purposes of cross-
reference and for purposes of determining whether plans are exempt from
the business tax and whether contributions to plans are deductible or
excludable from gross income under chapter 1.
``(b) Effect on Business Tax Deductions.--Notwithstanding any
provision to the contrary in this chapter, no provision of this chapter
shall cause any amount to be treated as a cost of business purchase or
to otherwise be deducted from gross receipts for purposes of computing
the Simplified USA for Tax Businesses under chapter 2.
``(c) No Credits.--Notwithstanding any provision to the contrary in
this chapter, no provision of this chapter shall result in a tax credit
against any tax imposed by chapter 1 or chapter 2.
``(d) Effect of Failure to Comply With Provisions.--A failure to
comply with applicable provisions in this chapter could cause a plan to
lose its exemption from the business tax and, thereby subject certain
business activities of the plan to the business tax and/or result in
the constructive distribution of plan assets to plan participants.''
(c) Section 408A Susperseded by Section 30.--Section 408A is
repealed.
SEC. 402. CLERICAL AMENDMENTS.
(a) Table of Sections.--The table of sections for subpart A of part
1 of chapter 3 of the USA Tax Code (formerly subchapter D of chapter 1
of the Code) is amended by inserting at the beginning of the table:
``CHAPTER 3--DEFERRED COMPENSATION, ETC''.
(b) Renumbering of Chapters.--
(1) Renumber chapters.--Chapters 2 and 3 of the Code are
renumbered 4 and 5 respectively. Such renumbering shall be
reflected in all tables and headings in the Code.
(2) Cross references.--Any cross reference to chapter 2 or
3 of the Code contained in any provision of the Code that is
not amended by this Act or in any other statute shall be
treated as a reference to such chapter as renumbered by
paragraph (1).
TITLE V--REPEAL OF ESTATE AND GIFT TAXES
SEC. 501. REPEAL OF GRATUITOUS TRANSFER TAXES.
Subtitle B of the Code (relating to estate and gift taxes) is
repealed.
SEC. 502. EFFECTIVE DATE.
Section 501 shall apply to--
(1) gifts made after December 31, 2006;
(2) the estates of decedents dying after December 31, 2006;
and
(3) generating skipping transfers (within the meaning of
subchapter B of chapter 13 as in effect before its repeal by
this Act) occurring after December 31, 2006.
TITLE VI--TECHNICAL AND ADMINISTRATIVE CHANGES: EFFECTIVE DATES
SEC. 601. USA TAX CODE.
(a) Redesignation of the Code.--The Internal Revenue Title enacted
August 16, 1954, and as heretofore and hereby amended may be cited as
the ``USA Tax Code''. The USA Tax Code, as hereinafter amended, may be
cited as the ``USA Tax Code, as amended''.
(b) References in Laws, etc.--Except where inappropriate, any
reference in any law, Executive order, or other document--
(1) to the Internal Revenue Code of 1954 or the Internal
Revenue Code of 1986 shall include a reference to the USA Tax
Code or the USA Tax Code, as amended,
(2) to the USA Tax Code or the USA Tax Code, as amended,
shall include a reference, with respect to periods before
January 1, 2007, to the Internal Revenue Code of 1954 or the
Internal Revenue Code of 1986.
SEC. 602. REVISIONS TO THE CODE.
Not later than January 1, 2008, the Secretary shall submit to
Congress proposed changes in the USA Tax Code that--
(1) eliminate cross-references to the Internal Revenue Code
of 1986 (except with respect to transition issues) and insert
provisions similar to the cross-referenced sections of the
Internal Revenue Code of 1986,
(2) revise subtitles C through J of the USA Tax Code to
fully reflect the amendments to subtitle A of the Code made by
this Act and the repeal of subtitle B,
(3) include statutory definitions or rules in cases where
the Secretary concludes that the definitions or rules cannot or
should not be addressed by regulation,
(4) revise chapter 4 of the USA Tax Code (as renumbered by
section 402 of this Act) (relating to the self-employment tax)
to conform to changes made by this Act, and
(5) revise chapter 5 of the USA Tax Code (as renumbered by
section 402 of this Act) (relating to withholding on
nonresident aliens and foreign corporations) to reflect changes
made in this Act.
SEC. 603. APPLICATION OF SUBTITLE F.
Until such time as subtitle F of the Code is amended to reflect the
amendments made by this Act, the provisions of subtitle F shall be
treated as generally applying to the Simplified USA Tax--
(1) without regard to specific cross references,
(2) without regard to provisions relating to partnerships,
and
(3) as if the business tax under chapter 2 were the
corporate income tax and all business entities were
corporations (except for purposes of collection, in which case
the owners of noncorporate entities shall be obligated for
taxes owned by the entities to the same extent as they would if
the entity owed the tax prior to the amendment of the Code).
SEC. 604. CLERICAL AMENDMENT.
The portion of the table at the beginning of the Code listing
subtitles and chapters of subtitle A is amended to read as follows:
``Subtitle A. Simplified USA Tax
``Subtitle B. [deleted]
``Subtitle C. Employment taxes
``Subtitle D. Miscellaneous excise taxes
``Subtitle E. Alcohol, tobacco and certain other excise taxes
``Subtitle F. Procedure and administration
``Subtitle G. The joint committee on taxation
``Subtitle H. Financing of presidential election campaigns
``Subtitle I. Trust fund code
``Subtitle K. Group health plan requirements
``Subtitle A--Simplified USA Tax
``Chapter 1. Simplified USA Tax for individuals
``Chapter 2. Simplified USA Tax for businesses
``Chapter 3. Deferred compensation plans
``Chapter 4. Tax on self-employment income
``Chapter 5. Withholding of tax on nonresident aliens and foreign
corporations''.
SEC. 605. EFFECTIVE DATES.
(a) In General.--Except as otherwise provided in this Act, the
amendments made by this Act shall be effective on January 1, 2007, with
respect to tax years beginning on such date.
(b) Special Rules for Businesses With 52-53 Week Year.--If a
business uses a 52-53 week taxable year the amendments made by this Act
shall apply to the business with respect to its tax year beginning in
the last week in December except with respect to any transactions
occurring during 2006 that were structured to take advantage of the
application of this Act to such business at a time when this Act did
not apply to other businesses or to individuals.
<all>
Introduced in House
Introduced in House
Referred to the House Committee on Ways and Means.
Llama 3.2 · runs locally in your browser
Ask anything about this bill. The AI reads the full text to answer.
Enter to send · Shift+Enter for new line